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 October 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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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 which has been prepared in accordance with Canadian generally accepted accounting policies, 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 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, 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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Other Operations. In a separate business segment, we own and manage a 332-acre manufactured home retirement property known as Wildwood Estates, in Wildwood, Florida. Operations have included the sale of manufactured homes and lots. In exchange for monthly maintenance fees, we provide the resident community with certain amenities and services commonly associated with similar developments. We presently have the entire property listed for sale at $2.5 million and are exploring other options regarding its disposition. The results of operations for this business segment were not significant for the six month period ended September 30, 2002, or September 30, 2001.

Our revenues consist primarily of fees from our primary and secondary check collection, electronic check authorization, electronic check conversion and transaction switching business. Revenues are recognized in accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition." Revenue from our electronic check authorization, electronic check conversion and transaction switching 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 our primary and secondary check collection business are contingent on successful recovery; accordingly, revenue is recognized as cash is received. In previous years, software license revenue was recognized upon shipment, provided fees are fixed and determinable and collection was 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.

Total revenues decreased to approximately $2.0 million for the three months ended September 30, 2002 from approximately $2.3 million for the three months ended September 30, 2001, a decrease of approximately 13%. 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 September 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 September 30, 2002, revenue from and associated with our three largest customers amounted to approximately 49.9% 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. During the three months ended September 30, 2002, 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 ten fiscal quarters, we generated approximately $980,000, or approximately 4.2% of our total revenue, from our electronic check recovery service provided to JCPenney. We were unsuccessful in our bid to JCPenney and, therefore, the resulting impact on future revenue is expected to be approximately $98,000 per quarter. We continue to provide primary collections and other services to JCPenney.

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Costs of operations decreased from approximately $2.3 million for the three months ended September 30, 2001, to approximately $1.6 million for the three months ended September 30, 2002, a decrease of approximately 30.4%. For the three months ended September 30, 2002, costs of operations as a percentage of sales decreased to approximately 80% compared to approximately 102% for the three months ended September 30, 2001. 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 41.2% in salaries and benefits from approximately $1.3 million for the three months ended September 30, 2001 to approximately $764,000 for the three months ended September 30, 2002 and a decrease of approximately 44.6% in telecommunications costs from approximately $130,000 for the three months ended September 30, 2001 to approximately $72,000 for the three months ended September 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 $560,000 from approximately $1.2 million for the three months ended September 30, 2002 and 2001, respectively, a decrease of approximately 53.3%. 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 $620,000 from approximately $810,000 for the three months ended September 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. Amortization of goodwill for the three months ended September 30, 2001 was approximately $207,000. Depreciation expenses for capital assets increased to approximately $554,000 from approximately $544,000 for the three months ended September 30, 2002 and 2001, respectively.

For the three months ended September 30, 2002 we had other expenses of approximately $14,000 compared to other expenses of approximately $30,000 for the three months ended September 30, 2001. The other expenses were attributed to a foreign exchange loss 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 previous period ended September 30, 2001.

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Interest expense increased to approximately $6,000 from approximately $3,000 for the three months ended September 30, 2002 and 2001, respectively. Interest income decreased to approximately $12,000 from approximately $48,000 for the three months ended September 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 2.32% to approximately 1.53% for the three months ended September 30, 2001 and 2002, respectively.

Earnings before income taxes, interest, depreciation and amortization, or "EBITDA," decreased to a loss of approximately $162,000 from a loss of approximately $1.2 million for the three months ended September 30, 2002 and 2001, respectively, a decrease in losses of approximately 86.5%. 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 $770,000 from approximately $2.0 million for the three months ended September 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 ($0.04) for the three months ended September 30, 2002, as compared to approximately ($0.10) for the three months ended September 30, 2001.

Total revenues decreased to approximately $3.9 million for the six months ended September 30, 2002 from approximately $4.7 million for the six months ended September 30, 2001. This decrease was mainly attributable to a decrease in revenues from our primary and secondary check collections business. Revenues from our primary check collections business decreased approximately 20% from approximately $2.5 million for the six months ended September 30, 2001 to approximately $2 million for the six months ended September 30, 2002. Revenues from our secondary check collections business decreased approximately 30% from approximately $1.3 million for the six months ended September 30, 2001 to approximately $900,000 for the six months ended September 30, 2002.

During the six months ended September 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 six months ended September 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 six months ended September 30, 2002, revenue from and associated with the Corporation's three largest customers amounted to approximately 54.1% of the Corporation's total sales volume. The Corporation may be economically dependent on sales volume to these customers.

Costs of operations decreased from approximately $4.7 million for the six months ended September 30, 2001, to approximately $3.2 million for the six months ended September 30, 2002, a decrease of approximately 32%. The decrease was principally attributable to our implementation of electronic check recovery methods which allowed us ot migrate from labor-intensive traditional check recovery methods to more cost efficient electronic check recovery methods. This resulted in a decrease of approximately 36% in salaries and benefits from approximately $2.5 million for the six months ended September 30, 2001 to approximately $1.6 million for the six months ended September 30, 2002 and a decrease of approximately 46.6% in telecommunications costs from approximately $277,000 for the six months ended September 30, 2001 to approximately $148,000 for the six months ended September 30, 2002. Costs of operations as a percentage of sales decreased to approximately 82% compared to approximately 100% for the six months ended September 30, 2001. 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 were approximately $1.3 million and approximately $2.2 million for the six months ended September 30, 2002 and 2001, respectively. 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 $1.2 million from approximately $1.6 million for the six months ended September 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. Amortization of goodwill for the six months ended September 30, 2001 was approximately $414,000. Depreciation expenses for capital assets were approximately $1.1 million as compared to approximately $1.1 million for the six months ended September 30, 2002 and 2001, respectively.

Other expenses decreased to approximately $8,000 from approximately $48,000 for the six months ended September 30, 2002 and 2001, respectively. The decrease in other expenses was primarily attributed to costs associated with the merger of our subsidiaries, which was completed during the six months ended September 30, 2001.

Interest expense decreased to approximately $14,000 from approximately $16,000 for the six months ended September 30, 2002 and 2001, respectively. This decrease was due to the decrease in long-term debt. Interest income decreased to approximately $24,000 from approximately $105,000 for the six months ended September 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 2.32% to 1.62% for the six months ended September 30, 2001 and 2002, respectively.

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Earnings before income taxes, interest, depreciation and amortization, or "EBITDA," decreased to a loss of approximately $586,000 from a loss of approximately $2.2 million for the six months ended September 30, 2002 and 2001, respectively, a decrease in losses of approximately 73.4%. 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 $1.8 million from approximately $3.7 million for the six months ended September 30, 2002 and 2001, respectively, a decrease in net loss of approximately 51.4%. The decrease in net loss 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.

Loss per both basic and diluted shares was ($0.09) for the six months ended September 30, 2002, as compared to ($0.20) for the six months ended September 30, 2001.

Subsequent to the quarter end, we were successful in securing agreements with 49 multi-lane grocery stores with 268 locations in the Houston, Texas area. Under these agreements, we will be providing electronic check verification, electronic check recovery, payroll check cashing and traditional check recovery services to these Houston area stores. Also subsequent to the quarter end, we agreed to act as the preferred merchant service provider for the SafeCHECK Company LLC ("SafeCHECK"). We will partner with SafeCHECK to offer real-time, on-line check verification and check conversion services to retailers and other clients.

Although the resulting impact has not yet been determined, we believe that both subsequent events should have a positive effect on our future financial performance. In addition to the check services presently being provided to the Houston area grocery stores, we plan, as a result of initial interest from a select group of stores, to initiate testing of electronic check conversion services. We have historically enjoyed significantly higher revenues and margins from electronic check conversion services compared to existing electronic check verification services. Our strategy is to encourage stores to adopt the electronic check conversion services in place of the check verification services.

We believe our partnership with SafeCHECK should allow us to develop new revenue streams by allowing us to provide a broader width of check related services such as electronic check conversion with guarantee to a segment of retailers and web-based merchants who previously were not considered potential clients.

We continue to be active in the area of our intellectual property and have received various levels of interest and clarification from parties regarding licensing arrangements regarding our patent estate. Our goal is to negotiate long-term arrangements based upon acceptable financial terms while at the same time preparing to enforce the rights granted to us under our patent estate. While we have not quantified the result of successfully licensing our patent estate, we expect that licensing arrangements would have a significant impact upon our future financial performance.

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. Determining 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 before the end of the second quarter of 2002. During the second quarter of 2002, the Corporation completed its first fair value based impairment tests and recorded a one-time, non-cash charge of approximately $6.4 million to reduce the carrying value of its goodwill. Such charge is non-operational in nature and is recognized as the effect of a change in accounting policy and recorded as an adjustment to the opening deficit balance as of the beginning of the current fiscal year under CICA 3062 (see Note 5 to the accompanying unaudited consolidated financial statements regarding SFAS 142).

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 September 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).

Based on their evaluation, as of a date within ninety days of the filing of this Report on Form 10-Q, our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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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.

At the Corporation's Annual General Meeting of Shareholders held September 4, 2002 (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 2003, as described in the Corporation's Information Circular and Proxy Statement for the Meeting; (2) to appoint Ernst & Young LLP, as auditor of the Corporation to hold office until the Annual General Meeting of Shareholders in 2003.

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

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Pursuant to the requirements 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/ Richard R. Schulz

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

Date: November 14, 2002

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