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

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 [ ]

The number of shares of the registrant's Common Stock outstanding as of July 31, 2002, was 19,451,061.

In this Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar amounts are expressed in United States Dollars.

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a) Under U.S. GAAP, the Corporation could not effect the reduction in deficit of $22,901,744 (performed in fiscal 2001 and disclosed in the Corporation's Form 10-K for the fiscal year ended March 31, 2001) by reducing the stated capital of the shares of the Corporation's common stock.

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The following discussion and analysis should be read in conjunction with the consolidated audited financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2002, filed with the Securities and Exchange Commission on June 28, 2002 (file no. 0-13959). We believe that all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the following quarterly information. Quarterly operating results have varied significantly in the past and can be expected to vary in the future. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year.

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 our services, the volume and total value of transactions processed by merchants utilizing our services, the technological adaptation of electronic check conversion end-users, the renewal of material contracts in our business, our 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, our ability to develop and market new product enhancements and new products and services that respond to technologi cal change or evolving industry standards, no unanticipated developments relating to previously disclosed lawsuits against us, and the cost of protecting our intellectual property. Even if the assumptions on which the forward-looking statements are based prove accurate and appropriate, the actual results of our 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 our filings with the Securities and Exchange Commission and other factors not yet known or anticipated. Accordingly, the actual results of our 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.

LML Payment Systems Inc. is a financial payment processor that primarily provides consumer financial payment processing solutions to retailers and other clients in the United States. Our financial payment processing solutions include traditional check recovery, electronic check re-presentment, electronic check authorization and electronic check conversion. We also provide electronic fund transfer switching services to certain segments of the retail industry. We focus on providing our services to supermarkets, grocery stores, multi-lane retailers, convenience stores and other national, regional and local retailers.

Our strategic objective is to acquire electronic payment volume across all our financial payment processing services and strengthen our position as a financial payment processor. We also have as an objective the goal of developing revenue streams from the licensing of our intellectual property, specifically, the licensing of the intellectual property associated with our four patents regarding electronic check processing.

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Total revenues decreased to approximately $1.9 million for the three months ended June 30, 2002 from approximately $2.4 million for the three months ended June 30, 2001, a decrease of approximately 21.2%. This decrease was mainly attributable to a decrease in revenues from our primary and secondary check collection business resulting from a reduction in overall returned check volume processed. We believe this reduction is partially a result of one of our largest customers, Dillons, moving its primary check collections in-house, which was completed by the end of the second quarter of fiscal 2002, and partially a result of softer consumer spending trends.

During the three months ended June 30, 2002, we granted a personal, non-exclusive, non-transferable, limited sub-license under our intellectual property estate regarding the processing of electronic check transactions to a third party payment processor. The agreement involved an initial license fee, a portion of which has been received during the three months ended June 30, 2002, in addition to a separate running royalty fee based upon future electronic check transactions processed by the licensee. Revenue from the initial license fee has been deferred and is expected to be recognized over the life of the agreement. The running royalty fee is being recognized on a monthly basis.

During the three months ended June 30, 2002, revenue from and associated with our three largest customers amounted to approximately 58.4% of our total sales volume. We may be economically dependent on sales volume to these customers.

We maintain contracts with our largest customers that typically run for three-year durations. In many cases, these contracts include our provision of separate and related services. Many times, related services are sold as a bundle of services to these customers. In some cases, contracts to provide these services to these customers are automatically renewed and in other cases, some or all of the services are put out to general bid at the expiration of the contract term. In the instances where contracts expire and the customer places the contract out for general bid, we compete with competitors in order to renew contracts. Subsequent to the quarter end, JCPenney, one of our largest customers, sought bids from us and other service providers to provide both a new service, being centralized returns, and electronic check recovery service, one of the services currently provided by us to JCPenney. Over the past nine fiscal quarters, we generated approximately $845,000, or approximately 4% o f our total revenues from our electronic check recovery service provided to JCPenney. While we have submitted a bid for both the new and existing service, there is no assurance that we will be successful and we have received a preliminary indication that we have not been successful in our bid to JCPenney. If our bid is unsuccessful, the resulting impact on future revenue could have a material adverse effect on our financial condition, results of operations and cash flows.

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Costs of operations decreased from approximately $2.4 million for the three months ended June 30, 2001, to approximately $1.6 million for the three months ended June 30, 2002, a decrease of approximately 33.3%. The decrease was principally attributable to our implementation of electronic check recovery methods which allowed us to migrate from labor-intensive traditional check recovery methods to more cost efficient electronic check recovery methods. This resulted in a decrease of approximately 34.8% in salaries and benefits from approximately $1.3 million for the three months ended June 30, 2001 to approximately $848,000 for the three months ended June 30, 2002 and a decrease of approximately 52.4% in telecommunications costs from approximately $147,000 for the three months ended June 30, 2001 to approximately $70,000 for the three months ended June 30, 2002. We continue to seek ways to reduce costs of operations.

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 decreased to approximately $715,000 from approximately $1 million for the three months ended June 30, 2002 and 2001, respectively, a decrease of approximately 28.5%. The decrease in sales, general and administrative expense is primarily attributable to lower costs associated with the reduction of personnel costs and general corporate expenses.

Amortization and depreciation decreased to approximately $619,000 from approximately $787,000 for the three months ended June 30, 2002 and 2001, respectively. These decreases are principally associated with our adoption of the provisions of CICA 3062 and SFAS 142 which no longer subject goodwill to amortization over its estimated useful life. Depreciation expenses for capital assets increased to approximately $556,000 from approximately $528,000 for the three months ended June 30, 2002 and 2001, respectively.

For the three months ended June 30, 2002 we had other income of approximately $6,000 compared to other expenses of approximately $19,000 for the three months ended June 30, 2001. The other income was attributed to a foreign exchange gain from cash and cash equivalents held in Canadian currency. The decrease in other expenses was primarily attributed to costs associated with the merger of our subsidiaries, which was completed during the three months ended June 30, 2001.

Interest expense decreased to approximately $8,000 from approximately $12,000 for the three months ended June 30, 2002 and 2001, respectively. This decrease was due to the decrease in long-term debt. Interest income decreased to approximately $20,000 from approximately $68,000 for the three months ended June 30, 2002 and 2001, respectively. This decrease in interest earned was primarily attributed to a decrease in funds placed in term deposits or short-term commercial paper, as well as the decrease in interest rates from an average of approximately 4.2% to approximately 1.7% for the three months ended June 30, 2002 and 2001, respectively.

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Earnings before income taxes, interest, depreciation and amortization, or "EBITDA," decreased to a loss of approximately $424,000 from a loss of approximately $971,000 for the three months ended June 30, 2002 and 2001, respectively, a decrease in losses of approximately 56.3%. The decrease was principally attributable to our Financial Payment Processing operations implementation of electronic check recovery methods, which enabled us to reduce staffing levels and related costs. The decrease was also attributed to a reduction in general corporate expenses.

Net loss decreased to approximately $1.1 million from approximately $1.7 million for the three months ended June 30, 2002 and 2001, respectively. The decrease was principally attributable to our Financial Payment Processing operations implementation of electronic check recovery methods, which enabled us to reduce staffing levels and related costs. The decrease was also attributed to a reduction in general corporate expenses.

Basic and diluted loss per share were both approximately ($0.05) for the three months ended June 30, 2002, as compared to approximately ($0.09) for the three months ended June 30, 2001.

Our liquidity and financial position consisted of approximately $3.6 million in working capital as of June 30, 2002, compared to approximately $3.8 million in working capital as of March 31, 2002. The decrease in working capital was related to normal operating activities and a decrease in accounts payable and accrued liabilities of approximately $447,000, a decrease of prepaid expenses of approximately $189,000 and an increase in accounts receivable of approximately $259,000. Cash flows used in operations were approximately $630,000 as compared to approximately $1.9 million for the three months ended June 30 2002 and 2001, respectively, a decrease in cash flows used in operations of approximately 66.8%. Cash used in investing activities was approximately $40,000 as compared to approximately $127,000 for the three months ended June 30, 2002 and 2001, respectively. The decrease during the three months ended June 30, 2002 was due mainly to a reduction in capital asset expenditures. Cash u sed in financing activities was approximately $86,000 for the three months ended June 30, 2002, as compared to approximately $54,000 for the three months ended June 30, 2001. The increase in cash used in financing activities is primarily due to the payments on capital leases.

We believe that existing cash and cash equivalent balances, and potential cash flows from operations should satisfy our working capital and capital expenditure requirements in the foreseeable future. However, any material acquisitions of complementary businesses, products or technologies, other arrangements, unexpected losses, or a further economic slowdown in the retail industry could require us to obtain additional equity or debt financing. There can be no assurance that such financing would be available on acceptable terms, if at all.

In 2001, the Financial Accounting Standards Board ("FASB") and the Canadian Institute of Chartered Accountants ("CICA") issued new pronouncements governing business combinations, goodwill and intangible assets as described in Note 2.(a) to the accompanying unaudited consolidated financial statements. With the adoption of CICA 3062 and FASB 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test at the reporting units level. Impairment loss would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. Under the new rules, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. De termining the useful lives of intangible assets will require considerable judgment and fact-based analysis.

We have adopted the provisions of CICA 3062 and SFAS 142 effective April 1, 2002 which require us to perform the first of the CICA 3062 and SFAS 142 impairment tests during the second quarter of 2002. Management believes this standard will have a material non-cash impact on our financial statements, as it will not allow for amortization of goodwill, which approximated $830,000 annually. At this time we have not determined how goodwill will be allocated to specific reporting units as of June 30, 2002, as we are in the process of evaluating our reporting units. We have not yet determined the effect that the adoption of CICA 3062 and SFAS 142 will have on our business, results of operations, and financial condition. Accordingly, we have not made a determination about whether or not an impairment charge will be necessary upon adoption of the new standard. Any such adjustment made in the second quarter of fiscal 2003, based on the results of the initial impairment tests would be treated as an adjustment to the April 1, 2002 opening shareholders' deficit balance.

In addition to the legal matters previously reported in our Annual Report filed on Form 10-K for the year ended March 31, 2002, as filed with the Securities and Exchange Commission on June 28, 2002 (file no. 0-13959), we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.

From March 31, 2002, until June 30, 2002, there were no material changes from the information concerning market risk contained in our Annual Report on Form 10-K for the year ended March 31, 2002, as filed with the Securities and Exchange Commission on June 28, 2002 (file no. 0-13959).

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There are no material changes with respect to the information concerning legal proceedings contained in our Annual Report on Form 10-K for the year ended March 31, 2002, as filed with the Securities and Exchange Commission on June 28, 2002 (file no. 0-13959). In addition to the legal matters as described herein and as previously reported in our most recent report on Form 10-K, we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.

Exhibit

Number Description of Document

Reports on Form 8-K

LML PAYMENT SYSTEMS INC.

By: /s/ Richard R. Schulz

Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer)

Date: August 14, 2002

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