EXHIBIT E-1

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 1995

Commission file number: 0-18192

MEGAMATION INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-3372947
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

51 Everett Drive
Building #B4
Lawrenceville, NJ 08648
(Address of principal executive offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: 609-799-7711

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]

As of December 31, 1995, there were 14,358,666 shares outstanding of
the Registrants common stock, $0.01 par value per share.

Page 1 of 30

Exhibit Index appears on page 17

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MEGAMATION INC.

Item 1. Financial Statements

Statements of Financial Position

(Unaudited) (Audited)
December 31, June 30,
1995 1995
------------- -------------

ASSETS:

Current assets:
Cash........................................................... $ 25,253 $ 264,225
Trade receivables, net of allowance for doubtful
accounts of $25,085 and $40,544............................. 350,837 700,191
Inventories.................................................... 642,786 886,896
Prepaid expenses and other current assets ..................... - 21,614
------------- -------------
Total current assets........................................ 1,018,876 1,872,926
Property and equipment................................................. 223,887 273,933
Other assets:
Patents, net................................................... 304,616 306,960
Other assets................................................... 56,624 59,066
------------- ------------
Total assets...................................... $ 1,604,003 $ 2,512,885
============= ============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
Revolving bank line of credit.................................. $ 1,700,000 $ 1,700,000
Term loans, related parties.................................... 1,860,000 1,760,000
Accounts payable............................................... 804,413 805,039
Accrued warranty costs......................................... 100,775 89,927
Accrued interest payable....................................... 145,956 21,222
Other customer deposits........................................ - 253,937
Accrued payroll and related expenses........................... 60,459 75,644
------------- ------------
Total current liabilities.................................. $ 4,571,603 $ 4,705,769

Commitments

Shareholders' deficit

Preferred stock, $0.01 par value: 1,000,000 shares
authorized no shares issued or outstanding..................
Common stock, $0.01 par value; 25,000,000 shares
authorized, 14,358,666 and 14,358,666 shares issued
and outstanding, respectively............................... 143,587 143,587
Additional paid in capital..................................... 5,756,744 5,756,744
Accumulated deficit............................................ (8,967,931) (8,093,215)
------------- -------------
Total shareholders' deficit................................. (3,067,600) (2,192,884)
------------- -------------
Total liabilities and shareholders' deficit....... $ 1,604,003 $ 2,512,885
============= =============

The accompanying notes are an integral part of the financial statements.

MEGAMATION INC.

Item 1. Financial Statements

Statements of Operations
(Unaudited)

Three months ended Six months ended
December 31, December 31,
----------------------------------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------

Revenues.. ....................................... $ 582,843 $ 958,489 $ 1,716,371 $ 1,967,084

Cost of revenues.................................. 709,677 783,223 1,663,370 1,362,234
---------- ---------- ----------- -----------
Gross profit................................... (126,834) 175,266 53,001 604,850

Selling expenses.................................. 37,336 100,257 92,504 213,385

Development and
engineering expenses........................... 84,634 87,643 200,284 170,208

General and administrative expenses............... 186,330 131,687 426,417 267,756
---------- ---------- ----------- -----------

Total operating expenses....................... 308,300 319,587 719,205 651,329
---------- ---------- ----------- -----------

Operating income/(loss).................... (435,134) (144,321) (666,204) (46,479)

Interest and debt expense......................... 104,821 61,949 208,512 108,277
---------- ---------- ----------- -----------

Net income/(loss).............................. $ (539,955) $ (206,270) $ (874,716) $ (154,756)
========== ========== =========== ===========

Net income/(loss) per common share................ $(0.04) $(0.01) $(0.06) $(0.01)
======= ======= ======= =======
Weighted average common
shares outstanding............................. 14,358,666 14,358,666 14,358,666 14,059,752
========== ========== =========== ===========

The accompanying notes are an integral part of the financial statements.

MEGAMATION INC.

Item 1. Financial Statements

Statements of Cash Flows
(Unaudited)

Six months ended
December 31,
------------------------------
1995 1994
------------ ------------

FROM OPERATING ACTIVITIES:
Net Income/(loss)........................................ $ (874,716) $ (154,756)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization............................ 71,810 45,834
Decrease/(increase) in:
Trade receivables..................................... 349,354 (262,678)
Costs and estimated earnings on uncompleted
contracts, net of customer deposits................ - (390,149)
Inventories........................................... 244,110 (216,304)
Prepaid expenses and other current assets............. 21,614 19,686
Other assets.......................................... 442 8,504
Increase/(decrease) in:
Accounts payable...................................... (626) (34,371)
Accrued warranty costs................................ 10,648 (23,801)
Accrued interest payable.............................. 124,734 36,104
Customer deposits on uncompleted contracts,
net of costs and estimated earnings................ - (147,079)
Other customer deposits.................................. (253,937) 220,867
Accrued payroll and related expenses..................... (15,185) (27,056)
------------ ------------

Cash used in operating activities........................ (321,552) (925,219)

FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (7,164) (6,617)
Costs of patents......................................... (10,256) (15,077)
------------ ------------
Cash used in investing activities........................ (17,420) (21,694)

FROM FINANCING ACTIVITIES:
Aggregate amount of payments on the
bank line of credit................................... - (24,979)
Aggregate amount of advances from the
bank line of credit................................... - 724,979
Proceeds from Term Loans................................. 100,000 250,000
Proceeds from Subscription Agreement..................... - 105,000
------------ ------------
Cash from financing activities........................... 100,000 1,055,000

(DECREASE)/INCREASE IN CASH (238,972) 108,057
Cash beginning of period................................. 264,225 7,417
------------ ------------
Cash end of period....................................... $ 25,253 $ 115,504
============ ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period.......................... $ 64,937 $ 67,816
============ ============

The accompanying notes are an integral part of the financial statements.

MEGAMATION INC
December 31, 1995
Notes to Financial Statements

1. BASIS OF PRESENTATION
---------------------

The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q for quarterly reports under
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and
therefore do not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles.

The financial information included in this report has been prepared in
conformity with the accounting principles reflected in the financial statements
included in the Annual Report on Form 10-K for the year ended June 30, 1995, as
filed with the Securities and Exchange Commission.

In the opinion of the management of Megamation Inc. (the "Company"),
all material adjustments necessary for a fair statement of the results of
operations for the interim periods presented (consisting of only normally
recurring accruals and estimates), have been recorded.

The results of operations for the period presented are not necessarily
indicative of the results to be expected for the entire year.

2. REVENUE RECOGNITION AND CONTRACT COSTS
--------------------------------------

The Company generally recognizes revenue upon the completion of one of
the following: (1) the performance of a service, (2) the shipment of product,
or (3) upon customer acceptance of completed units. The percentage of
completion method is used for long term contracts generally involving the
integration of the Company's products into a customer's production facility.
Sales and operating income are recognized as work is performed, based on the
relationship between actual labor cost incurred and the total labor cost
estimated to be required. At December 31, 1995 and June 30, 1995, there were no
long term contracts in process. At June 30, 1994, five long term contracts were
in process (completed during fiscal 1995), for which the Company recorded
$306,000 in revenue and $62,700 of operating income. At December 31, 1994 four
contracts were in process for which the Company recorded $1,118,000 in revenue
and $247,000 of operating income. One contract was completed during the quarter
ended December 31, 1994 for which the Company recorded $291,000 in revenue and
$61,000 in operating income during the term of the contract.

Contract costs for contracts accounted for on the percentage of
completion method include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.

3. INVENTORIES
-----------

Inventories consist of parts and subassemblies, work-in-process, and
completed units which are valued at the lower of cost (first-in/first-out) or
market value. Inventories are comprised of the following:

December 31, June 30,
1995 1995
------------ --------

Parts and subassemblies............. $516,993 $786,575
Work in process..................... 125,793 100,321
Finished goods...................... -0- -0-
-------- --------
Totals.............................. $642,786 $886,896
======== ========

MEGAMATION INC
December 31, 1995
Notes to Financial Statements

4. DEBT
----

The Company's debt consists of the following:

December 31, June 30,
1995 1995
------------ ----------

Revolving bank line of credit.... $1,700,000 $1,700,000
Term loans....................... 1,860,000 1,760,000
---------- ----------

$3,560,000 $3,460,000
========== ==========

Under Agreements entered into on May 12, 1994, and amended on August 18,
1994, the Company is a party to a Credit and Security Agreement (the "Line")
with a New Jersey bank secured by trade receivables and guaranteed by two
principal stockholders and directors (the "Guarantors") pursuant to a Guarantee
Agreement ("Agreement"). The Line provides for maximum borrowings of
$1,700,000. Under the terms of the Agreement, the Guarantors each guarantee
one-half of the outstanding balance of the Line. The Agreement imposes
borrowing formula limitations of the sum of 85% of trade receivables and 40% of
the qualifying open order backlog. At June 30 and December 31, 1995, the
Company was not in compliance with those borrowing limitation requirements.
Borrowings under the Line bear interest at the prime rate (9% and 7.25% at June
30, 1995 and 1994, respectively). Additionally, the Guarantors each receive
quarterly fees calculated at a 1.5% annual rate on the average outstanding
balance of the Line. The Guarantee fee expense which is included in interest
expense was $45,187 for the year ended June 30, 1995 and $25,710 for the six
months ended December 31, 1995. The Line expires on February 29, 1996.

At June 30, 1994, the Term Loan (originally granted on December 21, 1988),
was owed to an entity controlled by one of the Guarantors and was scheduled to
mature on March 31, 1995. On February 11, 1994, the other Guarantor provided
the Company with an additional $230,000 in the form of a New Term Loan, which
was also due on March 31, 1995. In connection with the New Term Loan, the
Guarantor was issued a warrant to purchase 460,000 shares of the Common Stock of
the Company at $.55 per share. In consideration of extending the due date of
the original Term Loan and modifying the security interest in the Company's
assets to recognize the co-priority of the New Term Loan, the Guarantor
controlling the entity holding the original Term Loan was issued a warrant to
purchase 72,000 shares of the Common Stock of the Company exercisable at $.55
per share. No value was assigned to these warrants as the amount was not
material. On December 16, 1994, the original Term Loan and the New Term Loan
were amended to provide for an additional $500,000 in borrowings from the
Guarantors. Additionally, the due dates of both Term Loans were extended to
June 30, 1995. Coincident with these amendments, the Company borrowed an
additional $250,000. In consideration of the December 1994 amendments, the
Guarantors were each issued warrants to purchase 500,000 shares of the Common
Stock of the Company at $.50 per share. No value was assigned to these warrants
as the amount was not material. In February 1995 the Company borrowed the
remaining $250,000 available under the Term Loans.

The annual interest rate on both Term Loans is prime plus 4% with a maximum
annual rate of 12%, payable quarterly in arrears. Substantially all of the
Company's assets are pledged as collateral for the Company's obligations under
the Term Loans, however the Term Loans have been subordinated to the Line.
Provisions of the Line and both Term Loans prohibit the Company from paying cash
dividends until these obligations are repaid. The interest rate on the Term
Loans at June 30 and December 31, 1995 was 12%.

MEGAMATION INC
December 31, 1995
Notes to Financial Statements

On March 3, 1995, the Company entered into an agreement with its principal
stockholders to provide an additional $800,000 in the form of short term loans
through June 30, 1995 and the Company borrowed this amount during fiscal 1995.
In addition, past due interest of approximately $120,000 under the existing Term
Loans with the stockholders was deferred until July 1, 1995. On May 12, 1995,
the Company obtained an agreement for the extension of its Term Loans and the
Line until January 1, 1996. Additionally, the May 12, 1995 agreement modified
the lending terms of the March 3, 1995 agreement whereby the principal
stockholders provided $700,000 in the form of short term loans and deferred
$100,000 of the past due interest on the Term Loans to January 1, 1996. The May
12, 1995 agreement sets forth the parties' intention to convert the $700,000 of
loans and the $100,000 of deferred past due interest to shares of the Company's
capital stock on terms and conditions to be agreed upon among the parties as
soon as is practicable. In view of the Company's need for substantial working
capital, management believes that any such conversion would occur only in
connection with a financing transaction. It is management's current intention
to pursue such a transaction; however no agreements or commitments for financing
exist and there can be no assurance that a financing transaction will occur, nor
as to the terms, if any, upon which a financing can be achieved. On December 4,
1995, the Company obtained an agreement for the extension of its Term Loans and
the Line until February 29, 1996. At December 31, 1995 there was accrued
interest of $13,069 on the Line, $107,178 on the term loans and $25,709 on the
guarantee fees. In December 1995 the Company borrowed $100,000 from one of the
Company's principal stockholders. Since January 1, 1996 the Company borrowed a
total of $235,000 from the Company's two principal stockholders. These term
loans follow the same term and conditions as the previously issued loans to
these stockholders.

At June 30 and December 31, 1995, the Company was not in compliance with
several financial covenants under the Agreement relating to, among other things,
net worth and under the Term Loans relating to, among other things, minimum
order levels. As of February 9, 1996 such non-compliance was continuing. The
lenders have not exercised their rights to accelerate payment under the loans,
but may do so at anytime.

5. COMMON STOCK AND STOCK WARRANT TRANSACTIONS
-------------------------------------------

In August 1994, the Company's two principal stockholders each purchased
500,000 shares of Common Stock. Net proceeds to the Company were $105,000. In
December 1994, 1,000,000 warrants at $.50 per share, were issued in connection
with the Term loans (Note 4). As of December 31, 1995, there has been no fiscal
1996 common stock or stock warrant transactions.

6. INCOME TAXES
------------

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109 "Accounting for Income Taxes", effective July 1, 1993. The cumulative
effect of adopting SFAS No. 109 had no impact on the Company's financial
statements.

SFAS No. 109 provides for, among other things, the recognition of deferred
tax assets subject to a valuation allowance. At July 1, 1994, the Company
recorded a deferred tax asset of approximately $2,276,000 primarily relating to
net operating loss carryforwards ("NOL") which amounted to $5,113,000 at June
30, 1994. Also at July 1, 1994, the Company established a valuation allowance
equal to the full amount of the deferred tax asset.

For the years ended June 30, 1995 and 1994, no income tax expense or
benefit was recorded. The Company increased its deferred tax asset by
approximately $783,000 and $687,000, for the years ended June 30, 1995 and 1994
respectively, with corresponding increases in the valuation allowance.

MEGAMATION INC
December 31, 1995
Notes to Financial Statements

The difference between the NOL for tax purposes of $6,867,000 and the NOL
for book purposes of $8,093,000 primarily reflects the net effect of timing
differences between the treatment of research and development costs for tax and
book purposes. The NOL's expire at various times and in varying amounts through
the year 2010.

These losses would generally be available to offset future taxable income,
if any. The utilization of Federal income tax loss carryforwards in any year is
subject to limitation if the Company experiences a certain level of changes in
ownership over any three year period. Management has recently determined that
the effects of changes in ownership through June 30, 1995 have not had a
material effect on the future utilization of the Company's operating loss
carryforwards. However, there have been substantial changes in ownership during
the prior three year period and future changes in ownership as a result of a
financing or otherwise could result in a substantial limitation on the amount of
operating loss carryforwards which the Company would apply in any one year to
offset income.

7. NET LOSS PER COMMON SHARE
-------------------------

Net losses per common share have been computed using the weighted average
number of common shares outstanding during the respective periods. Common stock
warrants and options outstanding were not included in the calculations, as the
effect of inclusion would be anti-dilutive.

8. GOING CONCERN
-------------

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the year ended June 30, 1995 and the quarter ended December
31, 1995, the Company incurred net losses of $1,991,000 and $540,000,
respectively, and, as of December 31, 1995, the Company's current liabilities
exceeded its current assets by $3,653,000, and its total liabilities exceeded
its total assets by $3,068,000. These factors among others indicated that at
June 30, 1995 that it was unlikely that the Company would be able to continue as
a going concern beyond December 31, 1995 absent additional financing. Since
January 1, 1996 the principal stockholders have loaned the Company an additional
$235,000 for the Company to meet its minimum cash flow and working capital
requirements.

Management has provided the principal stockholders, at their request, a
schedule of the Company's anticipated cash needs through June 30, 1996.
Although there are no commitments, management believes that given the past and
recent support provided by the principal stockholders, the needed funding will
be made available to provide for the Company's minimum cash flow and working
capital requirements through June 30, 1996, or such time as a financing occurs,
provided there are no adverse changes in the Company's projected operations.
Management believes that if such funding is provided, the holders of the Bank
Line of Credit and Term Loans will not exercise their rights to elect to
accelerate the due dates thereof, and the Company will receive further
extensions of its Bank Line of Credit and various Term Loans beyond the current
February 29, 1996 maturity date. However, there can be no assurance that any of
the foregoing will occur.

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.

MEGAMATION INC.
December 31, 1995

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------

Strategic and Financial Objectives

Throughout its history the Company has experienced significant losses and
corresponding negative cash flows from operations, which continued through the
quarter ended December 31, 1995 (see Note 8). The Company's current business
strategy is to focus on building: (a) specialized automation workstations for
the healthcare industry, (b) high speed non-contact scanning systems, and (c)
mechanical assembly systems for automotive transmissions and other applications.
The Company previously had placed emphasis on supplying large-scale integrated
systems for diverse industries. Management believes that there is a significant
business opportunity for its products in the health care industry and that it
can compete effectively in the high speed non-contact scanning and mechanical
assembly markets.

The success of the Company's current strategy is dependent on, but not
limited to: (a) the Company's ability to successfully serve a current strategic
health care industry customer, gain additional orders from that customer, and
leverage the success in serving this customer to develop customer relationships
with other leading health care industry leaders, (b) the Company's ability to
recapitalize its financial condition in order to provide sufficient working
capital and financial resources to execute its business strategy, and (c) the
Company's ability to attract and retain highly competent and professional
employees.

Health Care

The health care industry today faces extreme pressure to reduce costs,
errors, and improve safety. Certain segments of the health care industry, such
as clinical laboratories, require automation to meet these pressures. Health
care industry automation is currently in its infancy and the Company believes it
is well positioned in terms of product and knowledge of the industry's needs, to
capture a significant share of this market. Management believes its automation
workstations are ideally suited for the health care industry and specifically
clinical laboratories because all of the Company's automation workstations
incorporate an automatic shutdown feature which is activated when any moving
automatic tool encounters an obstruction, making the Company's products among
the safest automation systems available. This feature is extremely important in
applications where the automation systems require a high level of human
interaction which is normally the case in clinical laboratories and other health
care applications. Additionally, the Company's automation workstations have
historically performed more work, in less space than other traditional
automation systems. The Company believes that more work in less space is one of
the most critical requirements for controlling costs in healthcare industry
applications.

High speed, non-contact scanning

The Company's automation workstations serve as an integrated workstation
for high speed non-contact scanning applications for gathering dimensional data
for high volume parts manufacturing applications. The Company's automation
workstation is combined with scanners and related database and application
software to gather dimensional data of an object or surface to validate the
dimensions to the design intent. The automation workstation positions a scanner
employing laser radar technology that provides accurate three-dimensional
images. The captured images are then converted into dimensions by another
supplier's proprietary digital signal processing electronics and a sophisticated
rectification process. The automation workstation provides a high-speed means of
precisely addressing and positioning the scanners at designated data points in
defined planes and angles. This application can measure and analyze sources of
variation to enhance continuous process improvement which will enable customers
to reduce cost and increase both quality and throughput. Management believes
that there is a substantial potential market for the inspection and measurement
of parts in high volume, repetitive manufacturing applications.

MEGAMATION INC.
December 31, 1995

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------

Mechanical Assembly Systems for Automotive Transmissions and Other Applications

The automation workstation was initially designed to pick and place
automotive light assembly parts and printed circuit board components. The
Company has sold workstations for several such applications, the principal one
being for automotive transmissions.

Results of Operations

Six Months Ended December 31, 1995 and 1994

Net Revenues and Cost of Revenues

Net revenues for the six months ended December 31, 1995 (the "current
period") were $1,716,000 compared to $1,967,000 for the six months ended
December 31, 1994, (the "prior period"), a decrease of 13%. Cost of revenues
for the current period were 97% of net revenues compared to 69% of net revenues
in the prior period. During the prior period a one-time, application specific
technology license fee for $300,000 was recorded. Cost of revenues for the
prior period without the recognition of the $300,000 license fee would have been
82%. The cost of revenues increased 15% to 97% for the current period due to
inventory write offs and various overhead costs being charged to cost of sales
in the current period due to the under utilization of production capacity in
contrast to the prior period when these costs were being allocated to long term
projects being accounted for by the percentage of completion method. Five MEGA
2(R) systems and one MEGA 1(R) system were sold during the current period
generating $844,000 of revenues versus no MEGA 1 systems and one MEGA 2 system
sold during the prior period generating $81,000 of revenues. No revenues in the
current period were recognized from the percentage of completion method while
the prior period realized revenues of $1,103,000 by this method. Other revenues
(primarily engineering, service, spare parts, and training) were $872,000 during
the current period versus $483,000 during the prior period. The primary reason
for the $389,000 increase in other revenues for the current period was a
$352,000 increase in engineering revenues, which were derived primarily from the
Company's health care industry customer.

Operating Expenses

Operating expenses increased 10% to $719,000 in the current period from
$651,000 in the prior period, an increase of $68,000. The increase in operating
expenses was due to higher general and administrative and development and
engineering expenses partially offset by a decrease in selling expenses.

Selling expenses decreased 56% to $93,000 during the current period from
$213,000 during the prior period, a decrease of $120,000. The decrease in
selling expenses was primarily the result of lower salary and related expenses
resulting from reduced headcount.

MEGAMATION INC.
December 31, 1995

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------

Development and engineering expenses increased 18% to $200,000 during the
current period from $170,000 during the prior period, an increase of $30,000.
The increase in development and engineering expenses was primarily the result of
higher salary and related expense resulting from efforts on various development
projects relating to the MEGA 2, which were partially offset by lower material
expenses.

General and administrative expenses increased 59% to $426,000 during the
current period from $268,000 during the prior period, an increase of $158,000.
The increase in general and administrative expenses was primarily due to
increases in salary and related expenses, professional fees, and allocated
insurance costs.

Interest and Debt Expense

Interest and debt expense increased 93% to $209,000 during the current
period from $108,000 during the prior period, an increase of $101,000. The
change was primarily due to the increase in term loans with related parties from
the prior period's balance of $710,000 to the current period's balance of
$1,860,000.

Net Loss

Net loss for the current period of $875,000 compared to a net loss of
$155,000 for the prior period. Loss per share for the current period was
$(0.06) compared to $(0.01) per share during the prior period. The primary
reasons for the increase in the net loss during the current period was the
impact in the prior period from the recognition of the one time application
specific license fee of $300,000, the decrease in gross profit margin, along
with increases in general and administrative expenses and interest and debt
expense.

The increase in average common shares outstanding during the current period
resulted from the issuance of 1,000,000 shares on August 25, 1994 in exchange
for $105,000.

MEGAMATION INC.
December 31, 1995

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------

Results of Operations

Three Months Ended December 31, 1995 and 1994

Net Revenues and Cost of Revenues

Net revenues for the three months ended December 31, 1995 (the "current
quarter") were $583,000 compared to $958,000 for the three months ended December
31, 1994, (the "prior quarter"), a decrease of 39%. Cost of revenues for the
current quarter were 122% of net revenues compared to 82% of net revenues in the
prior quarter. The cost of revenues increased 40% to 122% for the current
quarter due to inventory write offs and various overhead costs being charged to
cost of sales in the current quarter due to the under utilization of production
capacity in contrast to the prior quarter when these costs were being allocated
to long term projects being accounted for by the percentage of completion
method. Two MEGA 2(R) systems and one MEGA 1(R) system were sold during the
current quarter generating $274,000 of revenues versus no MEGA 1 systems and
one MEGA 2 system sold during the prior quarter generating $81,000 of revenues.
No revenues in the current quarter were recognized from the percentage of
completion method, while the prior quarter realized revenues of $687,000 by this
method. Other revenues (primarily engineering, service, spare parts, and
training) were $309,000 during the current quarter versus $190,000 during the
prior quarter. The primary reason for the $119,000 increase in other revenues
for the current quarter was an increase in engineering revenues, which were
primarily derived from the Company's health care industry customer.

Operating Expenses

Operating expenses decreased 4% to $308,000 in the current quarter from
$320,000 in the prior quarter, a decrease of $12,000. The decrease in operating
expenses was due to lower selling and development and engineering expenses,
which were partially offset by higher general and administrative expenses.

Selling expenses decreased 63% to $37,000 during the current quarter from
$100,000 during the prior quarter, a decrease of $63,000. The decrease in
selling expenses was the result of lower salary and related expenses related to
reduced headcount, travel and advertising costs.

Development and engineering expenses decreased 3% to $85,000 during the
current quarter from $88,000 during the prior quarter, a decrease of $3,000.
The decrease in development and engineering expenses was primarily the result of
lower material expenses, which were partially offset by higher salary and
related expenses.

General and administrative expenses increased 42% to $186,000 during the
current quarter from $132,000 during the prior quarter, an increase of $54,000.
The increase in general and administrative expenses was primarily due to
increases in salary and related expenses, amortization costs, and allocated rent
and utility expenses, which were partially offset by lower depreciation and
equipment maintenance expenses.

MEGAMATION INC.
December 31, 1995

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------

Interest and Debt Expense

Interest and debt expense increased 69% to $105,000 during the current
quarter from $62,000 during the prior quarter, an increase of $43,000. The
change was primarily due to the increase in term loans with related parties from
the prior quarter's balance of $710,000 to the current quarter's balance of
$1,860,000.

Net Loss

Net loss for the current quarter of $540,000 compared to a net loss of
$206,000 for the prior quarter. Loss per share for the current quarter was
$(0.04) compared to $(0.01) per share during the prior quarter. The primary
reason for the increase in the net loss during the current quarter was the
negative gross profit margin and the increased interest and debt expense, which
was partially offset by a decrease in operating expenses.

Liquidity and Capital Resources

The financial condition of the Company has continued to decline during the
quarter ended December 31, 1995. Company operations have never provided a
positive cash flow and the Company has relied on loans and the proceeds from the
sale of common stock to fund its operations since inception. The shareholder's
deficit at December 31, 1995 was $3,068,000, which was an increase of $875,000
since June 30, 1995, (the amount of the net loss for the six months ended
December 31, 1995).

Cash declined $239,000 during the period from a beginning balance of $264,000 to
an ending balance of $25,000. The Company's current liabilities exceeded its
current assets by $3,653,000 and $743,000 at December 31, 1995 and 1994,
respectively, primarily due to the increases in the term loans to related
parties (see Note 4) and accounts payable and decreases in inventory and
accounts receivable.

The Company maintains a bank line of credit and has borrowed the maximum
limit of the bank line of $1,700,000. The bank line of credit is guaranteed by
related parties. As of December 31, 1995 the Company has also borrowed
$1,860,000 in the form of term loans from the same related parties that
guarantee the bank line of credit (see Note 8). Accounts payable total $804,000
and represent approximately one hundred seven days aging. Terms with most of
the Company's trade vendors are currently on a cash-on-delivery basis.

Capital investments have been curtailed because the Company does not have
cash available to make any capital investments. During the past year the only
significant capital investments have been for computers and software for the
implementation of an integrated accounting and manufacturing control system and
the development of the MEGA 2 and specialized MEGA 2 workstations. These
projects have been substantially completed and require little additional capital
investment.

The Company has not issued any common stock since August 1994, (see Note
5).

MEGAMATION INC.
December 31, 1995

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------

The Company and the principal stockholders previously entered into an
agreement which provided that the principal stockholders would convert $800,000
of term loans and deferred interest owed to them to capital stock on terms to be
agreed upon. As stated in the Company's Form 10-K for the period ended June 30,
1995, it was unlikely that the Company would be able to continue as a going
concern beyond December 31, 1995 absent additional financing. Since January 1,
1996 the principal stockholders have loaned the Company an additional $235,000
on a demand basis in order for the Company to meet its minimum cash flow and
working capital requirements.

MEGAMATION INC.
December 31, 1995

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities.

Not applicable.

Item 3. Defaults upon Senior Securities.

As of December 31, 1995 the Company had accrued but not paid $107,000
in interest due on term loans of $1,860,000 outstanding as of the same date. No
demand for payment of the amounts in default or notice of acceleration of the
Term Loans has been received by the Company. (See Notes to Financial
Statements-Note 4, and Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources.)

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form S-K.

(a) Exh. No. Description
----------------------------------------------------------------------
10.1 Fourth Amendment to Note and Revolving Loan and Security
Agreement.

10.2 Third Amendment to Guaranty made by Tristram C. Colket, Jr.

10.3 Third Amendment to Guaranty made by Max Cooper.

10.4 Term Note by the Company to Tristram C. Colket Jr.

(b) No reports on Form 8-K were required to be filed with respect to
events occurring in the quarter ended December 31, 1995.

MEGAMATION INC.
December 31, 1995

SIGNATURES
----------

Pursuant to the requirements 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.

MEGAMATION INC.

Date February 9, 1996 /s/ THOMAS D. SCHMIDT
---------------------------- -------------------------------------
Thomas D. Schmidt
Vice President of Marketing and Sales

Date February 9, 1996 /s/ THOMAS W. MURPHY
---------------------------- -------------------------------------
Thomas W. Murphy
Controller, Chief Accounting Officer
and Secretary

MEGAMATION INC.
December 31, 1995

EXHIBIT INDEX

Exh. No. Description Page No.
- ---------------------------------------------------------------------------------------------------

10.1 Fourth Amendment to Note and Revolving Loan and Security Agreement. 18

10.2 Third Amendment to Guaranty made by Tristram C. Colket, Jr. 23

10.3 Third Amendment to Guaranty made by Max Cooper. 26

10.4 Term Note by the Company to Tristram C. Colket Jr. 29