SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934.

For the fiscal year ended June 30, 1997

                                       OR

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934.

For the transition period from __________ to __________

                           Commission File No. 0-28452

                                  U-SHIP, INC.
                 (Name of Small Business Issuer in Its Charter)

               Utah                                      39-1713181
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)

                              5583 West 78th Street
                             Edina, Minnesota 55439

           (Address of principal executive offices including Zip Code)

          Issuer's Telephone Number, Including Area Code (612) 941-4080

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:  Common Stock, 
                                                                par value $.004
                                                                per share

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ____

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year.  $917,705

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within the past 60 days: $4,435,665 as of September 15, 1997.

As of September 15, 1997, there were 5,401,011 shares of common stock of the
registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None


September 25, 1997


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<TABLE>
<CAPTION>
                                                 FORM 10-KSB INDEX

                                                                                                                 Page

<S>                                                                                                               <C>
PART I     .....................................................................................................  1
           Item 1.    DESCRIPTION OF BUSINESS...................................................................  1
           Item 2.    DESCRIPTION OF PROPERTY................................................................... 10
           Item 3.    LEGAL PROCEEDINGS......................................................................... 10
           Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS....................................... 10

PART II    ..................................................................................................... 11
           Item 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                      MATTERS................................................................................... 11
           Item 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS...................................................... 11
           Item 7.    FINANCIAL STATEMENTS...................................................................... 19
           Item 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 34

PART III   ..................................................................................................... 34
           Item 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                      PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                      ACT....................................................................................... 34
           Item 10.  EXECUTIVE COMPENSATION..................................................................... 35
           Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                      MANAGEMENT................................................................................ 36
           Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 37
           Item 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K..................................................... 39

EXHIBIT 10.25 .................................................................................................. 44

EXHIBIT 11 ..................................................................................................... 48

EXHIBIT 23 ..................................................................................................... 49

EXHIBIT 27 ..................................................................................................... 50

</TABLE>

September 25, 1997



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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

         U-Ship, Inc. (the "Company" or "U-Ship") manufactures, markets,
operates and develops self-service, automated shipping systems for use by
consumers and small business shippers who ship packages and priority letters
through major carriers in the air express and package delivery market. In
November 1994, the Company began deployment of its own network of electronic,
customer-operated, self-service shipping centers. The Company's Automated
Shipping Center ("ASC"), which is being placed in retail locations in the United
States and Canada, provides a feeder system to United Parcel Service of America,
Inc. ("UPS") and can provide similar services to other carriers in the
multi-billion dollar air express and package shipping market. As of June 30,
1997, the Company had placed in service approximately 300 ASCs in 40 states. The
Company derives revenue primarily from package shipping transactions and, to a
lesser extent, from the sale of ASCs. The Company holds eight patents related to
hardware and software utilized in its ASCs and is not aware of other comparable
self-service, automated shipping systems currently marketed or available to
consumers and small business package shippers. The Company believes that its ASC
technology is among the most advanced self-service, automated, air express and
package shipping system available for consumers and small businesses.

         The Company's strategy is to make shipping services available to
consumers through the installation of its ASC systems in retail shopping
locations, major office supply and instant printing outlets, business centers
and office parks. Prior to 1996, the majority of ASCs placed in service by the
Company have been leased by retailers from third party leasing companies. The
Company placed in service approximately one-third of its 300 ASCs network
through such arrangements. During 1996 and 1997, however, the Company's
deployment strategy changed to emphasize the placement of Company-owned and
operated ASCs in retail locations. The Company is, however, currently
reevaluating these deployment methods in light of lower than anticipated package
shipping volumes and lack of anticipated revenue per site. There can be no
assurance, however, that current or other strategies currently being considered
by the Company will serve to increase market acceptance of the Company's ASCs.
See "Factors That May Affect Future Operating Results- Market Acceptance of
Product."

         The Company is currently focussing the majority of its marketing
efforts on establishing a strategic relationship with a major carrier. The
Company is also presently engaged in product development activities to produce
ASCs that meet specific carrier requirements. The Company believes that such a
relationship could provide greater revenue potential. The Company believes that
air express and package shipping carriers may, in the future, utilize some form
of self-service technology to increase accessibility to their services in the
market, although there can be no assurance that carriers will decide to use the
Company's technology, or that any strategic relationship will be profitable to
the Company.

         The Company anticipates continued operation of its own network of ASCs
and is exploring promotional activities to increase awareness and trial of its
services in the retail location. The Company is working in conjunction with
Kinko's and OfficeMax to develop in-store promotional programs to increase
shipping volume per site. The Company is developing methods in which to provide
advertising and promotional services on its ASCs for major product and service
companies. Additional expansion of the Company's network of ASCs will be
dependent upon the Company's ability to increase revenue generated per site
through shipping volume and offering additional services.

         The Company served customers in approximately 55,000 transactions
during the year ended June 30, 1997 through its various retail locations,
including OfficeMax stores and Kinko's Copy Centers. The Company enters into
agreements with retailers to provide service and maintenance support related to
the operation of the ASC at retail locations. The services provided by the
Company under these agreements include data processing of credit card
transactions, reconciliation and payment of weekly UPS bills for service
contracted 

September 25, 1997



<PAGE>

by the Company, customer service support related to package tracking and damage
and loss claims for consumers who have used the system. These agreements also
provide for maintenance of the hardware and licensing of the software related to
the operation of the ASC. The Company generates revenue from package shipping
transactions and compensates retailers based upon the number and types of
shipping transactions processed. Each location in the Company's network of ASCs
is centrally controlled and serviced through an electronic connection to the
Company's computer network system located at its headquarters. The Company
accepts cash and major credit cards for payment of package shipping charges. The
Company also issues U-Ship private labeled "Preferred Business Shipper" credit
cards to small businesses for which it bills and collects monthly. The Company
also derives revenue, to a lesser extent, from the sale of shipping supplies
such as boxes, packing material and tape to retailers for consumer sales.

         In September 1996, the Company entered into an Installation and
Marketing Agreement (the "Kinko's Agreement") with Kinko's, Inc. ("Kinko's").
The Kinko's Agreement provides that Kinko's will use its best efforts to provide
the Company the opportunity to install up to 250 ASCs in Kinko's Copy Centers by
December 1997. Under the terms of the Kinko's Agreement, each ASC shall remain
in service for 36 months following the date of its installation, subject to
certain contingencies. Also, the Kinko's Agreement provides that the Company
will retain ownership of the ASCs installed at Kinko's sites, and package
shipping revenue generated at each site will be shared between the Company and
Kinko's. As of June 30, 1997, the Company had installed 78 ASCs in Kinko's Copy
Center locations. In October 1996, the Company entered into a 36 month
Installation and Marketing Agreement (the "OfficeMax" Agreement") with
OfficeMax, Inc. ("OfficeMax"). The terms of the OfficeMax Agreement, as amended,
require the Company to install 140 ASCs into various OfficeMax locations by the
end of December 1997. Under the terms of the OfficeMax Agreement, each ASC shall
remain in service for 36 months following the date of its installation. As of
June 30, 1997, the Company had installed 87 ASCs in various OfficeMax stores.
The Company is currently conducting discussions with Kinko's and OfficeMax
concerning the placement of additional ASCs in Kinko's locations under existing
contracts and methods of promoting the increased usage of ASCs in Kinko's and
OfficeMax stores.

         The Company was incorporated in Utah under the name Basin Energy
Corporation on September 10, 1979. In January 1980, the Company completed a
public offering of 750,000 shares of Common Stock and thereafter engaged in
various activities unrelated to its present business. In February 1990, the
Company changed its name to EuroDynamics Corporation, and in May 1992, the
Company entered into an exchange agreement with U-Ship International, Ltd., a
Wisconsin corporation ("USI"), which provided for the acquisition of USI by the
Company, which then amended its name to U-Ship, Inc. All references to the
Company herein shall include U-Ship International, Ltd., the Company's operating
subsidiary, and U-Ship America, Inc. Substantially all of the Company's current
management and Board of Directors joined the Company subsequent to January 1993.

AGREEMENT WITH MANCHESTER FINANCIAL GROUP, INC.

         In September 1997, the Company engaged Manchester Financial Group, Inc.
("Manchester") to provide certain advisory and consulting services, including,
but not limited to, a strategic review and analysis of the Company's business,
market, management, development plans and financing. The engagement, which is
for a term of one year, provides for monthly payments to Manchester in the
amount of $15,000 and the issuance to Manchester of a five-year warrant for the
purchase of 200,000 shares of the Company's Common Stock. The Company has also
agreed to pay certain additional fees to Manchester in the event an
acquisition-related transaction is consummated with a party to which the Comapny
is introduced to by Manchester.

INDUSTRY BACKGROUND

         The air express and package delivery market is one of the fastest
growing segments of the shipping industry, with approximately 5.0 billion
packages and priority letters shipped by consumers and small businesses during
1994. Based upon information available to the Company, the Company believes that
the business associated with the shipment of small packages and overnight and
second-day packages is experiencing annual growth in excess of 10%. Persons who
send priority packages are frequently under a deadline and, therefore, the
Company believes that 24-hour a day access in most locations to the Company's
ASC is of value. The Company believes that the growth of companies such as
Federal Express, Inc. ("Federal Express") and UPS, and the launching of new
small parcel shipping services by the U.S. Postal Service evidence the high
growth of this segment of the shipping industry. The Company believes that small
package shipping volume will continue to increase for the foreseeable future
based upon the following market trends:

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         INABILITY OF CARRIERS TO SERVE THE CONSUMER AND SMALL BUSINESS MARKET.
While the number of packages shipped by consumers and small businesses is large
and growing, this is a difficult market for carriers to service because such
shipments typically occur on an infrequent basis. Thus, there can be
inefficiency and substantial expense if the carrier provides package pickup.
Moreover, carrier depots are generally located in difficult-to- find office,
warehouse, office parks or airport spaces, which are often inconvenient for
consumers and small businesses to access. Frequently, these depots have limited
hours and do not cater to the needs of the shipping public. To service this
market need the express air carriers have invested in the placement of express
letter drop boxes and there has been the growth of an air express and package
collection service industry, including "mailbox" stores in retail convenience
centers and shipping counters in grocery stores.

         HIGH GROWTH OF CATALOG AND TELEVISION SHOPPING. Busy two-income
families often lack the time to shop at conventional stores. Increasingly, the
Company believes, people are buying for themselves and purchasing gifts for
others through catalogs and television shopping channels. Such purchases
generated revenues of several billion dollars in 1994. There is also a new and
growing trend toward virtual shopping, with people buying goods and services
through the Internet and the World Wide Web. Statistics also show that a
substantial percentage of all items purchased through the mail and television
are returned, creating a significant and growing small package shipping-return
market. These packages typically are returned using ground shipping modes which
are more affordable than air shipping modes and are not accepted by the express
carriers letter drop boxes.

         GROWTH OF HOME-BASED BUSINESSES AND TELECOMMUNICATION. Recent census
data from the United States government indicates that several million small
businesses and sole proprietorships operate from private residences.
Availability of personal computers, facsimile and digital telephone lines have
increased the number of people who correspond and do business via
telecommunication. Additionally, at-home workers, who must gather and receive
information quickly and frequently, send and receive information via overnight
service. The Company believes that small business and home office growth
stimulates growth in priority shipments.

         GIFT-GIVING. The Company's historical package volume identifies a
seasonal increase during the Christmas, Mother's Day and graduation seasons.
Sending gifts through the use of package delivery services represents a
significant portion of the Company's business and is expected by the Company to
grow as the Company increases the number of ASC installations.

U-SHIP STRATEGY

         U-Ship's business strategy focuses on meeting the needs of consumers
and small businesses by offering automated package shipping systems that provide
accessibility, convenience, ease-of-use and flexibility. A key component of this
strategy is to create and utilize strategic partnerships with service carriers
and retailers to reach what the Company believes is an underserved segment of
the shipping market.

TO MEET THE PACKAGE SHIPPING NEEDS OF CONSUMERS AND SMALL BUSINESSES WITH:

         o        ACCESSIBILITY. Easy access is achieved by placing ASCs where
                  they can be accessed 24 hours a day, 7 days a week in high
                  volume retail locations such as copy centers, office supply
                  stores and grocery stores, all of which presently offer
                  shipping services and are easily accessible by consumers and
                  the small business and home office shippers. Consumers
                  regularly visit these local retail stores and U-Ship supports
                  the retailers strategy of being a "one-stop-shop."

                           For time sensitive shipments, such as priority
                  letters and packages, U-Ship believes placement of ASCs in
                  financial sites and business districts where accounting and
                  legal firms are located would provide needed access to express
                  shipping services. The Company believes that these businesses
                  use next-day priority shipments with great frequency. the
                  Company offers stand-alone unattended kiosks which processes
                  and captures parcels and letters to be shipped. There are 48
                  metropolitan statistical areas in the United States with
                  populations

September 25, 1997



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                  of more than 500,000. The Company believes that each such area
                  presents a potential market for U-Ship stand-alone ASC
                  systems.

         o        CONVENIENCE, SIMPLICITY AND CHOICE. By providing automatic
                  weighing, delivery services, label printing, shipping-manifest
                  creation and payment by credit card, U-Ship makes the process
                  of shipping more convenient and simple. The Company's system
                  can respond to a customer's frequent shipped-to list and
                  automatically complete the name and address of the recipient.
                  The Company's technology permits choice by providing visual
                  and verbal shipping options to the customer including price
                  and designated delivery date. The ASC provides the information
                  at the customer's fingertips to make time/value shipping
                  decisions on the spot.

                           The Company also markets its own Preferred Business
                  Shipper credit cards to frequent small business shippers, and
                  it markets special volume shipping programs to this cardholder
                  base. These credit cards enable an ASC to store certain
                  information about the recipient of each package shipped,
                  making it possible for the ASC to automatically supply the
                  appropriate address and other information about the recipient
                  the next time the card user ships a package. Payment for
                  charges made on these cards is due on receipt and the cards do
                  not extend credit beyond the terms of the relevant invoice.

OPENING OPPORTUNITIES FOR SERVICES IN AREAS SUCH AS:

         o        RETURNS PROGRAMS AND WARRANTY PROGRAMS. The Company believes
                  that there is an opportunity to act as the preferred shipper
                  for the return of merchandise previously purchased by
                  consumers through mail order catalogs. To qualify, however,
                  U-Ship must have broad accessibility in most geographic
                  markets.

TO CREATE STRATEGIC RELATIONSHIPS WITH CARRIERS:

         o        MARKETING TO CARRIERS. The Company is attempting to market its
                  product to major package shipping carriers. The Company
                  believes that entering into a strategic agreement for the use
                  of its technology by a major carrier can provide an important
                  base of revenue for future operations. Such arrangements could
                  include licensing existing technology or the development and
                  manufacture of custom products.

PRINCIPAL RETAILER RELATIONSHIPS

         In September 1996, the Company entered into an Installation and
Marketing Agreement (the "Kinko's Agreement") with Kinko's Inc. ("Kinko's"). The
Kinko's Agreement provides that Kinko's will use its best efforts to provide the
Company the opportunity to install up to 250 ASCs in Kinko's Copy Centers by
December 1997. Under the terms of the Kinko's Agreement, each ASC shall remain
in service for 36 months following the date of its installation, subject to
certain contingencies. Also, the Kinko's Agreement provides that the Company
will retain ownership of the ASCs installed at Kinko's sites, and package
shipping revenue generated at each site will be shared between the Company and
Kinko's. As of June 30, 1997 the Company had installed 78 ASCs in Kinko's Copy
Center locations. In October 1996, the Company entered into a 36 month
Installation and Marketing Agreement, (the "OfficeMax Agreement") with
OfficeMax, Inc. ("OfficeMax"). The terms of the OfficeMax Agreement as amended,
require the Company to install 140 ASCs into various OfficeMax locations by the
end of December 1997. Under the terms of the OfficeMax Agreement, each ASC shall
remain in service for 36 months following the date of its installation. As of
June 30, 1997 the Company had installed 87 ASCs in various OfficeMax stores. The
Company is currently conducting discussions with Kinko's and OfficeMax
concerning the placement of additional ASCs in Kinko's and OfficeMax stores.

September 25, 1997



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RELATIONSHIP WITH CARRIER:

           The Company entered into a pilot test agreement with UPS in 1993 to
test a free-standing, 24-hour self-service package shipping kiosk. This
installation remains in service adjacent to a UPS service counter facility in
Eau Claire, Wisconsin. U-Ship is also in discussions with both national and
regional carriers concerning custom systems for use within their respective
networks, although there can be no assurance that any agreements will result
from such discussions. In March 1996, the Company entered into a Master
Agreement for Automated Shipping Center Software License and Related
Software-Based Services with UPS Canada (the "Canada Agreement"), pursuant to
which the Company licenses its proprietary software to UPS Canada for use with
the Company's ASCs which will be placed in up to 10 retail counter applications
in three cities in Canada. Under the Canada Agreement, the Company will be paid
a fee by UPS Canada upon placement of the respective ASC at each Canadian
location, together with a per-package fee on each package shipped using the
Company's ASC. The term of the Canada Agreement is three years. The ASCs subject
to this agreement will be maintained under a separate maintenance agreement.
While the multi-lingual capabilities of the ASC offers advantages in the
international marketplace, the Company's initial focus will remain on the United
States and Canadian markets and, for the foreseeable future, it will pursue
other markets only on an opportunistic basis, primarily through economic
partnership relationships.

         For each ASC location, the Company enters into a Commercial Counter
Agreement with UPS which provides the basic terms of service, advertising
restrictions and certain related matters. The Company has also entered into an
Automated Shipping System Letter Agreement with UPS regarding the Company's
arrangements for use of UPS's Parcel Register, Computer Manifest and other
systems for identifying and recording packages turned over to UPS for delivery.
These agreements are generally terminable at will, although the Company has
enjoyed a shipper-carrier relationship with UPS since 1992. Further, UPS is a
regulated carrier which, under applicable laws and regulations, is obligated,
upon reasonable request, to provide safe and adequate service, equipment and
facilities for the surface transportation of property in interstate commerce.
This duty to furnish continuous and adequate service obligates UPS to furnish
ground transportation services without discrimination at its established rates
and to the limit of its capacity. However, UPS is not regulated with respect to
shipments tendered which involve prior or subsequent movement by air. The
Company is currently dependent upon UPS to pick up and transport packages
processed via the Company's ASCs. Any interruption in, or increase in price of,
such service, or the failure of the Company to continue to maintain such
arrangements with UPS and the failure to develop alternate relationships with
other carriers, would cause an interruption to the Company's package shipping
business and would likely have a material adverse effect upon the Company's
operations and prospects. The Company has no control over the nature, cost or
availability of services provided by any carrier and has no long term contracts
with any carrier.

MARKETING

         The Company markets ASCs directly through Company personnel. As of June
30, 1997, the Company employed 4 of its personnel, including its President and
Chief Executive Officer, in sales and marketing activities.

         The Company markets ASCs to retail organizations and carriers by direct
contacts, telemarketing, direct mail and print advertising and by displays and
appearances at industry trade shows. In fiscal year 1997, the Company presented
its ASCs at industry trade shows sponsored by Kinko's, the National Grocers
Association, the Association of Mail and Parcel Centers and various other
regional industry trade shows.

THE COMPANY'S ASC

         The Company manufactures, markets, develops and operates self-service,
automated, self-contained shipping equipment for use by consumers and small
business shippers to ship packages and priority letters through major carriers.
The Company's ASC contains proprietary software, a computer monitor and a
keyboard to facilitate a user-friendly interface to consumers. The ASC also
contains algorithms and electronic 


September 25, 1997



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communication capabilities which permit it to communicate with a central
computer system located at the Company's headquarters. The Company has used
market research and tests to refine and simplify its interface, which uses
graphics and voice prompts to simplify the shipping process. The Company has
also developed communications software that provides a seamless link to access
shipping information. This tool provides the Company with accurate data used to
manage site performance.

         The U-Ship ASC uses a Pentium microcomputer with user-friendly
interfaces incorporating multimedia color graphics and voice instructions to
enable consumers to make informed cost/delivery priority shipping decisions. The
ASC helps the consumer to complete all necessary shipping documents and
generates a high-quality bar-coded label that can be scanned by carriers. The
ASC allows the consumer to pay for the transaction using any major credit card
and U-Ship's Preferred Business Shipper credit card. The legible, scannable
labels and accurate invoices produced by the ASC help reduce the cost for
carriers receiving aggregated packages from U-Ship collection sites.

         The Company's ASCs use state-of-the-art technology to provide the
following:

         o        A graphic user interface supported by voice instructions which
                  guide the shipper through the shipping process step-by-step

         o        An interactive touch screen that allows the user to make
                  choices by lightly touching large, colorful graphic "buttons"
                  on the screen

         o        A keyboard for quick entry of "ship to" and contents data

         o        A credit card "swipe" that accepts all major credit cards and
                  the U-Ship Preferred Business Shipper card. The system
                  captures sender name and other key information encoded on the
                  magnetic stripe of these cards

         o        An integrated electronic scale that feeds accurate package 
                  weight to the system

         o        The Company's ASC provides a visible measuring grid that
                  allows the shipper to quickly judge the package dimensions and
                  enter them into the system

         o        A thermal label printer that prints a bar-coded label to
                  carrier specifications including proprietary tracking numbers
                  and sort codes

         o        A second printer, accessible only to the carrier pick-up 
                  driver, which provides a completely accurate, 
                  computer-generated manifest

         o        An interlocked parcel storage system that moves the packages 
                  into a locked receptacle for carrier pickup

         o        Americans with Disabilities Act accessible design

         o        Proprietary software that provides a unique, easy-to-use voice
                  prompted interface capable of translating complex rate and
                  zone calculations necessary for shipping packages via UPS into
                  layperson's language

         o        State-of-the-art communications network which allows U-Ship to
                  control, communicate with and reconfigure ASCs in remote sites
                  in a matter of minutes

         The Company believes that its ASC provides a complete solution that
reduces expenses related to bank credit card processing; training employees
about carrier services, rates and new service changes; package processing time
for label completion, shipping charge calculation, service explanations and
customer 

September 25, 1997



<PAGE>


interaction; daily shipping documentation preparation; accounting and record
keeping, reconciling and paying weekly carrier bills and generating management
reports; damage, loss and claims processing for customers with shipping related
problems; and customer service, assisting customers with tracking packages and
explaining services.

         The ASC offers several benefits to retailers and mass merchandisers
beyond the revenue shared through package shipping. The ASC enhances the
"one-stop shopping" experience for the existing customers. The ASC accomplishes
all of this while reducing additional overhead related to labor and maintenance
costs. Because the ASC is a turnkey system, the Company believes that retailers
recognize the value of not only offering shipping services, but also offering
those services through the fully automated, self-service ASC technology.

LEASE FINANCING FOR ASC SALES

         As of June 30, 1997, the Company paid approximately $79,636 to
equipment lessors on account of ASCs sold to equipment lessors with recourse to
the Company in the event of a lessee default or other nonpayment. The payments
to lessors were the result of the exercise by 27 lessees of options to return
ASCs due to low package volumes at their retail locations. The Company does not
believe such payments to lessors has had a material impact upon its operations
or financial condition. Of the ASCs returned as of June 30, 1997, approximately
$92,600 was recovered and placed in the Company's inventory and approximately
$22,900 was written off due upgrading returned machines with current ASC
technology. The Company has deferred a portion of its revenue related to such
recourse arrangements.

RETAILER SUPPORT AND COMMISSIONS

         The Company enters into a software and equipment maintenance agreement
("SEMA") with each new retailer who leases or places an ASC in service. The SEMA
is included in the product sales price and accordingly, related revenue is
recognized over the life of the contract. Under the terms of the SEMA, the
Company agrees to 1) install the ASC; 2) handle all user interactions and
financial transactions with UPS; 3) provide customer service, including package
tracking and loss recovery; 4) process all credit card transactions; 5) prepare
and submit usage reports to the retailer; 6) provide signage and promotional
material and assistance to the retailers; 7) provide on-line ASC maintenance and
support of the ASC's operation, including software support and maintenance and
emergency repairs; and 8) pay retailers a monthly commission equal to a portion
of the gross profit of the package shipping revenue. The Company has contracted
with independent service providers to provide parts and service for maintaining
and servicing ASCs. The Company defers revenue relating to SEMA obligations and
recognizes net service income relating thereto over the life of the obligation.

RESEARCH AND DEVELOPMENT

         The Company is currently focusing its product development efforts on
ASCS designed specifically for certain carriers. These systems are being
developed to assist in nurturing strategic relationships with domestic and
international carriers. The Company also has under development a variety of
communication tools that will help the shipper access information about its
shipping options, costs and current status of shipped packages more quickly
using the communications capabilities of the Internet. These products have not
yet been scheduled for release and remain subject to further development and
market research. The Company is also developing software that will allow the ASC
to perform additional retail functions to enhance the revenue per site. These
software developments will allow the Company to sell advertising services on the
ASC to major manufactures and services companies who wish to promote their
products and services through the use of the Company's technology.

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MANUFACTURING

         The Company buys substantially all of the components for its ASC from
third parties for assembly and testing by the Company at its facility. Some of
these components are designed by the Company and custom manufactured to the
Company's specifications, which permits the Company to produce the ASC without
the substantial commitment of resources that an integrated manufacturing
facility would require. The Company believes it maintains good relationships
with its suppliers and has no long-term manufacturing commitments with any such
component manufacturer or supplier. The Company does not believe that it is
materially dependent on any of its component suppliers because alternative
sources for product components are available. The Company believes that its
current facility has adequate manufacturing capacity to produce ASCs sufficient
to meet its current goals.

COMPETITION

         The express package and document collection and shipping industries,
which are dominated by major carriers, such as UPS, Federal Express, Airborne,
DHL and the U.S. Postal Service, are extremely competitive. The Company's
competitors and potential competitors have more experience, human and financial
resources. For example, UPS, the world's largest package distribution company,
had revenues of over $19.6 billion on a volume of 3.03 billion packages and
documents in 1994. In addition, many potential customers, including Federal
Express, UPS, and the United States Postal Service are larger, possess more
established methods of operation and have developed loyalty to select
manufacturing vendors who provide them with new technology and automation. The
Company is at a disadvantage in competing with these larger and more established
companies in trying to establish itself as a manufacturer of automation
equipment to be used in the shipping industry. The Company believes that between
1992 and 1994 both Federal Express and UPS developed or had third parties
develop for them one or more forms of automated shipping systems which could be
competitive with the Company's ASCs, but that these systems have not been
deployed other than on a limited test market basis. The Company's primary method
of competition with such carriers has been to patent its technology, which
creates barriers to entry by such carriers into the automated shipping market.

         In addition to the competition from the commercial counter and pick-up
services provided by the major carriers, the Company also competes to a limited
extent with the drop boxes maintained by these competitors. According to an
industry source, as of 1994, UPS and Federal Express maintained at least 32,000
and 30,000 drop boxes, respectively, in the United States. In addition, most of
the Company's competitors offer reduced prices to persons who use their boxes.
The Company believes that the cost of these non- automated drop boxes is
substantially less than that of its ASC. The Company believes it can compete
with the non-automated drop boxes by offering more convenience and service to
shippers who desire a means of weighing a package, acceptance of a credit card
and the printing of shipping documentation, including coded shipping labels. The
Company's ASCs are user-friendly and interactive, providing the shipper with
options for the method of shipment (e.g., overnight air or 3-day shipment) and
for the purchase of insurance. In addition, the Company believes that drop boxes
are primarily receptacles for letters and air shipments. The Company's ASCs
permit the shipment of all sizes of packages and letters.

         The related service industry (e.g., "mailbox" stores) providing package
collection services to consumers and small businesses is similarly very
competitive. The Company believes that these companies, many of which are
franchised, price their charges for shipping transactions based upon marking-up
line carrier charge and taking into account such factors as the type of service
provided, the size and weight of the package and the distance of the shipment.
The Company believes that there are at least nine national companies that have
established over 3,000 locations throughout the United States, primarily through
franchises. While the Company believes that such companies are a potential
customer base for the Company, they also represent intense competition for
Company owned and operated ASCs. The Company's primary method of competition



September 25, 1997



<PAGE>

with packaging stores is to offer package shipping automation, self-service and
24-hour access to its ASCs in most retail locations, with minimal services
required by on-site personnel.

         Additionally, the Company believes it has two major competitors in the
consumer retail market, Express Shipping Center, Inc. and Package Express, Inc.,
both of which provide services to retail and mass merchandisers related to
receiving and aggregating packages for commercial carrier pickup. These
competitors utilize store labor for manual processing and accepting of packages
at over 5,000 locations nationwide. The Company believes that its technology
provides substantial labor savings for retailers and mass merchandisers over the
methods provided by these competitors. The Company competes with these
competitors by offering a complete and automated solution that reduces time and
expenses related to: bank credit card processing; training employees related to
carrier services, rates and new service changes; package processing time for
label completion, shipping charge calculation, service explanations and customer
interaction; daily shipping documentation preparation; accounting and record
keeping, reconciliation and paying weekly carrier bills and generating
management reports.

PATENTS

         The Company currently owns eight issued U.S. patents relating to
technology currently employed in its ASC products. The Company has also received
patent protection in several foreign countries, including Australia, Canada,
Japan, and the European Patent Community and has filed a patent application
pursuant to the Patent Cooperation Treaty designating Australia, Canada, South
Korea, Mexico and the European Patent Community for potential patent protection.
However, there can be no assurance that the Company's patents will afford it
significant protection.

         In 1996, the Company purchased three additional patents that
complimented its current patent portfolio. In addition, the Company has a patent
application pending, which relates to significant aspects of its proprietary
technology. At the time it made such application, significant research was
conducted for the Company by its patent counsel, with respect to prior patented
art similar to the Company's ASC. Such research uncovered no art that is
believed by the Company and such counsel to be significantly detrimental to the
patentability of the inventions claimed in the application and, to the best of
the Company's knowledge, its ASC does not infringe upon patent or other
proprietary rights of any third parties. There can be no assurance, however,
that such application will result in the issuance of a patent.

         There can be no assurance that the patent application filed by the
Company will result in a patent being issued or that any patents now issued or
that may be issued in the future will afford protection against competitors with
similar technology. In addition, no assurance can be given that patents issued
to the Company will not be infringed, designed-around by others or invalidated.
Some foreign countries provide significantly less patent protection than the
United States. There also can be no assurance that the Company's technology will
not infringe patents or proprietary rights of others. Furthermore, there can be
no assurance that challenges will not be instituted against the validity or
enforceability of any patent owned by the Company or, if instituted, that such
challenges will not be successful. The cost of litigation to uphold the validity
and prevent infringement of a patent can be substantial as can be the costs of
defending against such claims.

         The Company also owns other proprietary technology and intellectual
property, including trade dress, trade secrets and software, that the Company
intends to protect vigorously with applicable state and federal intellectual
property laws. Although limited protection for software under the patent laws of
the United States is currently available, there can be no assurance that
software will continue to be the subject of such protection in the United
States. Also, foreign countries offer varying levels of patent protection for
software when compared with the United States.

September 25, 1997



<PAGE>

TRADEMARKS

         The Company presently owns United States trademark registrations for
the trademark U-SHIP & Design and for the trademark U-SHIP. In addition, the
Company owns a pending United States trademark registration application for the
trademark U-SHIP & Design. Each of these registrations and applications are for
the following goods: automated shipping machine for packages and overnight
letters which computes charges and prints labels, receipts and other similar
documents.

         There can be no assurance that the registered trademarks or the pending
trademark application flied by the Company will afford protection against
competitors with similar marks that may have a prior use date. In addition, no
assurance can be given that trademarks owned by the Company will not be
infringed upon by others. There also can be no assurance that the Company's
trademarks will not infringe upon trademarks or proprietary rights of others.
Furthermore, there can be no assurance that challenges will not be instituted
against the validity or enforceability of any trademark registration owned by
the Company or, if instituted, that such challenges will not be successful. The
cost of litigation to uphold the validity and prevent infringement of a
trademark can be substantial as can be the costs of defending against such
claims.

EMPLOYEES

         As of June 30, 1997, the Company employed 22 people on a full-time
basis and 1 on a part-time basis. The Company believes that its relations with
its employees are good.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company leases approximately 16,200 square feet of space used for
offices, assembly, storage and packaging at 5583 West 78th Street, Edina,
Minnesota 55439 at a monthly rent of $11,650. The lease expires on March 31,
1999. The Company believes that these leased premises will meet is requirements
for facilities for the remainder of the lease term.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not a party to nor is any of its property subject to any
material pending legal proceedings, nor does the Company know of any material
legal proceedings being contemplated by governmental authorities.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         There were no matters submitted to a vote of the Company's shareholders
during the three month period ended June 30, 1997.

September 25, 1997



<PAGE>



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock began trading under the symbol "UBOT" on the
NASDAQ SmallCap Market in June 1996. Prior to such time, the common stock of the
Company was traded on a limited basis on the over-the-counter market under the
symbol "UBOT." The following table sets forth the quarterly high and low bid
prices for the Company's common stock, as reported by the National Association
of Securities Dealers' Bulletin Board, for each full quarterly period within the
two most recent fiscal years.

                                                     CLOSING BID PRICES

                                          -----------------------------------
                                                 HIGH                  LOW
                                          ---------------      --------------


         Period
         ------
         Fiscal 1996

                  First Quarter                   2.50               1.00
                  Second Quarter                  3.50               1.00
                  Third Quarter                   5.50               3.50
                  Fourth Quarter                  4.25               3.50

         Fiscal 1997

                  First Quarter                   3.625              3.25
                  Second Quarter                  3.375              3.0625
                  Third Quarter                   2.50               2.00
                  Fourth Quarter                  1.9375             1.00

These prices represent inter-dealer prices without adjustment for mark-up,
mark-down or commission and do not necessarily reflect actual transactions.

         On September 1, 1997, the number of holders of record of common stock
was 454. The transfer agent for the Company's common stock is American Stock
Transfer & Trust, 40 Wall Street, New York, New York, telephone: (718) 921-8293

         The Company has not paid any dividends on its common stock and expects
that for the foreseeable future it will follow a policy of retaining earnings in
order to finance the continued development of its business. Payment of dividends
is within the discretion of the Company's Board of Directors and will depend
upon the earnings, capital requirements and operating and financial condition of
the Company, among other factors.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

         THE FOLLOWING DISCUSSION CONTAINS VARIOUS FORWARD-LOOKING STATEMENTS AS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH MAY BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "GOAL," "CONTINUE," OR OTHER COMPARABLE TERMINOLOGY.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES RELATING TO THE
COMPANY'S FUTURE PERFORMANCE. ACTUAL RESULTS OR EVENTS MAY MATERIALLY DIFFER
FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. IN EVALUATING SUCH
STATEMENTS, SHAREHOLDERS AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS AND ARE SPECIFICALLY DIRECTED
TO REVIEW THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION "CAUTIONARY FACTORS"
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN
SUCH FORWARD-LOOKING STATEMENTS.

September 25, 1997



<PAGE>



GENERAL

         As of June 30, 1997, the Company had 300 Automated Shipping Centers
("ASCs") located in 40 states. The first ASC was placed in service in November
1994. The Company has evolved from a product and technology company selling a
shipping product into a company offering automated shipping equipment, shipping
products and quality shipping services through the use of technology. In fiscal
year 1997, the Company's sales efforts have emphasized the placement of ASCs in
strategic retail locations at the Company's expense and operating them to
maximize the Company's revenue. Under this plan, the Company continues to pay a
percentage of package shipping revenue to the retail location where the ASC is
placed, but the Company retains a greater share of the shipping revenue. The
Company is presently evaluating the deployment strategy of owning and operating
ASCs due to a lack of anticipated shipping volume, and the significant losses
that the Company has incurred to date and is continuing to incur. The Company
had expected that by placing its ASCs at locations where individuals owning
small businesses or individuals working out of a home office frequent for
business services, it would be able to capture significant shipping volume
without incurring the significant expense of a consumer marketing program.
However, the Company's experience to date has not borne out this expectation. No
assurance can be given that this strategy will result in any significant
increase in package shipping volume at these ASC locations.

         The Company believes that its automation technology for shipping can
reduce costs, help in extending service hours through the use of unattended ASCs
and improve service to the shipping consumer. The ASCs would provide additional
access points for carriers and allow them to better serve their customers. The
Company currently intends to focus on marketing its product and technology to
carriers who generally have a broad, established customer base and greater
financial resources and marketing capability than the Company.

RESULTS OF OPERATIONS

         Package shipping revenue for the fiscal year ended June 30, 1997,
increased $156,648 or 29% to $696,415 from $539,767 for the fiscal year ended
June 30, 1996. Net sales for the fiscal year ended June 30, 1997, increased
$204,357 or 29% to $917,705 from $713,348 for the same period in 1996. The
increase in package shipping revenue is the result of the higher number of ASC
locations. New ASC units take a number of months to reach their expected
on-going volume. As a result, the increase in package volume does not reflect
the expected full impact of the increase in number of ASC locations from 156
active units as of June 30, 1996 to 300 active units at the end of June 30,
1997. The Company has placed 144 ASCs at retail locations during the last twelve
months. Of the increase in the number of ASCs between the two periods, 30 units
were placed in service during the quarter ended June 30, 1997. The Company's
expectations of package volume at new ASC locations have not been met to date.
The Company has initiated marketing initiatives in cooperation with the retail
establishments which are intended to increase the volume of package shipping at
its ASCs. The full results of these initiatives are not yet known and there can
be no assurance that the Company will be successful in increasing package
shipping volumes substantially at its existing ASC locations. The Company
emphasized placement of owned ASCs during the fiscal year ended June 30, 1997.
As a result, revenues from machine sales increased at a slower rate for this
period in comparison to the same period in 1996. Package shipping revenues will
continue to be the emphasis for growth in future periods, although the Company
is also making efforts to increase sales of ASCs in certain niche markets which
appear attractive.

         Gross margins increased by $95,431 or 323% to $124,984 for the twelve
month period ended June 30, 1997, from $29,553 for the twelve month period ended
June 30, 1996. Gross margins as a percent of sales increased during the fiscal
year to 14% compared to 4% in the previous fiscal year, primarily due to
increased revenues from package shipping. As package shipping volumes increase
and certain fixed related costs are covered, the Company expects gross margins
as a percent of sales to increase.


September 25, 1997



<PAGE>

         General and administrative expenses for the fiscal year ended June 30,
1997, increased $613,537 or 47% to $1,928,753 from $1,315,216 in fiscal year
1996. Personnel expenses accounted for approximately $250,000 of the increase
and additional increases in general and administrative expenses, particularly
ASC depreciation, an increase in maintenance costs associated with a field
upgrade completed in February 1997 and other administrative costs incurred in
the fourth quarter of the fiscal year, accounted for the remaining increase. In
April 1997, the Company implemented cost-cutting measures through the reduction
of staff and deferral of certain expenditures. Additional staff reductions and
operating expense reductions were implemented during July and August of 1997 and
the results of these reductions will be felt beginning in the first quarter of
fiscal 1998.

         Marketing and sales expenses for the fiscal year ended June 30, 1997
increased $282,104 or 96% to $576,142 from $294,038 for the fiscal year ended
June 30, 1996. Personnel expenses represented approximately $150,000 of the
increase, reflecting the increased marketing and sales activity being undertaken
by the Company to increase the placements of the ASC units and to increase
volume at existing ASC sites.

         Research and development expenses for the fiscal year ended June 30,
1997, decreased $9,161 or 4% to $237,892 from $247,053 for fiscal year 1996. The
Company's research and development activities were focused primarily on the
total unattended stand-a-lone ASC model and no new significant development
activities were undertaken during the fiscal year. Research and development
expenses relate primarily to the development of new software tools for the ASCs
and costs associated with the development of new experimental models of the ASC.

         Interest income increased to $108,577 for the fiscal year ended June
30,1997 compared to $21,304 for the fiscal year ended June 30, 1996 as a result
of higher cash balances resulting from proceeds of the Company's public offering
in May 1996 and the April 1997 private placement which allowed the Company to
pay down its outstanding debt and invest the surplus. Interest expense was lower
by $360,145 as a result of debt repayment facilitated by the public offering.

         Net loss for the fiscal year ended June 30, 1997 increased by $343,631
to $2,527,918 from $2,184,287 for the comparable period in the prior year. The
Company expects to incur additional losses until its ASC's generate sufficient
volume to offset its investment and operating expenses. There can be no
assurance that the shipping volume will increase sufficiently or the Company
will be able to expand its network of ASCs sufficiently to generate profitable
revenues.

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

         The Company's revenues for the fiscal year ended June 30, 1996 were
$713,348 as compared to $725,729 for the fiscal year ended June 30, 1995. The
Company's revenue consisted of ASC sales and recurring package shipping revenue.
During the fiscal year ended June 30, 1996, the Company began implementation of
its strategy to focus on package shipping revenue as its primary source of
revenue. The Company's package shipping revenue for the fiscal year ended June
30, 1996 was $539,767 as compared to $150,639 for the fiscal year ended June 30,
1995, an increase of 258%. During its 1996 fiscal year, the Company delivered
and installed 100 ASCs compared to 51 ASCs installed during fiscal year ended
1995 when the Company was introducing its ASC. The Company first shipped the
current version of its ASC to market in November 1994. As of June 30, 1996, the
Company had installed 156 systems in 24 states. Although ASCs deployed increased
during fiscal year 1996, machine sales revenue in the amount of $313,496 was
deferred by reason of sales made with retailer return options.

         In order to increase the number of ASC installations to produce greater
package shipping revenue, the Company introduced a new marketing program in 1995
which offered retailers a limited return option. This program allows the Company
or the retailer to terminate the lease if certain criteria related to package
volume, retailer advertising and promotion and consumer acceptance are not met
within the first twelve months of the ASC's operation. A sale under this program
is recorded as deferred revenue which is recognized as revenue as the return
rights lapse. During fiscal year 1996, approximately 62% of ASC sales 

September 25, 1997



<PAGE>



were made with this option. As of June 30, 1996, the Company had deferred
recognition of $313,496 of revenue related to this program and $238,106 of
related cost. The Company is also responsible for ongoing maintenance of the
ASCs. As of June 30, 1996, the Company had deferred a total of $106,206 for such
maintenance obligations. The Company recognizes deferred maintenance revenue
over the term of the maintenance agreement, generally five years.

         While the Company's package shipping revenues were higher for the
fiscal year ended June 30, 1996, its net sales for this period were actually
less than those for the fiscal year ended June 30, 1995, due to the deferral of
$313,496 of revenue related to ASCs leased with return privileges. Cost of sales
for the fiscal year ended June 30, 1996 consisted of package shipping revenue
costs of $502,708 and machine production costs of $181,087. For the fiscal year
ended June 30, 1995, cost of sales were comprised of package shipping service
costs of $149,750 and machine productions costs of $454,548. Gross margins
decreased from 17% to 4%, reflecting the Company's strategic decision to lower
the price of its ASCs in an effort to increase market share through increased
installations. The Company's decision to lease its ASC at its manufactured cost
reduced its gross margin by approximately $3,000 per unit. In addition,
increased training and installation expenses reduced the gross margin on ASC
placement by approximately $900 per unit. The reduction in the gross margin was
partially offset by the Company reducing its cost to manufacture ASCs through
production and purchasing efficiencies that increased the gross margin by $2,400
per Unit. The Company expects this strategy to produce greater package shipping
volume and revenue through increasing the number of installations.

         General and administrative expenses increased by $512,492 or 64% from
$802,724 for the fiscal year ended June 30, 1995 to $1,315,216 for the fiscal
year ended June 30, 1996. Of the increase, $251,923 is attributed to additions
to staff within the operations areas, and $172,990 is the result of additional
expenses related to depreciation, service and maintenance of installed ASCs. The
remaining $87,579 increase is associated with increased expenses related to
travel and general and administrative expenses.

         Marketing and sales expenses increased by $143,271 or 95% from $150,767
for the fiscal year ended June 30, 1995 to $294,038 for the fiscal year ended
June 30, 1996. Of the increase, $68,369 is attributed to additions to staff
within the sales area, and the remaining $74,902 is the result of additional
expenses related to promotion and advertisements.

         Research and development expenses for fiscal year 1996 were $247,053
which increased from $226,080 incurred in fiscal year 1995. Research and
development expenditures in fiscal year 1996 related to the development of
stand-alone versions of the ASC and development of software for the Company's
UPS Canada product.

         Interest expense increased from $137,174 for the fiscal year ended June
30, 1995 to $378,837 for the fiscal year ended June 30, 1996 primarily related
to the bridge financing obtained by the Company in December 1995.

         The net loss for the fiscal year ended June 30, 1996 was $2,184,287, or
$1.13 per share, compared to a net loss of $1,195,314, or $.73 per share, for
the fiscal year ended June 30, 1995.

LIQUIDITY AND CAPITAL RESOURCES

         The Company completed a public offering in May 1996, which raised
approximately $5.1 million. During the first quarter of the current fiscal year,
the Company received an additional $0.3 million as a result of the exercise by
the underwriter of its over-allotment option. The Company used approximately
$1.9 million of the public offering proceeds to repay bridge notes and bank
debt, leaving net proceeds of approximately $3.5 million to finance growth and
working capital. In April 1997, to meet working capital requirements, the
Company completed a private placement of its common stock raising approximately
$1.6 million. The Company is currently operating at a loss and depends on cash
generated through its equity offerings to fund its operating deficit. There can
be no assurance that the Company will be able to generate sufficient revenues 



September 25, 1997



<PAGE>


to meet its operating cash and growth needs or that any equity or debt funding
will be available or at terms acceptable to the Company in the future to
continue operating in its current form.

         The Company's loss for the fiscal year ended June 30, 1997 was
$2,527,918. The Company expects to incur losses for the foreseeable future due
to the ongoing activities of the Company to expand its ASC network and the costs
incurred in supporting this network. As noted earlier, the Company has initiated
marketing programs to influence the volume of package shipping at its shipping
centers. The Company believes that these programs, while initially requiring
additional cash outlays, will result in greater package shipping revenues per
shipping center, although no assurance can be given that volumes will increase
appreciably as a result of these initiatives in the near future, if at all.
Accordingly, the Company expects that its current ASC network operations will
continue to result in negative cash flow and working capital deficiencies that
will require the Company to continue to obtain additional capital.

         During September 1996, the Company entered into an agreement with
Kinko's to install up to 250 ASCs in Kinko's Copy Centers by December 1997. In
October 1996, the Company entered into a similar agreement with OfficeMax to
install 73 ASCs in OfficeMax locations by the end of January 1997, which
agreement was further expanded, in April 1997, to include a total of 140 ASCs.
The total cost of installing these units will be approximately $2 million.
Through June 30, 1997, the Company has installed 165 units at an approximate
cost of $908,000. To date, the Company has utilized funds generated from its May
1996 public offering to fund the installation of these units and expects to rely
on this, the private placement proceeds and internally generated funds to
continue financing the installations in the short term. It is likely that the
Company will need additional commercial financing for a portion of the remaining
installations. There can be no assurance that such financing will be available
to the Company on terms satisfactory to it. The Company will require at least
$1.3 million of additional capital to fulfill its commitments to install
additional ASCs pursuant to the Kinko's and OfficeMax Contracts.

         Inventory decreased by approximately $68,000 as of June 30, 1997,
compared to June 30, 1996. The Company has reduced its purchase of materials
during the fourth quarter and is drawing down its current inventory stock to
fulfill the Kinko's and OfficeMax agreements. Accounts receivables increased by
approximately $80,000 from June 30, 1996 to June 30, 1997 due to the greater
number of ASCs in operation in fiscal year 1997. Accounts payables decreased by
approximately $37,000 over the same period due to the decreased level of
inventory purchases. Accrued liabilities and deferred revenue decreased due to
reversals of deferred revenues resulting from the exercise of return rights and
recognition of revenue on the remaining leased units.

         Based on current commitments and on going working capital needs, the
Company believes that it will require additional debt or equity funding within
the next three to four months to continue to penetrate the market for automated
shipping and to fund its on going operations. The Company's cash needs and usage
may vary based on the outcome of these initiatives. There can be no assurance
that the necessary financing will be available to the Company or, if available,
that the same will be on terms satisfactory or favorable to it. It is likely
that additional equity financing will be highly dilutive to existing
shareholders.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

         THE COMPANY WISHES TO CAUTION SHAREHOLDERS AND PROSPECTIVE INVESTORS
THAT THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD IN THE FUTURE AFFECT
THE COMPANY'S ACTUAL OPERATING RESULTS, AND THAT SUCH RESULTS COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY THE
COMPANY. THE STATEMENTS UNDER THIS CAPTION ARE INTENDED TO SERVE AS CAUTIONARY
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THE FOLLOWING INFORMATION IS NOT INTENDED TO LIMIT IN ANY WAY THE
CHARACTERIZATION OF OTHER STATEMENTS OR INFORMATION UNDER OTHER CAPTIONS AS
CAUTIONARY STATEMENTS FOR SUCH PURPOSE. THE ORDER IN WHICH SUCH FACTORS APPEAR
BELOW SHOULD NOT BE CONSTRUED TO INDICATE THEIR RELATIVE IMPORTANCE OR PRIORITY.

September 25, 1997



<PAGE>


LIMITED OPERATING HISTORY; LOSSES FROM OPERATIONS; GOING CONCERN UNCERTAINTY

         The Company entered it current business in 1992 and has had a limited
operating history. The Company's proposed operations are subject to all the
risks inherent in the establishment of a new business. The Company has never
generated net income, continues to sustain substantial operating losses and
expects to continue to operate at a loss for the foreseeable future. For the
year ended June 30, 1997, the Company's net sales were $917,705. The Company has
never generated net income, continues to sustain substantial operating losses
and expects to continue to operate at a loss thorough its current fiscal year.
For the year ended June 30, 1997, the Company incurred net losses of $2,527,918.
As of June 30, 1997, the Company had an accumulated deficit of $7,871,213. As of
June 30, 1997, the Company had working capital of $1,225,063. The Company
anticipates that its working capital will fall below $350,000 by September 30,
1997. There can be no assurance that the Company will achieve profitable
operations. The Company expects that it will require additional debt or equity
financing during the next six to eight months to continue its business. A
failure on the part of the Company to raise such financing would result in the
reduction of cessation or the Company's business.

MARKET ACCEPTANCE OF PRODUCT

         A prerequisite to the Company's success will be the development of
demand for self-service, automated shipping services and wide placement of ASCs
at retail and other business locations. This is an undeveloped market and there
can be no assurance that such demand or market acceptance will develop. To date,
the Company has had limited success in creating a demand for automated shipping
services. The number of shipping transactions which currently utilize the
Company's ASCs are lower than expected. While the Company is undertaking efforts
to address these problems and to create a demand for the Company's ASCs, the
marketing and other costs of doing so may be beyond the Company's funding
capabilities. A failure on the part of the Company to address these and other
issues and to create a market demand for its products could result in the
reduction or cessation of the Company's business.

         The Company operates in 40 states from Alaska to New York. The
commercial (non-U.S. Postal Service) package shipping market is dominated by a
relatively small number of carriers, and carriers affiliated with direct air
carriers, including UPS, Fed. Ex., Inc. ("Federal Express"), Roadway Package
System, Inc. ("RPS"), DHL Worldwide Services ("DHL") and Airborne Express
("Airborne"). These established carriers, together with the U.S. Postal Service,
process the vast majority of consumer and small business package shipping
transactions. There can be no assurance that any of such dominant commercial
package shippers or the public will adopt a self-service shipping center concept
or that they will select the Company's ASCs in preference to the shipping
services offered by its competitors or potential competitors. The failure to
achieve market acceptance would have a material adverse effect on the Company's
business. In addition, there can be no assurance that the Company will have the
resources or the capacity to meet the demand, if any, for its product.

DEPENDENCE UPON CARRIERS

         The Company is substantially dependent upon UPS to pick up and
transport packages processed via the Company's ASCs. Any interruption in, or
increase in price of, such service, or the failure of the Company to continue to
maintain arrangements with UPS or to develop relationships with other package
carriers, would cause an interruption of service to the Company's customers and
would have a material adverse effect upon its business. The Company has no
control over the nature, cost or availability of services provided by any
carrier, including UPS, and has no long-term contracts with such carriers.

         On August 4, 1997, the Teamsters Union went on strike against UPS. As a
result, a significant number of UPS' 185,000 employees, who are also Teamster
Union members, joined the strike. In addition, most of the 2,000 pilots
belonging to the Independent Pilots Association honored the strike, further
hampering UPS' shipping capabilities. This strike halted the shipment of the
vast majority of packages intended to be shipped via UPS, including those
intended to be shipped utilizing the Company's ASCs. While UPS and the 


September 25, 1997



<PAGE>

Teamsters reached an agreement which ended the strike on August 18, 1997,
there can be no assurance that the inability to use the Company's ASCs during
the strike will not have a continued adverse affect on the acceptance or use of
the ASCs. During the period of the strike, and for sometime thereafter, the
Company experienced a material decline in revenue for package shipping
transactions.


ABILITY TO FORM STRATEGIC RELATIONSHIPS

         The Company's strategy includes the formation of strategic
relationships with major carriers and retailers. To date, the Company has had
limited success in creating such relationships. The Company believes that
relationships with carriers and other strategic partners will enable it to
deploy its proprietary technology in the market by leveraging a partner's
established service and distribution channels. The Company has entered into
relationships with Kinko's and OfficeMax pursuant to which the Company has
installed 78 ASCs in Kinko's Copy Centers and 87 ASCs in OfficeMax stores. These
agreements have, however, not generated expected levels of package shipping
transactions and the Company has curtailed installation of ASCs under the terms
of both agreements. The Company requires substantial additional financing in
order to continue its business. The Company believes that, at least in part,
such financing can be obtained from the partners with whom it is able to create
significant strategic relationships. The Company has not been successful in
creating relationships with potential partners other than Kinko's and OfficeMax.
To the extent that the Company is not able to enter into additional strategic
relationships with carriers or other business partners, it may be required to
reduce or cease its business operations.

SUBSTANTIAL INVESTMENT IN EQUIPMENT

         As a part of its business strategy, the Company seeks to place ASCs in
locations that it believes have the potential to generate high package volume
and with businesses that it believes have multiple strategic locations, such as
business centers and other service provider chains. Although the Company has
previously been able to sell ASCs with financing from third party lessors, no
assurance can be given that such financing will be available in the future
should it again seek to sell ASCs outright to retail site proprietors. Also, the
Company's strategy in fiscal year 1997 emphasized placement of ASCs in retail
locations at its expense. The Company expects that it will expend more than
$1.3 million to fulfill its commitments to install ASCs under the Kinko's and
OfficeMax Contracts. There can be no assurance that such strategy will be
successful or that the Company will be able to recover its investment in ASCs
through profit margins on higher volumes of package shipments. The Company's
strategy to date has resulted in lower-than-expected revenue and significant
operating losses.

DEPENDENCE ON PROPRIETARY RIGHTS

         The Company's success depends, in part, upon its ability to protect its
proprietary technology, for which it relies on a combination of patent,
copyright, trademark and trade secret laws. Although the Company has received
patents for its ASC, there can be no assurance that current intellectual
property laws will afford the Company significant protection against competitors
or that other technology will not be developed to functionally compete with the
Company's product. The Company believes that one or more major carriers, all of
which have greater financial, technical and marketing resources than the
Company, have attempted to develop or purchase products or technologies
competitive with the Company's ASCs. The Company is not currently aware of any
self-service, automated shipping products in use by private users which would
infringe upon the Company's patents. Should the Company determine that its
patents are being infringed, it could incur substantial legal costs in any
action to enforce its patents or other intellectual property rights, and there
can be no assurance that it would be successful in any such action.

COMPETITION

September 25, 1997



<PAGE>

         The commercial (non-U.S. Postal Service) package shipping market is
dominated by a relatively small number of companies which have more experience
in the industry and have greater financial and technical resources than the
Company. Both Federal Express and UPS have test marketed automated self-service
shipping terminals, but have, to the best of the Company's knowledge,
discontinued such tests, and neither of them currently operates competing
machines in the market that are comparable to the form and function of the
Company's ASC. The Company is aware, however, that the U.S. Postal Service is in
the process of developing the PTM. Because the Company's ASC does not currently
permit consumers to ship packages through the United States Mail, to the extent
that the PTM will, it may discourage people from using the Company's ASCs. The
Company also competes with major air express carriers, such as UPS, Federal
Express, Airborne, DHL and the U.S. Postal Service, all of which deploy large
numbers of "drop boxes" which compete with the Company's ASCs. According to
industry sources, these carriers are deploying additional drop boxes on an
ongoing basis. Many of such boxes have or will be installed in business centers,
office parks and shopping malls, which could be potential sites for the
Company's ASCs. There can be no assurance that such dominant commercial package
shippers or the public will adopt a self-service shipping center concept or that
they will select the Company's products and services in preference to their
current methods of package collection, or to those of the Company's competitors
or potential competitors. The Company also faces intense competition from the
related service industry providing non-automated package collection services,
such as mail and packaging stores. In addition, the Company's competitors and
the dominant package shippers, all which have greater resources than the
Company, could develop products competitive with the Company's ASCs.

TECHNOLOGICAL RISKS

         The Company anticipates that any market which develops for automated
shipping services will be characterized by rapidly changing technology and user
preferences. Such market will likely be heavily influenced by the preferences
and acceptance of such technology by major package and parcel carriers. There
can be no assurance that future products or technology developed by others will
not render obsolete the Company's technology. Failure on the part of the Company
to develop new technology to meet competitive challenges may adversely affect
the Company's prospects.

DEPENDENCE ON KEY PERSONNEL

         The Company's future success will depend in large part upon the
continued service of its key technical, marketing and management personnel, as
well as on its ability to continue to attract independent contractors. The
Company is also dependent on its ability to identify, hire, train and motivate
qualified personnel necessary to enable it to continue ongoing product
development and to market its products and services. The Company does not have
key person life insurance policies on any of its employees, except a $1,000,000
policy on Bruce Senske. Substantially all of the Company's employees are subject
to confidentiality agreements. The departure of key employees could have a
material adverse effect on the Company's business. No assurance can be given
that the Company's current employees will continue to work for the Company or
that the Company will be able to obtain the services of additional personnel
necessary for the Company's growth.

QUARTERLY REVENUE FLUCTUATION; SEASONALITY

         The Company expects to experience continued and substantial
fluctuations in revenue due to seasonal changes which affect the volume of
package shipping transactions. Generally, the Company experiences its highest
volume of package shipping between the back-to-school and Christmas seasons.
Such fluctuations create significant imbalances in the Company's cash flow.
Potential investors should not, therefore, rely on individual quarterly results
as being indicative of the Company's overall performance.

RELIANCE UPON THIRD PARTIES FOR FINANCING

         Historically, the Company has relied upon third parties to provide
lease financing for ASCs sold or leased to retailers. While the Company's focus
has shifted away from the placement of ASCs in reliance on

September 25, 1997



<PAGE>


such financing, there can be no assurance that such financing will be available
to the Company on terms acceptable or favorable to it. In the event the Company
should be unable to maintain relationships with third parties to provide lease
financing for ASCs, its business could be adversely affected.


ITEM 7.  FINANCIAL STATEMENTS

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U-Ship, Inc.:

We have audited the accompanying consolidated balance sheets of U-Ship, Inc. and
Subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U-Ship, Inc. and Subsidiaries
as of June 30, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company incurred net losses of $2,527,918 and
$2,184,287 for the years ended June 30, 1997 and 1996, respectively. This
factor, among others, as discussed in Note 1, raises substantial doubt about the
ability of the Company to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.



                                              /s/ ARTHUR ANDERSEN LLP
                                            ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
August 22, 1997

September 25, 1997



<PAGE>



<TABLE>
<CAPTION>
                                           U-SHIP, INC. AND SUBSIDIARIES

                                            Consolidated Balance Sheets
                                                   As of June 30

                                                                           1997             1996
                                                                       ------------    ------------
<S>                                                                    <C>             <C>         
                               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                         $    724,260    $  4,822,785
     Short-term investments                                                 250,000              --
     Accounts receivable                                                    138,683          59,135
     Inventories                                                            753,917         822,393
     Prepaid expenses and other                                              32,723          12,208
                                                                       ------------    ------------
         Total current assets                                             1,899,583       5,716,521
                                                                       ------------    ------------

PROPERTY AND EQUIPMENT:

     Shipping centers                                                     1,290,952          87,045
     Furniture, fixtures and equipment                                      558,233         365,003
     Less- Accumulated depreciation                                        (496,500)       (230,704)
                                                                       ------------    ------------
         Total property and equipment, net                                1,352,685         221,334

OTHER ASSETS, net                                                           186,871          76,964
                                                                       ------------    ------------
                                                                       $  3,439,139    $  6,014,829
                                                                       ============    ============

         LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

     Current maturities of long-term debt and notes payable            $     72,925    $     28,173
     Deferred revenue                                                        53,289         419,702
     Checks issued not yet presented for payment                                 --       1,851,365
     Accounts payable                                                       157,041         194,227
     Accrued liabilities                                                    391,265         250,353
                                                                       ------------    ------------
         Total current liabilities                                          674,520       2,743,820

LONG-TERM DEBT, net of current maturities                                   104,386          30,263
                                                                       ------------    ------------

COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)

SHAREHOLDERS' EQUITY:

     Preferred stock, $.004 par value; 25,000,000 shares authorized; 
          none issued and outstanding                                            --              --
     Common stock, $.004 par value; 75,000,000 shares authorized;
          4,967,669 and 3,916,573 issued and outstanding in 1997 and
          1996                                                               19,871          15,666
     Additional paid-in capital                                          10,492,075       8,548,875
     Warrants                                                                19,500          19,500
     Accumulated deficit                                                 (7,871,213)     (5,343,295)
                                                                       ------------    ------------
         Shareholders' equity                                             2,660,233       3,240,746
                                                                       ------------    ------------
                                                                       $  3,439,139    $  6,014,829
                                                                       ============    ============
</TABLE>

         The accompanying notes are an integral part of these consolidated
balance sheets.

September 25, 1997



<PAGE>



                          U-SHIP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations
                           For the Years Ended June 30

                                          1997           1996
                                      -----------    -----------
REVENUES:

     Package shipping                 $   696,415    $   539,767
     Machine sales                        195,883        159,021
     Other                                 25,407         14,560
                                      -----------    -----------

         Net sales                        917,705        713,348

COST OF SALES                             792,721        683,795
                                      -----------    -----------

         Gross profit                     124,984         29,553

GENERAL AND ADMINISTRATIVE EXPENSES     1,928,753      1,315,216

MARKETING AND SALES                       576,142        294,038

RESEARCH AND DEVELOPMENT EXPENSES         237,892        247,053
                                      -----------    -----------

     Loss from operations              (2,617,803)    (1,826,754)

INTEREST EXPENSE                          (18,692)      (378,837)

INTEREST INCOME                           108,577         21,304
                                      -----------    -----------

NET LOSS                              $(2,527,918)   $(2,184,287)
                                      ===========    ===========

NET LOSS PER SHARE                    $      (.61)   $     (1.13)
                                      ===========    ===========

WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING          4,172,862      1,930,786
                                      ===========    ===========



         The accompanying notes are an integral part of these consolidated
financial statements.


September 25, 1997



<PAGE>



<TABLE>
<CAPTION>
                                                 U-SHIP, INC. AND SUBSIDIARIES

                                        Consolidated Statements of Shareholders' Equity
                                                  For the Years Ended June 30

                                                                                           
                                             Common Stock                                   
                                    --------------------------      Paid-In                      Accumulated
                                     Shares          Amount         Capital         Warrants       Deficit           Total
                                  ------------    ------------    ------------    ------------   ------------    ------------
<S>                                 <C>          <C>             <C>             <C>            <C>             <C>         
BALANCE, June 30, 1995               1,754,880    $      7,019    $  1,631,109    $         --   $ (3,159,008)   $ (1,520,880)
    Sale of common stock at
       $3.00 per share from
       July to November                 34,333             137         102,863              --             --         103,000
    Cancellation of shares
       in October                     (200,000)           (800)            795              --             --              (5)
    Issuance of common stock
       for the retirement of
       debt at $3.00 per
       share in October                419,890           1,680       1,257,991              --             --       1,259,671
    Issuance of warrants                    --              --              --          19,500             --          19,500
    Issuance of stock for lease
       financing services at
       $3.50 per share                     750               3           2,622              --             --           2,625
    Repurchase of incremental shares       (34)             --            (155)             --             --            (155)
    Public offering of common stock  1,750,000           7,000       5,115,390              --             --       5,122,390
    Conversion of bridge notes
       at $2.80 per share              156,754             627         438,260              --             --         438,887
    Net loss                                --              --              --              --     (2,184,287)     (2,184,287)
                                  ------------    ------------    ------------    ------------   ------------    ------------

BALANCE, June 30, 1996               3,916,573          15,666       8,548,875          19,500     (5,343,295)      3,240,746
    Public offering of common stock    100,000             400         300,089              --             --         300,489
    Issuance of common stock
       in exchange for patent            4,286              17          14,983              --             --          15,000
    Private placement of
       common stock                    946,810           3,788       1,628,128              --             --       1,631,916
    Net loss                                --              --              --              --     (2,527,918)     (2,527,918)
                                  ------------    ------------    ------------    ------------   ------------    ------------

BALANCE, June 30, 1997               4,967,669    $     19,871    $ 10,492,075    $     19,500   $ (7,871,213)   $  2,660,233
                                  ============    ============    ============    ============   ============    ============

</TABLE>

         The accompanying notes are an integral part of these consolidated
financial statements.


September 25, 1997



<PAGE>



<TABLE>
<CAPTION>
                                           U-SHIP, INC. AND SUBSIDIARIES

                                       Consolidated Statements of Cash Flows
                                            For the Years Ended June 30

                                                                   1997           1996
                                                               -----------    -----------
<S>                                                            <C>            <C>         
OPERATING ACTIVITIES:
     Net Loss                                                  $(2,527,918)   $(2,184,287)
     Adjustments to reconcile net loss to net cash flows
         used for operating activities -
              Depreciation and amortization                        323,473        136,468
              Common stock issued for services                          --          2,625
              Change in current operating items:
                  Checks held, not yet presented for payment    (1,851,365)     1,851,365
                  Accounts receivable                              (79,548)        (3,531)
                  Inventories                                       68,476       (375,457)
                  Prepaid expenses and other                       (20,515)        (1,467)
                  Accounts payable                                 (37,186)      (316,548)
                  Accrued liabilities and deferred revenue        (225,501)       258,852
                                                               -----------    -----------
                      Cash used for operating activities        (4,350,084)      (631,980)
                                                               -----------    -----------

INVESTING ACTIVITIES:
     Purchases of property and equipment, net                   (1,363,630)      (129,779)
     Purchases of short-term investments                          (250,000)            --
                                                               -----------    -----------
                      Cash used for investing activities        (1,613,630)      (129,779)
                                                               -----------    -----------

FINANCING ACTIVITIES:
     Proceeds from notes payable and long-term debt                     --      2,248,509
     Payments on notes payable and long-term debt                  (67,216)    (1,931,049)
     Sale of common stock                                        1,932,405      5,225,236
     Cancellation of shares                                             --             (5)
                                                               -----------    -----------
                      Cash provided by financing activities      1,865,189      5,542,691
                                                               -----------    -----------

NET INCREASE (DECREASE) IN CASH                                 (4,098,525)     4,780,932

CASH AND CASH EQUIVALENTS, beginning of year                     4,822,785         41,853
                                                               -----------    -----------

CASH AND CASH EQUIVALENTS, end of year                         $   724,260    $ 4,822,785
                                                               ===========    ===========

NONCASH TRANSACTIONS:
     Conversion of debt to common stock                        $        --    $ 1,095,001
     Conversion of payables to common stock                             --        164,670
     Common stock issued for services or property                       --          2,625
     Conversion of bridge notes to common stock                         --        438,887
     Common stock issued in exchange for patent                     15,000             --
     Property and equipment leased under capital lease             186,091             --

CASH PAID DURING THE YEAR FOR INTEREST:                             18,692        189,684
                                                               ===========    ===========

</TABLE>

         The accompanying notes are an integral part of these consolidated
financial statements.

September 25, 1997



<PAGE>



                          U-SHIP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996

1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

U-Ship, Inc. (the Parent) has two subsidiaries, U-Ship International, Ltd.
(International) and U-Ship America, Inc. (America). International is in the
business of developing, manufacturing and operating equipment used as automated
self-service package shipping systems. America is an inactive subsidiary.
U-Ship, Inc. and its subsidiaries are collectively referred to herein as the
Company.

Since inception (September 30, 1991) through June 30, 1994, the Company was a
development stage enterprise, having devoted substantially all of its efforts to
proprietary product development and providing prototype products to certain
customers. Such efforts also included raising capital and acquiring and
constructing property and equipment. Although the Company began actively selling
its products during 1995 and no longer considers itself to be in the development
stage, it has not operated profitably to date and there are no assurances that
it will operate profitably in the future.

The Company incurred net losses of $2,527,918 and $2,184,287 for the years ended
June 30, 1997 and 1996, respectively, and unaudited information indicates that
losses are continuing subsequent to June 30, 1997. The Company's ability to
continue present operations, further develop potential proprietary products and
operate as a going concern is contingent upon approval, acceptance and sales of
the Company's products and the ability to obtain financing that might not be
available. The aforementioned factors raise substantial doubt about the
Company's ability to continue as a going concern.

Management's plan of action includes the following:

a.   Focus on marketing activities to increase usage of its automated shipping
     centers (ASCs) located in Kinko's and CopyMax stores. The Company is in
     discussions with Kinko's and CopyMax about marketing activities within
     these stores to promote awareness of the shipping kiosk and services.

b.   The Company has reduced staff and is in the process of reducing operating
     costs to preserve cash in the short term.

c.   The Company has focused its sales activities towards sales and leasing of
     its ASCs to reduce the cash investment associated with owning and operating
     ASCs.

d.   The Company is pursuing strategic relationships with carriers who could
     partner with the Company in deploying ASCs in the marketplace and assist in
     marketing activities to increase awareness and usage of the shipping
     kiosks.

Management believes that the successful completion of its plans and activities
will result in greater awareness of its product and services resulting in
increasing revenues and cash flows. However, no assurance can be given that the
Company will be successful in the implementation of its plans or that the
Company will be able to raise sufficient funds to meet its ongoing operating
liquidity needs. In 

September 25, 1997


<PAGE>


the event that the Company's activities do not result in increased revenues and
cash flows and the Company is not able to raise additional financing to meet its
operating needs, it may no longer be able to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Parent,
International and America. All intercompany balances and transactions have been
eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers all short-term, highly liquid investments, primarily in
commercial paper and money market accounts, that are readily convertible into
known amounts of cash and that have original maturities of three months or less
to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market. Inventories consist of shipping systems in various stages of completion,
including component parts. The components of inventory as of June 30 are:

                                                     1997              1996
                                                  ---------          --------
Raw materials and work components                  $718,217          $490,342

Finished goods at customer sites                     35,700           332,051
                                                  ---------          --------

                                                   $753,917          $822,393
                                                   ========          ========


REVENUE RECOGNITION

The Company generates revenue from two primary sources: the sale of automated
shipping centers and the per package shipping revenue generated from ongoing
shipping volume. Revenues are also derived, to a lesser extent, from the sale of
shipping supplies and maintenance contracts.

The Company generally recognizes revenue from sales of shipping systems upon
delivery and installation. Certain sales agreements allow the customer to return
the shipping system under certain circumstances within the first 12 months. Such
revenue and related costs are deferred until return rights lapse.

Package shipping revenue is recognized when the package is shipped. Revenue from
maintenance contracts is deferred and recognized over the period of the related
agreement.

Most of the automated shipping center sales are financed by third-party
equipment lessors. The lessor has certain recourse to the Company in the event
of customer default or return of the automated shipping center, primarily to
remarket the automated shipping center on a best-efforts basis. The Company has
reserved the estimated cost of fulfilling such recourse arrangements.


September 25, 1997



<PAGE>



CONCENTRATIONS OF CREDIT RISK

Concentrations of credit risk with respect to accounts receivable for package
revenues are limited due to the large number of customers comprising the
Company's customer base and their geographical dispersion. The Company generally
does not require collateral or other security for customer receivables. The
Company sells automated shipping centers to third-party leasing companies and,
at times, could maintain individually significant receivable balances with
primary leasing companies. Company credit card receivables are monitored and
controlled through credit checks, verification of bank references and regular
monitoring. Allowance for doubtful accounts is evaluated periodically based on
management's evaluation of collectibility, historical experience and other
economic factors.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Major renewals and betterments are
capitalized, and maintenance and repairs which do not improve or extend the
lives of the respective assets are charged to operations. Depreciation is
provided using the straight-line method for financial reporting purposes as
follows:

         Shipping centers                                  3-4 years
         Furniture, fixtures and equipment                 3-5 years

OTHER ASSETS

Other assets primarily represent costs related to the automated shipping machine
patents. These costs are amortized over five years.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to expense as incurred.

NET LOSS PER SHARE

Net loss per share was computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period. Common stock equivalents include the effects of options and
warrants which are assumed to be exercised or converted into common stock at the
beginning of the period. Pursuant to Securities and Exchange Commission rules,
shares of stock sold and stock options and warrants granted within one year of
the date of the initial public offering have been included in the calculation of
common share equivalents, using the treasury stock method, as if they were
outstanding for all periods presented. Shares canceled within one year of the
initial public offering have been reflected as if they had been canceled for all
periods presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate outcomes could differ from those estimates.


September 25, 1997



<PAGE>



NEW PRONOUNCEMENT

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
changes the way companies calculate their earnings per share (EPS). SFAS 128
replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be
disclosed. The Company is required to adopt SFAS 128 in the second quarter of
fiscal 1998, at which time all prior period EPS are to be restated in accordance
with SFAS 128. The Company believes the effect of adoption of SFAS 128 will not
be material to previously reported EPS.

2.   LONG-TERM DEBT AND NOTES PAYABLE:

Long-term debt consisted of the following as of June 30:

                                                       1997              1996
                                                    ---------         ---------
         Capital lease obligations                  $ 161,318         $  31,646
         Other                                         15,993            26,790
                                                    ---------         ---------
                  Total                               177,311            58,436
         Less-Current maturities                      (72,925)          (28,173)
                                                    ---------         ---------
                  Total long-term debt              $ 104,386         $  30,263
                                                    =========         =========


Maturities of long-term debt as of June 30, 1997 are as follows: $72,925 in
1998, $57,432 in 1999, $35,977 in 2000 and $10,977 in 2001.

3.       INCOME TAXES:

As of June 30, 1997, the Company had net operating loss carryforwards for income
tax purposes of approximately $7,054,000. These income tax net operating loss
carryforwards expire beginning in the year 2005. Because of the lack of
profitability, a valuation allowance equal to the deferred tax asset has been
recorded.

Ownership changes resulting from the conversion of long-term debt to common
stock or the issuance of additional convertible debt or equity ownership will
limit future annual realization of the tax net operating loss carryforwards to a
specified percentage of the value of the Company under Section 382 of the
Internal Revenue Code.

4.       CAPITAL STOCK:

RECAPITALIZATION AND FINANCING

On September 18, 1995, the board of directors approved a recapitalization
program which was effected in October 1995. This program included the conversion
of $1,259,671 of debt and payables to common stock, a reduction in the number of
outstanding shares of common stock by 200,000 shares, and a reduction in the
number of outstanding warrants to purchase common stock by 70,000 shares.

Further, on December 15, 1995, the Company closed a $1,950,000 bridge financing
arrangement in which the Company received net proceeds of $1,808,673. The
financing was offered in the form of


September 25, 1997



<PAGE>



a unit which included $25,000 in principal and a warrant to purchase common
stock. Fifty percent of the principal amount of the bridge notes was convertible
at the option of the holder to common stock for a period of 20 days following
the initial public offering at $2.80 per share. Bridge note holders elected to
convert $438,887 into 156,754 shares of common stock in June 1996.

Warrants to purchase 390,000 shares were issued as part of this financing. The
warrants became exercisable beginning September 30, 1996 and will terminate five
years from the date of issuance. The exercise price of these warrants is $2.80
per share.

PUBLIC OFFERING

On May 29, 1996, the Company completed a public offering of 1,750,000 shares of
common stock at an offering price to the public of $3.50 per share.
Additionally, the Company closed on the underwriter's overallotment of an
additional 100,000 shares of common stock on July 3, 1996. Net proceeds to the
Company totaled $5,422,879. In connection with the public offering of common
stock, the Company sold the underwriter a five-year warrant to purchase up to
175,000 shares of the Company's stock at $4.20 per share. The proceeds were used
by the Company to retire the bridge notes, repay other debt and construct
additional automated shipping centers.

PRIVATE PLACEMENT

The Company completed a private placement of its common stock in April 1997,
raising approximately $1,630,000, selling approximately 947,000 shares of its
common stock at $1.725 per share. The shares were sold to certain existing
institutional shareholders, certain directors and officers of the Company. Under
terms of the financing, the Company agreed to retroactively reduce the per share
price of shares to investors in the private placement if an offering of its
common stock before July 29, 1997 was consummated at a price lower than the
private placement price of $1.725. No event requiring such reduction occurred.

WARRANTS

During fiscal year 1995, the Company issued 163,945 warrants to purchase common
stock at prices ranging from $3.50 to $5.20 per share to various shareholders
and investors as part of capital stock and financing transactions. These
warrants expire at various dates through fiscal year 2000. In addition to the
warrants issued to the underwriter and bridge note holders, the Company issued
134,421 warrants during fiscal year 1996 in exchange for capital stock and
financing transactions. These warrants are exercisable at $3.63 to $4.00 per
share through 2003.

Warrants outstanding at June 30, 1997 totaled 1,087,196, exercisable at prices
ranging from $2.80 to $5.20 per share through 2003.

OTHER STOCK MATTERS

During the years ended June 30, 1997 and 1996, the Company issued 4,286 and 750
shares for a patent, services, property and equipment, and interest foregone on
loans to the Company, respectively. The Company recognized expense for such
shares issued totaling $15,000 and $2,625 for the years ended June 30, 1997 and
1996, respectively.

During 1996, the Company sold 34,333 shares of its common stock at $3.00 per
share.

September 25, 1997



<PAGE>



The Company's board of directors declared a 1-for-4 reverse stock split during
January 1996, which was effected on February 29, 1996, the date of shareholder
approval. The reverse stock split has been retroactively restated for all
periods presented.

5.       STOCK OPTION PLAN:

During 1995, the Company established an employee stock option plan which
reserves 450,000 shares of the Company's common stock. Under the plan, the board
of directors may grant options to purchase shares of the Company's stock to
eligible employees and contractors at a price of not less than 100% of the fair
market value at the time of the grant for incentive stock options. As of June
30, 1997, options to purchase 235,000 shares of common stock at prices ranging
from $3.13 to $3.50 per share were outstanding and exercisable.

Prior to June 30, 1994, the Company granted options to purchase up to 42,500
shares of restricted common stock to former officers and service providers of
the Company at $4.00 per share. These options expire in October 1997 and are not
part of the aforementioned stock option plan.

In January 1996, the Company adopted the 1996 Director Stock Option Plan
authorizing up to 100,000 options to be issued. These options expire within five
years of grant and are exercisable at 100% of the fair market value at the date
of grant. As of June 30, 1997, 60,000 shares were outstanding and exercisable at
prices ranging from $3.125 to $4.875.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
accompanying consolidated statements of operations. Had compensation cost been
recognized based on the fair values of options at the grant dates consistent
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss per common share would have been increased to the
following pro forma amounts:

                                             1997                 1996
                                        ----------------     ----------------
         Net loss:
                  As reported            $  (2,527,918)      $(2,184,287)
                  Pro forma                 (2,643,393)       (2,356,622)

         Loss per share:
                  As reported                    (.61)             (1.13)
                  Pro forma                      (.63)             (1.22)


Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to June 30, 1995, the resulting pro forma compensation may not be
representative of that to be expected in future years. The weighted average fair
value of options granted in 1997 and 1996 was $2.71 and $3.36, respectively. The
weighted average exercise price was $3.20 and $3.99, respectively.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rates of 6.0% for 1996 and 6.4% for 1997;
no expected dividends; expected lives of five years for 1996 and 1997; and
expected volatility of 119.1% for 1996 and 1997 grants.

September 25, 1997



<PAGE>



6.       COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

In February 1995, the Company entered into a lease for office/warehouse space.
The lease calls for monthly rent payments of $10,386 including certain operating
expenses and real estate taxes through March 31, 1999. The Company also granted
stock warrants totaling 5,775 shares, exercisable at $4.00 per share and
expiring February 28, 2000, to the landlord (see Note 4).

Minimum rental payments under the leases are as follows:

  Year Ending June 30
  -------------------

         1998                                $93,728
         1999                                 78,331
         2000                                    936


SHIPPING CLAIMS

The Company may have exposure to a customer to the maximum extent of the
declared value of a shipped package in the event of its damage or destruction
while in the possession of the Company or the retailer. The Company limits its
liability to the customer to the amount of the declared value pursuant to the
shipping transactions documentation; however, the Company has no insurance which
would protect it against losses from shipping claims. Through June 30, 1997,
claims against the Company have not been significant. The Company maintains
reserves for shipping claims based on past experience.

LITIGATION

The nature of the Company's operations expose it to the risk of certain legal
claims in the normal course of business. Management believes that such claims
will not have a material adverse effect on the Company's operating results or
financial condition.

September 25, 1997



<PAGE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The directors and executive offices of the Company are as follows:

         Name               Age  Position(s)
         ----               ---  -----------

         B. Richard Vogen   54   Chairman and Director
         Bruce H. Senske    42   President, Chief Executive Officer and Director
         Donald L. Kotula   51   Director
         Gary W. Ramsden    40   Director

         B. RICHARD VOGEN, Mr. Vogen joined the Company's Board in June 1993,
founded Vocam Systems, Inc. in 1985, and served as its President and Chairman
until its acquisition by the Pitney Bowes Company in 1990. After its acquisition
by Pitney Bowes, Mr. Vogen continued to serve as President of the Vocam Systems
division until June 30, 1994. Since that date, Mr. Vogen has served as an
independent management consultant.

         BRUCE H. SENSKE, Mr. Senske has served as the Company's President and
Chief Executive Officer since January 1993, with the exception of the period of
June 5, 1997 to July 24, 1997, when he was removed as Chief Executive Officer by
action of the Company's Board of Directors. On July 24, 1997, Mr. Senske was
reappointed as the Company's Chief Executive Officer. Mr. Senske has been a
member of the Company's Board since January 1993, and served as its Chief
financial Officer and Treasurer between January 1993 and November 1996. From
1988 to 1992, Mr. Senske was Vice President of Strategic Marketing and Product
Planning at Vocam Systems, a division of the Pitney Bowes Company, a
manufacturer of transportation management software systems.

         DONALD L. KOTULA, Mr. Kotula has been a member of the Company's Board
since January 1995. Mr. Kotula is founder of Northern Hydraulics, a major
retailer of construction and light industrial equipment, tools and supplies. Mr.
Kotula has served as President and Chief Executive Officer of Northern
Hydraulics since 1981.

         GARY W. RAMSDEN, Mr. Ramsden served as the President of U-Ship
International, Ltd., a subsidiary of the Company, from its inception in
September 1991 to January 1993, and has served as director of U-Ship, Inc. since
its merger with U-Ship International, Ltd. in June 1992. Mr. Ramsden is
currently an officer and director of Commonweal Mortgage in Eau Claire,
Wisconsin. From October 1989 to March 1991, Mr. Ramsden was employed in sales
and management capacities for Crandell Moving and Storage, Incorporated in
Altoona, Wisconsin. From July 1988 to September 1989, Mr. Ramsden was President
of Five Star Moving Systems, Incorporated in Shoreview, Minnesota.

         To the Company's knowledge, based solely on a review of copies of
reports filed with the Securities and Exchange Commission during fiscal year
1997, all applicable Section 16(a) filing requirements were complied with.

September 25, 1997



<PAGE>




ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth the aggregate cash compensation paid to
or accrued by each of the Company's executive officers receiving in excess of
$100,000 for services rendered to the Company during the fiscal years ended June
30, 1997, June 30, 1996 and June 30, 1995. The Company has not formalized
employment agreements with its executive officers.

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE

                                                                                                             Long-Term
                                                                                        Annual             Compensation
                                                                                     Compensation             Awards
                                                                                  ----------------      -----------------
                                                                                                            Securities
                                                              Fiscal                                        Underlying
           Name and Principal Position                         Year                     Salary                Options
----------------------------------------------      -------------------------     ----------------      -----------------
<S>                                                          <C>                  <C>                 <C>   
       Bruce H. Senske
          Chief Executive Officer........................    1997                 $ 110,000           15,000
                                                             1996                 $ 114,000               -
                                                             1995                 $  79,000               -
       Bryan M. Virgin
          Vice President of Sales and Marketing..........    1997                 $ 105,000           50,000
                                                             1996(1)              $   4,167               -
                                                             1995                       -                 -
</TABLE>
----------------------

(1)    Mr. Virgin's employment with the Company began on June 17, 1996.

       The following table summarizes stock option grants during the fiscal year
ended June 30, 1997 to the executive officers set forth below and certain other
information relative to such options.

<TABLE>
<CAPTION>
                                                                  Percent of Total
                                    Number of Securities          Options Granted           Exercise or
                                     Underlying Options           to Employees in            Base Price          Expiration
             Name                         Granted                   Fiscal Year              ($/Share)              Date
---------------------------      -----------------------      ---------------------     -----------------      -------------
<S>                                        <C>                       <C>                     <C>                 <C>       
       Bruce H. Senske                     15,000                       20.0%                  3.125              07/01/06
       Bryan M. Virgin                     50,000                       33.3%                  3.25               09/15/05

</TABLE>

       There were no options exercised in fiscal 1997 by the executive officers
set forth below.

<TABLE>
<CAPTION>
                                       Number of Securities             Value of Unexercised In-
                                      Underlying Unexercised              the-Money Options at
                                       Options at FY-End (#)                   FY-End ($)
         Name                        Exercisable/Unexercisable         Exercisable/Unexercisable
---------------------------      ------------------------------      ----------------------------
<S>                                         <C>                                <C> 
    Bruce H. Senske                         15,000/0                            0/0
    Bryan M. Virgin                         50,000/0                            0/0

</TABLE>




September 25, 1997



<PAGE>



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The following table contains certain information as of June 30, 1997 as
to the number of shares of common stock beneficially owned by (i) each person
known by the Company to own beneficially more than five percent (5%) of the
Company's common stock, (ii) each person who is a director of the Company, and
(iii) all persons who are directors and officers of the Company as a group, and
as to the percentage of the outstanding shares held by them on such date. Unless
otherwise noted, each person identified below possesses sole voting and
investment power with respect to such shares.

<TABLE>
<CAPTION>
                                                                   AMOUNT AND NATURE OF           PERCENTAGE OF
NAME OF BENEFICIAL OWNER OR GROUP                                BENEFICIAL OWNERSHIP(1)        OUTSTANDING STOCK(6)
-------------------------------------------------------------   -------------------------   -------------------------
<S>                                                                      <C>                              <C>   
Robertson Stephens & Company, Inc.                                       1,244,567                        24.87%
  555 California St., Suite # 2600
  San Francisco, CA 94104

Perkins Capital Management, Inc.                                           401,905
  708 East Lake Street                                                                                     10.7%
  Wayzata, MN 55391

Donald L. Kotula
  2800 South Cross Drive West                                              265,352(2)                       5.2%
  Burnsville, MN  55337

Bruce H. Senske                                                            254,630(3)                       5.0%
  5583 West 78th Street
  Edina, MN  55439

Gary W. Ramsden                                                             87,230(4)                       1.7%
  5896 Crocus Drive
  Eau Claire, WI  54701

B. Richard Vogen                                                            61,647(5)                       1.2%
  17883 179th Trail West
  Lakeville, MN 55044

All Directors and Officers as a Group (4 persons)                          668,859                         12.9%

</TABLE>

--------------------

(1)      The securities "beneficially owned" by a person are determined in
         accordance with the definition of "beneficial ownership" set forth in
         the regulations of the Commission and accordingly, may include
         securities owned by or for, among others, the spouse, children or
         certain other relatives of such person as well as other securities as
         to which the person has or shares voting or investment power or has the
         right to acquire within 60 days. The same shares may be beneficially
         owned by more than one person.

(2)      Includes 40,466 shares held by Mr. Kotula, 132,010 shares held by
         Norquip Leasing, Inc. ("Norquip"), a company owned by Mr. Kotula, 5,375
         shares purchasable pursuant to options and warrants held by Mr. Kotula
         and 87,500 shares purchasable pursuant to warrants held by Norquip.

(3)      Includes 85,260 shares purchasable pursuant to the exercise of
         warrants.

(4)      Includes 15,000 shares purchasable pursuant to the exercise of options.

(5)      Includes 18,250 shares purchasable upon the exercise of options and
         warrants.

(6)      Assumes no exercise of: (a) 957,737 shares of common stock issuable
         upon exercise of outstanding employee stock options, outstanding
         director stock options and warrants, including warrants issued in
         conjunction with bridge financing completed by the Company in December
         1995, or up to 175,000

September 25, 1997



<PAGE>

         shares of common stock issuable upon exercise of warrants granted to
         the Underwriter in connection with the public offering completed by the
         Company in June 1996.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

BREWSTER TRANSACTIONS

         During the fiscal years ended June 30, 1994 and 1995, Brewster
Diversified Services, Inc. ("Brewster") loaned the Company an aggregate of
$705,000 evidenced by promissory notes. The loans, as amended, bore interest at
10% per annum and called for a $50,000 principal payment on January 1, 1996. In
addition, the Company was required to make principal payments of $100,000 on
January 1, 1997 and 1998, and on January 1, 1999, the Company was required to
pay any remaining unpaid principal and any accrued interest. As additional
consideration for the loans, the Company issued Brewster warrants for the
purchase of 140,000 shares of its common stock exercisable at $2.96 per share.
In addition, pursuant to a Stock Exchange Agreement dated December 2, 1993,
Brewster entered into an agreement with certain of the Company's shareholders to
exchange 100,000 shares of Brewster's common stock for an additional 250,000
shares of the Company's common stock in the following amounts: 60,000 shares
from each of Gary Ramsden, Keith Ramsden, Marvin Ramsden and Elwood Taylor;
10,000 shares from Bruce Senske.

         In December 1994, Brewster agreed to convert $355,000 of the Company's
indebtedness to it, plus accrued interest of $52,173, into common stock of the
Company at a rate of $3.20 per share. The $350,000 remaining balance due
Brewster under promissory notes was converted into a subordinated convertible
debenture, bearing an interest rate of 10% per annum, with conversion rights to
convert the balance to common stock at the time of a public offering at the
offering price. The Company completed a public offering of its stock in May
1996. In October 1995, Brewster converted the balance of the debenture, plus
accrued interest of $32,123, into common stock of the Company at a rate of $3.00
per share. Also in October 1995, Brewster exchanged a warrant to purchase
125,000 shares of the Company's common stock for a warrant to purchase 55,000
shares of the Company's common stock bearing the same exercise price and
maturity date. Between the third quarter of fiscal year 1994 and the second
quarter of fiscal year 1995, the high and low bid prices for the Company's
common stock were $8.00 and $2.00, respectively. The Company determined that the
prices at which the above conversions were effected, $3.20 and $3.00 per share,
respectively, were at the fair market value for the common stock, taking into
account that the shares issued were restricted securities under applicable
federal and state securities laws.

September 25, 1997



<PAGE>



LOANS FROM OFFICERS, DIRECTORS AND RELATED PARTIES; CONVERSION OF INDEBTEDNESS
INTO STOCK AND WARRANTS

         Between January 1994 and September 1995, the Company borrowed an
aggregate of the following amounts from the persons and/or entities set forth
below for operating capital: $52,945 from Bruce Senske, $350,000 from Norquip
Leasing, Inc. (a company owned by Donald L. Kotula), $70,000 from William
Bartkowski, $200,000 from Donald L. Johnson, and $50,00 from B. Richard Vogen.
The Company gave each individual a promissory note bearing interest at the rates
from 8% to First Bank Reference Rate plus 4% per annum. These noteholders
received warrants for the purchase of one share of common stock for every $4.00
loaned to the Company. The warrants are exercisable at $3.50 to $4.00 per share.
Such consideration was determined to be fair by the Board of Directors in
consideration of the noteholders' financial assistance to the Company.

         In October 1995, the noteholders converted the following loan amounts
into common stock of the Company at the rate of $3.00 per share: Bruce Senske,
$25,000; Norquip Leasing, Inc., $350,000 plus accrued interest of $46,030; B.
Richard Vogen, $50,000, plus accrued interest of $4,104; and William Bartkowski,
$70,000 plus accrued interest of $3,414. Such conversion was determined to be
fair by the Board of Directors in consideration of the noteholders' financial
assistance to the Company and the fact that such sales were effected directly by
the Company without the assistance of an underwriter.

         During 1994, the Company became indebted to Kenneth Liles, a vice
president of the Company, in the amount of $79,000 for software development work
performed by Mr. Liles for the Company. In October 1995, Mr. Liles converted
such indebtedness into 26,333 shares of the Company's common stock. Such
conversion was determined to be fair by the Board of Directors in consideration
of Mr. Liles' work on behalf of the Company.

September 25, 1997



<PAGE>



ITEM 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K

(A)      EXHIBITS.

         Exhibit

            3.1   The Company's Articles of Incorporation, as amended and
                  restated (incorporated by reference to the Registrant's
                  Registration Statement on Form SB-2, File No. 333-01652C).

            3.2   The Company's Bylaws, as amended (incorporated by reference to
                  the Registrant's Registration Statement on Form SB-2, File No.
                  333-01652C).

            4.1   Specimen form of the Company's common stock Certificate
                  (incorporated by reference to the Registrant's Statement on
                  Form SB-2, File No. 333-01652C).

            4.2   The Company's Articles of Incorporation, as amended and 
                  restated (see Exhibit 3.1)

            4.3   The Company's Bylaws (see Exhibit 3.2)

           10.1   Warrant dated March 25, 1994 between the Company and Brewster
                  Diversified Services, Inc. to purchase 220,000 shares of the
                  Company's Common Stock (incorporated by reference to the
                  Registrant's Statement on Form SB-2, File No. 333-01652C).

           10.2   Merchant Application/Credit Card Processing Agreement dated
                  August 22, 1994 by and between the Company, NTB Merchant
                  Services and Card Establishment Services, Inc. (incorporated
                  by reference to the Registrant's Statement on Form SB-2, File
                  No. 333- 01652C).

           10.3   Lease Agreement dated February 27, 1995 between the Company
                  and Carpenter Land Company for property located at 5575-5599
                  West 78th Street, Edina, Minnesota (incorporated by reference
                  to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.4   Warrant dated March 1, 1995 between the Company and Carpenter
                  Land Company (form of warrant issued to several investors as
                  compensation for the investment of various forms of capital)
                  (incorporated by reference to the Registrant's Statement on
                  Form SB-2, File No. 333- 01652C).

           10.5   Amendment No. 1 dated March 23, 1995 to Lease Agreement dated
                  February 27, 1995 between the Company and Carpenter Land
                  Company (incorporated by reference to the Registrant's
                  Statement on Form SB-2, File No. 333-01652C).

           10.6   Vendor Remarket Agreement dated October 23, 1995 between the
                  Company and MLC Commercial Leasing (incorporated by reference
                  to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.7   Stock Purchase and Debt Conversion Agreement dated October 31,
                  1995 between the Company and Brewster Diversified Services,
                  Inc. for the conversion of debt into common stock of the
                  Company, the purchase by the Company of common stock and the
                  cancellation and exchange of a warrant (incorporated by
                  reference to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.8   Stock Purchase Agreement dated October 31, 1995 between the
                  Company and William Bartkowski for the conversion of debt into
                  common stock of the Company (form of Stock Purchase Agreement
                  used for various debtholders) (incorporated by reference to
                  the Registrant's Statement on Form SB-2, File No. 333-01652C).

September 25, 1997



<PAGE>



           10.9   Master Agreement dated November 21, 1995 between the Company
                  and Enterprise Financial Corporation (incorporated by
                  reference to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.10  Letter Agreement dated December 8, 1995 between the Company
                  and Minnesota Bankfirst (incorporated by reference to the
                  Registrant's Statement on Form SB-2, File No. 333- 01652C).

           10.11  Stock Purchase Agreement dated December 12, 1995 between the
                  Company and Ronald L. Randall for the conversion of debt into
                  Common Stock (incorporated by reference to the Registrant's
                  Statement on Form SB-2, File No. 333-01652C).

           10.12  Form of warrant issued pursuant to bridge loan financing
                  completed by the Company in December 1995 (incorporated by
                  reference to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.13  Independent Contractor Agreement dated March 1, 1996 between
                  the Company and Venture Brokerage Group, Inc. (incorporated by
                  reference to the Registrant's Statement on Form SB- 2, File
                  No. 333-01652C).

           10.14  Broker Lease Agreement dated March 5, 1996 between the Company
                  and First Concord Funding Group, Inc. (incorporated by
                  reference to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.15  Amendment No. 2 dated March 27, 1996 to Lease Agreement dated
                  February 27, 1995 between the Company and Carpenter Land
                  Company (incorporated by reference to the Registrant's
                  Statement on Form SB-2, File No. 333-01652C).

           10.16  1995 Stock Option Plan (incorporated by reference to the
                  Registrant's Statement on Form SB-2, File No. 333-01652C).

           10.17  Director Stock Option Plan (incorporated by reference to the
                  Registrant's Statement on Form SB-2, File No. 333-01652C).

           10.18  Form of Software and Equipment Maintenance Agreement
                  (incorporated by reference to the Registrant's Statement on
                  Form SB-2, File No. 333-01652C).

           10.19  Form of Automated Shipping System Letter of Agreement
                  (incorporated by reference to the Registrant's Statement on
                  Form SB-2, File No. 333-01652C).

           10.20  Form of Letter of Agreement for Commercial Counters
                  (incorporated by reference to the Registrant's Statement on
                  Form SB-2, File No. 333-01652C).

           10.21  Software and Equipment Maintenance Agreement dated December
                  14, 1995 between the Company and CDP (incorporated by
                  reference to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.22  Specialty License Agreement dated July 10, 1995 between
                  Company and Homart Development Co. (incorporated by reference
                  to the Registrant's Statement on Form SB-2, File No.
                  333-01652C).

           10.23  Kinko's Installations Financing Arrangements dated September
                  30, 1996 between Company Kinko's Service Corporation.
                  (incorporated by reference to the Registrant's Statement on
                  Form 10-QSB, File No. 000-28452).

           10.24  Installation and Marketing Agreement dated October 16, 1996
                  between the Company and OfficeMax, Inc. (incorporated by
                  reference to the Registrant's Statement on Form 10-QSB, File
                  No. 000-28452).

September 25, 1997



<PAGE>



           10.25  Retainer Agreement dated September 12, 1997 between the
                  Company and Manchester Financial Group, Inc.

           11     Computation of Net Loss Per Common Share

           21     Subsidiaries (incorporated by reference to the Registrant's
                  Statement on Form SB-2, File No. 333-01652C).

           23     Consent of Arthur Andersen LLP

           27     Financial Data Schedule.

------------------------------------


(B)      REPORTS ON FORM 8-K.

         The Company did not file any reports on Form 8-K with the Securities
and Exchange Commission during the three month period ended June 30, 1997.

September 25, 1997



<PAGE>




                                   SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           U-SHIP, INC.

Dated: September 26, 1997


                                           By /s/Bruce H. Senske
                                           Bruce H. Senske,
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                                                                                                  Date
                                                                                                  ----
<S>                                       <C>                                              <C> 
/s/Bruce H. Senske                        President, Chief Executive Officer and           September 26, 1997
----------------------------------------  Director (Principal Executive,   
Bruce H. Senske                           Accounting and Financial Officer)
                                          

/s/B. Richard Vogen                       Chairman and Director                            September 26, 1997
-------------------------------------
B. Richard Vogen

/s/Donald L. Kotula                       Director                                         September 26, 1997
-------------------------------------
Donald L. Kotula

                                          Director
-------------------------------------
Gary W. Ramsden

</TABLE>

September 25, 1997



<PAGE>



                                  EXHIBIT INDEX

Exhibit
Number   Description
------   -----------

10.25    Retainer Agreement dated September 12, 1997 between the Company and
         Manchester Financial, Inc.

11       Computation of Net Loss Per Common Share

23       Consent of Arthur Andersen LLP

27       Financial Data Schedule

September 25, 1997