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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.). Yes [X] No [ ]

The number of shares of the registrant's Common Stock outstanding as of July 16, 2004, was 19,909,851.

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

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

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

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During the three months ended June 30, 2004, the Corporation granted 380,000 stock options under the Corporation's 1996 Stock Option Plan and 75,000 stock options under the 1998 Stock Incentive Plan. The 380,000 stock options have a weighted average fair value of $3.80 and the 75,000 stock options have a weighted average fair value of $4.44. The total fair value of stock-based compensation is amortized over the vesting period resulting in additional stock-based compensation expense of $1,007,658 for a total stock-based compensation expense of $1,042,562 for the three months ended June 30, 2004. The fair value for the 380,000 and 75,000 stock option grants was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

The pro-forma disclosure below relates to stock options granted prior to April 1, 2003 which have vested in the periods presented below. The pro forma compensation expense recorded during the three months ended June 30, 2004 represents the amortization of previously issued stock options. These previously issued options are amortized to pro forma compensation expenses as the options vest.

The fair value of stock options granted prior to April 1, 2003 are estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the three months ended June 30, 2004 and 2003:

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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:

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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, 2004, filed with the Securities and Exchange Commission on June 14, 2004 (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," "estimate," "intend," "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 technological 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, new government regulation or intervention in the industry, general economic conditions, other risks described in our filings with the Securities and Exchange Commission. 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. We provide check risk services such as electronic check authorization, electronic check processing services such as electronic check conversion and return check management such as traditional and electronic recovery services to retail clients. We also provide mainframe payment processing software modules and rights to use our patented intellectual property to retailers and other payment processors.

When we provide return check management services, we typically receive revenue when we are successful at recovering the principal amount of the original transaction on behalf of the client. In some instances we also earn a percentage of the principal amount and in some other instances our secondary recovery services provide for us to earn additional fees when legal action is required.

When we provide check authorization and electronic check conversion services we typically earn revenue based upon the number of transactions we process through our data center.

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When we provide mainframe based payment software modules to clients who are of sufficient size and possess the technical capability to process financial transactions in-house, or through their own data center, we typically earn revenue by way of a fixed software license fee. In some instances we also earn revenue by way of royalties that are typically based upon a fixed sale price or on a usage or transaction basis.

When we provide clients licenses to our intellectual property estate that includes four U.S. patents describing electronic check processing methods, we typically earn revenue from release fees for potential past infringement and ongoing royalty fees.

In a former, separate business segment, we owned and managed a 332-acre manufactured home retirement property known as Wildwood Estates, in Wildwood, Florida. Operations included the sale of manufactured homes and lots. In exchange for monthly maintenance fees, we provided the resident community with certain amenities and services commonly associated with similar developments. During the year ended March 31, 2004, we sold the Wildwood Estates property for total gross proceeds of approximately $2.4 million cash.

We now concentrate all our activity in the financial payment processing segment and provide our financial payment processing services from our office locations in Scottsdale, Arizona, Wichita, Kansas and Dallas, Texas.

Total revenue for the three months ended June 30, 2004 was approximately $2.1 million, approximately a 10.5% increase over total revenue of approximately $1.9 million for the three months ended June 30, 2003. This increase is primarily attributable to an increase in revenue associated with royalties received from CheckFree Corporation.

Revenue from electronic check verification was approximately $331,000 for the three months ended June 30, 2004 as compared to approximately $333,000 for the three months ended June 30, 2003.

Revenue from our primary check collections business decreased approximately 12% from approximately $848,000 for the three months ended June 30, 2003 to approximately $746,000 for the three months ended June 30, 2004. Revenue from our secondary check collections business increased approximately 36.5% from approximately $532,000 for the three months ended June 30, 2003 to approximately $726,000 for the three months ended June 30, 2004. We believe the reduction in revenue from our primary check collections business is partially a result of us no longer providing electronic check recovery services for one of our customers and partially a result of a decrease in overall returned check volume from our existing customers.

Revenue from our licensing of certain payment software modules was approximately $25,000 for the three months ended June 30, 2004, compared to approximately $45,000 for the three months ended June 30, 2003.

Revenue from royalties received from CheckFree Corporation pertaining to their marketing of the PEP+ reACH™ product was approximately $99,000 for the three months ended June 30, 2004, versus Nil for the three months ended June 30, 2003. We believe future royalties are dependent upon the continued successful marketing by CheckFree Corporation of the PEP+ reACH™ product.

During the three months ended June 30, 2004, revenue from and associated with our two largest customers amounted to approximately 35.6% of total revenue as compared to approximately 38.3% of total revenue for the three months ended June 30, 2003. We may be economically dependent on revenue from these customers.

We ceased providing check authorization and recovery services to 7-Eleven on May 31, 2004. We believe that replacement revenue may come from sales of our electronic check verification, recovery and electronic check conversion products and services to existing and new merchant clients, the licensing of our patented technology regarding electronic check processing and royalties from software licensing agreements. Failure to successfully replace some or all of this revenue could have a material adverse effect on our liquidity, capital resources or results of operations.

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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 $466,000 from approximately $613,000 for the three months ended June 30, 2004 and 2003, respectively, a decrease of approximately 24%. The decrease in sales, general and administrative expense is primarily attributable to lower costs associated with the reduction of personnel costs, legal and general corporate expenses.

Amortization and depreciation decreased to approximately $453,000 from approximately $572,000 for the three months ended June 30, 2004 and 2003, respectively. The decrease was primarily attributable to certain capital assets, acquired through previous years' acquisitions, which had become fully depreciated.

In our previous fiscal year, 2004, we adopted new accounting standards which require fair value accounting for all stock options issued subsequent to April 1, 2003. During the three months ended June 30, 2004, we granted a total of 455,000 stock options under our 1996 Stock Option Plan and 1998 Stock Incentive Plan. The total fair value stock-based compensation is amortized over the vesting period resulting in a stock-based compensation expense of approximately $1.0 million for the three months ended June 30, 2004 versus Nil for the three months ended June 30, 2003.

Other expenses decreased to approximately $1,900 from approximately $16,000 for the three months ended June 30, 2004 and 2003, respectively.

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Basic and diluted loss per share from continuing operations were both approximately ($0.07) for the three months ended June 30, 2004, as compared to approximately ($0.05) for the three months ended June 30, 2003.

Subsequent to the quarter end, we filed suit in the U.S. District Court for the District of Delaware against four companies who provide equipment, systems and services that convert paper checks presented at the point of sale into electronic transactions. In the suit, we allege that these four companies infringe three of our U.S. patents. We are seeking damages, injunctive and other relief for the alleged willful infringement of these patents. The Court has not yet set a trial date or a schedule for the case.

Also subsequent to the quarter end, we made a filing with the United States Patent and Trademark Office for the re-issuance of U.S. Patent No. 6,547,129 which was originally issued on April 15, 2003.

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.

There have been no changes to our critical accounting policies since March 31, 2004. For a description of our critical accounting policies, see our Annual Report on Form 10-K for the year ended March 31, 2004 filed with the Securities and Exchange Commission.

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An evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), was carried out by management with the participation of the Chief Executive Officer and Chief Accounting Officer as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that such controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. As required by Exchange Act Rule 13a-15(d), management, with the participation of the Chief Executive Officer and Chief Accounting Officer, also conducted an evaluation of our internal control over financial reporting to determine whether changes occurred during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the first fiscal quarter.

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The following exhibits are attached hereto or are incorporated herein by reference as indicated in the table below:

(b) Reports on Form 8-K

We filed the following Current Reports on Form 8-K with the Securities and Exchange Commission during the quarter ended June 30, 2004:

i) A current report on Form 8-K, dated June 14, 2004, was filed on June 15, 2004 (Items 5 and 7)

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LML PAYMENT SYSTEMS INC.

By: /s/ Richard R. Schulz
Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer)

Date: August 9, 2004