LML PAYMENT SYSTEMS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Transition Period from ________ to ________

Commission File Number: 0-13959

LML PAYMENT SYSTEMS INC.
(Exact name of registrant as specified in its charter)

Yukon Territory, Canada 980-20-9289
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1680-1140 West Pender Street
Vancouver, British Columbia
Canada V6E 4G1
(Address of principal executive offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (604) 689-4440

Securities registered pursuant to Section 12(b) of the Act:

Title of Class Name of each exchange on which registered
None None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of class)

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock which consists solely of shares
of Common Stock held by non-affiliates of the Registrant as of June 8, 2001,
based upon the closing sale price of the Common Stock on such date as reported
on the NASDAQ SmallCap Market, was approximately $60,552,586. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of June 8, 2001, Registrant had outstanding 18,724,929 shares of Common
Stock. No Class "A" Preference Shares or Class "B" Preference Shares were
outstanding as of such date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement for its 2001 Annual Meeting of
Shareholders, which will be filed with the Commission within 120 days after the
end of the Registrant's fiscal year are incorporated by reference into Part III
of this Annual Report on Form 10-K.

LML PAYMENT SYSTEMS INC.
2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
PART I Page

Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 12
Item 3. Legal Proceedings............................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........................... 14

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Security Matters.............................................................. 15
Item 6. Selected Consolidated Financial Data.......................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................... 26
Item 8. Financial Statements and Supplemental Data.................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures................................................................... 26

Part III
Item 10. Directors and Executive Officers of the Registrant............................ 27
Item 11. Executive Compensation........................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 27
Item 13. Certain Relationships and Related Transactions................................ 27

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 28

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PART I

ITEM 1. Business

Unless the context otherwise requires, references in this report on Form
10-K to "LML," "we," "us" or "our" refer to LML Payment Systems Inc. and its
direct and indirect subsidiaries. Effective April 1, 2001, CFDC Holdings Corp.,
CF Data Corp., Check Technologies, Inc., National Recovery Systems, Ltd. of
America d/b/a Check Center, National Process Servers, Inc. and Phoenix EPS, Inc.
merged into LML Payment Systems Corp. (formerly known as ChequeMARK Inc.).
Subsequent to the merger, LML Payment Systems Inc.'s subsidiaries are LML Corp.
(formerly known as ChequeMARK Holdings Inc.), Legacy Promotions Inc. and LHTW
Properties, Inc. LML Corp's subsidiaries are LML Patent Corp. (formerly known as
ChequeMARK Patent Inc.), and LML Payment Systems Corp. Unless otherwise
specified herein, all references herein to dollars or "$" are to U.S. Dollars.

Overview

LML Payment Systems Inc. is a financial payment processor that provides
check processing solutions for national, regional and local retail merchants in
the United States. LML's processing services include check verification and
collection services along with electronic processing services, including
Electronic Check Re-presentment or "RCK" (whereby returned checks are re-
presented for payment electronically) and Electronic Check Conversion or "ECC"
(whereby paper checks are converted into electronic transactions at the point of
sale). LML focuses on providing these services to supermarkets, grocery stores,
multi-lane retailers, convenience stores and other national, regional and local
retailers in the United States. LML also provides selective routing, including
real-time monitoring of debit, credit and Electronic Benefit Transaction or
"EBT" card transactions for authorization and settlement.

LML's ECC services utilize LML's proprietary system, including software,
hardware and modes of interaction, known as the "ChequeMARK System." The
ChequeMARK System allows merchants to electronically authorize, capture and
settle paper check transactions conducted at the point-of-sale without
negotiating the paper check. Some unique elements of the ChequeMARK System are
protected under patent, trademark, and copyright laws such as U.S. Patent Nos.
5,484,988 and 6,164,528 and other pending patent applications. The ChequeMARK
System, through a centralized database and authorization system, is capable of
providing and administering various electronic payment services for customers
and businesses. The proprietary intellectual property describes various methods
and systems for electronic check processing.

An objective of LML is to increase transaction volume through internal
growth and acquisitions, including the acquisition of business relationships
through which LML can integrate its ChequeMARK technology as a preferred service
provider. During the past two fiscal years, LML has begun to implement this
objective. On November 30, 1999, LML completed the acquisition of CFDC Holdings
Corp., a Dallas, Texas, based company, which through its subsidiary CF Data
Corp., provided check verification and check recovery services to retail
merchants. Effective January 1, 2000, CFDC Holdings Corp. completed the
acquisition of National Recovery Systems Ltd. of America, a Wichita, Kansas-
based company that operated under the trade name "Check Center." Check Center,
like CF Data Corp., provided check verification and check recovery services to
retail merchants. On July 22, 2000, LML acquired Check Technologies, Inc., a
Dallas, Texas, based company that also provided check verification and recovery
services. On July 9, 2000, LML also acquired Phoenix EPS, Inc., which engineered
and marketed host-based software products that provide centralized gateway
services for electronic payment authorization traffic between store registers
and authorized networks. See "Corporate History" for more information regarding
these acquisitions.

Subsequent to LML's fiscal 2001 year end, effective April 1, 2001, CFDC
Holdings Corp., CF Data Corp., Check Technologies, Check Center, National
Process Servers, Inc. and Phoenix EPS merged operations and management into LML
Payment Systems Corp. (formerly known as ChequeMARK Inc.), a Delaware
corporation and a wholly-owned subsidiary of LML Corp. LML Payment Systems Corp.
maintains operations in Dallas, Texas; Wichita, Kansas; Tulsa, Oklahoma; and
Phoenix, Arizona. The merger is designed to achieve certain economies related to
costs and the elimination of redundant systems and services. It is also designed
to take advantage of the growing recognition of the LML brand name. The

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consolidation should allow a coordinated approach to the marketing of payment
services under the LML trademarks. See the Notes to LML's Consolidated Financial
Statements included herein.

LML's acquisitions, in particular the acquisitions of CF Data and Check
Center, provided LML with over 95 million transactions, making LML one of the
top ten check verification companies in the United States for 1999. In addition,
the ChequeMARK System and the Retail Electronic Payment System, which are the
cornerstones of LML's electronic processing services, together with the call
center, check writer databases and NSF handling capabilities of LML Payment
Systems Corp. (as successor to CF Data and Check Center), give LML a suite of
retail point-of-sale check handling services and an infrastructure to further
expand its offerings to include other forms of electronic payment systems in the
future, such as expansion into the e-commerce market. LML's client list now
includes, on either a national or regional basis, such household-name retailers
as JC Penney, KFC, 7-Eleven, Coastal Mart, Applebee's, Pizza Hut, Blockbuster
Video, Amarillo Mesquite Grill, Kwan Court, Star Lumber, Sutherlands,
Godfather's Pizza, Domino's Pizza, Drug Emporium, Rainbow Foods, Stater Bros.
Markets, Fred Meyer, The Pep Boys, Garrett's IGA Supermarkets and Sun Foods.

During the fiscal year ended March 31, 2001, LML established a primary
processing center in Phoenix, Arizona. LML's plan is to eventually process all
check transactions through this center. LML made significant investments in
connection with this processing center, including entering into a five-year
office lease for approximately 5,000 square feet in Phoenix, Arizona. LML also
entered into certain capital lease agreements with a total value of more than
$600,000 in August 2000, to obtain additional hardware, software and maintenance
services in connection with the facilities in Phoenix, Arizona. In addition, LML
completed the relocation of its Jacksonville, Florida offices to Dallas, Texas,
during the 2001 fiscal year. LML is in the process of augmenting the existing
processing facilities in Dallas, Texas, to form a fully redundant secondary
processing center. See "Item 2 - Properties."

A key to LML's continued growth is the continued protection of its
intellectual property estate. On December 26, 2000, the United States Patent and
Trademark Office granted LML a new patent, U.S. Patent No. 6,164,528, regarding,
among other issues, Internet purchases where payments from checking accounts are
authorized over the Internet. This new patent is designed to apply LML's
electronic check processing methods to Internet purchases. In addition, LML
received a notice of allowance from the U.S. Patent and Trademark Office for a
new patent that describes corporate checks and electronic fund transfers (EFT).
The new patent and notice of allowance provide support for LML to enter the e-
commerce arena and relate to U.S. Patent No. 5,484,988.

LHTW Properties Inc., a subsidiary of LML, owns and operates Wildwood
Estates, a 332-acre residential community in Wildwood, Florida. Operations have
included the sale of manufactured homes and lots. In exchange for monthly
maintenance fees, LHTW Properties Inc. provides the resident community with
certain amenities and services commonly associated with similar developments.

Financial Payment Processing Services

LML provides check processing services to national, regional and local
retail merchants in the United States, including supermarket chains, grocery
stores, convenience stores and other retailers. These services include check
verification, check collections, RCK and ECC, as described below. In addition,
LML's Retail Electronic Payments System provides real-time transaction
monitoring, authorization and selective routing for credit card, debit card, EBT
and check verification transactions.

Check Verification

LML's check verification services utilize certain check writer databases
for electronic verification of checks presented at the point-of-sale of
participating merchants, who may pay a fee for this service, although in many
cases LML provides both check verification and check collections/recovery
services to its retail clients as an "all in one" package. When using this
service, the retail merchant "swipes" the paper check

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through a check reader, which reads the Magnetic Ink Character Recognition or
"MICR" string numbers on the bottom of the check. This information is
electronically transmitted to LML for comparison against LML's check writer
databases. If the check writer has current, delinquent check-related debts, the
merchant is notified of this by way of a coded response from LML. The merchant
must then decide whether to accept or decline the check.

LML's check verification services may be adapted for a particular
merchant's needs to verify against other identification references in addition
to the MICR string numbers, such as the check-writer's drivers license number
and social security number.

Check Collections/Recovery Services

As with many check authorization firms, LML provides, in many cases, both
check verification and check collections/recovery services to its retail clients
as an "all in one" package. The decision to approve or decline a check
transaction is, in many cases, intrinsically associated with recovering, on
behalf of a client, a returned check transaction. Typically, transactions are
verified on the "front-end" at the time of the transaction, and, if required,
transactions can also be collected or recovered on the "back-end" (i.e., when a
check is returned NSF - "not sufficient funds"). LML, through its call center
and NSF handling capabilities, offers merchants traditional paper-based check
collections/recovery services including skip-tracing and letter services, in
addition to Electronic Check Re-Presentment, or RCK, services (as described
below). LML employs industry standard collections system software and
technology, including sophisticated database management and predictive dialing,
as well as secondary agency relationships, enabling LML to provide significant
resources for check verification and collections/recovery services.

Electronic Check Re-Presentment

LML's Electronic Check Re-Presentment, or RCK service, electronically re-
presents paper check data for payment with greater speed and higher priority
than traditional paper re-deposit allows. When eligible paper checks are
returned to LML's merchant clients due to insufficient funds in a check-writer's
account, they are forwarded by the merchant or the merchant's bank to LML for
electronic processing. LML captures the data from the MICR string of each
returned item, and re-submits the returned item electronically through the
facilities of the Automated Clearing House ("ACH") Network. Electronic items are
easier to process, are re-presented for payment more quickly than paper items,
and generally are given priority in the re-presentment process over paper
checks.

Electronic Check Conversion Service

LML's Electronic Check Conversion, or "ECC", service is offered to clients
through utilization of the ChequeMARK System and its proprietary software and
databases.

LML's ECC service is comprised of three distinct steps: authorization, data
capture, and settlement. The process involves converting paper checks into
electronic transactions at the point-of-sale. The paper check is "swiped"
through a check reader which electronically reads the "MICR" string numbers and
electronically transmits this information, along with the manually entered sale
amount, to LML's ChequeMARK System for pre-authorization through LML's check
writer databases. In addition to searching the databases, the authorization
process conducts numerous other searches, commands each inquiry to satisfy
various transaction qualification standards and submits the inquiry to various
velocity criteria. If approved, certain transaction information is captured and
the merchant's terminal automatically prints a sales receipt, which closely
resembles a credit card receipt, to be signed by the consumer, authorizing the
electronic debit to the consumer's account. The paper check can be returned to
the consumer as it has been replaced with an electronic payment. If disapproved,
the merchant's terminal will display a "DECLINED" message. The ChequeMARK System
automatically produces an ACH file which includes an electronic debit against
each consumer's checking account for the amount of that consumer's transaction
and an electronic

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credit to the merchant's bank account, which settles the transaction for the
aggregate amount of all consumer transactions within each processing interval
(i.e., daily or at the end of a shift).

LML's ECC service can significantly reduce a merchant's traditional
handling costs and bank deposit fees associated with paper check acceptance.
Merchants who choose LML's ECC service can additionally select a specific
recovery option for transactions that are returned by the consumer's bank.
Returned items automatically update LML's check writer database, reducing the
opportunity to pass another NSF check, therefore reducing future risk for
merchants. The earlier start to collection activities increases the merchants'
chances of recovery.

Retail Electronic Payment System

LML has engineered a family of host-based software products that provide a
centralized gateway for real-time transaction monitoring and electronic payment
authorization traffic between store registers and authorization networks. The
Retail Electronic Payment System or "REPS" provides authorization routing of
direct debit, credit card, EBT, checks, employee discount authorization and gift
certificate transactions. The REPS architecture is scalable to support a wide
range of electronic payment transaction volume, and is expected to allow LML to
offer integrated solutions on a single and well-proven platform, and to allow
product offerings to be made side by side with credit cards, debit cards, EBT
cards (food stamps) and other electronic payment methods. Other associated
systems include check collections and network communication connection
monitoring.

Transaction information from various physical points-of-sale (multi-lane or
multi-terminal retail venues, such as a grocery store or merchandise retailer)
is centrally collected on the retailer's premises, and the software developed by
LML provides gateway services that sort the information and route it to the
appropriate processor based on transaction type - i.e., credit card (e.g., Visa
or Mastercard), bank debit card (e.g., Bank of America), EBT "electronic benefit
transactions" (e.g., EDS), or check processors for authorization and/or
settlement.

Sales and Marketing

LML intends to develop the profitability of its ChequeMARK technology in
part through the acquisition of business relationships through which LML can
integrate its ChequeMARK technology as a preferred service provider. Certain of
LML's acquisitions bring existing relationships to LML from various segments of
the check verification and collection market.

LML's stated business goal is to develop its acquired check verification
and collection business into ECC business, by marketing its patented process to
the acquired client bases. The acquisitions of CFDC Holdings Corp., National
Recovery Systems, Ltd. and Check Technologies, Inc. and their subsequent
integration were a direct implementation of LML's plan. Their current
contribution to total revenue derives principally from check verification and
check collection transactions, which are expected to decrease incrementally
initially, and more dramatically as LML's patented process is integrated to
convert those transactions into ECC business.

In that regard, LML continues to pursue the acquisition of existing
business relationships through which LML's patented technology can be marketed.
LML anticipates the integration of its technology into the various services
offered by each new subsidiary, which is a future step in its marketing plan.

LML markets check verification, check collection, RCK, ECC and transaction
routing services through a direct sales force. As of June 8, 2001, LML had a
direct sales and technical sales force of 10 employees. LML generates new
customers through direct solicitation. LML also sponsors certain industry trade
shows.

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Competition

The financial payment processing market in which LML operates is highly
competitive and is characterized by changing technology, evolving industry
standards, merchant requirements, pricing competition and rapid rates of product
obsolescence. LML's competitors include other check verification, collections,
software development and guarantee firms offering some or all of the payment
processing services offered by LML, including check verification and
collections, RCK and ECC. There are at least 17 competing verification
companies. LML believes its largest competitors are TeleCheck Services, eFunds
Corporation, Equifax and International Check Services Inc. In addition, LML
anticipates that entities within the related credit card and banking industry,
which are both highly competitive, may elect to provide competing electronic
checking services in the future. Many of LML's competitors have greater
technical, financial and marketing resources than LML and, as a result, may be
able to respond more quickly to changes in technology, industry standards and
merchant requirements or may be able to devote greater resources to product
development and marketing than LML. There can be no assurance that LML's current
products and services will not become obsolete or that LML will have the
financial, technical and marketing resources and support facilities to compete
successfully in the future.

LML believes that part of its success will depend on its ability to
successfully market existing products, to acquire transaction volume, and to
develop and introduce new products and services in addition to or as
enhancements of existing products and services. However, there can be no
assurance that LML will be able to increase its transaction volume, develop and
introduce new products and services in addition to or as enhancements of
existing products and services or compete successfully in the future.

Regulatory Matters

LML's business is either subject to or may be affected by current and
future governmental and other regulations in many different jurisdictions. The
rules, regulations, policies and procedures affecting its business are
constantly subject to change.

Certain check collection, recovery, and electronic check re-presentment
services provided by LML are governed by the Fair Debt Collection Practices Act
and the Fair Credit Reporting Act. Electronic check re-presentment transactions
are subject to applicable National Automated Clearing House Association
("NACHA") Operating Rules, and applicable Uniform Commercial Code statutes.
LML's ECC transactions currently utilize the facilities of the ACH Network and
therefore are governed by and subject to NACHA Operating Rules and Regulation E.

Intellectual Property

LML's success will depend, in part, on its ability to protect and enforce
intellectual property protection for the technology contained in the ChequeMARK
System and the Retail Electronic Payment System. Certain unique aspects of the
ChequeMARK System are protected by patents, trademarks, copyright and trade
secrets. For example, U.S. Patent No. 5,484,988 owned by LML Patent Corp.
(formerly known as ChequeMARK Patent, Inc.), describes an electronic
checkwriting point-of-sale system for consumer transactions that do not require
the negotiation of a paper check. Moreover, the 5,484,988 patent addresses the
electronic submission of transactions through a centralized database and
authorization system for approval electronically, electronic debiting of
consumer bank accounts and electronic crediting of designated merchant accounts
in real time or off-line modes using the facilities of the ACH Network or any
competing network.

Also included in LML's intellectual property estate is U.S. Patent No.
6,164,528 regarding, among other issues, Internet purchases where payments from
checking accounts are authorized over the Internet. This patent, which was
granted by the U.S. Patent and Trademark Office on December 26, 2000, is
designed to include protection for LML's electronic check processing methods as
applied to Internet purchases. In

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addition, LML has filed and received a notice of allowance from the U.S. Patent
and Trademark Office for a new patent based upon U.S. Patent No. 6,164,528. The
new patent application describes corporate checks and electronic fund transfers
(EFT) and relates to U.S. Patent No. 5,484,988 and U.S. Patent No. 6,164,528.

LML intends to continue to file additional patent applications to expand
its intellectual property estate, seeking coverage of its developments in its
business areas. LML relies on a combination of patent, trademark, copyright and
trade secret laws and contractual provisions to establish and protect
proprietary rights in its system. There can be no assurance that these
protections will be adequate to deter misappropriation of LML's technologies or
independent third-party development of similar technologies. The cost of
prosecuting a claim of infringement against others, or defending a patent
infringement claim, may be substantial and there can be no assurance that LML
will have the resources necessary to successfully prosecute or defend a patent
infringement claim. Although LML does not believe that its technology infringes
the patent rights of others, there can be no assurance that infringement claims
will not be made in the future or that the validity of any patent issued to LML
will be sustained if judicially tested.

Risks Associated with the Development by LML of its Business

As LML continues to develop its business in the financial payment
processing industry, LML may encounter unforeseen difficulties, some of which
may be beyond LML's ability to control related to marketing, product
development, regulation, or proprietary technology. The success of LML's
business will depend on, among other things, the demand for and cost of
marketing LML's technology, the volume and total value of transactions processed
by merchants utilizing LML's technology, the technological adaptation of check
verification end-users, the issuance of the additional patents necessary to
protect the business enterprise, the renewal of material contracts in LML's
business, LML's ability to anticipate and respond to technological changes,
particularly with respect to e-commerce, in a highly competitive industry
characterized by rapid technological change and rapid rates of product
obsolescence, LML's ability to develop and market new product enhancements and
new products and services that respond to technological change or evolving
industry standards, no unanticipated developments relating to previously
disclosed lawsuits against LML, and the cost of protecting LML's technological
products. The actual results of LML's operations in the future may vary widely
due to technological change, increased competition, additional government
regulation or intervention in the industry, general economic conditions, other
risks described in LML's filings with the Securities and Exchange Commission and
other factors not yet known or anticipated.

Corporate History

Background

LML was originally incorporated under the laws of the Province of British
Columbia, Canada, as a "specially limited company" on January 24, 1974. In
October 1997, after receipt of shareholder approval, the directors of LML
elected to change LML's governing corporate jurisdiction by continuing out of
the Province of British Columbia into the Yukon Territory, which change was
effected in November 1997. Under the Yukon Business Corporations Act, LML is a
corporation, which enjoys limited liability for its shareholders, is governed by
its Board of Directors and generally has the powers and capacity attributable to
a corporation.

Acquisitions

Since the beginning of 1998, LML has expanded its business through a number
of acquisitions, which are discussed below.

ChequeMARK. Effective March 11, 1998, pursuant to the terms of an Asset
Purchase Agreement and a Patent Purchase Agreement, collectively referred to as
the "Acquisition Agreements," LML, through its subsidiaries, acquired (a)
substantially all of the assets and assumed certain liabilities of ChequeMARK
Technologies Corporation, now known as MARK Technologies Corporation ("MARK"),
for cash, shares of LML's common stock and LML's agreement to issue additional
shares of LML's common stock pursuant to

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an earn-out formula if certain conditions were met, and (b) U.S. Patent No.
5,484,988, or any continuations, divisions, reissues or additional patent
application rights from Robert R. Hills and Henry R. Nichols in exchange for the
issuance of shares of LML's common stock and LML's agreement to issue additional
shares of LML's common stock pursuant to an earn-out formula if certain
conditions were met. LML's acquisition of the ChequeMARK assets and patent gave
rise to litigation between LML, Mr. Hills and MARK, which was settled in August
2000. See "Item 3 -- Legal Proceedings."

CFDC Holdings Corp. On November 30, 1999, LML completed the acquisition of
CFDC Holdings Corp., a Dallas based company, which, through its subsidiary CF
Data Corp., provided check verification and check recovery services on both a
national and regional basis to retail merchants. CF Data was ranked by the
Nilson Report (issue #715) as the 11th largest check verification company in the
United States in 1999, verifying more than 74 million checks with a dollar value
exceeding $3.6 billion from a total of 7,795 retail outlets.

Check Center. Effective January 1, 2000, LML acquired, through its wholly
owned subsidiary, CFDC Holdings Corp., National Recovery Systems, Ltd. of
America, a Wichita based company, which operated under the trade name "Check
Center." Check Center had one wholly owned subsidiary, National Process Servers
Inc. Check Center, like CF Data, also provided check verification and check
recovery services on a regional basis to retail merchants. According to Nilson
Report (issue #715), Check Center verified 22 million check transactions with a
dollar value exceeding $1.1 billion from a total of 1,626 retail outlets in
1999.

Phoenix, EPS. On July 9, 2000, LML acquired Phoenix EPS, which engineered
and marketed host-based software products that provide centralized gateway
services for electronic payment authorization traffic between store registers
and authorized networks. Phoenix's flagship product REPS (Retail Electronic
Payment System) provides real-time transaction monitoring, authorization and
selective routing of debit card, credit card, EBT cards (food stamps) and check
verification transactions. The REPS architecture is scalable to support a wide
range of electronic payment transaction volume, and will be used to assist in
building LML's infrastructure, such that LML will be able to offer integrated
payment processing solutions on a single and well-proven platform, and product
offerings can be made side by side with credit cards, debit cards, EBT cards and
other electronic payment methods. As of LML's 2001 fiscal year end, Phoenix EPS
clients included supermarkets, multi-lane mass merchandisers and retail
merchants ranging in size from $2 million to over $20 billion in sales.

Pursuant to a Share Purchase Agreement between LML, Phoenix and the Phoenix
shareholders dated July 9, 2000, LML agreed to purchase all of the issued and
outstanding shares of Phoenix from the Phoenix shareholders for a purchase price
of $4,500,000 paid by the issuance to the Phoenix shareholders of an aggregate
of 220,857 shares of LML's common stock. As part of this acquisition, LML agreed
to certain price protection covenants for the benefit of the Phoenix
shareholders. In the event the value of the shares of LML's common stock
exchanged for shares of Phoenix's stock decreases below the deemed issue price
per share of LML's common stock, and the Phoenix shareholders sold such shares
of LML's common stock at a lower price after the expiration of any applicable
hold period and within a specified period of time thereafter, such Phoenix
shareholders would have a right to receive additional shares of LML's common
stock. LML also agreed to pay a finder's fee in connection with this acquisition
through the issuance of an additional 7,730 shares of LML's common stock. In an
amended agreement dated June 27, 2001, the former shareholders of Phoenix EPS,
Inc. agreed to forfeit their rights to receive certain price protection benefits
in exchange for 679,134 shares of LML's common stock. See the Notes to LML's
Consolidated Financial Statements included herein.

Check Technologies Inc. On July 22, 2000, LML acquired Check Technologies,
which is located in Dallas, Texas and provided check verification and recovery
services with a primary client base located in Texas and Louisiana.

Pursuant to a Share Purchase Agreement between LML and the Check
Technologies shareholders dated as of July 22, 2000, LML agreed to purchase all
of the issued and outstanding shares of Check

9

Technologies from the Check Technologies shareholders for a purchase price of
$500,000, consisting of $250,000 in cash and the issuance to the Check
Technologies shareholders of an aggregate of 22,987 shares of LML's common
stock. In connection with the purchase of Check Technologies and in exchange for
certain cash consideration, one of the Check Technologies shareholders and an
employee of Check Technologies entered into separate non-compete agreements with
LML. As part of this acquisition, LML agreed to certain price protection
covenants for the benefit of the Check Technologies shareholders. In the event
the value of the shares of LML's common stock exchanged for shares of Check
Technologies' stock decreases below the deemed issue price per share of LML's
common stock, and the Check Technologies shareholders sold such shares of LML's
common stock at a lower price after the expiration of any applicable hold period
and within a specified period of time thereafter, such Check Technologies
shareholders would have a right to receive additional shares of LML's common
stock. LML also agreed to pay a finder's fee in cash in connection with this
acquisition. See the Notes to LML's Consolidated Financial Statements included
herein.

Employees

Competition for personnel in the financial payment processing industry is
intense. LML believes that its future success will depend in part on its
continued ability to hire and retain qualified personnel. There can be no
assurance that LML will be successful in attracting and retaining a sufficient
number of qualified employees to conduct its business in the future. As of June
8, 2001, LML (including its subsidiaries) had 140 full-time employees and 4
part-time employees, including approximately 10 employees in sales and
marketing and approximately 21 employees in administration and finance. LML also
employs consultants to perform services for LML from time to time.

Business Concentration

During the fiscal year ended March 31, 2001, fees from and associated with
LML's three largest customers amounted to approximately 56% of total sales
volume. JC Penney, 7-Eleven and Dillon's are LML's principal customers. In
fiscal 2001, sales to JC Penney, 7-Eleven and Dillon's amounted to
approximately 18%, 17% and 21%, respectively, of its total revenues. LML may be
economically dependent on sales volume to these customers. During the year ended
March 31, 2001 Dillon's notified LML that it is moving its check verification
processing in house. Verification transactions started being transferred over in
February 2001 and are expected to be completed by the end of LML's second
quarter of fiscal 2002. This customer is also planning on moving its primary
check collections in house. LML expects to continue to provide secondary check
collection services to this client. See "Item 7 -- Management Discussion and
Analysis of Financial Condition and Results of Operations."

Financial Information by Industry and Geographical Segments

Financial information relating to industry and geographical segments can be
found in the Notes to LML's Consolidated Financial Statements included herein.

Florida Manufactured Home Retirement Community Business

LHTW Properties Inc., LML's wholly owned subsidiary, owns and operates a
retirement styled residential community located in Wildwood, Florida, known as
Wildwood Estates. Wildwood Estates consists of approximately 332 acres including
approximately 76 acres of platted and developed land, 136 acres of developable
area outside of the platted area, and 120 acres of wetlands. As the development
of wetlands is subject to stringent federal and state regulations, there can be
no assurance that the development of any portion of the property, which is
designated as wetlands, will be permitted under such regulations or, if
permitted, that any such development will be economically feasible.

The developed portion of the property includes approximately 121 occupied
residential sites. Wildwood Estates is located in close proximity to several
large competitive developments, most notably

10

Continental Country Club, Orange Blossom Gardens and Spruce Creek, which are
marketed primarily towards retirees from the northeastern region of the United
States.

The manufactured home retirement community business is generally divided
into two categories: rental parks and subdivisions. Residents of communities,
known as rental parks, purchase a manufactured home and rent a "lot" from the
park owners. Subdivisions differ in that residents purchase both the
manufactured home and the land upon which the home is located. Subdivisions also
charge residents a monthly fee for the usage of common area facilities such as
swimming pools, clubhouses, tennis courts and other amenities but such fees are
typically much lower than monthly fees for rental parks. Wildwood Estates is a
manufactured home subdivision. All residents own their own home and land and pay
for the amenities and the upkeep and maintenance of common area facilities.
Development of a manufactured home subdivision business requires subdividing
suitable land into individual lots, installing improvements such as water,
sewer, roadways, and electrical power and marketing the improved land and
manufactured homes to potential residents.

LHTW Properties Inc., has continued implementing steps necessary to resume
sales and marketing activities at Wildwood Estates. In order to conduct mobile
home sales at Wildwood Estates, LHTW Properties has taken steps to obtain a
`Mobile Home Dealer's License' and has also begun investigating the acquisition
of model home inventory which would be made available for viewing by potential
home purchasers. LHTW Properties also initiated magazine advertising to promote
the sale of homes at Wildwood Estates. Further, LHTW Properties has retained a
real estate agent to sell homes and real estate lots at Wildwood Estates. These
steps, in addition to the recent connection of the City of Wildwood's water and
wastewater facilities to the property, should enhance opportunities for the
potential development of new and existing home sites. LHTW Properties plans to
continue to list the property for sale while evaluating its options for further
development of the undeveloped portion of the property or possible disposition
of the property if a transaction can be consummated on acceptable terms.

LML acquired Wildwood Estates in November 1993 for a purchase price
consisting of cash payable by the assumption of a mortgage and the issuance of
fully paid common shares of LML. The mortgage has since been paid in full. See
"Item 2 - Properties." In connection with the acquisition, a portion of these
shares were deposited with a trustee under the terms of a voluntary pooling
agreement and were to be released in equal share increments upon the sale of
each unit, which consists of one lot and one manufactured home. Any shares not
released prior to December 2003 were to be returned to LML for cancellation.
However, LML received a claim regarding the release of shares from the pooling
agreement, which was settled on February 24, 2001, and, in connection therewith,
approximately half of the shares held under the pooling agreement were released
to the plaintiffs and the other half were released from the pooling agreement
but are still being held in escrow pending the occurrence of certain future
events. See "Item 3 -- Legal Proceedings."

11

ITEM 2. Properties

Office Space. As of June 8, 2001, LML leased office space containing
approximately 37,854 square feet of floor space for its operations. LML's
principal facilities include:

Approximate
Location Square Feet Description
-------- ----------- -----------

Vancouver, British Columbia 3,348 Corporate headquarters for administration and finance
Wichita, Kansas 10,000 Financial payment processing operations
Dallas, Texas 19,560 Financial payment processing operations
Phoenix, Arizona 4,946 Financial payment processing operations

LML's primary corporate headquarters are located in Vancouver, British
Columbia, Canada. On January 19, 2001 the lease term was extended for a further
three-year term. LML's Wichita, Kansas, location lease, which originally expired
on March 2002, was extended for an additional 33 months, expiring December 31,
2004.

LML has established a new primary data processing center in Phoenix,
Arizona, and is in the process of augmenting the existing processing facilities
in Dallas, Texas, to form a fully redundant secondary processing center.

LML considers its current facilities adequate for its current needs and
believes that suitable additional space will be available, as needed, to
accommodate further physical expansion of corporate and processing operations
and for additional sales and service.

Florida Real Estate. Wildwood Estates is a manufactured housing subdivision
located in Wildwood, Florida and is comprised of five platted subdivisions,
along with adjacent land area (common areas and surplus land). The total
development consists of approximately 332 acres including approximately 76 acres
of platted and developed land, 136 acres of developable area outside of the
platted areas, and 120 acres of wetlands. On June 8, 2000 LHTW Properties paid
the mortgage on the property that was held by Destiny Petroleum Inc., a Texas
corporation controlled by Robert Moore, an affiliate of LML.

ITEM 3. Legal Proceedings

Pursuant to the terms of the Acquisition Agreements for LML's acquisition
of the ChequeMARK assets from MARK Technologies Corp. ("MARK") and patent or any
continuations, divisions, reissues or additional patent application rights from
Robert R. Hills and Henry R. Nichols, LML, as part of the consideration for such
acquisition, agreed to issue up to an additional 1,900,000 shares of LML's
common stock to MARK and up to an additional 1,900,000 shares of LML's common
stock to Messrs. Hills and Nichols, in each case pursuant to an earn-out formula
if certain conditions were met during an earn-out period that is to expire in
August 2003, which shares are collectively referred to as the "Earn-Out Shares."
No common shares were earned pursuant to the earn-out formula during any of the
years ended March 31, 1999, 2000 or 2001. In addition, as a condition to LML's
acquisition of the ChequeMARK assets and patent, Mr. Hills, then a principal
shareholder of MARK, entered into an employment agreement with one of LML's
subsidiaries.

On March 10, 1999, LML commenced a legal action in the United States
District Court for the Middle District of Florida, Jacksonville Division,
against Mr. Hills and MARK seeking, among other relief, a declaratory judgment
that the Defendant Mr. Hills breached the terms of his employment agreement with
LML by effecting a "Unilateral Resignation." LML also sought declaratory relief
in connection with technology purchased by LML and its subsidiaries from Mr.
Hills. In addition, LML requested that the court require Mr. Hills to sign all
documents and do all things necessary regarding ownership of LML's patents.

12

On August 22, 2000, LML, Mr. Hills and MARK finalized a settlement with
respect to LML's legal action commenced against Mr. Hills and MARK. Pursuant to
the terms of the settlement, 466,820 of the 541,820 shares of LML common stock
that were being held in escrow were returned to LML for cancellation. In
addition, LML was relieved of its obligation to issue to Mr. Hills and MARK
1,828,560 Earn-Out Shares pursuant to certain agreements (which amount includes
Earn-Out Shares issuable to Mr. Hills and Mr. Hills' portion of any Earn-Out
Shares issuable to MARK). The settlement did not affect the rights to Earn-Out
Shares of shareholders of MARK, other than Mr. Hills. LML agreed to pay
$2,500,000 cash and to allow 75,000 common shares to be released from escrow to
Mr. Hills. See the Notes to LML's Consolidated Financial Statements included
herein. Pursuant to the terms of the settlement, LML withheld $350,000 of the
$2,500,000 cash settlement proceeds for the purpose of defending or pursuing
other legal claims regarding ownership, license or infringement of certain
intellectual property of LML, including U.S. Patent No. 5,484,988, against
persons other than Mr. Hills who may claim rights directly or indirectly from
Mr. Hills, including the claims asserted by Global Transaction Systems, LLC,
discussed below. If there is no such ongoing litigation as of August 21, 2005,
the portion of the $350,000 not used by LML for litigation expenses will be
delivered to Mr. Hills. As of March 31, 2001, $313,071 had been applied by LML
to offset litigation expenses and $36,929 was still being withheld by LML. The
settlement also called for entry of an agreed permanent injunction, which has
been entered, in which Mr. Hills will not (a) for a period of three (3) years
from the date of the injunction, carry on or engage in any business that is
competitive with the products or services of LML, or that relates to the
electronic payment and collections industry, (b) engage in any acts constituting
partial or complete infringement of U.S. Patent No. 5,484,988 or the ChequeMARK
System software, (c) represent that anyone other than LML is the holder of U.S.
Patent No. 5,484,988, or (d) represent or imply that he holds any ownership
interest in the ChequeMARK System or its underlying patents.

On July 20, 2000, Global Transaction Systems, LLC, a Nevada limited
liability corporation, filed a complaint against LML in the United States
District Court, Southern District of Florida for patent and copyright
infringement of U.S. Patent No. 5,484,988. Global Transaction Systems, LLC
served an amended complaint on LML on September 7, 2000, seeking a declaratory
judgment that Global Transaction Systems, LLC was the owner of U.S. Patent No.
5,484,988. LML filed a motion to dismiss the action for lack of subject matter
jurisdiction under 28 U.S.C. 1338(a). On January 11, 2001, the amended complaint
was dismissed by the court without prejudice. LML continues to protect its
intellectual property, including property owned by its subsidiaries.

On December 14, 2000, LML received a complaint filed by Todd H. Moore
against LML in the 150th District Court, Bexar County, Texas. Mr. Moore is
seeking an order directing LML to deliver an option to purchase 250,000 shares
of LML's common stock at $1.50 per share, or, alternatively, damages of $10
million, and certain other relief. Mr. Moore alleges that LML retained him in
1998 to assist in raising media exposure of LML and that as compensation for
such services Mr. Moore was to receive the stock option. Originally, in December
1999, Mr. Moore filed a similar suit against LML in the United States District
Court, Western District of Washington, alleging substantially the same facts as
those set forth above. The original suit was dismissed with prejudice on June 5,
2000. Mr. Moore filed a motion with the court in Washington to have the
dismissal in the prior suit changed to a dismissal without prejudice. This
motion was granted by the court in February 2001. LML believes this suit is
without merit and intends to defend this action vigorously.

On February 1, 2001 LML and its indirect, wholly owned subsidiary LML
Patent Corp., filed suit in the United States District Court for the District of
Nevada against Global Transaction Systems, LLC on grounds of violations of the
unfair competition provisions under the Lanham Trademark Act of 1946, violation
of common law, unfair competition and wrongful interference with prospective
economic advantage. The suit also seeks a declaratory judgment that declares LML
Patent Corp. the sole owner of all right, title and interest in United States
Patent Nos. 5,484,988 and 6,164,528 for a check writing point-of-sale system
("the Patents"); and that further declares any actions taken in derogation of
such rights to be null and void, and therefore rescinded. The suit additionally
seeks injunctive relief against Global Transaction Systems, LLC, restraining and
enjoining it and its agents from representing or implying that they have any
ownership interest

13

in the Patents or that they have the right or ability to provide electronic
transaction processing services through use of the technology described in the
Patents. The court has not yet ruled on the motion.

On February 24, 2001, LML entered into a settlement agreement regarding the
lawsuit that was brought against LML and LHTW Properties by the former owners of
the Wildwood Estates property concerning their claims for the release of 252,502
shares of LML's common stock being held under the terms of the voluntary pooling
agreement established in connection with the property in November, 1993. The
plaintiffs had alleged that LML was improperly preventing the release from
escrow of the shares. Pursuant to the terms of the settlement agreement, LML
allowed the release of 126,251 shares from escrow and paid $150,000 towards
costs. The agreement also calls for the remaining 126,251 shares to remain in
escrow until the property is sold in its entirety or until November 30, 2002,
whichever occurs first. The plaintiffs have agreed that LML and LHTW Properties
have no duty to sell or attempt to sell the property or any additional lots
before November 30, 2002.

Other than as described herein, there are no material legal proceedings
involving LML. However, LML is party to additional ordinary litigation
incidental to its business, none of which is expected to have a material adverse
effect on the results of operations, financial position or liquidity of LML.

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

None.

14

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Security
Matters

LML's common stock is traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") SmallCap Market, which is the
principal market for LML's common stock, and trades under the symbol "LMLP".
LML's common stock is neither listed nor traded on any foreign trading market.
The following table sets forth the range of high and low prices for LML's common
stock during the fiscal periods indicated. The prices set forth below represent
quotations between dealers and do not include retail markups, markdowns or
commissions and may not represent actual transactions.

Fiscal Year Ended High Low
March 31 $ $

2001
1Q 32.75 10.00
2Q 20.75 4.13
3Q 8.25 3.38
4Q 7.94 3.51

2000
1Q 3.88 3.00
2Q 4.25 3.13
3Q 9.25 3.93
4Q 76.00 8.68

The prices set forth above are not necessarily indicative of liquidity of
the trading market. Trading in LML's common stock is limited and sporadic.

Our common stock price is volatile.

The market price of our common stock has been volatile in the past and may
change rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:

. Actual or anticipated fluctuations in our operating results;
. Announcements by us, our competitors or our customers;
. Announcements of the introduction of new or enhanced products and
services by us or our competitors;
. Announcements of joint development efforts or corporate partnerships
in the electronic commerce market;
. Market conditions in the banking, telecommunications, technology and
other emerging growth sectors;
. Rumors relating to our competitors or us; and
. General market or economic conditions.

In addition, the stock market has experienced significant price and volume
fluctuations, which have particularly affected the trading price of equity
securities of many technology companies.

15

Holders of Common Stock

As of March 31, 2001, there were approximately 358 record holders of LML's
common stock, with 18,697,929 shares outstanding. The number of holders of
record is based on the actual number of holders registered on the books of LML's
transfer agent and does not reflect holders of shares in "street name" or
persons, partnerships, associations, corporations or other entities identified
in security position listings maintained by depository trust companies.

Recent Sales of Unregistered Securities

On July 9, 2000, LML issued 220,857 shares of LML's common stock with a
value of $4.5 million, for the acquisition of Phoenix EPS, Inc., to the former
shareholders of Phoenix EPS. In addition LML issued 7,730 shares of LML's common
stock with a value of $157,500 to a third party finder in connection with this
acquisition. On July 22, 2000, LML issued 22,987 shares of LML's common stock
with a value of $250,000 to former shareholders of Check Technologies, Inc., for
the acquisition of Check Technologies. See the Notes to LML's Consolidated
Financial Statements included herein. On November 30, 2000, LML issued 3,533,132
shares of LML's common stock to Destiny Petroleum Inc. in exchange for the
surrender of 883,283 LHTW Properties Class A Preference Shares. See the Notes to
LML's Consolidated Financial Statements included herein. On January 26, 2001 and
March 6, 2001, LML issued 138,997 shares and 1,059 shares, respectively, of
LML's common stock with no par value, to former stockholders of CFDC Holdings
Corp. under the price protection covenants. On June 27, 2001, LML issued 679,134
shares of common stock with no par value to the former shareholders of Phoenix
EPS, Inc. in consideration of the forfeiture of certain price protection
covenants included in the July 9, 2000 purchase agreement. See the Notes to
LML's Consolidated Financial Statements included herein. We believe that the
issuance of securities in the foregoing transactions were exempt from
registration in reliance on Section 4(2) of the Securities Act of 1933, as
amended, as transactions not involving public offerings.

Dividend Policy

LML paid $453,787 in dividends and interest on the LHTW Properties Class
A Preference Shares that had accrued in connection with the debt conversion
agreement entered into among LML, LHTW Properties and Destiny Petroleum, Inc., a
corporation controlled by an affiliate of LML.

LML has not paid any dividends on its common stock in the past and has no
current plan to pay dividends in the future. LML intends to devote all funds to
the operation of its businesses.

Canadian Federal Tax Considerations

Generally, dividends that are paid or credited by Canadian corporations to
non-resident shareholders are subject to a nonresident tax of 25%. However, the
Canada-United States Income Tax Convention, 1980 (the "Treaty") provides that
dividends paid by a Canadian corporation to a corporation resident of the United
States with no permanent establishment in Canada, which owns at least 10% of the
voting stock of LML paying the dividend, are subject to the Canadian non-
resident withholding tax of 5%. In all other cases, when a dividend is paid by a
Canadian corporation to the beneficial owner resident in the United States, the
Canadian non-resident withholding tax is 15% of the amount of the dividend.

The reduced withholding tax rates do not apply if the beneficial owner of
the shares carries on business through a permanent establishment in Canada and
the stock holding in respect of which the dividends are paid is effectively
connected with such permanent establishment. In such a case, the dividends are
taxable in Canada as general business profits at rates that may exceed the 5% or
15% rates applicable to dividends that are not effectively connected with a
Canadian permanent establishment.

The Treaty permits Canada to apply its domestic law rules for
differentiating dividends from interest and other disbursements. Stock dividends
are subject to the normal Canadian non-resident withholding tax

16

rules on the amount of the dividend. The amount of a stock dividend is equal to
the increase in the paid-up capital of LML by virtue of the dividend.

Generally, interest paid or credited to a non-resident is subject to a 25%
Canadian withholding tax. If, at a time when interest has accrued but is not yet
payable, the holder of the debt transfers it to a Canadian resident or, in
certain circumstances, a non-resident who carries on business in Canada, part of
the proceeds of the disposition may be considered to be interest for Canadian
income tax purposes. Under the Treaty, the rate of withholding tax on interest
paid to a United States resident is 10%. For Treaty purposes, interest means
interest as defined by domestic Canadian income tax rules. The withholding tax
applies to the gross amount of the interest payment.

Non-residents are subject to Canadian income tax on dispositions of
"taxable Canadian property." Taxable Canadian property includes shares of a
publicly traded Canadian corporation if, at any time during the preceding five
years, the non-resident and persons with whom the non-resident did not deal at
arm's length owned at least 25% of the issued and outstanding shares of any
class of stock of LML.

The applicable tax rate on capital gains realized by a non-resident is
19.5% for corporations and 21.7% for individuals. Under the Treaty, capital
gains realized by a United States resident on the disposition of shares of a
Canadian corporation are exempt from Canadian income tax, unless (i) the value
of the shares is derived principally from Canadian real property, or (ii) the
shares are effectively connected with a permanent Canadian establishment of such
non-resident, the capital gains are attributable to such permanent
establishment, and the gains are realized not later than twelve months after the
termination of such permanent establishment.

There are no foreign or currency controls in Canada, and there are no
exchange restrictions on borrowing from abroad, on the repatriation of capital,
or the ability to remit dividends, profits, interests, royalties, or other
payments to non-resident holders of LML's common stock. However, any such
remittance to a resident of the United States is subject to a 15% withholding
tax pursuant to Article XI of the reciprocal tax treaty between Canada and the
United States.

17

ITEM 6. Selected Consolidated Financial Data

The following table presents summary historical financial and other data
for LML. The selected historical financial data presented below as of and for
each of the years in the five year period ended March 31, 2001, is derived from
the audited Consolidated Financial Statements of LML. You should read the
financial data below together with Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD&A") and with LML's
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this document.

Table of Selected Consolidated Financial Data/1/
Year Ended March 31
(Amounts in thousands, except per share data)

2001 2000 1999 1998 1997

Statement of operations data:
Operating revenue................................................... $10,071 $ 3,045 $ 234 $ 179 $ 199
Net Income (loss)/2/................................................ (5,214) (2,347) (2,315) (388) (2,276)
Per share - basic................................................. (.34) (.19) (.22) (.06) (.38)
Per share - diluted............................................... (.34) (.19) (.22) (.06) (.38)
Weighted average number of common shares outstanding - basic........ 16,769 12,089 10,460 6,541 5,916
Weighted average number of common shares outstanding - diluted...... 16,769 12,089 10,460 6,541 5,916
Balance Sheet Data:
Current assets...................................................... $ 9,659 $12,358 $ 150 $ 107 $ 23
Total assets/3/..................................................... 27,311 23,738 3,562 4,036 2,164
Current liabilities................................................. 2,976 2,522 1,101 1,071 708
Long-term debt, less current portion................................ 274 70 879 896 800

Table of Selected Consolidated Financial Data/1/
Year Ended March 31
(As Adjusted for U.S. GAAP Reconciliation)
(Amounts in thousands, except per share data)

2001 2000 1999 1998 1997

Statement of operations data:
Operating revenue................................................... $10,071 $ 3,045 $ 234 $ 179 $ 199
Net Income (loss)/2/................................................ (5,214) (2,229) (2,433) (388) (2,276)
Per share - basic................................................. (.34) (.18) (.23) (.06) (.38)
Per share - diluted............................................... (.34) (.18) (.23) (.06) (.38)
Weighted average number of common shares outstanding - basic........ 16,769 12,089 10,460 6,541 5,916
Weighted average number of common shares outstanding - diluted...... 16,769 12,089 10,460 6,541 5,916
Balance Sheet Data:
Current assets...................................................... $ 9,659 $12,358 $ 150 $ 107 $ 23
Total assets/3/..................................................... 27,311 23,738 3,444 4,036 2,164
Current liabilities................................................. 2,976 2,522 1,101 1,071 708
Long-term debt, less current portion................................ 274 70 879 896 800

- ----------------------------
/1/ The financial information set forth in this table for the fiscal years
ended March 31, 1997, 1998, 1999, 2000 and 2001 includes the accounts of
LML on a consolidated basis. The total assets reported for the 1998 fiscal
year include $1,827,903 attributable to LML's acquisition effective March
11, 1998 of substantially all of the assets of MARK and all right, title
and interest to U.S. Patent No. 5,484,988 and any continuations, divisions,
reissues or additional patent application rights thereto. The financial
data for the fiscal year ended March 31, 2000 include the acquisition of
CFDC Holdings Corp. and Check Center. The financial data for the fiscal
year ended March 31, 2001 include the acquisition of Phoenix EPS and Check
Technologies. For a description of these acquisitions see "Item I -
Description of Business - Corporate History" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
/2/ The Net Income (Loss) for the fiscal year ended March 31, 1997 has been
retroactively restated to reflect the adoption of a new accounting policy
of expensing development costs.
/3/ The Total Assets for the fiscal year ended March 31, 1997, 1998 and 1999
have been retroactively restated to reflect the adoption of a new
accounting policy of expensing development costs. See the Notes to LML's
Consolidated Financial Statements included herein.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in this Form
10-K. See "Item 8 -- Financial Statements." This information is not necessarily
indicative of future operating results.

Forward Looking Information

All statements other than statements of historical fact contained herein
are forward-looking statements. Forward-looking statements generally are
accompanied by words such as "anticipate," "believe," "project," "potential" or
"expect" or similar statements. The forward-looking statements were prepared on
the basis of certain assumptions which relate, among other things, to the demand
for and cost of marketing LML's services, the volume and total value of
transactions processed by merchants utilizing LML's services, the technological
adaptation of check verification end-users, the issuance of additional patents
necessary to protect the business enterprise, the renewal of material contracts
in LML's business, LML's ability to anticipate and respond to technological
changes, particularly with respect to financial payments and e-commerce, in a
highly competitive industry characterized by rapid technological change and
rapid rates of product obsolescence, LML's ability to develop and market new
product enhancements and new products and services that respond to technological
change or evolving industry standards, no unanticipated developments relating to
previously disclosed lawsuits against LML, and the cost of protecting LML's
intellectual property. Even if the assumptions on which the forward-looking
statements are based prove accurate and appropriate, the actual results of LML's
operations in the future may vary widely due to technological change, increased
competition, additional government regulation or intervention in the industry,
general economic conditions, other risks described in LML's filings with the
Securities and Exchange Commission and other factors not yet known or
anticipated. Accordingly, the actual results of LML's operations in the future
may vary widely from the forward-looking statements included herein. All
forward-looking statements included herein are expressly qualified in their
entirety by the cautionary statements in this paragraph.

Overview

LML is a financial payment processor that provides check processing
solutions for national, regional and local retail merchants in the United
States. LML's processing services include check verification and collection
services along with electronic processing services, including Electronic Check
Re-presentment or "RCK" (whereby returned checks are re-presented for payment
electronically) and Electronic Check Conversion or "ECC" (whereby paper checks
are converted into electronic transactions right at the point of sale). LML
focuses on providing these services to supermarkets, grocery stores, multi-lane
retailers, convenience stores and other national, regional and local retailers
in the United States. LML also provides selective routing, including real-time
monitoring of debit, credit and Electronic Benefit Transaction or "EBT" card
transactions for authorization and settlement.

LML's ECC services utilize LML's proprietary system, including software,
hardware and modes of interaction, known as the "ChequeMARK System." An
objective of LML is to increase transaction volume through internal growth and
acquisitions, including the acquisition of business relationships through which
LML can integrate its ChequeMARK technology as a preferred service provider.
During the past two fiscal years, LML has begun to implement this objective
through a number of acquisitions. See "Business - Overview." These acquisitions
give LML a suite of retail point-of-sale check handling services and an
infrastructure to further expand its offerings to include other forms of
electronic payment systems in the future such as expansion into the e-commerce
market.

The acquisitions that have been completed by LML over the past two years
have made our results of operations not comparable year over year due to a full
12 months of operation results not being included in

19

current or prior fiscal years, as well as the increase in amortization for all
the acquisitions. The acquisition of CF Data and Check Center, which were
completed in fiscal year 2000, were not included in our results of operations
until December 1999 and January 2000, respectively. The acquisition of Phoenix
EPS and Check Technologies, which were completed in fiscal year 2001, were not
included in our results of operations until July 2000.

During the fiscal year ended March 31, 2001, LML established a primary
processing center in Phoenix, Arizona. LML's plan is to eventually process all
transactions through this center. LML made significant investments in connection
with this processing center including entering into a five-year office lease for
approximately 5,000 square feet in Phoenix, Arizona. LML also entered into
certain capital lease agreements with a total value of more than $600,000 in
August 2000, to obtain additional hardware, software and maintenance services in
connection with the facilities in Phoenix, Arizona. In addition, LML completed
the relocation of its Jacksonville, Florida offices to Dallas, Texas during the
2001 fiscal year. LML is in the process of augmenting the existing processing
facilities in Dallas, Texas to form a fully redundant secondary processing
center. See "Item 2 - Properties."

Subsequent to LML's fiscal 2001 year-end, effective April 1, 2001, CFDC
Holdings, CF Data , Check Technologies, Check Center, National Process Servers,
Inc. and Phoenix EPS merged operations and management into LML Payment Systems
Corp. (formerly known as ChequeMARK Inc.), a Delaware corporation. LML Payment
Systems Corp. maintains operations in Dallas, Texas; Wichita, Kansas; Tulsa,
Oklahoma; and Phoenix, Arizona. The merger is designed to achieve certain
economies related to costs and the elimination of redundant systems and
services. The consolidation is designed to take advantage of the growing
recognition of the LML brand name, and will allow a coordinated approach to the
marketing of payment services under the LML trademarks. See the Notes to LML's
Consolidated Financial Statements included herein.

LHTW Properties owns and operates Wildwood Estates, a 332-acre residential
community in Wildwood, Florida. Operations have included the sale of
manufactured homes and lots. In exchange for monthly maintenance fees, LHTW
Properties provides the resident community with certain amenities and services
commonly associated with similar developments.

Results of Operations

Fiscal 2001 compared to Fiscal 2000

Revenues

LML's revenues consist primarily of fees from LML's check verification and
electronic processing business and check recovery business. Revenues are
recognized in accordance with SEC Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition." Revenue from LML's check verification and electronic
processing business is recognized at the time the transactions are processed by
the merchant, provided the fee is fixed and determinable and collectability is
reasonably assured. Fees associated with LML's check recovery business are
contingent on successful recovery; accordingly, revenue is recognized as cash is
received. Software license revenue is recognized upon shipment, provided fees
are fixed and determinable and collection is probable, in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." Software
maintenance revenues are recognized over the term of the maintenance agreement.
Any cash consideration received prior to meeting revenue recognition criteria is
recorded as deferred revenue. Revenue regarding Wildwood Estates is recognized
when sales of property lots and mobile homes are completed. Maintenance fees
from the management of the property and from the maintenance of the common areas
are recognized straight line over the service period.

During the year ended March 31, 2001 one of LML's largest customers,
accounting for 21% of LML's total revenue in fiscal 2001, notified LML of its
intention to perform its check verification services (which amounted

20

to 1.16% of LML's total revenue in fiscal 2001) in house. The transition process
commenced in February 2001 and is expected to be completed by the end of LML's
fiscal 2002 second quarter. This customer is also planning on moving its primary
check collections (which amounted to 7% of LML's total revenue in fiscal 2001)
in house. The transfer of these services in house by this customer may have a
material adverse effect on LML's results of operations. LML expects to continue
to provide secondary check collection services to this customer.

Total revenues for fiscal year 2001 were approximately $10.1 million, a
236.7% increase over revenues of approximately $3 million for the fiscal year
2000. Revenues derived from the financial payment processing services increased
241.4% from $2.9 million in fiscal year 2000 to $9.9 million for fiscal year
2001. This increase was principally attributable to the acquisition of Phoenix
EPS and Check Technologies, which were completed in July 2000, and the inclusion
of a full year of operations for CF Data and Check Center, which were acquired
in November 1999 and January 2000, respectively (the "Acquisitions"). Revenues
related to Wildwood Estates increased 13.6% from $168,316 in fiscal year 2000 to
$191,235 for fiscal year 2001.

Costs of operations

Costs of operations increased from approximately $2.7 million in fiscal
year 2000 to approximately $7.9 million in fiscal year 2001, an increase of
192.6%. Financial payment processing costs of operations increased 196.2% from
$2.6 million in fiscal year 2000 to $7.7 million for fiscal year 2001. The
increase was principally attributable to inclusion of a full year of operations
for CF Data and Check Center, acquired in fiscal year 2000, and inclusion of
costs for the acquisitions of Phoenix EPS and Check Technologies, which were
completed in fiscal year 2001. Costs of operations consist of transaction
processing costs, personnel costs, equipment related costs and telecommunication
costs. For fiscal year 2001, costs of operations as a percentage of sales
decreased to 78.2% compared to 90% for fiscal year 2000. This decrease was due
to the operating activities from the acquisitions. Costs of operations related
to Wildwood Estates increased 36.8% from $182,340 in fiscal year 2000 to
$249,401 for fiscal year 2001.

Sales, general and administrative expenses

Sales, general and administrative expenses consist primarily of personnel
costs, commissions, office facilities, travel, promotional events such as trade
shows, seminars and technical conferences and public relations. Sales, general
and administrative expenses increased from approximately $1.5 million in fiscal
year 2000 to approximately $4 million in fiscal year 2001, an increase of
166.7%. The increase in sales, general and administrative expenses are
principally attributable to inclusion of a full year of expenses for CF Data and
Check Center, acquired in fiscal year 2000, and inclusion of expenses for the
acquisitions of Phoenix EPS and Check Technologies, which were completed in
fiscal year 2001. The increase is also due to professional fees associated with
various legal matters and expenses associated with the relocation of the
Jacksonville, Florida office to Dallas, Texas. For fiscal year 2001, expenses as
a percentage of sales decreased to 39.6% compared to 48.6% for fiscal year 2000.
This decrease was due to the operating activities from the acquisitions.

Other expenses and income

Other expenses increased to $768,770 in fiscal year 2001 from $59,871 for
fiscal year 2000. Interest income for fiscal year 2001 increased to $685,391
from $60,559 for fiscal year 2000. The increase in other expenses was primarily
attributed to $443,720 in costs associated with the Wildwood Estates legal
settlement, as well as $174,268 in costs associated with the merger of LML's
subsidiaries which took place on April 1, 2001, and expenses for potential
acquisitions that LML has determined will not be completed. The increase in
other income is due to the increase in interest earned for funds placed in term
deposits or short-term commercial paper.

21

Amortization and depreciation

Amortization on intangibles increased to $946,706 for fiscal year 2001 from
$387,508 for fiscal year 2000. Depreciation expenses relating to the ChequeMARK
system software and other software increased to $1,055,811 for fiscal year 2001
from $262,558 for fiscal year 2000. Depreciation expenses for capital assets
increased to $1,082,629 for fiscal year 2001 from $233,908 for fiscal year 2000.
These increases are principally associated with amortization of goodwill from
the Acquisitions and amortization of the Patents, depreciation of the ChequeMARK
system software and the software acquired in the acquisition of Phoenix EPS, and
depreciation of capital assets acquired in the Acquisitions.

EBITDA/1/

Earnings before income taxes, interest expense, depreciation and
amortization, or "EBITDA," decreased to a loss of approximately $1.9 million in
fiscal year 2001 from a loss of approximately $1.2 million for fiscal year 2000.
The decrease is primarily the result of amortization of intangibles,
depreciation of capital assets and increased costs associated with the
acquisitions, as well as costs associated with the Wildwood Estates legal
settlement, and the costs associated with the merger of LML's subsidiaries,
which took place on April 1, 2001.

Income Taxes

Management regularly evaluates the realizability of its deferred tax assets
given the nature of its operations and given the tax jurisdictions in which LML
operates. The valuation allowance is adjusted from time to time based on such
evaluations. Management considers it more likely than not that the deferred tax
assets will not be realized through future taxable income. Accordingly, the
deferred tax asset is reserved in full as of March 31, 2001.

Net loss

Net loss increased to approximately $5.2 million for fiscal year 2001 from
approximately $2.3 million for fiscal year 2000. The increase in LML's net loss
is due primarily to amortization of intangibles, depreciation of capital assets
and increased costs associated with the acquisitions. Loss per both basic and
diluted shares was ($0.34) in fiscal year 2001, as compared to ($0.19) for
fiscal year 2000.

Fiscal 2000 compared to Fiscal 1999

Revenues

Total revenues for fiscal year 2000 were approximately $3 million, a
1180.5% increase over revenues of approximately $234,284 for fiscal year 1999.
Revenues derived from the financial payment processing services increased
5079.3% from $55,992 in fiscal year 1999 to approximately $2.9 million for
fiscal year 2000. The revenue increase is principally attributable to the
acquisitions of CF Data and Check Center. Revenues related to Wildwood Estates
decreased 5.6% from $178,292 in fiscal year 1999 to $168,316 for fiscal year
2000.

- --------------------------
/1/ EBITDA is earnings before income taxes, interest expense and depreciation
and amortization. LML believes that, in addition to cash flows from
operations and net income, EBITDA is a useful financial performance measure
for assessing operating performance as it provides an additional basis to
evaluate the ability of LML to incur and service debt and to fund capital
expenditures. To evaluate EBITDA, the components of EBITDA such as revenue
and operating expenses and the variability of such components over time
should also be considered. EBITDA should not be construed, however, as an
alternative to net income (loss) as an indicator of LML's operating
performance or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. LML's method of
calculating EBITDA may differ from methods used by other companies, and as
a result, EBITDA measures disclosed herein may not be comparable to other
similarly titled measures used by other companies.

22

Costs of operations

Costs of operations increased from approximately $531,646 in fiscal year
1999 to approximately $2.7 million in fiscal year 2000, an increase of 407.9%.
Financial payment processing costs of operations increased 737% from $310,644
in fiscal year 1999 to approximately $2.6 million for fiscal year 2000. The
increase in costs of operations are principally attributable to the acquisitions
of CF Data and Check Center. Costs of operations consist of transaction
processing costs, personnel costs, equipment related costs and telecommunication
costs. Costs related to Wildwood Estates decreased 17.5% from $221,002 in fiscal
year 1999 to $182,340 for fiscal year 2000.

Sales, general and administrative expenses

Sales, general and administrative expenses consist primarily of personnel
costs, commissions, office facilities, travel, promotional events such as trade
shows, seminars and technical conferences and public relations. Sales, general
and administrative expenses increased from approximately $1.1 million in fiscal
year 1999 to approximately $1.5 million in fiscal year 2000, an increase of
36.4%. The increase in sales, general and administrative expenses are
principally attributable to the acquisitions completed in fiscal 2000.

Other expenses and income

Other expenses for fiscal year 2000 were $59,871 compared to other income
for fiscal year 1999 of $199,003, consisting mainly of a gain in settlement of
debts relating to payroll taxes. Interest income for fiscal year 2000 was
$60,559, from interest earned for funds placed in term deposits or short-term
commercial paper. No interest income was earned in fiscal 1999.

Amortization and depreciation

Amortization on intangibles increased to $387,508 for fiscal year 2000 from
$43,568 for fiscal year 1999. Depreciation expenses relating to the ChequeMARK
system software increased to $262,558 for fiscal year 2000 from $239,089 for
fiscal year 1999. Depreciation expenses for capital assets increased to $233,908
for fiscal year 2000 from $66,811 for fiscal year 1999. These increases are
principally associated with amortization of goodwill and depreciation of capital
assets acquired in the acquisitions of CF Data and Check Center, which were
completed in fiscal year 2000.

EBITDA

Loss before income taxes, interest expense, depreciation and amortization,
or "EBITDA," for fiscal year 2000 was approximately $1.2 million compared to
approximately $1.9 million for fiscal year 1999.

Income Taxes

Management regularly evaluates the realizability of its deferred tax assets
given the nature of its operations and given the tax jurisdictions in which LML
operates. The valuation allowance is adjusted from time to time based on such
evaluations. Management considers it more likely than not that the deferred tax
assets will not be realized through future taxable income. Accordingly, the
deferred tax asset is reserved in full as of March 31, 2000.

Net loss

Net loss for both fiscal year 2000 and fiscal year 1999 was approximately
$2.3 million. Both basic and diluted loss per share were ($0.19) in fiscal year
2000, as compared to ($0.22) for fiscal year 1999.

23

Liquidity and Capital Resources

LML's liquidity and financial position consisted of approximately $6.7
million in working capital as of March 31, 2001 compared to approximately $9.8
million in working capital as of March 31, 2000. The decrease in working capital
was primarily related to a decrease in cash associated with legal costs
associated with LML's Patents, the Phoenix and Check Technologies acquisitions,
an increase in accounts payable and accrued liabilities to approximately $2.7
million as of March 31, 2001 from approximately $1.4 million at March 31, 2000,
and a dividend payment of approximately $454,000 required under the Conversion
Agreement (as amended) with Destiny. The decrease was offset by an increase in
accounts receivable to $549,133 as of March 31, 2001 from $369,464 at March 31,
2000. See "Item 5 - Market for Registrant's Common Equity and Related
Stockholder Security Matters - Dividend Policy". Cash flows used in operations
were approximately $1.3 million for fiscal 2001 and approximately $2.5 million
for fiscal 2000. Cash used in investing activities was approximately $4.3
million for fiscal 2001 as compared to approximately $6.1 million for fiscal
2000. Expenditures during fiscal 2001 consisted mainly of capital asset
expenditures, additional consideration for certain Patents and the acquisition
of Phoenix and Check Technologies. Cash provided by financing activities was
approximately $2.4 million for fiscal 2001 as compared to approximately $20
million for fiscal 2000. The decrease in cash provided by financing activities
is primarily due to the private placements of LML's common stock that were
completed in November 1999 and March 2000.

Management believes that existing cash and cash equivalent balances, and
potential cash flows from operations will satisfy LML's working capital and
capital expenditure requirements for the next 12 months. However, any material
acquisitions of complementary businesses, products or technologies or other
arrangements could require LML to obtain additional equity or debt financing.
There can be no assurance that such financing would be available on acceptable
terms, if at all.

Recently Issued Accounting Standards

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". This interpretation is
effective for applicable transactions beginning July 1, 2000. The adoption of
this interpretation did not have a material impact on LML's consolidated
financial statements.

In February 2001, the Financial Accounting Standards Board issued a
revision to a previously issued exposure draft covering business combinations
proposing new accounting guidance related to goodwill. This proposed standard
would not allow for amortization of goodwill. The carrying amount of goodwill
would be reduced only if it was found to be impaired. Goodwill would be tested
for impairment when events or circumstances occur indicating that goodwill might
be impaired. A fair-value based impairment test would be used to measure
goodwill for impairment in lieu of the method for measuring impairment of long-
lived assets set forth in SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-Lived Assets to Be Disposed Of." As goodwill is measured as
a residual amount in an acquisition, it is not possible to directly measure the
fair value of goodwill. Under this proposed standard, the net assets of a
reporting unit should be subtracted from the fair value of that reporting unit
to determine the implied fair value of goodwill. Impairment loss would be
recognized to the extent the carrying amount of goodwill exceeds the implied
fair value. The provisions of this proposed standard may be adopted by LML in
fiscal 2002 or 2003. Management is currently assessing the period of adoption
and believes adoption of this standard, as it is proposed, will have a material
non-cash impact on LML's financial statements as it will not allow for
amortization of goodwill.

24

Quarterly Financial Data (Unaudited)

The following summarizes the unaudited quarterly financial results of LML for
the fiscal years ended March 31, 2001 and March 31, 2000 (in thousands, except
share data):

Year Ended March 31, 2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------

Net revenues........................................ 2,145 2,463 2,637 2,826
Net income (loss)................................... (561) (996) (1,179) (2,478)
Basic net income (loss) per common share............ (.04) (.06) (.10) (.15)
Diluted net income (loss) per common share.......... (.04) (.06) (.10) (.15)

Year Ended March 31, 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------
Net revenues........................................ 90 58 338 2,559
Net income (loss)................................... (433) (376) (688) (850)
Basic net income (loss) per common share............ (.04) (.03) (.06) (.06)
Diluted net income (loss) per common share.......... (.04) (.03) (.06) (.06)

25

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

LML is exposed to market risk from changes in marketable securities (which
consist of money market and commercial paper). At March 31, 2001, marketable
securities of LML were recorded at a fair value of approximately $6.8 million,
with an overall weighted average return of approximately 5.3% and an overall
weighted average life of less than three months. The marketable securities held
by LML have exposure to price risk, which is estimated as the potential loss in
fair value due to a hypothetical change of 50 basis points (9% of LML's overall
average return on marketable securities) in quoted market prices. This
hypothetical change would have an immaterial effect on the recorded value of the
marketable securities.

LML is not exposed to material future earnings or cash flow fluctuations
from changes in interest rates on long-term debt since 100% of its long-term
debt is at a fixed rate as of March 31, 2001. The fair value of LML's debt
approximates its carrying value. To date, LML has not entered into any
derivative financial instruments to manage interest rate risk and is currently
not evaluating the future use of any such financial instruments.

LML has immaterial exposure to foreign currency transaction gains or
losses. To date, LML has not entered into any derivative financial instrument to
manage foreign currency risk and is currently not evaluating the future use of
any such financial instruments.

ITEM 8. Financial Statements and Supplemental Data

Information called for by this item is set forth in LML's Consolidated
Financial Statements contained in this report. LML's Consolidated Financial
Statements begin at page F-1 hereunder.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

Information concerning LML's change in accountants was disclosed in its
current report on Form 8-K dated December 11, 2000.

26

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information on LML's directors and executive officers is contained in LML's
Proxy Statement for its 2001 Annual Meeting of Shareholders, and is incorporated
herein by reference.

ITEM 11. Executive Compensation

Information on compensation of LML's directors and executive officers is
contained in LML's Proxy Statement for its 2001 Annual Meeting of Shareholders,
and is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Information on the securities ownership of certain beneficial owners and
management of LML is contained in LML's Proxy Statement for its 2001 Annual
Meeting of Shareholders, and is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions

Information on certain relationships and related transactions is contained
in LML's Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.

27

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8K

(a) The following documents are filed as part of this report:

(1) Consolidated Financial Statements
Page

Report of Arthur Andersen LLP, Independent Public Accountants................F-1

Report of Dale, Matheson, Carr-Hilton Independent Chartered Accountants......F-2

Consolidated Balance Sheets at March 31, 2001 and 2000.......................F-3

Consolidated Statements of Operations for each of the three years
ended March 31, 2001, 2000 and 1999.....................................F-4

Consolidated Statements of Shareholders' Equity
for each of the three years ended March 31, 2001, 2000 and 1999.........F-5

Consolidated Statements of Cash Flows for each of the three years
ended March 31, 2001, 2000 and 1999.....................................F-6

Notes to Consolidated Financial Statements...................................F-7

All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.

(b) Reports on Form 8-K for fourth quarter ending March 31, 2001:

None

(c) Exhibits:

Exhibit
Number Description of Document

3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit
3.1 to the Quarterly Report on Form 10-Q for the period ended September
30, 2000 of LML (File No. 0-13959)).

3.2 Bylaws of LML (incorporated by reference to Exhibit 1.2 to the Annual
Report on Form 20-F for the fiscal year ended March 31, 1998 of LML (File
No. 0-13959)).

10.1 Form of Share Purchase Agreement between LML and Roger Jahnel and Ed
Campbell, dated as of July 22, 2000 (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q for the period ended September
30, 2000 of LML (File No. 0-13959)).

10.2 Form of Share Purchase Agreement between LML and Phoenix EPS, Inc. and
Robert E. Peyton, Joseph M. Bandiera and Peter D. Stenhjem, dated as of
July 9, 2000 (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the period ended September 30, 2000 of LML (File
No. 0-13959)).

10.3 Office Lease Agreement, executed August 2000 for Granite Reef Centre
(incorporated by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q for the period ended September 30, 2000 of LML

28

(File No. 0-13959)).

10.4 Settlement Agreement, dated July 14, 2000, by, between and among LML,
ChequeMARK Holdings, Inc., ChequeMARK Patent, Inc., ChequeMARK, Inc.,
Robert R. Hills and ChequeMARK Technologies Corporation n/k/a MARK
Technologies, Inc. (incorporated by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q for the period ended September 30, 2000 of
LML (File No. 0-13959)).

10.5 Amendment to Settlement Agreement, dated August 22, 2000 by, between and
among LML, ChequeMARK Holdings, Inc., ChequeMARK Patent, Inc.,
ChequeMARK, Inc., Robert R. Hills and ChequeMARK Technologies Corporation
n/k/a MARK Technologies, Inc. (incorporated by reference to Exhibit 10.5
to the Quarterly Report on Form 10-Q for the period ended September 30,
2000 of LML (File No. 0-13959)).

10.6 1998 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 99.1 of the Registration Statement on Form S-8 filed November 6,
2000 (File No. 333-49402)).

10.7 1996 Stock Option plan, as amended (incorporated by reference to Exhibit
99.2 of the Registration Statement on Form S-8 filed November 6, 2000
(File No. 333-49402)).

21* Subsidiaries of LML.

23.1* Consent of Arthur Andersen LLP

23.2* Consent of Dale, Matheson, Carr-Hilton
- ---------------
*Filed herewith

29

LML PAYMENT SYSTEMS INC.

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

LML PAYMENT SYSTEMS INC.

By: /s/ Patrick H. Gaines
-----------------------
Patrick H. Gaines, Chief Executive
Officer, and President

Date: June 28, 2001

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

Signature Title

/s/ Patrick H. Gaines Chairman of the Board, President, Chief
- ----------------------------- Executive Officer, and Director
Patrick H. Gaines (Principal Executive Officer)

/s/ Wendy J. Ogilvie Controller
- ----------------------------- (Principal Financial and Accounting Officer)
Wendy J. Ogilvie

/s/ Gregory A. MacRae Director
- -----------------------------
Gregory A. MacRae

/s/ L. William Seidman Director
- -----------------------------
L. William Seidman

/s/ Jacqueline Pace Director
- -----------------------------
Jacqueline Pace

/s/ Robin Martin Director
- -----------------------------
Robin Martin

30

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------

To the Shareholders of
LML Payment Systems, Inc.:

We have audited the accompanying consolidated balance sheet of LML Payment
Systems, Inc. (a Yukon Territory corporation) and subsidiaries as of March 31,
2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LML Payment Systems, Inc. and
subsidiaries as of March 31, 2001, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in Canada.

Accounting practices used by the Company in preparing the accompanying financial
statements conform with accounting principles generally accepted in Canada but
do not conform with certain accounting principles generally accepted in the
United States. A description of these differences and a complete reconciliation
of consolidated net income and shareholders' equity to accounting principles
generally accepted in the United States are set forth in Note 17.

/s/ ARTHUR ANDERSEN LLP

Dallas, Texas,
June 27, 2001

F-1

AUDITORS' REPORT
----------------

To the Shareholders of
LML Payment Systems Inc.

We have audited the consolidated balance sheets of LML Payment Systems Inc. as
at March 31, 2000 and March 31, 1999 and the consolidated statements of
operations and deficit and cash flow for the years ended March 31, 2000 and
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 2000
and March 31, 1999 and the results of its operations and cash flows for the
years ended March 31, 2000 and 1999 in accordance with generally accepted
accounting principles in Canada.

Vancouver, B.C. /s/ DALE, MATHESON, CARR-HILTON
June 28, 2000 CHARTERED ACCOUNTANTS

F-2

LML PAYMENT SYSTEMS INC.

CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)

March 31
2001 2000
$ $
- -----------------------------------------------------------------------------------------------------------------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents 8,357,354 11,528,850
Restricted cash 250,000 -
Accounts receivable, less allowances of $155,737 and $73,102, respectively 549,133 369,464
Prepaid expenses 502,121 459,999
---------------- -----------------
Total Current Assets 9,658,608 12,358,313

REAL PROPERTY, net 1,617,491 1,378,467

CAPITAL ASSETS, net 6,596,535 2,157,326

PATENTS, net 1,710,581 602,491

GOODWILL, net 7,259,665 7,009,387

OTHER ASSETS 467,631 231,597
- -----------------------------------------------------------------------------------------------------------------------
Total Assets 27,310,511 23,737,581
=======================================================================================================================

LIABILITIES
CURRENT LIABILITIES
Accounts payable 1,876,186 1,185,135
Accrued liabilities 823,066 185,276
Current portion of long-term debt 276,535 1,151,751
---------------- -----------------
Total current liabilities 2,975,787 2,522,162

LONG TERM DEBT 273,970 69,613
---------------- -----------------
Total liabilities 3,249,757 2,591,775
---------------- -----------------

COMMITMENTS AND CONTINGENCIES (Note 14)

SHAREHOLDERS' EQUITY

CAPITAL STOCK
Class A, preferred stock, $1.00 CDN par value, 150,000,000,
shares authorized, issuable in series, none issued or
outstanding
Class B, preferred stock, $1.00 CDN par value, 150,000,000,
shares authorized, issuable in series, none issued or
outstanding
Common shares, no par value, 100,000,000, shares authorized,
18,697,929 and 14,956,487 issued and outstanding, respectively 29,728,236 43,164,267
LHTW Class A Preference shares - 883,283
DEFICIT (5,667,482) (22,901,744)
---------------- -----------------
Total shareholders' equity 24,060,754 21,145,806
- -----------------------------------------------------------------------------------------------------------------------

Total liabilities and shareholders' equity 27,310,511 23,737,581
=======================================================================================================================

See accompanying notes to the consolidated financial statements.

F-3

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. Dollars, except share data)

Year ended March 31,

2001 2000 1999
$ $ $
- --------------------------------------------------------------------------------------------------------------------

REVENUE 10,071,358 3,045,445 234,284

COSTS AND EXPENSES
Cost of operations 7,950,620 2,737,069 531,646
Sales, general and administrative expenses 3,993,653 1,480,860 1,122,620

OTHER ITEMS
Other expenses 325,050 59,871 (199,003)
Interest income (685,391) (60,559) -
Settlement of lawsuit 443,720 - -
Write-down of real property - - 637,544

LOSS BEFORE TAX, INTEREST, DEPRECIATION -------------- --------------- ---------------
AND AMORTIZATION EXPENSE (1,956,294) (1,171,796) (1,858,523)
============== =============== ===============

Amortization and depreciation 3,085,146 883,974 349,468
Interest expense 114,371 273,760 107,162
-------------- --------------- ---------------
3,199,517 1,157,734 456,630
------------------------------------------------------

LOSS BEFORE INCOME TAXES (5,155,811) (2,329,530) (2,315,153)

State income taxes 57,884 17,969 -

-------------- --------------- ---------------
NET LOSS (5,213,695) (2,347,499) (2,315,153)
============== =============== ===============

DIVIDENDS, PREFERRED (453,787) - -
============== =============== ===============

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS (5,667,482) (2,347,499) (2,315,153)
============== =============== ===============

LOSS PER SHARE
Basic (0.34) (0.19) (0.22)
============== =============== ===============
Diluted (0.34) (0.19) (0.22)
============== =============== ===============

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 16,769,410 12,088,607 10,460,441
Diluted 16,769,410 12,088,607 10,460,441

See accompanying notes to the consolidated financial statements.

F-4

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In U.S. Dollars)

Common Preferred Amount $ Deficit $ Total $
- ----------------------------------------------------------------------------------------------------------------

Balance at March 31, 1998 9,654,838 883,283 20,306,966 (18,239,092) 2,067,874

Exercise of stock options 590,000 957,000 957,000
Exercise of warrants 656,666 747,719 747,719
Issuance of common stock -
Conversion of 12% notes 125,000 125,000 125,000
Net loss (2,315,153) (2,315,153)
- ----------------------------------------------------------------------------------------------------------------

Balance at March 31, 1999 11,026,504 883,283 22,136,685 (20,554,245) 1,582,440

Exercise of stock options 880,000 2,527,250 2,527,250
Exercise of warrants 616,666 754,588 754,588
Issuance of common stock - acquisition 233,317 1,709,246 1,709,246
Issuance of common stock and
warrants - private placement, net of
issuance costs 2,200,000 16,919,781 16,919,781
Net loss (2,347,499) (2,347,499)
- ----------------------------------------------------------------------------------------------------------------

Balance at March 31, 2000 14,956,487 883,283 44,047,550 (22,901,744) 21,145,806

Exercise of stock options 283,500 4,141,750 4,141,750
Issuance of common stock - acquisition 251,574 4,907,500 4,907,500
Return of common stock - associated
with settlement (466,820) (466,820) (466,820)
Shares issued for conversion of
subsidiary preferred stock to common 3,533,132 (883,283) - -
Issuance of common stock - previous
acquisition, price protection 140,056 - -
Deficit adjustment (22,901,744) 22,901,744 -
Preferred dividends paid (453,787) (453,787)
Net loss (5,213,695) (5,213,695)
- ----------------------------------------------------------------------------------------------------------------

Balance at March 31, 2001 18,697,929 - 29,728,236 (5,667,482) 24,060,754
================================================================================================================

See accompanying notes to the consolidated financial statements

F-5

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)

Year ended March 31,
2001 2000 1999
$ $ $
- ---------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES:
Net Loss (5,213,695) (2,347,499) (2,315,153)
Adjustments to reconcile net loss to net cash
used in operating activities
Provisions for losses on accounts receivable 82,635 72,546 -
Amortization and depreciation 3,085,146 883,974 349,468
Write-down of assets - - 637,544
Other 22,837 44,751 33,604

Changes in operating assets and liabilities
(excluding effect of acquisitions)
Restricted cash (250,000) - -
Accounts receivable (231,935) (130,362) (53,991)
Prepaid expenses 78,779 (259,259) (19,778)
Accounts payable and accrued liabilities 1,209,007 (531,618) (4,067)
Other assets (71,500) (237,879) (118,274)
-----------------------------------------------------
Net cash used in operating activities (1,288,726) (2,505,346) (1,490,647)
-----------------------------------------------------

INVESTING ACTIVITIES
Purchase of Phoenix, net of cash acquired (126,205) - -
Purchase of Check Technologies, net of cash acquired (518,505) - -
Purchase of CFDC Holdings Corp., net of cash acquired - (2,671,996) -
Purchase of Check Center, net of cash acquired - (3,180,718) -
Additional ChequeMARK & Patent consideration (2,664,464) - -
Real property improvements (272,846) (3,480) (5,050)
Capital asset expenditures (657,783) (209,813) (254,870)
Patents (27,384) (36,101) -
-----------------------------------------------------
Net cash used in investing activities (4,267,187) (6,102,108) (259,920)
-----------------------------------------------------

FINANCING ACTIVITIES
Payments on long term debt, net (1,121,280) (138,604) 25,260
Proceeds from long term borrowing - 260,000 -
Payments on capital leases (182,266) (228,639) (10,075)
Payment of dividend (453,787) - -
Proceeds from exercise of stock options 4,141,750 2,527,250 957,000
Proceeds from exercise of warrants - 754,588 747,719
Proceeds from private placement of common shares - 17,000,000 -
Share capital financing costs - (80,219) -
-----------------------------------------------------
Net cash provided by financing activities 2,384,417 20,094,376 1,719,904
-----------------------------------------------------

INCREASE (DECREASE) IN CASH (3,171,496) 11,486,922 (30,663)

Cash and cash equivalents, beginning of year 11,528,850 41,928 72,591

Cash and cash equivalents, end of year 8,357,354 11,528,850 41,928
===============================================================================================================

Supplemental disclosure of cash flow information:
Interest paid 153,871 289,432 39,015
Taxes paid 18,121 - -
===============================================================================================================

See accompanying notes to the consolidated financial statements.

F-6

LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise indicated, all dollar amounts are U.S. dollars)

1. NATURE OF OPERATIONS

LML Payment Systems Inc. (a Yukon Territory corporation) and its subsidiaries
(the "Corporation"), See Note 2(a), is a provider of electronic payment services
employed primarily at the retail point-of-sale. The Corporation focuses on
providing electronic check authorization services, including check verification,
check conversion and check recovery solutions to supermarkets, grocery stores,
multi-lane retailers and convenience stores located in the United States.

Through its subsidiary LML Payment Systems Corp. (f/k/a ChequeMARK, Inc.), the
Corporation owns and operates proprietary software (the "ChequeMARK System")
that allows merchants to electronically authorize, capture and settle paper
check transactions conducted at the point-of-sale. The ChequeMARK System is
protected by the Corporation's intellectual property estate.

The Corporation's intellectual property estate, owned by subsidiary LML Patent
Corp., includes U.S. Patent No. 5,484,988, U.S. Patent No. 6,164,528 regarding
Internet checking transactions, and other pending patent applications. The
Corporation recently received a Notice of Allowance from the United States
Patent and Trademark Office regarding a new patent.. The allowed patent
application describes corporate checks and electronic fund transfers (EFT)
systems and relates to systems described in U.S. Patent No. 6,164,528 and U.S.
Patent No. 5,484,988.

On July 9, 2000, the Corporation completed the acquisition of Phoenix EPS, Inc.,
("Phoenix") an Arizona based company, which engineered and marketed electronic
payment system software solutions to the retail industry. Phoenix also provides
selective routing, including real-time monitoring of check, debit, credit and
EBT transactions for authorization and settlement through its flagship
transaction processing product Retail Electronic Payment System ("REPS").

On July 22, 2000, the Corporation completed the acquisition of Check
Technologies Inc., ("Check Technologies") a Dallas based company, which provided
check verification and check recovery services to retail merchants.

Through its subsidiary LHTW Properties Inc., ("LHTW") the corporation owns and
operates Wildwood Estates, a 332-acre residential community in Wildwood,
Florida. Operations have included the sale of manufactured homes and lots. In
exchange for monthly maintenance fees, the Corporation provides the resident
community with certain amenities and services commonly associated with similar
developments.

2. SIGNIFICANT ACCOUNTING POLICIES

A) Basis of Presentation

These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada. Except as
disclosed in Note 17, these principles do not differ materially from
accounting principles generally accepted in the United States.

These consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiaries as set out below. All
significant intercompany balances and transactions have been eliminated
in consolidation.

CANADA
------
Legacy Promotions Inc.

UNITED STATES
-------------
LHTW Properties Inc.
LML Corp. (f/k/a ChequeMARK Holdings Inc.)
LML Patent Corp. (f/k/a ChequeMARK Patent Inc.)
LML Payment Systems Corp. (f/k/a ChequeMARK Inc.) *
CFDC Holdings Corp. *
CF Data Corp. *
Check Technologies, Inc. *
National Recovery Systems, Ltd. of America *
National Process Servers Inc. *
Phoenix, EPS Inc. *

F-7

* On April 1, 2001, the Corporation consolidated seven subsidiaries into
a single operating subsidiary, LML Payment Systems Corp.

Certain of the prior period financial statement amounts have been
reclassified to conform to the current period presentation.

B) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant areas requiring the use of management
estimates relate to, among others, the allowance for doubtful accounts,
determination of impairment of assets, useful lives for depreciation and
amortization and income taxes. Financial results could differ from those
estimates.

C) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, and all highly liquid
debt instruments purchased with a maturity of three months or less.

D) Restricted Cash
Under the terms of the processing agreement with one of the
Corporation's processing banks, the Corporation has pledged a deposit of
$250,000 against charge back losses. In addition, restricted cash of
$208,561 relating to the IBM financing is long term in nature and is
included in "Other Assets."

E) Concentrations of Credit Risk
Financial instruments, which potentially subject the Corporation to
concentrations of credit risk, consist primarily of cash and cash
equivalents and accounts receivable. The Corporation places its cash
with quality financial institutions. However, at times during the year
ended March 31, 2001 certain balances exceeded the Canadian Deposit
Insurance Corporation limits of $60,000 CDN and the United States
Federal Deposit Insurance Corporation limits of $100,000.

During the year, sales to the Corporation's three (3) largest customers
amounted to approximately 21%, 18% and 17% of total sales volume. The
amount of actual sales to these customers amounted to $2,064,334,
$1,759,553 and $1,656,240, respectively. The Corporation may be
economically dependent on sales volume to these customers. These
revenues are attributable to the Financial Payment Processing Operating
segment. During the year ended March 31, 2001, one of the largest
customers that amounted to 21% of total sales revenue, notified the
Corporation that it is moving its check verification processing in
house. Verification transactions started being transferred over in
February 2001 and are expected to be completed by the end of the
Corporation's second quarter of fiscal 2002. This customer is also
planning on moving its primary check collections in house. The date on
this move is yet to be determined. LML expects to continue to provide
secondary check collection services to this client.

F) Capital Assets
The straight-line method is used to depreciate the life of assets as
follows:

Computer Equipment and Software 3 - 5 years
Furniture and Fixtures 3 years
Leasehold Improvements Lesser of the life of the lease or the useful life of the leasehold improvement
Office Equipment 5 years
Tradeshow Equipment 3 years
Vehicles 4 years
Website 5 years
System and software 5 years
IBM software 1 year

Assets are recorded at cost.

G) Goodwill and Intangible Assets
Goodwill is amortized using the straight-line method over 10 years.
Patent costs are amortized using the straight-line method over the life
of the patents, which approximates 15 years.

F-8

Amortization expense totaled $946,692 in 2001, $387,509 in 2000 and
$43,568 in 1999.

H) Long-lived Assets
Capital Assets, real property, goodwill, patents and other intangibles
are reviewed for impairment when events indicate their carrying amount
may not be recoverable from undiscounted cash flows. An impairment
charge, if any, is recorded in the statement of operations based on the
difference in the asset's book value and fair value. There were no
impairment charges taken in fiscal 2001 and 2000. There was a $637,544
charge taken in fiscal 1999 to record the Residential Real Estate
operations segment's property at its estimated recoverable value based
on a third party appraisal.

I) Revenue Recognition
Revenues consist primarily of transaction charges from the
Corporation's check recovery business, check verification and
electronic processing business, software license sales and maintenance
fees. Revenues are recognized in accordance with SEC Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition." Revenue from the
Corporation's check verification and electronic processing business is
recognized at the time the transactions are processed by the merchant,
provided the fee is fixed and determinable and collectability is
reasonably assured. Fees associated with the Corporation's check
recovery business are contingent on successful recovery; accordingly,
revenue is recognized as cash is received. Software license revenue is
recognized upon shipment, provided fees are fixed and determinable and
collection is probable, in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition."
Software maintenance revenues are recognized over the term of the
maintenance agreement, any pre-paid maintenance fees are recorded as
unearned revenue.
Revenue from sales of Wildwood Estates property lots and mobile homes
is recognized when the sale is completed. Maintenance fees from the
management of the property and from the maintenance of the common areas
are recognized straight line over the service period.
Cash received in advance of meeting revenue recognition criteria is
deferred.

J) Income Taxes
The Corporation has adopted a new accounting recommendation from the
Canadian Institute of Chartered Accountants relating to the
recognition, measurement, presentation and disclosure of income and
refundable taxes in an enterprise's financial statements (CICA Handbook
Section 3465). The recommendations of Section 3465 replace the concept
of "deferred income taxes" with "future income taxes." The fundamental
principle of "future income taxes" is that an enterprise would
recognize a future income tax liability whenever recovery or settlement
of the carrying amount of an asset or liability would result in future
income tax outflows. Similarly, an enterprise would recognize a future
income tax asset whenever recovery or settlement of the carrying amount
of an asset or liability would generate future income tax reductions.
An extension of this fundamental principle is that in the case of the
unused tax losses, income tax reductions, and certain items that have a
tax basis but cannot be identified with an asset or liability on the
balance sheet, the recognition of future income tax benefits is
determined by reference to the likely realization of a future income
tax reduction. No future income tax benefit has been recorded in these
financial statements as the criteria for recognition has not been
satisfied (See Note 12).

K) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is calculated based on net loss,
less preferred stock dividends divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings (loss)
per share includes the dilutive effect of stock options and warrants
granted using the treasury stock method.
As a result of the net loss incurred for 2001, 2000 and 1999, the
effect of dilutive securities would have been anti-dilutive to the
diluted loss per common share computation and were thus excluded.
Dilutive securities that would have otherwise been included in the
determination of the weighted-average number of common shares
outstanding for the purposes of computing diluted earnings per common
share included 1,243,500 for 2001, 4,550,132 for 2000, and 4,589,798
for 1999, issuable under stock options, warrants and convertible
shares.

L) Stock Based Compensation Plans
Employee compensation expense under stock option plans is reported only
if options are granted below market price at grant date in accordance
with Accounting Principles Board ("APB") Opinion No. 25. Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock
Based Compensation" requires pro-forma disclosures of net income and
earnings per share for companies not adopting its fair value accounting
method. (See Note 17).

F-9

M) Foreign Exchange
For the Corporation's Canadian parent and certain subsidiaries, balance
sheet items in Canadian dollars are translated into U.S. dollars at
exchange rates prevailing at the balance sheet date for monetary items
and at exchange rates in effect at the transaction date for non
monetary items. The functional currency is the US dollar for all
entities. Income statement items are translated at average rates
prevailing during the year. These translations are recorded in other
expenses on the income statement and were immaterial in fiscal 2001,
2000 and 1999.

N) Financial Instruments
The Corporation's financial instruments consist of cash, accounts
receivable, note receivable, accounts payable and accrued liabilities,
notes payable and long-term debt, the fair value of which approximates
their carrying value. From time to time the Corporation purchases
short-term investments including commercial paper. The principal
objective of the Corporation's investment activities is to provide
maximum levels of interest income while maintaining acceptable levels
of interest rate and liquidity risk and facilitating the funding needs
of the Corporation.

3. REAL PROPERTY
2001 2000
$ $
------------ -----------
Land held for resale 584,672 584,672
Common area land 803,554 545,950
Common area building 220,688 220,688
Machinery and equipment 36,309 21,069
Wastewater treatment plant 31,101 31,101
------------ -----------
Total cost 1,676,324 1,403,480
------------ -----------
Less: accumulated depreciation 58,833 25,013
------------ -----------
Net book value 1,617,491 1,378,467
============ ===========

Depreciation expense of real property totaled $33,820 in 2001, $25,013 in
2000 and $25,644 in 1999.

4. CAPITAL ASSETS

2001 2000
$ $
------------ -----------
Computer equipment 1,053,045 408,205
Computer software 708,285 471,949
Furniture and fixtures 241,681 150,366
Leasehold improvements 131,923 97,076
Office equipment 538,882 405,787
Vehicles 102,971 102,898
Website & Trademarks 20,886 4,945
System & software 6,713,706 1,354,379
------------ -----------
Total cost 9,511,379 2,995,605
------------ -----------
Less: accumulated amortization and depreciation 2,914,844 838,279
------------ -----------
Net book value 6,596,535 2,157,326
============ ===========

Depreciation expense on capital assets totaled $2,104,634 in 2001, $471,452
in 2000, and $280,256 in 1999. Capital assets include $683,822 and $138,461
of assets, that are financed under various capital leases for the years
ended March 31, 2001 and 2000, respectively. Accumulated amortization on
these assets totals $220,927 and $42,165 for the years ended March 31, 2001
and 2000, respectively. Amortization of capital lease assets is included in
depreciation expense.

5. PATENTS
2001 2000
$ $
------------ -----------
Cost 1,903,745 689,627
------------ -----------
Less: accumulated amortization 193,164 87,136
------------ -----------
Net book value 1,710,581 602,491
============ ===========

F-10

6. GOODWILL

2001 2000
Goodwill has been recorded as follows: $ $ $ $
---------------------------------------------------------------------------------
Total Accumulated
Goodwill Amortization Net Net
------------------------------------------------------------- ---------------

CFDC Holdings Corp. (c) 4,334,368 577,915 3,756,453 4,189,889
National Recovery Systems, Ltd. of America (d) 2,891,793 361,474 2,530,319 2,819,498
Phoenix EPS, Inc. (a) 539,805 40,485 499,320 -
Check Technologies Inc. (b) 511,846 38,273 473,573 -
============== ================== =================== ===============
8,277,812 1,018,147 7,259,665 7,009,387
============== ================== =================== ===============

(a) On July 9, 2000, the Corporation purchased all of the issued and
outstanding shares of Phoenix EPS, Inc. ("Phoenix") in exchange for
220,857 shares of the Corporation's common stock with a fair market
value of $4.5 million. Phoenix, located in Scottsdale, Arizona,
engineered and marketed electronic payment system software solutions to
the retail industry. Phoenix also provided selective routing, including
real-time monitoring of check, debit, credit and EBT transactions for
authorization and settlement through its flagship transaction
processing product REPS. In connection with the acquisition, the
Corporation incurred transaction costs consisting primarily of
professional fees of $126,205 and a finder's fee of 7,730 shares of the
Corporation's common stock with a fair market value of $157,500,
resulting in a total purchase price of $4,783,705. The acquisition was
accounted for as a purchase business combination; accordingly, the
results of operations of Phoenix have been included with the
Corporation's results of operations since July 9, 2000.

The total purchase price paid for the Phoenix acquisition was allocated
based on a third party valuation of the estimated fair values of the
assets acquired as follows:

$
------------
Software 4,243,900
Goodwill 539,805
------------
4,783,705
============

The purchase price allocation is preliminary and subject to final
valuation.

A total of approximately $4.2 million of the purchase consideration was
allocated to software, which is being depreciated over five years.
Goodwill is to be amortized over ten years.

(b) On July 22, 2000, the Corporation purchased all of the issued and
outstanding shares of Check Technologies in exchange for 22,987 shares
of the Corporation's common stock with a fair market value of $250,000
and $250,000 cash. The Corporation also agreed to pay to certain former
Check Technologies Inc. shareholders and a former employee a total of
$150,010 pursuant to separate non compete agreements having a maximum
term of three (3) years. The employee and one of the former
shareholders of Check Technologies Inc. was paid additional
consideration of $25,000 each in the first year upon satisfaction of
certain conditions. The Corporation is obligated to pay additional
consideration of $25,000 each to the former employee and one of the
former shareholders of Check Technologies Inc. in each of the second
and third years. The non compete agreement payments are recorded in
other assets, and the carrying value net of accumulated amortization at
March 31, 2001 was $160,722. Check Technologies Inc., located in
Dallas, Texas, was a check verification and recovery business. In
connection with the acquisition, the Corporation incurred transaction
costs consisting primarily of professional fees of $43,088 and a
finder's fee of $26,020, resulting in a total purchase price of
$769,118. The acquisition was accounted for as a purchase business
combination; accordingly, the results of operations of Check
Technologies Inc. have been included with the Corporation's results of
operations since July 22, 2000.

The total purchase price paid for the Check Technologies acquisition
was allocated based on the estimated fair values of the assets acquired
as follows:

$
------------
Net assets acquired 57,262
Identifiable intangible assets 200,010
Goodwill 511,846
------------
769,118
============

The purchase price allocation is preliminary and subject to final
valuation.

F-11

(c) On November 30, 1999, the Corporation purchased all of the issued and
outstanding shares of CFDC Holdings Corp. ("CFDC") and it's wholly
owned subsidiary CF Data Corp. ("CF Data"), located in Dallas, Texas,
in exchange for the issuance of up to the value of $1,500,000 in the
Corporation's common stock. In connection with the acquisition, the
Corporation assumed all liabilities of $4,055,348, incurred transaction
costs consisting primarily of professional fees of $86,539 and a
finder's fee of 21,818 shares of the Corporation's common stock with a
fair market value of $157,499, resulting in a total purchase price of
$5,799,386. The acquisition was accounted for as a purchase business
combination; accordingly, the results of operations of CFDC and CF Data
have been included with the Corporation's results of operations since
November 30, 1999.

$
------------
Net assets acquired 1,465,018
Goodwill 4,334,368
------------
5,799,386
============

(d) On January 4, 2000, effective January 1, 2000, CFDC purchased all of
the issued and outstanding shares of National Recovery Systems, Ltd. of
America ("Check Center"), and it's wholly owned subsidiary, National
Process Servers Inc., located in Wichita, Kansas, in exchange for
$3,250,000 cash. In connection with the acquisition, the Corporation
assumed all liabilities of $152,470, incurred transaction costs
consisting primarily of professional fees of $47,921 and a finder's fee
of 12,297 shares of the Corporation's common stock with a fair market
value of $113,787, resulting in a total purchase price of $3,564,178.
The acquisition was accounted for as a purchase business combination;
accordingly, the results of operations of Check Center and National
Process Servers have been included with the Corporation's results of
operations since January 1, 2000.

$
------------
Net assets acquired 672,385
Goodwill 2,891,793
------------
3,564,178
============

(e) The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the year
ended March 31, 2001 and 2000 assuming Phoenix, Check Technologies
Inc., CF Data, and Check Center had been acquired as of April 1, 1999:

PRO FORMA (UNAUDITED)
Year ended March 31
2001 2000
$ $
------------ ------------
Revenue 10,783,284 10,941,816

Net Loss (5,286,403) (4,298,032)
============ ============
Net loss available to common
sharehholders (5,740,190) (4,298,032)
============ ============
Basic and diluted net loss per share (0.34) (0.34)
============ ============

The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the years presented
and are not intended to be a projection of future results.

(f) The purchase price for each of CFDC, Phoenix and Check Technologies
Inc. was paid either entirely or partially with shares of the
Corporation's common stock. As part of each transaction, the
Corporation agreed to certain price protection covenants for the
benefit of the former stockholders of the acquired companies. In the
event the value of the shares of the Corporation's common stock
exchanged for the shares of the acquired company's stock decreases
below the deemed issue price per share of the Corporation's common
stock, and the former shareholders of the acquired company sell such
shares of the Corporation's common stock at a lower price after the
expiration of any applicable hold period and within a specified period
of time thereafter, such shareholders would have a right to receive
additional shares of the Corporation's common stock. On November 30,
2000 the price protection covenants for the benefit of the former
stockholders of CFDC came into effect. As a result, the Corporation
issued an additional 140,056 shares of the Corporation's common stock
to certain former owners of CFDC under the price protection covenants.

F-12

7. LONG TERM DEBT
2001 2000
$ $
---------- ----------
Destiny Petroleum Inc. (a) - 1,121,280
Obligations under capital lease agreement (b) 550,505 100,084
---------- ----------

550,505 1,221,364
Less current portion 276,535 1,151,751
---------- ----------
273,970 69,613
========== ==========

(a) On June 8, 2000, the Corporation paid $1,201,117 to Destiny Petroleum
Inc., a company controlled by an affiliate ("Destiny") in full satisfaction
of a promissory note, mortgage and accrued interest on the Wildwood Estates
property.

(b) In September 2000, the Corporation entered into a lease agreement with IBM
Credit Corporation to finance equipment and software purchases of $545,361
and maintenance services of $87,326. Lease payments are due on the last day
of each month under the lease terms, which range from twelve (12) to thirty-
six (36) months. Title to the equipment will transfer to the Corporation at
the expiration of the lease, at the Corporation's option. Accordingly these
amounts have been recorded as a capital lease.

Future minimum payments due $
----------
2002 317,596
2003 205,326
2004 91,637
2005 -
2006 -
----------
614,559
Less amount representing interest 64,054
----------
Net principal balance 550,505
==========

The leases are secured by the equipment under capital lease.

8. SHARE CAPITAL

(a) At the Corporation's Annual General Meeting held September 18, 2000, the
Corporation's shareholders approved a reduction in the stated capital of
the shares of the Corporation's common stock by $22,901,744 and to effect
such reduction by reducing the amount of the Corporation's deficit by the
same amount as allowed under Canadian GAAP.

(b) In December 1995, the Corporation, LHTW and Destiny entered into a debt
conversion agreement (the "Conversion Agreement"). On November 30, 2000,
the Corporation, pursuant to the Conversion Agreement (as amended), issued
3,533,132 shares of the Corporation's common stock to Destiny in exchange
for the surrender of 883,283 LHTW Class A Preference Shares. Prior to the
exchange, dividends and interest on the LHTW Class A Preference Shares had
accrued in an amount totaling $453,787. In January 2001, the Corporation
paid this amount to Destiny in full satisfaction of any and all remaining
monetary obligations related to the LHTW Class A Preference Shares.

(c) In March 2000, the Corporation completed a private placement with three
subscribers (the "Subscribers"). The private placement consisted of
1,000,000 units purchased at a price of $12.00 per unit. Each unit
consisted of one common share and one share purchase warrant to purchase
one common share at $16.00 until March 31, 2002 (the "Unit"). The
Corporation paid a 10% finder's fee in cash to a finder. The finder
subscribed for 100,000 Units and a special warrant (the "Finder's Unit") at
$12.00 per Finders Unit. The special warrant provides the finder with the
right to acquire common shares in the Corporation without the payment of
any additional consideration. The number of common shares to be acquired by
the finder under the special warrant is determined by dividing 10% of the
aggregate exercise price received by the Corporation in respect of warrants
exercised by the Subscribers by a deemed price of $16.00 per share.
In November, 1999 the Corporation completed a private placement of common
stock. The private placement consisted of 1,000,000 common shares at a
purchase price of $5.00 per common share. The Corporation paid a 10%
finders fee to a finder through the issuance of an additional 100,000
shares at $5.00 per share.

F-13

The fair value of the warrants are $6.89 per share, based on the Black-
Scholes fair value pricing model. The total fair value of approximately
$8.3 million is included in common shares.

(d) Warrants
(i) Exercised

On December 3, 1999, 616,666 share purchase warrants were exercised by
a company controlled by an affiliate at a price of $1.80 (CDN) per
share.

During the year ended March 31, 1999, two companies, one owned by a
director and one owned by a former director exercised 70,000 share
purchase warrants each at a price of $1.00 per share. On December 2,
1998, 516,666 share purchase warrants were exercised by a shareholder
at a price of $1.80 (CDN) per share.

(ii) Outstanding

Number Expiration Date Price per share $
------ --------------- -----------------
1,100,000 March 31, 2002 16.00
100,000 March 31, 2002 16.00 (deemed)

(e) Conversion of 12% Notes
On June 23, 1998, the holder of 125 convertible notes with a face value of
$1,000 each converted the notes to 125,000 common shares at a price of
$1.00 per share.

9. COMMON STOCK OPTIONS

Stock Option activity during 2001, 2000, and 1999 was as follows:

Options Exercise price $
-------------------------------------------

Outstanding March 31, 1998 930,000 1.00 - 1.30
Granted 400,000 3.50
Forfeited - -
Exercised (590,000) 1.00 - 3.50
-------------------------------------------
Outstanding March 31, 1999 740,000 1.00 - 3.50
-------------------------------------------

Granted 1,315,000 3.00 - 10.00
Forfeited (85,000) 3.00 - 3.50
Exercised (880,000) 1.00 - 10.00
-------------------------------------------
Outstanding March 31, 2000 1,090,000 1.00 - 10.00
-------------------------------------------

Granted 645,000 3.50 - 20.375
Forfeited (78,000) 3.00 - 6.25
Exercised (283,500) 3.00 - 16.00
-------------------------------------------
Outstanding March 31, 2001 1,373,500 1.00 - 20.375
-------------------------------------------

Exercisable at March 31, 1999 572,500 1.00 - 3.50
Exercisable at March 31, 2000 248,000 1.00 - 10.00
Exercisable at March 31, 2001 686,750 1.00 - 20.375
Options available for grant at March 31, 2000 1,460,000
Options available for grant at March 31, 2001 3,393,000

All director, officer and employee options are granted under the
Corporation's 1996 Stock Option Plan ("1996 Plan") or the 1998 Stock
Incentive Plan ("1998 Plan"), with the exception of 80,000 shares of
options granted to a consultant, vesting over a one year period, which were
not granted under the 1996 Plan or the 1998 Plan. The exercise price of
options granted under the 1996 Plan and the 1998 Plan is 100% of the fair
market value on the date the option is granted. Options to directors,
officers and employees are normally vested over a three-year period.
Options are exercisable for a period of five years from date of grant.

At the Corporation's Annual General Meeting on September 18, 2000,
shareholders approved an increase of the number of shares that may be
granted under the 1996 Plan from 2.5 million shares to a total of 3 million
shares and the 1998 Plan from 1 million shares to a total of 3 million
shares, each to purchase one share of the common stock at a price not less
than 100% of the market price at the date of grant.

F-14

10. NON-CASH INVESTING AND FINANCING ACTIVITIES

2001 2000 1999
$ $ $
-----------------------------------------------

Acquisition of capital assets under capital lease 632,687 45,929 92,532
Issuance of 251,574 shares of common stock - acquisitions 4,907,500 - -
Issuance of 233,317 shares of common stock - acquisition - 1,709,246 -
Return to treasury 466,820 shares of common stock (466,820) - -
Conversion of 12% notes for 125,000 shares of common stock - - 125,000
-----------------------------------------------
Conversion of 883,283 LHTW Class A Preference shares for 3,533,132 shares of
common stock - - -
-----------------------------------------------
5,073,367 1,755,175 217,532
===============================================

11. EMPLOYEE BENEFIT PLAN

The Corporation has a defined contribution 401 (k) plan (the "Plan") for
eligible employees. The Plan requires that the Corporation match 25% of eligible
employees contributions, up to 5% of their compensation. The Corporation
recorded matching contribution expenses for the years ended March 31, 2001, 2000
and 1999 of $81,698, $10,394 and $0, respectively.

12. INCOME TAXES

The reconciliation of the Corporation's Canadian statutory rate of 45% to the
effective rate is not disclosed as that information is not considered
meaningful. Due to the uncertainty of the Corporation's ability to generate
future taxable income, the income tax benefit is fully reserved.

Deferred tax assets:

2001 2000
$ $
---------- ----------
Net operating losses 7,152,288 3,490,756
Intangibles (1,700,000) -
Valuation allowance for net deferred tax assets (5,452,288) (3,490,756)
---------- ----------
Net deferred tax assets - -
========== ==========

At March 31, 2001 and 2000, the Corporation had $13,058,440 and $4,462,613 of
U.S. federal net operating loss carry forwards. At March 31, 2001 and 2000, the
Corporation had $4,286,472 and $3,294,623 of Canadian net operating loss carry
forwards. The U.S. federal and Canadian net operating loss carry forwards expire
from 2002 through 2021 and are subject to certain annual limitations.

Management regularly evaluates the realizability of its deferred tax assets
given the nature of its operations and given the tax jurisdictions in which the
Corporation operates. The valuation allowance is adjusted from time to time
based on such evaluations. Management considers it more likely than not that the
deferred tax assets will not be realized through future taxable income;
accordingly, the deferred tax asset is reserved in full as of March 31, 2001.

13. INDUSTRY AND GEOGRAPHIC SEGMENTS

Financial Payment Processing Operations
U.S.
------------------ ------------------- ---------------------
2001 2000 1999
$ $ $
------------------ ------------------- ---------------------

Revenue (excluding intercompany sales) 9,880,123 2,877,129 55,992
================== =================== =====================
Revenue major customers 5,480,127 1,932,053 -
================== =================== =====================
Segment operating loss (3,211,283) (1,360,937) (944,520)
================== =================== =====================
Total assets 18,222,594 11,115,434 2,027,205
================== =================== =====================

F-15

Residential Real Estate Operations
U.S.
------------------ ------------------- ---------------------
2001 2000 1999
$ $ $
------------------ ------------------- ---------------------

Revenue (excluding intercompany sales) 191,235 168,316 178,292
================== =================== =====================
Segment operating loss (373,029) (178,291) (804,375)
================== =================== =====================
Total assets 1,643,506 1,520,488 1,419,467
================== =================== =====================

Administrative Operations
Canada
------------------ ------------------- ---------------------
2001 2000 1999
$ $ $
------------------ ------------------- ---------------------

Revenue (excluding intercompany sales) - - -
================== =================== =====================
Segment operating loss (1,629,383) (808,271) (566,258)
================== =================== =====================
Total assets 7,444,411 11,101,659 115,734
================== =================== =====================

The Corporation employs a large amount of financial and managerial resources
relating to its Financial Payment Processing Operations. The Financial Payment
Processing Operations involve point-of-sale check authorization and check
recovery services. In previous years, the Corporation operated primarily in two
industries, the Administrative Operations and Residential Real Estate
Operations. Administrative Operations is the corporate administration of the
Corporation's headquarters. Residential Real Estate Operations involve the
development and sale of residential real estate lots and homes in the United
States. There were no inter-segment sales.

14. COMMITMENTS AND CONTINGENCIES

(a) Effective August 22, 2000, the Corporation, Mr. Hills and MARK reached a
settlement with respect to the Corporation's legal action commenced March
10, 1999 and other claims against Mr. Hills and MARK. Pursuant to the terms
of the settlement, the Corporation paid additional consideration of $2.5
million for the software and U.S. Patent No. 5,484,988 or any
continuations, divisions, reissues or additional patent applications for
all or any part thereof (the "Patent") acquired from MARK and Mr. Hills. In
addition, in exchange for relief of its obligation to issue to the
defendants 1,828,560 earn-out shares pursuant to certain agreements,
466,820 shares of the Corporation's common stock with a value of $466,820
held in escrow were canceled and returned to the Corporation. The
settlement does not affect the rights to earn-out shares of shareholders of
Mark Technologies, Inc., other than Mr. Hills (See Note 14 (b)).
Additionally, $350,000 of the $2.5 million cash settlement was withheld for
the purpose of defending or pursuing other legal claims regarding
ownership, license or infringement of certain intellectual property of the
Corporation including the Patent, against persons other than Mr. Hills who
may claim rights directly or indirectly from Mr. Hills, including the
claims asserted by Global Transaction Systems, LLC ("Global"). If there is
no such ongoing litigation as of August 21, 2005, the portion of the
$350,000 not used by the Corporation for litigation expenses will be
delivered to Mr. Hills. As of the year ended March 31, 2001, the
Corporation had incurred and deducted $313,071 for litigation expenses,
leaving a balance of $36,929.

(b) Pursuant to certain agreements dated March 11, 1998 regarding the
Corporation's acquisition of the assets of ChequeMARK Technologies Corp.
(the "Asset Purchase Agreement") and U.S. Patent No. 5,484,988 or any
continuations, divisions, reissues or additional patent applications for
all or any part thereof (the "Patent Purchase Agreement"), the Corporation
committed to issue to the vendors up to a maximum of 1,971,440 common
shares (original commitment of 3,800,000 earn-out shares less Mr. Hills and
Mr. Hills portion of any earn-out shares issuable to MARK settlement of
1,828,560), subject to a defined earn-out formula, for the period up to
August 2003. No common shares were earned during the year ended March 31,
2001.

(c) On December 14, 2000, the Corporation received a complaint filed by Todd H.
Moore ("Moore") against the Corporation in the 150th District Court, Bexar
County, Texas. Moore is seeking an order directing the Corporation to
deliver an option to purchase 250,000 shares of the Corporation's common
stock at $1.50 per share, or, alternatively, damages of $10 million, and
certain other relief. Moore alleges that the Corporation retained him in
1998 to assist in raising media exposure of the Corporation and that as
compensation for such services Moore was to receive the stock option. In
December 1999, Moore filed a similar suit against the Corporation in the
United States District Court, Western District of Washington, alleging
substantially the same facts as those set forth above. The original suit
was dismissed with prejudice on June 5, 2000. Moore filed a motion with the
court in Washington to attempt to have the dismissal in the prior suit
changed to a dismissal without prejudice, this motion was granted by the
court in

F-16

February 2001. The Corporation believes this suit is without merit and
intends to defend this action vigorously. At March 31, 2001, no amount has
been accrued on this matter.

(d) During 1993 the Corporation issued 316,667 common shares to settle debt to
former owners of Wildwood Estates. 266,669 of the shares were held under a
voluntary pooling agreement. As of March 31, 2000, 14,167 shares had been
released. On February 24, 2001, the Corporation entered into a settlement
agreement regarding the lawsuit that commenced during fiscal year 2001, by
the former owners of the Wildwood Estates property concerning their claims
for the release of the remaining 252,502 shares of the Corporation's common
stock being held under this voluntary pooling agreement. Pursuant to the
terms of the settlement agreement, the Corporation allowed the release of
126,251 shares from escrow and paid $150,000 towards costs. The agreement
also calls for the remaining 126,251 shares to remain in escrow until the
property is sold in its entirety or until November 30, 2002, whichever
occurs first.

The Corporation is a party to additional ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on results
of operations, financial position or liquidity of the Corporation.

(e) Operating lease obligations

Future minimum lease payments for obligations under operating leases are as
follows:

$
----------
2002 412,461
2003 360,927
2004 142,527
2005 90,752
2006 37,758
----------
1,044,425
==========

The Corporation's Canadian premise lease was extended on January 19, 2001
for a further three-year term, expiring on September 30, 2003. The
Corporation's rent expense totaled $377,264 in 2001, $231,177 in 2000, and
$149,701 in 1999.

15. RELATED PARTY TRANSACTIONS

During the year, the Corporation entered into the following transactions with
related parties:

(a) A subsidiary of the Corporation leases office facilities from a company
controlled by a former director of the subsidiary. The lease term expires
March 2002. Subsequent to year-end the lease was extended for thirty-three
months, with the lease ending on December 31, 2004. Total lease expenses
paid to this related party for the year ended March 31, 2001 were $45,000
(2000 - $11,250).

(b) The Corporation paid to Destiny $1,076,530 of principal and $124,587 of
interest and penalties for a total of $1,201,117, in full satisfaction of a
promissory note and mortgage on the Wildwood Estates property.

(c) In December 1995, the Corporation, LHTW and Destiny entered into the
Conversion Agreement. On November 30, 2000, the Corporation, pursuant to
the Conversion Agreement (as amended), issued 3,533,132 shares of the
Corporation's common stock to Destiny in exchange for the surrender of
883,283 LHTW Class A Preference Shares. Prior to the exchange, dividends
and interest on the LHTW Class A Preference Shares had accrued in an amount
totaling $453,787. In January 2001, the Corporation paid this amount to
Destiny in full satisfaction of any and all remaining monetary obligations
related to the LHTW Class A Preference Shares.

16. SUBSEQUENT EVENTS

(a) Subsequent to year-end, the Corporation consolidated seven subsidiary
companies into a single operating subsidiary. CFDC Holdings Corp., CF Data
Corp., and Check Technologies Inc., of Texas; National Recovery Systems
Ltd. of America d/b/a/ Check Center, and National Process Servers, Inc. of
Kansas, and Phoenix EPS Inc. of Arizona have merged operations and
management into LML Payment Systems Corp. (f/k/a ChequeMARK, Inc.), a
Delaware corporation. LML Payment Systems Corp. maintains

F-17

operations in Dallas, Wichita, Tulsa and Phoenix. The merger is designed to
achieve certain economies related to costs and the elimination of redundant
systems and services.

(b) Subsequent to year-end, on June 27, 2001, the Corporation issued 679,134
shares of common stock to the former shareholders of Phoenix in
consideration of certain price protection covenants included in the July 9,
2000 purchase agreement.

17. RECONCILIATION OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES

These financial statements are prepared using Canadian generally accepted
accounting principles ("CDN GAAP"), which do not differ materially from United
States generally accepted accounting principles ("U.S. GAAP") with respect to
the accounting policies and disclosures in these financial statements except as
set out below:

(a) Under U.S. GAAP, merchant contract costs, which have been deferred in the
accounts, would be recorded as operating expenses.

(b) Under U.S. GAAP, preferred shares of a subsidiary that were held by a third
party are not included in equity and would be presented as a minority
interest.

(c) Under U.S. GAAP, foreign currency translation adjustments resulting from
translation of financial statement amounts would be recorded as a separate
component of shareholders' equity and other comprehensive income. This
difference did not have a material effect on the financial statements for
the periods presented.

(d) Under U.S. GAAP, the Corporation could not effect the reduction in deficit
of $22,901,744 by reducing the stated capital of the shares of the
Corporation's common stock.

Adjustments under U.S. GAAP result in changes to the Consolidated Statement of
Operations of the Corporation as follows:

Year ended
March 31
----------------------------------------------------------------------------
2001 2000 1999
$ $ $
- ------------------------------------------------ ---------------------- -------------------- ----------------------

Net loss - CDN GAAP (5,213,695) (2,347,499) (2,315,153)
U.S. GAAP adjustments:
Add: amortization merchant contract costs (a) - 127,166 -
Merchant contract costs expensed (a) - (8,893) (118,273)
---------------------- -------------------- ----------------------

Net loss - U.S. GAAP (5,213,695) (2,229,226) (2,433,426)
====================== ==================== ======================
Loss per share - U.S. GAAP
Basic (0.34) (0.18) (0.23)
====================== ==================== ======================
Diluted (0.34) (0.18) (0.23)
====================== ==================== ======================

F-18

Adjustments under U.S. GAAP result in changes to the Consolidated Balance
Sheet of the Corporation as follows:

March 31, 2001 March 31, 2000
----------------------------------------- -------------------------------------------------
CDN. U.S. CDN. U.S.
GAAP $ ADJ. GAAP $ GAAP $ ADJ. GAAP $
----------------------------------------- -------------------------------------------------

Current Assets 9,658,608 - 9,658,608 12,358,313 - 12,358,313

Real Property 1,617,491 - 1,617,491 1,378,467 - 1,378,467

Capital Assets 6,596,535 - 6,596,535 2,157,326 - 2,157,326

Patent 1,710,581 - 1,710,581 602,491 - 602,491

Goodwill 7,259,665 - 7,259,665 7,009,387 - 7,009,387

Other Assets 467,631 - 467,631 231,597 - 231,597
----------------------------------------- -------------------------------------------------

27,310,511 - 27,310,511 23,737,581 - 23,737,581
========================================= =================================================

Current Liabilities 2,975,787 - 2,975,787 2,522,162 - 2,522,162

Long Term Debt 273,970 - 273,970 69,613 - 69,613
----------------------------------------- -------------------------------------------------

TOTAL LIABILITIES 3,249,757 - 3,249,757 2,591,775 - 2,591,775
----------------------------------------- -------------------------------------------------

LHTW CLASS A
PREFERENCE SHARES (b) - - - - 883,283 883,283
- --------------------------------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY 24,060,754 - 24,060,754 21,145,806 (883,283) 20,262,523
(a), (b), (d) ----------------------------------------- -------------------------------------------------

27,310,511 - 27,310,511 23,737,581 - 23,737,581
========================================= =================================================

(e) The following pro forma information presents net loss and loss per share
for 2001, 2000, and 1999 had the fair value method of SFAS No. 123 been
used to measure compensation cost for stock compensation plans. For
purposes of these pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. These
amounts have not been reflected in our Consolidated Statements of
Operations.

The weighted average fair value of options granted in 2001, 2000 and 1999
was $11.12, $4.90 and $3.66 per option. Fair values of options are
estimated at the date of grant using the Black-Scholes option pricing model
with the following assumptions for 2001, 2000, and 1999: Risk free interest
rate of 6.0%; volatility factors of the expected market price of our common
stock ranging from 1.26 to 1.85; an expected life of the options of 5
years; and no dividend yields.

2001 2000 1999
$ $ $
------------------ ------------------- ---------------------

Net loss available to common shareholders:
As reported (5,667,482) (2,347,499) (2,315,153)
Pro forma (9,891,766) (3,842,044) (2,688,620)
Basic and diluted loss per common share:
As reported (0.34) (0.19) (0.22)
Pro forma (0.59) (0.32) (0.26)

F-19