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

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 October 15, 2004, was 20,143,594.

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

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

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LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(Unaudited)

Effective April 1, 2003, the Corporation prospectively early adopted CICA 3870 which corresponds to SFAS 123, as amended by SFAS 148, which requires fair value accounting for all stock options issued during the year. Prior to the adoption of the new accounting standard, the Corporation did not record the fair value of all stock options issued, rather, it provided pro-forma disclosure of the effect of applying the fair value based method to stock options issued to directors, officers and employees.

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During the three months ended September 30, 2004, the Corporation granted 105,000 stock options under the Corporation's 1996 Stock Option Plan and 75,000 stock options under the 1998 Stock Incentive Plan. The weighted average fair value for 80,000 of these stock options granted is $3.41 and the remaining 100,000 stock options granted have a weighted average fair value of $3.07. For the six months ended September 30, 2004, the Corporation has granted 485,000 stock options under the Corporation's 1996 Stock Option Plan and 150,000 stock options under the 1998 Stock Incentive Plan. The weighted average fair value of the 635,000 stock options granted during the six months ended September 30, 2004 range from a low of $3.07 to a high of $4.44. The total fair value of stock-based compensation is amortized over the vesting period resulting in stock-based compensation expense of $129,175 for the three months ended September 30, 2004 (three months ended September 30, 2003 - $15,726) and $1,171,7 37 for the six months ended September 30, 2004 (six months ended September 30, 2003 - $15,726). The fair value for the 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 and six months ended September 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.

During the three months and six months ended September 30, 2004, a subsidiary of the Corporation 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, the subsidiary of the Corporation alleges that these four companies infringe three patents owned by the subsidiary of the Corporation. The subsidiary of the Corporation is seeking damages, injunctive and other relief for the alleged willful infringement of these patents. Subsequent to the three months and six months ended September 30, 2004 a federal judge has set a trial date of April 17, 2006 in this matter.

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:

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 September 30, 2004 was approximately $1.6 million, approximately an 11.1% decrease over total revenue of approximately $1.8 million for the three months ended September 30, 2003. This decrease is primarily attributable to a decrease in revenue associated with our electronic check verification and primary check collections business.

Revenue from electronic check verification decreased approximately 29% from approximately $283,000 for the three months ended September 30, 2003 to approximately $201,000 for the three months ended September 30, 2004. This decrease was mainly attributable to us no longer providing check authorization services to 7-Eleven, formerly one of our largest customers which was responsible for approximately 17% of our electronic check verification revenue for the three months ended September 30, 2003.

Revenue from our primary check collections business decreased approximately 40.8% from approximately $836,000 for the three months ended September 30, 2003 to approximately $495,000 for the three months ended September 30, 2004. Revenue from our secondary check collections business increased approximately 33.7% from approximately $492,000 for the three months ended September 30, 2003 to approximately $658,000 for the three months ended September 30, 2004. The reduction in revenue from our primary check collections business was mainly attributable to us no longer providing check recovery services to 7-Eleven, formerly one of our largest customers which was responsible for approximately 42.7% of revenue from our primary check collections business for the three months ended September 30, 2003.

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

Revenue from royalties received from CheckFree Corporation pertaining to their marketing of the PEP+ reACH™ product was approximately $34,000 for the three months ended September 30, 2004, versus Nil for the three months ended September 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 September 30, 2004, revenue from and associated with our largest customer amounted to approximately 20.7% of total revenue as compared to approximately 14% of total revenue for the three months ended September 30, 2003. We may be economically dependent on revenue from this customer.

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Costs of operations decreased from approximately $1.7 million for the three months ended September 30, 2003, to approximately $1.4 million for the three months ended September 30, 2004, a decrease of approximately 17.6%. Cost of operations consist of transaction processing costs, personnel costs, equipment related costs and telecommunication costs. The decrease was partially attributable to certain cost reductions, including staff reductions, implemented during the third quarter of our fiscal year ended March 31, 2004 and partially attributable to certain cost reductions associated with us no longer providing check authorization and recovery services to 7-Eleven. 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, public relations and professional service fees, which include legal fees, audit fees, SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act of 2002. Sales, general and administrative expenses decreased to approximately $608,000 from approximately $670,000 for the three months ended September 30, 2004 and 2003, respectively, a decrease of approximately 9.3%. The decrease in sales, general and administrative expense is primarily attributable to lower costs associated with the reduction of personnel and reduced general corporate expenses. We expect that professional fees for legal matters will continue to fluctuate depending on the timing and development of on-going legal matters, and we expect increases in professional fees associated with the continuing compliance wi th the Sarbanes-Oxley Act of 2002.

Amortization and depreciation decreased to approximately $327,000 from approximately $526,000 for the three months ended September 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 fiscal year ended March 31, 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 September 30, 2004, we granted a total of 180,000 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 $129,000 for the three months ended September 30, 2004 versus approximately $16,000 for the three months ended September 30, 2003.

Other expenses decreased to approximately $6,000 from approximately $40,000 for the three months ended September 30, 2004 and 2003, respectively.

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Basic and diluted loss per share from continuing operations were both approximately ($0.04) for the three months ended September 30, 2004, as compared to approximately ($0.06) for the three months ended September 30, 2003.

Total revenue was approximately $3.7 million for the six months ended September 30, 2004 and 2003, respectively.

Revenue from electronic check verification decreased approximately 13.6% from approximately $616,000 for the six months ended September 30, 2003 to approximately $532,000 for the six months ended September 30, 2004.

Revenue from our primary check collections business decreased approximately 29.4% from approximately $1.7 million for the six months ended September 30, 2003 to approximately $1.2 million for the six months ended September 30, 2004. Revenue from our secondary check collections business increased approximately 40% from approximately $1 million for the six months ended September 30, 2003 to approximately $1.4 million for the six months ended September 30, 2004. The reduction in revenue from our primary check collections business was primarily attributable to us no longer providing check recovery services to 7-Eleven, formerly one of our largest customers which was responsible for approximately 43.4% of revenue from our primary check collections business for the six months ended September 30, 2003.

Revenue from our licensing of certain payment software modules was approximately $55,000 for the six months ended September 30, 2004, compared to approximately $70,000 for the six months ended September 30, 2003.

Revenue from royalties received from CheckFree Corporation pertaining to their marketing of the PEP+ reACH™ product was approximately $133,000 for the six months ended September 30, 2004, versus Nil for the six months ended September 30, 2003. We believe future royalties are dependent upon the continued successful marketing by CheckFree Corporation of the PEP+ reACH™ product.

During the six months ended September 30, 2004, revenue from and associated with our two largest customers amounted to approximately 29.3% of total revenue as compared to approximately 37.2% of total revenue for the six months ended September 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.

Costs of operations decreased from approximately $3.4 million for the six months ended September 30, 2003, to approximately $2.8 million for the six months ended September 30, 2004, a decrease of approximately 17.6%. Cost of operations consist of transaction processing costs, personnel costs, equipment related costs and telecommunication costs. The decrease was partially attributable to certain cost reductions, including staff reductions, implemented during the third quarter of our fiscal year ended March 31, 2004 and partially attributable to certain cost reductions associated with us no longer providing check authorization and recovery services to 7-Eleven. 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, public relations and professional service fees, which include legal fees, audit fees, SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act of 2002. Sales, general and administrative expenses decreased to approximately $1.1 million from approximately $1.3 million for the six months ended September 30, 2004 and 2003, respectively, a decrease of approximately 15.4%. The decrease in sales, general and administrative expense is primarily attributable to lower costs associated with the reduction of personnel and reduced general corporate expenses. We expect that professional fees for legal matters will continue to fluctuate depending on the timing and development of on-going legal matters, and we expect increases in professional fees associated with the continuing compli ance with the Sarbanes-Oxley Act of 2002.

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In our fiscal year ended March 31, 2004, we adopted new accounting standards which require fair value accounting for all stock options issued subsequent to April 1, 2003. During the six months ended September 30, 2004, we granted a total of 635,000 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 $1.2 million for the six months ended September 30, 2004 versus approximately $16,000 for the six months ended September 30, 2003.

Other expenses decreased to approximately $8,000 from approximately $57,000 for the six months ended September 30, 2004 and 2003, respectively.

Basic and diluted loss per share from continuing operations were both approximately ($0.11) for the six months ended September 30, 2004 and 2003, respectively.

Our liquidity and financial position consisted of approximately $6.4 million in working capital as of September 30, 2004, compared to approximately $5.6 million in working capital as of March 31, 2004. The increase in working capital was attributable to cash flows provided by financing activities of continuing operations of approximately $1.1 million and cash provided by operating activities of continuing operations of approximately $123,000. Cash provided by operating activities of continuing operations related to normal operating activities and a decrease in accounts payable and accrued liabilities of approximately $12,000, a decrease of prepaid expenses of approximately $56,000 and a decrease in accounts receivable of approximately $308,000. Cash flows provided by operating activities of continuing operations were approximately $123,000 for the six months ended September 30, 2004 compared to cash flows used in operating activities of continuing operations of approximately $886,000 f or the six months ended September 30, 2003. Cash provided by investing activities of continuing operations was approximately $97,000 for the six months ended September 30, 2004 as compared to cash used in investing activities of continuing operations of approximately $64,000 for the six months ended September 30, 2003, respectively. The increase was primarily attributed to the maturity of short-term investments of approximately $184,000 during the six months ended September 30, 2004. Cash provided by financing activities of continuing operations was approximately $1.1 million for the six months ended September 30, 2004 compared to cash used in financing activities of continuing operations of approximately $46,000 for the six months ended September 30, 2003. The increase in cash provided by financing activities of continuing operations is primarily due to the increase in proceeds from exercise of options of our common stock.

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.

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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.

In addition to the legal matters previously reported in our Annual Report filed on Form 10-K for the year ended March 31, 2004, as filed with the Securities and Exchange Commission on June 14, 2004 (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. See also "Part II - Other Information (Item 1 - Legal Proceedings)".

From March 31, 2004, until September 30, 2004, 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, 2004, as filed with the Securities and Exchange Commission on June 14, 2004 (file no. 0-13959).

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 September 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 quarter ended September 30, 2004.

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On July 14, 2004 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 and injunctive and other relief for the alleged willful infringement of these patents. A federal judge has set a trial date of April 17, 2006 in this matter. In addition to the legal matters as described herein and as previously reported in our Annual Report on Form 10-K for the year ended March 31, 2004, as filed with the Securities and Exchange Commission on June 14, 2004 (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.

At the Corporation's Annual General Meeting of Shareholders held August 25, 2004 (the "Meeting"), the following proposals were adopted by shareholders of the Corporation (the "Shareholders") by ordinary resolution: (1) to elect PATRICK H. GAINES, GREG A. MACRAE, L. WILLIAM SEIDMAN, ROBIN B. MARTIN and JACQUELINE PACE as directors of the Corporation for terms expiring at the Annual General Meeting of Shareholders in 2005, as described in the Corporation's Information Circular and Proxy Statement for the Meeting; and (2) to appoint Grant Thornton LLP as auditor of the Corporation to hold office until the Annual General Meeting of Shareholders in 2005.

The number of shares cast for, against, withheld and spoiled, as well as the number of abstentions and broker non-votes as to each of these matters, are as follows:

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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 Payment Systems Inc. (File No. 0-13959)).

3.2    Bylaws (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 Payment Systems Inc. (File No. 0-13959)).

3.3    Amendment to Bylaws of LML Payment Systems Inc. (incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q for the period ended September 30, 2001, of LML Payment Systems Inc. (File No. 0-13959)).

31.1    Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith).

31.2    Rule 13a-14(a) Certification of Principal Financial Officer (filed herewith).

32    Section 1350 Certifications of Chief Executive Officer and Controller and Chief Accounting Officer (furnished herewith).

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LML PAYMENT SYSTEMS INC.

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

Date: November 9, 2004