Edgar Filing: USA TECHNOLOGIES INC

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

USA TECHNOLOGIES, INC.
-------------------------------
(Name of Registrant as Specified in Its Charter)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
--------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------

(5) Total fee paid:
--------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:
--------------------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------

(3) Filing Party:
--------------------------------------------------------------------------------

(4) Date Filed:
--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

January 18, 2003

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders
of USA Technologies, Inc. to be held at 10:00 a.m., February 14, 2003, at the
Chester Valley Golf Club, 430 Swedesford Road, Malvern, Pennsylvania 19355.

In connection with the Annual Meeting, enclosed herewith is the Proxy
Statement and Proxy. We are requesting your approval of a number of proposals
which are very important to the Company`s future success. Therefore, whether or
not you expect to attend the meeting in person, it is imperative that your
shares be voted at the meeting. At your earliest convenience, please complete,
date and sign the Proxy and return it in the enclosed, postage-paid envelope
furnished for that purpose.

Following the consideration of the proposals by the shareholders,
management will present a current report on the activities of the Company. At
the meeting, we will welcome your comments on or inquiries about the business of
the Company that would be of interest to shareholders generally.

I look forward to seeing you at the Annual Meeting. In the meantime,
please feel free to contact me with any questions you may have.

Sincerely,

/s/ George R. Jensen, Jr.

George R. Jensen, Jr.
Chairman and Chief Executive
Officer

USA TECHNOLOGIES, INC.
_________________________

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 14, 2003
_________________________

To Our Shareholders:

The Annual Meeting of Shareholders of USA Technologies, Inc., a
Pennsylvania corporation (the "Company"), will be held at 10:00 a.m., February
14, 2003, at the Chester Valley Golf Club, 430 Swedesford Road, Malvern,
Pennsylvania 19355 for the following purposes:

1. The election of George R. Jensen, Jr., Stephen P. Herbert,
William W. Sellers, William L. Van Alen, Jr., Steven Katz, Douglas M. Lurio,
Edwin R. Boynton, and Kenneth C. Boyle, as Directors;

2. To act upon a proposal to ratify the appointment of Ernst &
Young LLP as the independent public accountants of the Company for fiscal 2003;

3. To act upon an amendment to increase the number of authorized
shares of Common Stock to 300,000,000; and

4. To transact such other business as may properly come before the
Annual Meeting and any and all adjournments thereof.

The Board of Directors has fixed the close of business on December 31,
2002 as the record date for the determination of shareholders entitled to notice
of, and to vote at, the Annual Meeting and any and all adjournments thereof.

You are cordially invited to attend the meeting in person. Whether or
not you expect to attend the meeting in person, please promptly mark, sign and
date the enclosed proxy and return it in the envelope provided for that purpose.

By Order of the Board of Directors,

/s/ George R. Jensen, Jr.

GEORGE R. JENSEN, JR.
Chairman and Chief Executive Officer

USA TECHNOLOGIES, INC.
----------------------
PROXY STATEMENT
----------------

SOLICITATION OF PROXY, REVOCABILITY AND VOTING

GENERAL

The enclosed proxy is solicited on behalf of the Board of Directors of USA
Technologies, Inc., a Pennsylvania corporation (the "Company"), for use at the
2003 Annual Meeting of Shareholders (the "Annual Meeting"), to be held at 10:00
a.m., on February 14, 2003, at the Chester Valley Golf Club located at 430
Swedesford Road, Malvern, Pennsylvania 19355.

Only holders of Common Stock or Series A Convertible Preferred Stock of
record at the close of business on December 31, 2002 will be entitled to notice
of and to vote at the Annual Meeting. Each share of Common Stock and Series A
Preferred Stock is entitled to one vote on all matters to come before the Annual
Meeting. On December 31, 2002, the record date for the Annual Meeting, the
Company had issued and outstanding 82,097,004 shares of Common Stock, no par
value ("Common Stock"), and 533,227 shares of Series A Convertible Preferred
Stock, no par value ("Series A Preferred Stock").

The Company`s principal executive offices are located at 200 Plant Avenue,
Wayne, Pennsylvania 19087. The approximate date on which this Proxy Statement
and the accompanying proxy are first being sent to shareholders is January 18,
2003.

QUORUM AND VOTING

The presence, in person or by proxy, of the holders of a majority of the
votes entitled to be cast by the shareholders entitled to vote generally at the
Annual Meeting is necessary to constitute a quorum. Votes withheld for director
nominees and abstentions on the other proposals to be considered at the Annual
Meeting will be counted in determining whether a quorum has been reached, but
the failure to execute and return a proxy will result in a shareholder not being
considered present at the meeting. The holders of the Common Stock and Series A
Preferred Stock vote together, and not as a separate class, on all matters to be
submitted to shareholders at the Annual Meeting. If a quorum is not present at
the Annual Meeting, we expect that the Annual Meeting will be adjourned or
postponed to solicit additional proxies.

Assuming the presence of a quorum, generally the adoption of a proposal by
the shareholders requires the affirmative vote of the holders of at least a
majority of all shares casting votes in person or by proxy at the Annual
Meeting. Directors are elected by a plurality, and the eight nominees who
receive the most votes will be elected. Abstentions and broker non-votes will
not be taken into account to determine the outcome of the election of directors
or the approval of any proposal. Approval of the proposal to ratify the
selection of auditors will require the affirmative vote of the holders of at
least a majority of all shares casting votes in person or by proxy at the Annual
Meeting. Approval of the proposal to increase the number of authorized shares
of Common Stock will require the affirmative vote of the holders of at least a
majority of all shares casting votes in person or by proxy at the Annual
Meeting. Only shares affirmatively voted for a proposal, including properly
executed proxies that do not contain voting instructions, will be counted as
favorable votes for that proposal. Brokers who hold shares of stock in street
name for customers and who indicate on a proxy that the broker does not have
discretionary authority to vote those shares as to a particular matter are

referred to as broker non-votes. Broker non-votes will have no effect in
determining whether a proposal will be adopted at the Annual Meeting although
they would be counted as present for purposes of determining the existence of a
quorum. Abstentions as to a particular proposal will have the same effect as
votes against such proposal.

REVOCABILITY OF PROXIES

Shares represented by proxies, if properly signed and returned, will be
voted in accordance with the specifications made thereon by the shareholders.
Any proxy not specifying to the contrary will be voted in favor of the adoption
of all of the proposals referred to in the Notice of Annual Meeting and for the
eight nominees for Director listed in Item 1 below. A shareholder who signs and
returns a proxy may revoke it any time before it is voted by the filing of an
instrument revoking it or a duly executed proxy bearing a later date with the
Secretary of the Company. Your mere attendance at the Annual Meeting will not
revoke your proxy.

SOLICITATION

The cost of soliciting proxies will be borne by the Company. Such
solicitation will be made by mail and may also be made on behalf of the Company
by the Company`s Directors, officers or employees in person or by telephone,
facsimile transmission or telegram.

SECURITY OWNERSHIP

COMMON STOCK

The following table sets forth, as of December 31, 2002, the beneficial
ownership of the Common Stock of each of the Company`s directors and executive
officers, the other employee named in the Summary Compensation Table set forth
below, as well as by the Company`s directors and executive officers as a group.
Except as set forth below, the Company is not aware of any beneficial owner of
more than five percent of the Common Stock. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.

Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- ------------
George R. Jensen, Jr. 759,000(3) *
517 Legion Road
West Chester, Pennsylvania 19382

Stephen P. Herbert 486,050(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087

Haven Brock Kolls, Jr. 104,725(5) *
1573 Potter Drive
Pottstown, PA 19464

Leland P. Maxwell 277,050 *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010

Michael K. Lawlor 407,050(6) *
131 Lisa Drive
Paoli, PA 19301

Edwin R. Boynton 327,887(7) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010

Douglas M. Lurio 257,213(8) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103

William W. Sellers 912,108(9) *
394 East Church Road
King of Prussia, Pennsylvania 19406

William L. Van Alen, Jr. 274,005(10) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028

Kenneth C. Boyle 126,188 (11) *
403 West Fourth Street North
Newton, Iowa 50208

Adele H. Hepburn
208 St. Georges Road
Ardmore, Pennsylvania 19003 2,316,983(12) 1.19%

Kazi Management VI, Inc.
30 Dronningens Gade, Suite B 30
St. Thomas, Virgin Islands 00802 22,857,145(13) 11.7%

All Directors and Executive Officers
As a Group (11 persons) 3,931,276(14) 2.02%
---------
*Less than one percent (1%)

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of
December 31, 2002, are deemed to be beneficially owned for purposes hereof.

(2) On December 31, 2002 there were 82,097,004 shares of Common Stock and
533,227 shares of Series A Preferred Stock issued and outstanding. For purposes
of computing the percentages under this table, it is assumed that all shares of
issued and outstanding Preferred Stock have been converted into shares of Common
Stock, that all of the options to acquire Common Stock which have been issued
and are fully vested as of December 31, 2002 (or within 60-days thereof) have
been converted into shares of Common Stock, that all Common Stock Purchase
Warrants have been exercised, that all of the Senior Notes have been converted
into shares of Common Stock, that all of the Convertible Debentures have been
converted and related Warrants have been exercised into shares of Common Stock,
and that all of the accrued and unpaid dividends on the Preferred Stock have
been converted into shares of Common Stock. Therefore, for purposes of computing
the percentages under this table, there are 194,774,754 shares of Common Stock
issued and outstanding.

(3) Includes 438,000 shares issuable upon conversion of Senior Notes, 86,000
shares of Common Stock beneficially owned by his spouse and 135,000 shares
issuable upon exercise of warrants. Does not include the right granted to Mr.
Jensen under his Employment Agreement to receive seven percent (7%) of the
issued and outstanding Common Stock upon the occurrence of a USA Transaction (as
defined therein). See "Executive Employment Agreements".

(4) Includes 1,000 shares of Common Stock beneficially owned by his child.

(5) Includes 16,500 shares of Common Stock owned by his spouse, 24,000 shares
issuable to his spouse upon conversion of her Senior Note, and 22,500 shares
issuable upon exercise of warrants held by his spouse.

(6) Includes 130,000 shares beneficially owned by his spouse.

(7) Includes 8,100 shares of Common Stock issuable upon conversion of shares of
Series A Preferred Stock. Includes 47,250 shares issuable upon conversion of
Senior Notes and 24,375 shares issuable upon exercise of warrants. Does not

include any shares of Common Stock issuable upon conversion of any accrued and
unpaid dividends in the Series A Preferred Stock.

(8) Includes 42,213 shares of Common Stock held jointly with Mr. Lurio`s spouse,
99,000 shares issuable upon conversion of Senior Notes and 33,750 shares
issuable upon exercise of warrants.

(9) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4952 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 10,423 shares of Common
Stock owned by Mr. Seller`s wife. Includes 199,167 shares of Common Stock
issuable upon exercise of Warrants, and 119,170 shares issuable upon conversion
of his Senior Notes.

(10) Includes 4,000 shares owned by his spouse, 108,335 shares underlying his
Senior Notes, and 88,336 shares issuable upon exercise of warrants.

(11) Represents shares underlying options.

(12) Includes 52, 275 shares held by her spouse, 5,150 shares underlying Series
A Preferred Stock held by her and her spouse, 856,085 shares underlying her
Senior Notes and 68,648 shares underlying her spouse`s Senior Notes, 235,375
shares issuable upon exercise of warrants held by her and 22,274 shares issuable
upon exercise of warrants held by her spouse, and 277,000 shares underlying
options held by her and 5,000 shares underlying options held by her spouse.

(13) Includes 19,285,716 shares underlying warrants. Zubair Kazi, an individual,
is the owner and President of Kazi Management VI, Inc. and would also be deemed
the beneficial owner of all 22,857,145 shares under the applicable rules of the
Securities and Exchange Commission.

(14) Includes all shares of Common Stock described in footnotes (2) through (11)
above.

SERIES A PREFERRED STOCK

The following table sets forth, as of December 31, 2002 the beneficial
ownership of the Preferred Stock by the Company`s directors and executive
officers, the other employee named in the Summary Compensation Table set forth
below, as well as by the Company`s directors and executive officers as a group.
Except as set forth below, the Company is not aware of any beneficial owner of
more than five percent of the Preferred Stock. Except as otherwise indicated,
the Company believes that the beneficial owners of the Preferred Stock listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.

Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
------------------- ------------------ -----------
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 8,100 1.5%

Adele H. Hepburn
208 St. Georges Road
Ardmore, Pennsylvania 19003 5,150(2) *

All Directors and Executive
Officers As a Group (11 persons) 8,100 1.5%
--------------
* Less than one percent (1%)

(1) There were 533,227 shares of Preferred Stock issued and outstanding as of
December 31, 2002.
(2) Includes 2,000 shares held by her spouse.

ITEM 1

ELECTION OF DIRECTORS
-----------------------

(Item 1 on Proxy Card)

The shareholders are being asked to elect eight directors, who will
comprise the entire Board of Directors of the Company, to serve until the next
annual meeting of shareholders or until their successors are duly elected and
qualified. All of the nominees are current members of the Board of Directors.

Although the Board of Directors has no reason to believe any of the
nominees will be unable to accept such nomination, if such should occur, proxies
will be voted (unless marked to the contrary) for such substitute person or
persons, if any, as shall be recommended by the Board of Directors. However,
proxies will not be voted for more than eight Directors. Shareholders who do not
wish their shares to be voted for a particular nominee may so direct in the
space provided in the proxy card.

The Board of Directors has nominated, and recommends the election of, the
eight persons listed below to serve as Directors of the Company. The following
information is furnished with respect to each nominee for election as a
Director:

Name Age Position(s) with the Company
-------------------------------------------------------------------------

George R. Jensen, Jr. 54 Chief Executive Officer,
Chairman of the Board of Directors

Stephen P. Herbert 40 President, Chief Operating Officer,
Director

William W. Sellers 80 Director

William L. Van Alen, Jr. 68 Director

Steven Katz 53 Director
Douglas M. Lurio 46 Director

Edwin R. Boynton 48 Director

Kenneth C. Boyle 39 Director

George R. Jensen, Jr., has been the Chairman of the Board, Chief Executive
Officer, and Director of the Company since January 1992. Mr. Jensen is the
founder, and was Chairman, Director, and Chief Executive Officer of American
Film Technologies, Inc. ("AFT") from 1985 until 1992. AFT was in the business
of creating color imaged versions of black-and-white films. From 1979 to 1985,
Mr. Jensen was Chief Executive Officer and President of International Film
Productions, Inc. Mr. Jensen was the Executive Producer of the twelve hour
mini-series, "A.D.", a $33 million dollar production filmed in Tunisia. Proctor
and Gamble, Inc., the primary source of funds, co-produced and sponsored the
epic, which aired in March 1985 for five consecutive nights on the NBC network.
Mr. Jensen was also the Executive Producer for the 1983 special for public
television, "A Tribute to Princess Grace". From 1971 to 1978, Mr. Jensen was a
securities broker, primarily for the firm of Smith Barney, Harris AFAM. Mr.
Jensen was chosen 1989 Entrepreneur of the Year in the high technology category
for the Philadelphia, Pennsylvania area by Ernst & Young LLP and Inc. Magazine.
Mr. Jensen received his Bachelor of Science degree from the University of
Tennessee and is a graduate of the Advanced Management Program at the Wharton
School of the University of Pennsylvania.

Stephen P. Herbert was elected a Director of the Company in April 1996, and
joined the Company on a full-time basis in May 1996. Mr. Herbert became
President and Chief Operating Officer of the Company in June 1999. Prior to
joining the Company and since 1986, Mr. Herbert had been employed by Pepsi-Cola,
the beverage division of PepsiCo, Inc. From 1994 to April 1996, Mr. Herbert was
a Manager of Market Strategy. In such position he was responsible for directing
development of market strategy for the vending channel and subsequently the
supermarket channel for Pepsi-Cola in North America. Prior thereto, Mr. Herbert
held various sales and management positions with Pepsi-Cola. Mr. Herbert
graduated with a Bachelor of Science degree from Louisiana State University.

William W. Sellers joined the Board of Directors of the Company in May
1993. Mr. Sellers founded The Sellers Company in 1949 which has been nationally
recognized as the leader in the design and manufacture of state-of-the-art
equipment for the paving industry. Mr. Sellers has been awarded five United
States patents and several Canadian patents pertaining to this equipment. The
Sellers Company was sold to Mechtron International in 1985. Mr. Sellers is
Chairman of the Board of the Sellers Process Equipment Company which sells
products and systems to the food and other industries. Mr. Sellers is actively
involved in his community. Mr. Sellers received his undergraduate degree from
the University of Pennsylvania.

William L. Van Alen, Jr., joined the Board of Directors of the Company in
May 1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an
organization engaged in the production of feature films of which he was a
founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of
The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen
practiced law in Pennsylvania for twenty-two years. Mr. Van Alen received his
undergraduate degree in Economics from the University of Pennsylvania and his
law degree from Villanova Law School.

Steven Katz joined the Board of Directors in May 1999. He is President of
Steven Katz & Associates, Inc., a management consulting firm specializing in
strategic planning and corporate development for technology and service-based
companies in the health care, environmental, telecommunications and Internet
markets. Mr. Katz`s prior experience includes five years with Price Waterhouse &

Co. in audit, tax and management advisory services; two years of corporate
planning with Revlon, Inc.; five years with National Patent Development
Corporation ("NPDC") in strategic planning, merger and acquisition, technology
in-licensing and out-licensing, and corporate turnaround experience as President
of three NPDC subsidiaries; and two years as a Vice President and General
Manager of a non-banking division of Citicorp, N.A.

Douglas M. Lurio joined the Board of Directors of the Company in June 1999.
Mr. Lurio is President of Lurio & Associates, P.C., attorneys-at-law, which he
founded in 1991. He specializes in the practice of corporate and securities
law. Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio
received a Bachelor of Arts degree in Government from Franklin & Marshall
College, a Juris Doctor degree from Villanova Law School, and a Masters in Law
(Taxation) from Temple Law School.

Edwin R. Boynton joined the Board of Directors in July 1999. He is a
partner of Stradley Ronon Stevens & Young LLP, and is a member of and currently
the chair of the firm`s estates department. Mr. Boynton received his Bachelor
of Arts degree from Harvard University in 1976 and his Juris Doctor degree from
Duke University in 1979.

Kenneth C. Boyle joined the Board of Directors in May 2002. Mr. Boyle is
the Vice President & General Manager - eBusiness of the Maytag Corporation. He
leads Maytag`s global eBusiness unit, which explores and develops e-commerce
opportunities and Web enabled business models that support profitable growth
across Maytag`s business units. He is responsible for all eBusiness efforts at
the corporate level as well as business and brand specific activities at the
operating unit level, inclusive of partnerships and strategy development. Prior
to Maytag, Mr. Boyle served as a director of business development with iXL, a
major global e-consulting firm. He was responsible for developing long-term,
strategic relationships with Global 2000 companies and assisting them with
consulting services to transform their traditional business models by leveraging
Internet technology. Mr. Boyle began his career with Delta Air Lines. His
ten-year career with Delta included management positions in sales and marketing
and founding Delta`s e-commerce department. While there he led the development
and implementation of initiatives to drive sales via the Internet,
Internet-connected kiosks, smart card programs and other digital avenues.

Cumulative voting rights do not exist with respect to the election of
Directors. Pursuant to the Articles of Incorporation and Pennsylvania law, the
Directors of the Company are to be elected by the holders of the Common Stock
and Series A Preferred Stock voting together, with each share of Common Stock
and Series A Preferred Stock entitled to one vote.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
ELECTION OF ALL NOMINEES.

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES

The Board of Directors of the Company held a total of six meetings during
the fiscal year ended June 30, 2002 (not including actions adopted by unanimous
consent). Each member of the Board of Directors attended at least 75% of the
aggregate of the number of meetings of the Board and Board Committees of which
he was a member during the 2002 fiscal year.

The Board of Directors has an Audit Committee and a Compensation Committee.

The Audit Committee of the Board of Directors presently consists of Mr. Van
Alen (Chairman), Mr. Sellers and Mr. Lurio. It held four meetings during the
2002 fiscal year. The Audit Committee recommends the engagement of the Company`s
independent accountants and is primarily responsible for approving the services
performed by the Company`s independent accountants, for reviewing and evaluating
the Company`s accounting principles, reviewing the independence of independent
auditors, and reviewing the adequacy and effectiveness of the Company`s internal
controls. See "Report of the Audit Committee."

The Compensation Committee of the Board of Directors presently consists of
Mr. Sellers (Chairman), Mr. Katz and Mr. Van Alen. The Committee reviews and
recommends compensation and compensation changes for executives of the Company
and the Board of Directors and administers the Company`s stock option and stock
grant plans. The Compensation Committee met two times during the 2002 fiscal
year.

COMPENSATION OF DIRECTORS

Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors or any Committee thereof.

In April 2002, the Company granted to each of the five outside Directors
(Messrs. Sellers, Van Alen, Katz, Lurio, and Boynton) options to purchase up to
100,000 shares of Common Stock at $.40 per share as compensation for serving the
one-year term which commenced March 21, 2002. The options are fully vested and
are exercisable at any time prior to April 12, 2005. Commencing on July 1, 2002
and at any and all times through June 30, 2003, each Director has been granted
the right, without the payment of the per share exercise price of such options,
to receive up to 50,000 shares represented by those options. In September 2002,
Edwin P. Boynton elected to receive 50,000 shares in lieu of the above options.

In February 2001, the Company granted a total of 300,000 options to
purchase Common Stock at $1.00 per share to each of the then outside members of
the Board (Messrs. Sellers, Van Alen, Smith, Katz, Lurio, and Boynton). Of
these, 120,000 options vested immediately; 90,000 options vested on June 30,
2001; and 90,000 vested on June 30, 2002. The options are exercisable at any
time within five years following the vesting.

The Company has agreed to use its best efforts to register for resale all
of the Common Stock underlying the above options under the Securities Act of
1933, as amended ("Act"), at the Company`s cost and expense. All of the
foregoing options are non-qualified stock options and not part of a qualified
stock option plan and do not constitute incentive stock options as such term is
defined under Section 422 of the Internal Revenue Code, as amended, and are not
part of an employee stock purchase plan as described in Section 423 thereunder.

On December 31, 2002, each of Messrs. Sellers, Van Alen, Katz, Lurio, and
Boynton voluntarily canceled all of the outstanding options then held by them.

ITEM 2

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
--------------------------------------------------------

(Item 2 on Proxy Card)

The firm of Ernst & Young LLP has served as the Company`s independent
auditors for fiscal years since 1992 and has been selected by the Board of
Directors to serve in the same capacity for fiscal year 2003. The shareholders
will be asked to ratify this appointment at the Annual Meeting. A
representative of Ernst & Young LLP is expected to be present at the Annual
Meeting and will have the opportunity to make a statement if desired and is
expected to be available to respond to appropriate questions.

The following resolution concerning the appointment of the independent
auditors will be presented to the shareholders at the Annual Meeting:

RESOLVED, that the appointment by the Board of Directors of the Company of
Ernst & Young LLP, independent auditors, to examine the books, accounts and
records of the Company for the fiscal year ending June 30, 2003 is hereby
ratified and approved.

The affirmative vote of a majority of the votes cast by all holders of the
outstanding shares of Common Stock and Series A Preferred Stock voting together
(with each share of Common Stock and Series A Preferred Stock entitled to one
vote) is required for ratification of this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
RATIFICATION OF THE PROPOSAL SET FORTH ABOVE.

ITEM 3

APPROVAL OF AN AMENDMENT TO THE COMPANY`S
ARTICLES OF INCORPORATION INCREASING
THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
-----------------------------------------------

(Item 3 on Proxy Card)

The Company`s Articles of Incorporation presently authorizes the issuance
of up to 200,000,000 shares of Common Stock. The Board of Directors has
approved a resolution which if approved by the shareholders would increase the
number of authorized shares of Common Stock to 300,000,000.

As of December 31, 2002, the number of issued and outstanding shares of
Common Stock on a fully converted basis is 194,774,754 which is slightly less
than the number of shares of Common Stock which are currently authorized
(200,000,000) by the Articles of Incorporation. These shares consist of the
following:

*82,097,004 shares of Common Stock actually issued and outstanding;
*533,227 shares issuable upon conversion of the currently issued and
outstanding Series A Preferred Stock;

*557,096 shares issuable upon conversion of the accrued and unpaid
dividends on the Series A Preferred Stock;
*3,172,485 shares issuable upon exercise of outstanding options (of which
3,052,487 were vested as of such date);
*27,598,118 shares issuable upon exercise of outstanding warrants;
* 6,105,000 shares issuable to La Jolla Cove Investors, Inc. pursuant to
conversion of Convertible Debenture and exercise of related conversion warrants;
* 43,786,509 shares reserved for issuance upon the conversion of the
outstanding 12% Convertible Senior Notes;
* 601,034 shares reserved to provide the option to each holder of the 12%
Convertible Senior Notes to elect to accept shares of Common Stock in lieu of
receiving cash in satisfaction of the interest payments otherwise due to them on
account of the quarter ended December 31, 2002;
* 30,324,281 shares reserved for issuance to various investors or
consultants not reflected above.

Based upon the foregoing outstanding and reserved shares, the Company
currently has 5,225,246 shares of Common Stock remaining available for other
purposes. The purpose of the proposed amendment is to authorize a sufficient
number of additional shares of Common Stock to provide the Company with the
flexibility to issue Common Stock for a variety of corporate purposes, such as
to make acquisitions through the use of shares, to raise equity capital, to
issue additional warrants or options, or to issue shares in lieu of quarterly
cash interest payments due on the Convertible Senior Notes. At this time, the
Company has no such plans, proposals or arrangements, written or otherwise. As
of December 31, 2002, and assuming approval of this proposal, there would be
105,225,246 shares of Common Stock eligible for future issuance. The Board of
Directors will have the authority to issue these authorized shares of Common
Stock from time to time for proper corporate purposes without further
shareholder approval unless required by applicable law. Shareholders do not have
preemptive rights with respect to the Common Stock. The issuance of Common Stock
or securities convertible into Common Stock, on other than a pro-rata basis,
would result in the dilution of a present shareholder`s interest in the Company.

The Company has not proposed the increase in the authorized number of
shares with the intention of using the additional shares for anti-takeover
purposes, although the Company could theoretically use the additional shares to
make it more difficult or to discourage an attempt to acquire control of the
Company. For example, in the event of an attempt to take over control of the
Company, it may be possible for the Company to endeavor to impede the attempt by
issuing shares of the Common Stock, thereby diluting the voting power of the
other outstanding shares and increasing the potential cost to acquire control of
the Company. The proposed amendment may therefore have the effect of
discouraging unsolicited takeover attempts. By potentially discouraging
initiation of any such unsolicited takeover attempt, the proposed amendment may
limit the opportunity for the Company`s shareholders to dispose of their shares
at the higher price generally available in takeover attempts. In addition,
management might use the additional shares to resist or frustrate a third-party
transaction providing an above-market premium that is favored by a majority of
the independent shareholders. The Board of Directors is not aware of any attempt
to take control of the Company and the Board of Directors has not presented this
proposal with the intent that it be utilized as a type of anti-takeover device.
At this time, the Company has no additional plans or proposals to adopt other
provisions or enter into other arrangements that may have material anti-takeover
consequences.

The resolution to be considered by the shareholders at the Annual Meeting
reads as follows:

RESOLVED, that Paragraph (A) Classes of Stock of Article 4 of the
-----------------
Articles of Incorporation of the Company shall be amended and restated to
read in full as follows:

(A) Classes of Stock. The aggregate number of shares which
------------------
the corporation shall have authority to issue is 301,800,000
shares, consisting of 300,000,000 shares of Common Stock, without
par value, and 1,800,000 shares of Series Preferred Stock,
without par value.

Shareholder approval of this proposal is required under Pennsylvania law
and the Articles of Incorporation. Approval of the amendment to the Company`s
Articles of Incorporation increasing the number of authorized shares of Common
Stock requires the affirmative vote of a majority of all votes cast by the
holders of outstanding shares of Common Stock and Series A Preferred Stock
voting together (with each share of Common Stock and Series A Preferred Stock
entitled to one vote). If this proposal is adopted, it will become effective
upon filing of Articles of Amendment with the Department of State of the
Commonwealth of Pennsylvania which the Company anticipates filing immediately
following the Annual Meeting.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS
AMENDMENT TO THE COMPANY`S ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK.

EXECUTIVE COMPENSATION
COMPENSATION TABLES

The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 2000, June 30, 2001 and June 30, 2002 to each of the executive officers and
employee of the Company named below.

SUMMARY COMPENSATION TABLE

Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation(5)
--------------------------- ------ ---------------------- ---------------------------

Salary Bonus Other Annual Restricted Stock
(1) Compensation Awards
------ ----- ----- -------------- ---------------------------

George R. Jensen, Jr., 2002 $135,000 $288,000 $80,000 (4) --
Chief Executive Officer 2001 $135,000 $140,000 -- --
2000 $117,500 $0 -- $80,000 (2)
--------------------------------------------------------------------------------------------------------
Stephen P. Herbert, 2002 $125,000 $270,000 $80,000 (4) --
President 2001 $125,000 $134,40 -- --
2000 $107,500 $94,000 -- $80,000 (2)
--------------------------------------------------------------------------------------------------------
Leland P. Maxwell, Chief 2002 $110,308 $151,200 -- --
Financial Officer, Treasurer 2001 $108,000 $44,240 -- --
2000 $ 99,000 $29,000 -- --
--------------------------------------------------------------------------------------------------------
H. Brock Kolls, Senior Vice 2002 $125,769 $180,000 $50,000 (4) --
President, Research & 2001 $120,000 $ 97,440 -- --
Development 2000 $105,000 $ 44,000 -- $80,000 (2)
--------------------------------------------------------------------------------------------------------
Michael K. Lawlor, Senior 2002 $103,846 $151,200 -- --
Vice President, Sales and 2001 $100,000 $ 38,640 -- --
Marketing 2000 $ 83,200 $ 45,500 $43,000 (3) --
--------------------------------------------------------------------------------------------------------
Adele H. Hepburn 2002 $ 91,000 $472,609 -- --
Director of Public Relations 2001 $ 91,000 $171,700 -- --
2000 $ 91,000 $147,800 -- --
--------------------------------------------------------------------------------------------------------

(1) For fiscal year 2000, represents shares of Common Stock issued to the
executive officers during the fiscal year valued at $2.00 per share, the closing
bid price on the date of issuance. For Mr. Lawlor, the bonus also includes a
$5,500 sales commission. For fiscal year 2001, represents shares of Common
Stock issued to the executive officers during the fiscal year valued at $1.12
per share, the closing bid price on the date of issuance. For Mr. Lawlor, the
bonus also includes $1,265 sales commission. For fiscal year 2002, represents
shares of Common Stock issued to the executive officers valued at $.45 per
share, which was the market value on the date of grant (Mr. Jensen-640,000
shares; Mr. Herbert-600,000 shares; Mr. Kolls-400,000 shares; Mr. Maxwell-
260,000 shares; and Mr. Lawlor-260,000 shares). For Mr. Maxwell and Mr. Lawlor
in 2002, the bonus also includes 90,000 shares of Common Stock valued at $.38,
which was the market price on the day of grant. This stock was awarded to
reimburse them for tax payments incurred as a result of the award of a
previous bonus. For Adele Hepburn in fiscal 2002, the bonus includes
$408,267 of non cash compensation, as follows: 435,334 shares of Common Stock
at $.60; 384,334 shares at $.10; and a $108,834 2001 - D 12% Senior Notes due
December 31, 2003.

(2) Represents shares of Common Stock to be issued to such executive officers
if employed by the Company on June 30, 2002. The shares have been valued at
$2.00 per share, the closing bid price on the date of grant.

(3) Represents cash payment by the Company of relocation expenses.

(4) Represents cash payments authorized to reimburse certain executive
officers for tax payments incurred from the award of a previous bonus.

(5) In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; William Sellers - 15,500 options; and William Van Alen - 12,500
options. All of the foregoing options would have expired in the first two

calendar quarters of the year 2000 or the first calendar quarter of year 2001.
In February, 2001, all these options were further extended until June 30, 2003,
and in addition the expiration dates of the following additional options were
also extended to June 30, 2003: H. Brock Kolls - 20,000 options; Stephen Herbert
- 40,000 options; Michael Lawlor - 3,750 options; George Jensen - 200,000
options. In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003. Effective December 31, 2002, all of the outstanding
options (whether vested or un vested) then held by each of Messrs. Jensen,
Herbert, Kolls, Maxwell, Sellers, Van Alen, Katz, Lurio and Boynton were
voluntarily canceled by each of the foregoing individuals.

The following table sets forth information regarding stock options
granted during the fiscal year 2002 to the executive officers of the Company
named below:

OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2002

Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share($)
Granted(#) Fiscal Year (%)
----------------------------------------------------------------------------------------------------------

George R. Jensen, Jr. 320,000(1) 9.6 $.40 June 30, 2003

----------------------------------------------------------------------------------------------------------
Stephen P. Herbert 300,000(1) 9.0 $.40 June 30, 2003
----------------------------------------------------------------------------------------------------------
Leland P. Maxwell 130,000(1) 3.9 $.40 June 30, 2003
----------------------------------------------------------------------------------------------------------
H. Brock Kolls 50,000 1.5 $.40 April 15, 2005
200,000(1) 6.0 $.40 June 30, 2003
----------------------------------------------------------------------------------------------------------
Michael K. Lawlor 130,000(1) 3.9 $.40 June 30, 2003
----------------------------------------------------------------------------------------------------------
Adele H. Hepburn 200,000 6.0 $.70 June 30,2003
300,000 9.0 $.40 November 23, 2003
----------------------------------------------------------------------------------------------------------

(1) Represents shares issued by the Company during January 2002 in satisfaction
of options issued in November 2001 at no cost to the named executive officer.
The shares have been valued at $.45 per share, the price on the date of
issuance. The value of these shares has been included in the Summary
Compensation Table set forth above.

TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2002 AND YEAR END VALUES

This table gives information for options exercised by each of the named
executive officers in fiscal year 2002, and the number of options held by these
executive officers at fiscal year end.

Number of
Securities Value of
Underlying Unexercised
Unexercised In-the -Money
Options at Options at
FY-End (#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexersisabble Unexercisable
--------------------------------------------------------------------------------------------------------

George R. Jensen, Jr. 320,000(1) 144,000 446,666/ 0
33,334
--------------------------------------------------------------------------------------------------------
Stephen P. Herbert 300,000(1) 135,000 263,334/ 0
26,666
--------------------------------------------------------------------------------------------------------
Leland P. Maxwell 130,000(1) 58,500 103,334/ 0
16,666
--------------------------------------------------------------------------------------------------------
H. Brock Kolls 200,000(1) 90,000 273,334/ 0
26,666
--------------------------------------------------------------------------------------------------------
Michael K. Lawlor 130,000(1) 58,500 83,334/ 0
16,666
--------------------------------------------------------------------------------------------------------
Adele H. Hepburn 0 0 577,000/ 0
0
--------------------------------------------------------------------------------------------------------

EXECUTIVE EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Mr. Jensen which
expires June 30, 2004, and is automatically renewed from year to year thereafter
unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $180,000 effective April 15, 2002. Mr. Jensen is entitled
to receive such bonus or bonuses as may be awarded to him by the Board of
Directors. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full
time and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of the Agreement and for a period of one year
thereafter.

The agreement also grants to Mr. Jensen in the event a "USA Transaction"
(as defined below) occurs after the date thereof that number of shares of Common
Stock as shall when issued to him equal seven percent of all the then issued and
outstanding shares of Common Stock (the "Rights"). Mr. Jensen is not required to
pay any additional consideration for such shares. At the time of any USA
Transaction, all of the shares of Common Stock underlying the Rights are
automatically deemed to be issued and outstanding immediately prior to any USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.

The term USA Transaction is defined as (i) the acquisition of fifty-one
percent or more of the then outstanding voting securities entitled to vote
generally in the election of Directors of the Company by any person, entity or
group, or (ii) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation, or dissolution of the
Company, or the sale, transfer, lease or other disposition of all or
substantially all of the assets of the Company.

The Rights are irrevocable and fully vested, have no expiration date, and
will not be affected by the termination of Mr. Jensen`s employment with the
Company for any reason whatsoever. If a USA Transaction shall occur at a time
when there not a sufficient number of authorized but unissued shares of Common
Stock, then the Company shall as a condition of such USA Transaction promptly
take any and all appropriate action to make available a sufficient number of
shares of Common Stock. In the alternative, the Company may structure the USA
Transaction so that Mr. Jensen would receive the same amount and type of
consideration in connection with the USA Transaction as any other holder of
Common Stock.

The Company has entered into an employment agreement with Mr. Herbert which
expires on June 30, 2004, and is automatically renewed from year to year
thereafter unless canceled by Mr. Herbert or the Company. The Agreement
provides for an annual base salary of $165,000 per year effective April 15,
2002. Mr. Herbert is entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Herbert to devote his

full time and attention to the business and affairs of the Company and obligates
him not to engage in any investments or activities which would compete with the
Company during the term of the agreement and for a period of one year
thereafter.

Mr. Kolls has entered into an employment agreement with the Company which
expires on June 30, 2004, and is automatically renewed from year to year
thereafter unless canceled by Mr. Kolls or the Company. The agreement provides
for an annual base salary of $150,000 per year effective April 15, 2002. Mr.
Kolls is also entitled to receive such bonus or bonuses as may be awarded to him
by the Board of Directors. The Agreement requires Mr. Kolls to devote his full
time and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of his agreement and for a period of one year
thereafter.

Mr. Maxwell has entered into an employment agreement with the Company which
expires on June 30, 2003, and is automatically renewed from year to year
thereafter unless canceled by Mr. Maxwell or the Company. The agreement provides
for an annual base salary of $120,000 per year effective April 15, 2002. Mr.
Maxwell is also entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Maxwell to devote his
full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of the agreement and for a period of one year
thereafter.

Mr. Lawlor has entered into an employment agreement with the Company which
expires on June 30, 2003, and is automatically renewed from year to year
thereafter unless canceled by Mr. Lawlor or the Company. The agreement provides
for an annual base salary of $120,000 per year effective April 15, 2002. Mr.
Lawlor is also entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Lawlor to devote his full
time and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of the agreement and for a period of one year
thereafter.

Ms. Hepburn has entered into an employment agreement with the Company which
expires on June 30, 2003, and is automatically renewed from year to year
thereafter unless canceled by Ms. Hepburn or the Company. The agreement provides
for an annual base salary of $91,000 per year. Ms. Hepburn is also entitled to
receive such bonus or bonuses as the Board of Directors may award to her. The
Agreement requires Ms. Hepburn to devote her full time and attention to the
business and affairs of the Company, and obligates her not to engage in any
investments or activities which would compete with the Company during the term
of the agreement and for a period of one year thereafter.

REPORT OF THE AUDIT COMMITTEE

MEMBERSHIP AND ROLE OF THE AUDIT COMMITTEE

The Audit Committee of the Company`s Board of Directors (the "Audit
Committee") consists of three outside directors, currently Messrs. Sellers, Van
Alen, and Lurio, appointed by the Board of Directors. Each member of the Audit
Committee other than Mr. Lurio is independent as defined under the National
Association of Securities Dealers` listing standards. The Audit Committee is
governed by a written charter adopted and approved by the Board of Directors, a
copy of which is attached to this Proxy Statement as Appendix A.

REVIEW OF THE COMPANY`S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 2002

The Audit Committee has reviewed and discussed the audited financial
statements of the Company for the fiscal year ended June 30, 2002 with the
Company`s management. The Audit Committee also discussed with Ernst & Young
LLP, the Company`s independent auditors, the matters required to be discussed by
Statement on Auditing Standards No. 61 "Communication with Audit Committees".

The Audit Committee has also received the written disclosures from Ernst &
Young LLP relating to their independence as required by Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committees) and the
Audit Committee has discussed with Ernst & Young LLP the independence of that
firm. The Audit Committee has also considered whether the provision of non-audit
services by Ernst & Young LLP is compatible with maintaining Ernst & Young
LLP`s independence.

Based on the Audit Committee`s reviews and discussions noted above, the
Audit Committee recommended to the Board of Directors that the Company`s
consolidated audited financial statements be included in the Company`s Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2002, for filing with
the Securities and Exchange Commission.

Audit Committee
Mr. William L. Van Alen (Chairman)
Mr. William W. Sellers
Mr. Douglas M. Lurio

AUDIT AND RELATED FEES

Fees to Accountants for Services Rendered During Fiscal Year 2002

Audit Fees

The aggregate fees billed to the Company by Ernst & Young LLP for
professional services rendered for the audit of the Company`s annual financial
statements for the fiscal year ended June 30, 2002 and the reviews of the
financial statements included in the Company`s quarterly reports on Form 10-QSB
for that fiscal year totaled $226,469.

Financial Information Systems Design and Implementation Fees

The Company did not engage Ernst & Young LLP to provide, during the
fiscal year ended June 30, 2002, any services for the Company regarding the
design or implementation of the Company`s financial information systems, within
the meaning of Rule 2-01(c)(4)(ii) of Regulation S-X.

All Other Fees

Fees billed to the Company by Ernst & Young LLP during the Company`s
2002 fiscal year for services rendered other than for services covered by the
preceding two paragraphs, including tax related services, totaled $165,037.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company`s
directors and executive officers, and persons who own more than ten percent of
Common Stock, to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock. Executive officers, directors and ten
percent stockholders are required by SEC regulations to furnish the Company with
a copy of all Section 16(a) forms ("Forms 3, 4, and 5") that they file. To the
Company`s knowledge, based solely on a review of copies of the Forms 3, 4 and 5
furnished to the Company, except as set forth below, all applicable Section
16(a) filing requirements were complied with.

Mr. Kolls failed to file a Form 3 reporting his beneficial ownership of
securities which was required to be filed on October 28, 2002. The appropriate
Form was filed by Mr. Kolls on January 3, 2003.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 31, 2000, Stitch Networks Corporation ("Stitch") executed a
Vending Placement, Supply and Distribution Agreement with Eastman Kodak
Company, Maytag Corporation and Dixie Narco, Inc., which formed a
strategic alliance to market and execute a national vending program for the sale
of one-time use camera and film products. The Agreement provides for an initial
term of three years ending December 31, 2003, with additional provisions for
early termination and extensions as defined. Furthermore, the Agreement also
provides for exclusivity among the parties for the term of the Agreement
relating to the sale of camera and film products from vending machines within
the Continental United States. Pursuant to this agreement, Stitch, the
Company`s subsidiary, purchases vending machines from Dixie-Narco, Inc.
("Dixie"). Dixie is owned by Maytag Corporation which is the owner of the
Company`s shareholder, Maytag Holdings, Inc. Mr. Boyle, a Director of the
Company, is a Vice President of Maytag Corporation. There were no purchases
from Dixie for the period May 14, 2002 (the date Stitch was acquired by the
Company) to June 30, 2002. Amounts payable to Dixie of $124,333 are included in
accounts payable in the June 30, 2002 consolidated balance sheet of the Company.

During the fiscal years ended June 30, 2002 and June 30, 2001, the Company
paid Lurio & Associates, P.C., of which Mr. Lurio is President and a
shareholder, professional fees of approximately $209,000 and $220,000
respectively, for legal services rendered to the Company by such law firm.
During the years ended June 30, 2002 and 2001, the Company accrued approximately
$213,000 and $271,000, respectively, for these services. Mr. Lurio is a Director
of the Company.

In October 2002, the Company approved the issuance to each of George R.
Jensen, Jr., our Chief Executive Officer, and Stephen P. Herbert, our President
and Chief Operating Officer, of $100,000 of the senior note offering.
Pursuant thereto, each of them will receive a $100,000 12% senior note due
December 31, 2005, and 200,000 shares of Common Stock. Mr. Jensen earned $70,000
of the senior note and 140,000 of these shares in November 2002 for services
rendered in the 2002 calendar year. The remaining $30,000 senior note and 60,000
shares will be earned by Mr. Jensen on March 15, 2003 if he is then employed by
the Company on account of services rendered during the 2003 calendar year. All
of Mr. Herbert`s senior note and shares will be earned by him on March 15, 2003
if he is then employed by the Company on account of services rendered during the
2003 calendar year. In October 2002, the Company approved the issuance of
$100,000 of the senior note offering to Adele Hepburn for services rendered
during the 2002 calendar year (subject to final Board of Director approval).

SHAREHOLDER PROPOSALS FOR THE 2004 ANNUAL MEETING OF SHAREHOLDERS
Shareholder proposals submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") for inclusion in the
Company`s proxy materials for its 2004 Annual Meeting of Shareholders must be
received by the Secretary of the Company at the principal offices of the Company
no later than September 16, 2003.

Written notice of proposals of shareholders submitted outside the processes
of Rule 14a-8 under the Exchange Act for consideration at the 2004 Annual
Meeting must have been received by the Company on or before December 5, 2003 in
order to be considered timely for purposes of Rule 14a-4 under the Exchange Act.
The persons designated in the Company`s proxy card will be granted discretionary
authority with respect to any shareholder proposal with respect to which the
Company does not receive timely notice.

------ GENERAL INFORMATION

The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the Notice of Annual Meeting,
but if any matters are properly presented, it is the intention of the persons
named in the enclosed form of proxy to vote on such matters in accordance with
their best judgment to the same extent as the person signing the proxy would be
entitled to vote.

Shareholders who desire to have their shares voted at the Annual Meeting
are requested to mark, sign, and date the enclosed proxy and return it promptly
in the enclosed postage-paid envelope. Shareholders may revoke their proxies at
any time prior to the Annual Meeting and shareholders who are present at the
Annual Meeting may revoke their proxies and vote, if they so desire, in person.

A copy of the Company`s Annual Report on Form 10-KSB, as filed with the
Securities and Exchange Commission, for the fiscal year ended June 30, 2002 may
be obtained, free of charge, by any shareholder by writing or calling Investor
Relations Department, USA Technologies, Inc., 200 Plant Avenue, Wayne,
Pennsylvania 19087, telephone (610)989-0340.

By Order of the Board of Directors,

/s/ George R. Jensen, Jr.

January 18, 2003 GEORGE R. JENSEN, JR.
Chairman and Chief Executive Officer

APPENDIX A

CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OF USA TECHNOLOGIES, INC.

ORGANIZATION

This charter governs the operations of the USA Technologies` audit committee.
The committee shall review and reassess the charter at least annually and obtain
the approval of the board of directors. The committee shall be appointed by the
board of directors and shall comprise at least three directors, each of whom are
independent of management and the Company. Members of the committee shall be
considered independent if they have no relationship that may interfere with the
exercise of their independence from management and the Company. All committee
members shall be financially literate, (or shall become financially literate
within a reasonable period of time after appointment to the committee,) and at
least one member shall have accounting or related financial management
expertise.

STATEMENT OF POLICY

The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the company`s
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the internal audit function, the
annual independent audit of the Company`s financial statements, and the legal
compliance and ethics programs as established by management and the board. In
so doing, it is the responsibility of the committee to maintain free and open
communication between the committee, independent auditors, the internal auditors
and management of the Company. In discharging its oversight role, the committee
is empowered to investigate any matter brought to its attention with full access
to all books, records, facilities, and personnel of the Company and the power to
retain outside counsel, or other experts for this purpose.

RESPONSIBILITIES AND PROCESSES

The primary responsibility of the audit committee is to oversee the Company`s
financial reporting process on behalf of the board and report the results of
their activities to the board. Management is responsible for preparing the
Company`s financial statements, and the independent auditors are responsible for
auditing those financial statements. The committee in carrying out its
responsibilities believes its policies and procedures should remain flexible, in
order to best react to changing conditions and circumstances. The committee
should take the appropriate actions to set the overall corporate "tone" for
quality financial reporting, sound business risk practices, and ethical
behavior.

The following shall be the principal recurring processes of the audit committee
in carrying out its oversight responsibilities. The processes are set forth as
a guide with the understanding that the committee may supplement them as
appropriate.

X The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately accountable to
the board and the audit committee, as representatives of the Company`s
shareholders. The committee shall have the ultimate authority and
responsibility to evaluate and, where appropriate, replace the independent
auditors. The committee shall discuss with the auditors their independence from
management and the Company and the matters included in the written disclosures
required by the Independence Standards Board. Annually, the committee shall
review and recommend to the board the selection of the Company`s independent
auditors, subject to shareholders` approval.

X The committee shall discuss with the internal auditors and the independent
auditors the overall scope and plans for their respective audits including the
adequacy of staffing and compensation. Also, the committee shall discuss with
management, the internal auditors, and the independent auditors the adequacy and
effectiveness of the accounting and financial controls, including the Company`s
system to monitor and manage business risk, and legal and ethical compliance
programs. Further, the committee shall meet separately with the internal
auditors and the independent auditors, with and without management present, to
discuss the results of their examinations.

X The committee shall review the interim financial statements with management
and the independent auditors prior to the filing of the Company`s Quarterly
Report on Form 10-Q. Also, the committee shall discuss the results of the
quarterly review and any other matters required to be communicated to the
committee by the independent auditors under generally accepted auditing
standards. The chair of the committee may represent the entire committee for
the purposes of this review.

X The committee shall review with management and the independent auditors the
financial statements to be included in the Company`s Annual Report on Form 10-K
(or the annual report to shareholders if distributed prior to the filing of Form
10-K), including their judgment about the quality, not just acceptability, of
accounting principles, the reasonableness of significant judgments, and the
clarity of the disclosures in the financial statements. Also, the committee
shall discuss the results of the annual audit and any other matters required to
be communicated to the committee by the independent auditors under generally
accepted auditing standards.

USA TECHNOLOGIES, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS -
ANNUAL MEETING OF SHAREHOLDERS - FEBRUARY 14, 2003

The undersigned, revoking all prior proxies, hereby appoint(s) George R.
Jensen, Jr., and Leland P. Maxwell, or either of them, with full power of
substitution, as proxies to represent and vote, as designated below, all share
of Common Stock and Series A Preferred Stock of USA Technologies, Inc., held of
record by the undersigned at the close of business on December 31, 2002, at the
Annual Meeting of Shareholders to be held on February 14, 2003, and at any
adjournment thereof.

This proxy when properly executed will be voted in the manner directed on
the reverse side hereof by the undersigned. If no contrary direction is made,
this proxy will be voted "FOR" all of the proposals set forth on the reverse
side hereof, including all the nominees listed in Item 1 (or, if any such
nominees should be unable to accept such nomination, for such other substitute
person or persons as may be recommended by the Board of Directors), and in
accordance with the proxies` best judgment upon other matters properly coming
before the Annual Meeting and any adjournments thereof.

Please date and sign exactly as your name appears below. In the case of
joint holders, each should sign. If the signor is a corporation or partnership,
sign in full the corporate or partnership name by an authorized officer or
partner. When signing as attorney, executor, trustee, officer, partner, etc.,
give full title.

Dated: _____________, 2003

Signature

PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.

IF YOU SIGN THIS PROXY WITHOUT OTHERWISE MARKING THE FORM, THIS PROXY WILL BE
VOTED AS RECOMMENDED BY THE BOARD OF DIRECTORS ON ALL MATTERS TO BE CONSIDERED
AT THE ANNUAL MEETING.
[SEE REVERSE SIDE]

1. The election of George R. Jensen, Jr., Stephen P. Herbert,
William W. Sellers, William L. Van Alen, Jr., Steven Katz, Douglas M. Lurio,
Edwin R. Boynton, and Kenneth C. Boyle as Directors.

FOR ALL NOMINEES WITHHOLD AUTHORITY
-- ---

(If you wish to withhold authority to vote for one or more but less than all of
the nominees named above, so indicate on the line provided below.)

2. Ratification of the appointment of Ernst & Young LLP as the
independent auditors of the Company for fiscal year ending June 30, 2003.

FOR AGAINST ABSTAIN
-- --- ---

3. The proposal to increase the authorized shares of Common Stock
to 300,000,000.

___ FOR ____ AGAINST ___ ABSTAIN

4. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the Annual Meeting and any
adjournment thereof.