The material terms of the 1996 Stock Option Plan are summarized below.  The following summary of certain provisions of the 1996 Stock Option Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the 1996 Stock Option Plan, a copy of which was filed as Exhibit 99.2 to a Form S-8 filed by LML with the SEC on November 6, 2000 (which can be found at www.sec.gov).

 

If the amendment to the 1996 Stock Option Plan is approved by shareholders, the aggregate number of shares of our common stock that would be available for future issuance would be 3,176,000.  In the event of an equity restructuring of our Corporation that causes the per-share fair value of the our common stock to change (e.g., a stock dividend, stock split, spinoff, etc.), the committee will make equitable adjustments to the share limits described above, the number and type of shares subject to outstanding options, and the purchase or exercise price of outstanding options. In the case of any other corporate transaction or event, the committee may make adjustments in order to prevent dilution or enlargement of the benefits or potential benefits intended to be provided under the 1996 Stock Option Plan.

Shares that are subject to options that terminate, lapse or are cancelled or forfeited will be available again for grant under the 1996 Stock Option Plan.

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Generally, employees, directors, officers and consultants of LML are eligible to receive options under the 1996 Stock Option Plan (except that under the terms of the plan, U.S. residents are not eligible to receive option grants).  As of June 15, 2007, approximately 10 employees, officers and directors of LML are eligible as a class to be selected by the committee to receive options under the 1996 Stock Option Plan.

Withholding of Taxes

The Corporation may deduct, from any payment or distribution of shares under the 1996 Stock Option Plan, the amount of any tax required by law to be withheld with respect to such payment, or may require the participant to pay such amount to the Corporation prior to, and as a condition of, making such payment or distribution.

 

The 1996 Stock Option Plan became effective in 1996 and will continue until suspended or terminated by the Board of Directors, provided no such suspension or termination will adversely affect any then-outstanding options that have been granted under the plan. The Board of Directors may at any time amend the 1996 Stock Option Plan, provided that the Board will obtain shareholder approval of any amendment if required under any applicable laws or under the rules of any regulatory agency.

The following discussion of the principal U.S. federal income tax consequences of participation in the 1996 Stock Option Plan is based on statutory authority, as well as judicial and administrative interpretations as of the date of this proxy statement, all of which are subject to change at any time (possibly with retroactive effect).  The following discussion pertains only to the tax laws of the U.S. and does not pertain to the tax laws of any other jurisdiction (including Canada).

Grant of Stock Options

The grant of a stock option is not expected to result in any taxable income for the recipient.

Exercise of Stock Options  

Upon exercise of a non-qualified stock option, the option holder must recognize ordinary income equal to the excess of the fair market value of the shares of LML common stock acquired on the date of exercise over the exercise price, and the Corporation generally will be entitled at that time to an income tax deduction for the same amount. The holder of an incentive stock option generally will have no taxable income upon exercising the option (except that an alternative minimum tax liability may arise), and the Corporation will not be entitled to an income tax deduction.

Disposition of Shares Acquired Upon Exercise of Options

The tax consequence upon a disposition of shares acquired through the exercise of an option will depend on how long the shares have been held and whether the shares were acquired by exercising an incentive stock option or by exercising a non-qualified stock option. Generally, there will be no tax consequence to the Corporation in connection with the disposition of shares acquired under an option, except that the Corporation may be entitled to an income tax deduction in the case of the disposition of shares acquired under an incentive stock option before the applicable incentive stock option holding periods set forth in the Internal Revenue Code have been satisfied.

Income Tax Deduction  

Subject to the usual rules concerning reasonable compensation, including the Corporation's obligation to withhold or otherwise collect certain income and payroll taxes, the Corporation generally will be entitled to a corresponding income tax deduction at the time a participant recognizes ordinary income from option grants made under the 1996 Stock Option Plan.

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The table below shows the aggregate number of stock options granted under the 1996 Stock Option Plan during our fiscal year ended March 31, 2007 to (i) each Named Executive Officer named in the Summary Compensation Table in this proxy statement, (ii) each nominee for election as a director, and (iii) and each group specified below.  Additional information regarding grants of equity awards is contained in the "Equity Compensation Plan Information” and “Executive Compensation” sections in this proxy statement.  The amounts and types of options that will be granted in the future under the 1996 Stock Option Plan are not determinable because the committee in its discretion will make such determinations.

Name or Group		Number of Shares Subject to Stock Options
Patrick H. Gaines, President, CEO and a Director		50,000
Greg A. MacRae, Director		25,000
L. William Seidman, Director		0
Jacqueline Pace, Director		0
Richard R. Schulz, Controller and Chief Accounting Officer		25,000
Robert E. Peyton,  Executive Vice-President of Information Technologies of LML Payment Systems Corp.		0
All Current Executive Officers as a Group(1)		100,000
Non-Employee Directors as a Group(2)		25,000
All Employees Who Are Not Executive Officers, as a Group		0

(1)  Includes options granted to Messrs. Gaines and Schulz

(2)  Includes options granted to Mr. MacRae.

On June 15, 2007, the closing price of LML’s common stock on The NASDAQ Capital Market was $3.55 per share.

PROPOSAL FOUR – AMENDMENT OF 1998 STOCK INCENTIVE PLAN

Proposed Amendment to the 1998 Stock Incentive Plan

Our 1998 Stock Incentive Plan, which was first adopted by our Board of Directors and shareholders in 1998, provides for the grant of stock options, restricted stock and other stock-based awards to acquire our common stock to eligible participants.  The purpose of the 1998 Stock Incentive Plan is to attract and retain the best available personnel, to provide additional incentives to employees, officers, directors and consultants to achieve the goals of our corporation and our shareholders and to promote the success of our business.  The Board of Directors believes that the grant of stock options and other equity awards is a highly effective way to align the interests of management with those of our shareholders and provides a cost-effective means of recognizing employee contributions to the success of the Corporation.

At our annual meeting on September 18, 2000, our shareholders approved an amendment to our 1998 Stock Incentive Plan to increase the maximum number of common shares in our capital that may be issued pursuant to all awards granted under the 1998 Stock Incentive Plan from 1,000,000 common shares to 3,000,000 common shares.  As of June 15, 2007, a total of 1,518,033 stock options have been granted under the 1998 Stock Incentive Plan, of which 1,009,500 remain outstanding as of that date.  As of June 15, 2007, a total of 1,481,967 stock options and other awards remain available to be granted under the 1998 Stock Incentive Plan.

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The Board of Directors believes that increasing the number of shares of common stock available for grant under our 1998 Stock Incentive Plan will be important to our future success by allowing us to remain competitive in attracting and retaining highly qualified employees and executive officers.  Therefore, in June 2007, the Board of Directors approved an amendment to the 1998 Stock Incentive Plan to increase the number of common share purchase options and other stock-based awards granted or to be granted thereunder by 3,000,000 common shares , subject to shareholder approval.

Accordingly, the shareholders of the Corporation are now being asked to consider and, if thought fit, pass the following ordinary resolution:

“RESOLVED that the 1998 Stock Incentive Plan in the form approved by the directors of the Corporation, pursuant to which the maximum number of common shares which may be issued under the 1998 Stock Incentive Plan be increased by 3,000,000 common shares, be and the same is hereby approved, subject to any amendment thereto requested or required by the applicable regulatory authorities.”

The affirmative vote of a majority of the common shares represented in person or by proxy at our annual and special meeting is required to approve this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" INCREASING THE NUMBER OF COMMON SHARE PURCHASE OPTIONS OR OTHER STOCK-BASED AWARDS GRANTED OR TO BE GRANTED UNDER OUR 1998 STOCK INCENTIVE PLAN BY 3,000,000 COMMON SHARES.

Summary of the 1998 Stock Incentive Plan

 

The material terms of the 1998 Stock Incentive Plan are summarized below.  The following summary of certain provisions of the 1998 Stock Incentive Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the 1998 Stock Incentive Plan, a copy of which was filed as Exhibit 99.1 to a Form S-8 filed by LML with the SEC on November 6, 2000 (which can be found at www.sec.gov).

Administration and General Terms

 

Our 1998 Stock Incentive Plan is currently administered by our stock option plan administration committee.  The committee considers recommendations from the corporation’s compensation committee as to the granting of stock options or other awards and has sole discretion as to the interpretation and construction of any provision of the 1998 Stock Incentive Plan, and the determination of the terms and conditions of awards granted pursuant to the 1998 Stock Incentive Plan.  Awards will be evidenced by a written agreement or other document containing the terms and conditions of the awards.

The maximum number of shares with respect to which options or SARs may be granted in any fiscal year to any grantee who is a director, officer or employee of our corporation or any of its subsidiaries is 500,000 shares, subject to certain adjustments. The term of each award shall not exceed that permitted by any applicable regulator (presently 10 years from the date of grant), provided that the term of any incentive stock option shall not exceed 10 years, and provided further that if an incentive stock option is granted to a grantee who, at the time of the grant, owns stock representing more than 10% of the voting power of all classes of stock of our corporation or any of its subsidiaries, the term of the incentive stock option shall not exceed 5 years. The right to exercise awards is limited in the event the participant ceases, for any reason, to be a director, employee or consultant of our corporation. Awards are generally not transferable or assignable, other than by will or by the laws of descent and distribution upon the demise of the award holder.

The committee has the discretion to determine the exercise or purchase price for any awards under the 1998 Stock Incentive Plan, except that: (a) the exercise or purchase price of any incentive stock option or any award intended to qualify as "Performance-Based Compensation" under Section 162(m) of the Internal Revenue Code may not be less than 100% of the fair market value of our common stock on the date of grant; and the exercise price of an incentive stock option granted to a grantee whose holdings exceed 10% of the voting power must be at least 110% of the fair market value on the date of grant.  The committee does not intend to grant any stock options for an exercise price less than 100% of the fair market value of our common stock on the date of grant.

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Types of Awards

The 1998 Stock Incentive Plan permits the granting of:

 

·	stock options (including both incentive and non-qualified stock options),

 

·	stock appreciation rights ("SARs"),

 

·	restricted stock,

 

·	dividend equivalents rights,

 

·	performance awards (which may be "qualified performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code), and

 

·	other stock-based awards.

 

Stock options may be granted as either "Incentive Stock Options" under Section 422 of the Internal Revenue Code of 1986 or options which do not qualify as incentive stock options (which are commonly referred to as non-qualified stock options).  Stock appreciation rights generally entitle the grantee to acquire such number of common shares or such cash compensation as will be determined by reference to any appreciation in the value of our common shares in accordance with terms established by the committee.  Shares of restricted stock are generally issuable for such consideration (if any) and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as are established by the committee.  Dividend equivalent rights generally entitle the grantee to compensation measured by any dividends paid on our common shares.  Performance awards include “Performance Shares" that may be earned in whole or in part upon attainment of performance criteria established by the committee and "Performance Units" that may be earned in whole or in part upon attainment of performance criteria established by the committee and which may be settled in cash, common shares or other securities, or a combination of cash, common shares or other securities, as established by the committee.

Shares Available for Award Grants

 

If the amendment to the 1998 Stock Incentive Plan is approved by shareholders, the aggregate number of shares of our common stock that would be available for future issuance would be 4,481,967.  In the event of an equity restructuring of our Corporation that causes the per-share fair value of the our common stock to change (e.g., a stock dividend, stock split, spinoff, etc.), the committee will make equitable adjustments to the share limits described above, the number and type of shares subject to outstanding awards, and the purchase or exercise price of outstanding awards. In the case of any other corporate transaction or event, the committee may make adjustments in order to prevent dilution or enlargement of the benefits or potential benefits intended to be provided under the 1998 Stock Incentive Plan.

Shares that are subject to options or other awards that terminate, lapse or are cancelled or forfeited will be available again for grant under the 1998 Stock Incentive Plan.

Eligibility

 

Generally, employees, directors, officers and consultants of LML and its subsidiaries are eligible to receive options and other awards under the 1998 Stock Incentive Plan.  Incentive stock options may only be granted to employees and officers of the Corporation and its subsidiaries.  The committee currently intends to grant options and/or other awards to both eligible participants who are residents of the United States and those who are residents of Canada.  As of June 15, 2007, approximately 51 employees, officers and directors of LML are eligible as a class to be selected by the committee to receive options or other awards under the 1998 Stock Incentive Plan.

 

Withholding of Taxes

The Corporation may deduct, from any payment or distribution of shares under the 1998 Stock Incentive Plan, the amount of any tax required by law to be withheld with respect to such payment, or may require the participant to pay such amount to the Corporation prior to, and as a condition of, making such payment or distribution.

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Termination and Amendment

The 1998 Stock Incentive Plan became effective in 1998 and may be suspended or terminated by the Board of Directors at any time, provided no such suspension or termination will adversely affect any then-outstanding options or other awards that have been granted under the plan.  The Board of Directors may at any time amend the 1998 Stock Incentive Plan, provided that the Board will obtain shareholder approval of any amendment if required under any applicable laws or under the rules of any regulatory agency.  Under applicable U.S. tax laws, a material amendment to a stock incentive plan (such as an amendment increasing the number of shares to be granted thereunder) effectively constitutes a re-adoption of the plan.  Accordingly, the 1998 Stock Incentive Plan will continue for a term of ten (10) years from the date of the last material amendment of the plan.

Federal Income Tax Consequences

The following discussion of the principal U.S. federal income tax consequences of participation in the 1998 Stock Incentive Plan is based on statutory authority, as well as judicial and administrative interpretations as of the date of this proxy statement, all of which are subject to change at any time (possibly with retroactive effect).  The following discussion pertains only to the tax laws of the U.S. and does not pertain to the tax laws of any other jurisdiction (including Canada).

Grant of Options and SARs

The grant of a stock option or SAR is not expected to result in any taxable income for the recipient.

Exercise of Options and SARs

Upon exercise of a non-qualified stock option, the option holder must recognize ordinary income equal to the excess of the fair market value of the shares of LML common stock acquired on the date of exercise over the exercise price, and the Corporation generally will be entitled at that time to an income tax deduction for the same amount. The holder of an incentive stock option generally will have no taxable income upon exercising the option (except that an alternative minimum tax liability may arise), and the Corporation will not be entitled to an income tax deduction. Upon exercise of an SAR, the amount of any cash received and the fair market value on the exercise date of any shares of LML common stock received are taxable to the recipient as ordinary income and generally deductible by the Corporation.

Disposition of Shares Acquired Upon Exercise of Options and SARs

The tax consequence upon a disposition of shares acquired through the exercise of an option or SAR will depend on how long the shares have been held and whether the shares were acquired by exercising an incentive stock option or by exercising a non-qualified stock option or SAR. Generally, there will be no tax consequence to the Corporation in connection with the disposition of shares acquired under an option or SAR, except that the Corporation may be entitled to an income tax deduction in the case of the disposition of shares acquired under an incentive stock option before the applicable incentive stock option holding periods set forth in the Internal Revenue Code have been satisfied.

Awards Other than Options and SARs

As to other awards granted under the 1998 Stock Incentive Plan that are payable either in cash or shares of LML common stock that are either transferable or not subject to substantial risk of forfeiture, the holder of the award must recognize ordinary income equal to (a) the amount of cash received or, as applicable, (b) the excess of the (i) fair market value of the shares received (determined as of the date of receipt) over (ii) the amount (if any) paid for the shares by the holder of the award. The Corporation generally will be entitled at that time to an income tax deduction for the same amount.

As to an award that is payable in shares of LML common stock that are restricted as to transferability and subject to substantial risk of forfeiture, unless a special election is made by the holder of the award pursuant to the Internal Revenue Code, the holder must recognize ordinary income equal to the excess of (i) the fair market value of the shares received (determined as of the first time the shares become transferable or not subject to substantial risk of forfeiture, whichever occurs earlier) over (ii) the amount (if any) paid for the shares by the holder of the award. The Corporation generally will be entitled at that time to an income tax deduction for the same amount.

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Income Tax Deduction

Subject to the usual rules concerning reasonable compensation, including the Corporation's obligation to withhold or otherwise collect certain income and payroll taxes, and assuming that, as expected, stock options, SARs and certain other performance awards paid under the 1998 Stock Incentive Plan are "qualified performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the Corporation generally will be entitled to a corresponding income tax deduction at the time a participant recognizes ordinary income from awards made under the Plan.

Special Rules

 Special rules may apply to individuals subject to Section 16 of the Securities Exchange Act of 1934. In particular, unless a special election is made by the holder of the award pursuant to the Internal Revenue Code, shares received through the exercise of a stock option or SAR may be treated as restricted as to transferability and subject to a substantial risk of forfeiture for a period of up to six months after the date of exercise. Accordingly, the amount of any ordinary income recognized and the amount of the Corporation's income tax deduction will be determined as of the end of that period.

Plan Benefits

The table below shows the aggregate number of awards granted under the 1998 Stock Incentive Plan during our fiscal year ended March 31, 2007 to (i) each Named Executive Officer named in the Summary Compensation Table in this proxy statement, (ii) each nominee for election as a director, and (iii) and each group specified below.  Additional information regarding grants of equity awards is contained in the "Equity Compensation Plan Information” and “Executive Compensation” sections in this proxy statement.  The amounts and types of options and other awards that will be granted in the future under the 1998 Stock Incentive Plan are not determinable because the committee in its discretion will make such determinations.

		Number of Shares Subject to Awards
Name or Group		Stock Options	Other Stock  Based Awards
Patrick H. Gaines, President, CEO and a Director		0	0
Greg A. MacRae, Director		0	0
L. William Seidman, Director		25,000	0
Jacqueline Pace, Director		25,000	0
Richard R. Schulz,  Controller and Chief Accounting Officer		0	0
Robert E. Peyton,  Executive Vice-President of Information Technologies of LML Payment Systems Corp.		50,000	0
All Current Executive Officers as a Group(1)		50,000	0
Non-Employee Directors as a Group(2)		50,000	0
All Employees Who Are Not Executive Officers, as a Group		535,000	0

(1)  Includes options granted to Mr. Peyton

(2)  Includes options granted to Mr. Seidman and Ms. Pace

On June 15, 2007, the closing price of LML’s common stock on The NASDAQ Capital Market was $3.55 per share.

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PROPOSAL FIVE – AMENDMENT OF BY-LAWS

Effective January 1, 2008, all securities listed on NASDAQ are required to be eligible for a Direct Registration System (“DRS”).  This listing requirement applies to all listed issuers including Canadian incorporated issuers such as the Corporation.  DRS enables an investor to have securities registered in the investor’s name without having a physical certificate issued to the investor and also allows the investor to transfer securities electronically to its broker-dealer in order to effect a transaction without the risk of delays associated with the use of physical certificates.

Our board of directors has approved, and recommends that our shareholders confirm, an amendment to Section 8.05 of our Bylaws to clarify the requirements with respect to the registration of transfers of the Corporation’s shares for which a certificate has not been issued.

The full text of the amendment to Section 8.05 of our Bylaws is as follows:

8.05           Registration of Transfer

Subject to the provisions of the Act, no transfer of shares shall be registered in a securities register except upon presentation of the certificate representing such shares with a transfer endorsed thereon or delivered therewith duly executed by the registered holder or by his attorney or successor duly appointed, or upon proper instructions from the holder of uncertificated shares, in each case together with such reasonable assurances or evidence of signature, identification and authority to transfer as the board may from time to time prescribe, upon payment of all applicable taxes and any fees prescribed by the board, upon compliance with such restrictions on transfer as are authorized by the articles and upon satisfaction of any lien referred to in Clause 8.11.

The foregoing amendment to our Bylaws became effective upon its adoption by our board of directors on June 20, 2007, but pursuant to the Business Corporations Act (Yukon), is subject to confirmation by our shareholders.  If the amendment is confirmed, or if it is confirmed with such further amendments as the shareholders may approve, it will continue in effect in the form in which it was so confirmed.  If the amendment is rejected by the shareholders, it will cease to be effective as at the date of our annual and special meeting.

 

The affirmative vote of a majority of the common shares represented in person or by proxy at our annual and special meeting is required to approve this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" AMENDING SECTION 8.05 OF OUR BYLAWS, TO CLARIFY THE REQUIREMENTS WITH RESPECT TO THE REGISTRATION OF TRANSFERS OF THE CORPORATION’S SHARES FOR WHICH A CERTIFICATE HAS NOT BEEN ISSUED.

INCLUSION OF FUTURE SHAREHOLDER PROPOSALS IN PROXY MATERIALS

All proposals of shareholders intended to be included in our proxy statement and form of proxy relating to our annual meeting of shareholders for the year ending March 31, 2008 (the "2008 Annual Meeting") must be received by our corporation no later than March 10, 2008 (assuming that the 2008 Annual Meeting is held on a date that is within 30 days from the date of our annual and special meeting of shareholders to be held on August 8, 2007).  All such proposals must comply with the requirements of Rule 14a-8 of Regulation 14A of the Securities Exchange Act of 1934 and Section 138 of the Business Corporations Act (Yukon), both of which set forth specific requirements and limitations applicable to nominations and proposals at annual meetings of shareholders.

For any shareholder proposal that is not submitted for inclusion in our proxy statement and form of proxy relating to the 2008 Annual Meeting pursuant to the processes of Rule 14a-8 of the Securities Exchange Act of 1934 or any proposal that is submitted under Section 138 of the Business Corporations Act (Yukon), notice of such proposal must be received by our corporation no later than May 22, 2008 (assuming that the 2008 Annual Meeting is held on a date that is within 30 days from the anniversary date of our annual and special meeting of shareholders to be held on August 8, 2007); otherwise, we may exercise, pursuant to Rule 14a-4(c)(1) of the Securities Exchange Act of 1934, discretionary voting authority under proxies we solicit for the 2008 Annual Meeting.

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All shareholder proposals, notices and requests should be made in writing and sent via registered, certified or express mail, to our corporation at Suite 1680, 1140 West Pender Street, Vancouver, British Columbia V6E 4G1 Attention:  Carolyn Gaines, Corporate Secretary.

With respect to business to be brought before the 2007 annual and special meeting to be held on August 8, 2007, we have not received any notices from shareholders that we were required to include in this proxy statement.

“HOUSEHOLDING” OF PROXY MATERIAL

The Securities and Exchange Commission has adopted rules that permit companies and intermediaries (e.g. brokers) to satisfy the delivery requirements for proxy statements and annual reports to shareholders with respect to two or more shareholders sharing the same address by delivering a single copy of those documents addressed to those shareholders.  This process, which is commonly referred to as “householding”, potentially means extra conveniences for security holders and cost savings for companies.

This year, a number of brokers with accountholders who are shareholders of our corporation will be “householding” our proxy materials.  As indicated in the notice previously provided by these brokers to shareholders of our corporation, a single proxy statement and a single annual report to shareholders will be delivered to multiple shareholders sharing an address unless contrary instructions have been received from an affected shareholder.  Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent.  If at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement and/or a separate annual report to shareholders, please notify your broker, or call us at 604-689-4440 or write to us at LML Payment Systems Inc., Suite 1680, 1140 West Pender Street, Vancouver, British Columbia, Canada, V6E 4G1, Attn: Corporate Secretary.  We will deliver promptly upon written or oral request a separate copy of the proxy statement and/or a separate annual report to shareholders, as applicable, to a shareholder at a shared address to which a single copy of the documents was delivered.

Shareholders who currently receive multiple copies of the proxy statement and/or a separate annual report to shareholders at their address and would like to request “householding” of their communications should contact their broker.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Other than as described under the heading “Executive Compensation”, since the beginning of the fiscal year ended March 31, 2007, we have not been a party to any transaction, proposed transaction, or series of transactions in which the amount involved exceeds $120,000, and in which, to our knowledge, any of the following persons had, or will have, a direct or indirect material interest: any director or executive officer of our corporation; any nominee for election as a director of our corporation; any beneficial owner of more than five percent of the outstanding shares of our common stock; or any member of the immediate family of any of the foregoing persons.

All transactions with related persons are reviewed, approved and ratified by the Audit Committee of our board of directors.  The Audit Committee is in the process of adopting a written policy with respect to the review, approval and ratification of transactions with related persons.

ANNUAL REPORT AND FINANCIAL STATEMENTS

Attention is directed to the financial statements contained in our Annual Report to Shareholders on Form 10-K for the year ended March 31, 2007.  A copy of the Annual Report to Shareholders on Form 10-K has been sent, or is concurrently being sent, to all shareholders of record as of June 26,2007.

AVAILABILITY OF FORM 10-K

A copy of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007, which has been filed with the Securities and Exchange Commission, including the financial statements, but without exhibits, is available on our website at www.lmlpayment.com by clicking on “investor relations” and will be provided without charge to any shareholder or beneficial owner of our common shares upon written request to Carolyn L. Gaines, Corporate Secretary, LML Payment Systems Inc., Suite 1680 - 1140 West Pender Street, Vancouver, British Columbia V6E 4G1.

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REGISTRAR AND TRANSFER AGENT

Our registrar and transfer agent is Computershare Investor Services Inc., 6th Floor, 530 - 8th Avenue, S.W., Calgary, Alberta, Canada, T2P 3S8 (facsimile (403) 267-6529).

SUBMITTING A PROXY VIA THE INTERNET OR BY TELEPHONE

For Shares Directly Registered in the Name of the Shareholder

Shareholders with shares registered directly with Computershare Investor Services Inc. may submit a proxy to vote those shares telephonically or via the Internet by following the instructions on the proxy card that they receive.

For Shares Registered in the Name of a Broker or a Bank

A number of brokers and banks are participating in a program provided through Broadridge Financial Solutions, Inc. (formerly known as ADP Investor Communication Services) in the United States and Broadridge Investor Communications Solutions, Canada (formerly known as ADP Investor Communications Canada) that offers telephone and Internet voting options.  This program is different from the program provided by Computershare for shares registered directly in the name of shareholders.  If your shares are held in an account with a broker or a bank participating in the Broadridge Solutions program, you may provide voting instructions to the broker or bank holding your shares telephonically by calling the telephone number shown on the voting form received from your broker or bank, or via the Internet at Broadridge Solutions’ website (www.proxyvote.com).

OTHER MATTERS TO COME BEFORE THE MEETING

In addition to the matters to be voted upon by the shareholders of our common shares, we will receive and consider both the Report of the Board of Directors to the Shareholders, and the financial statements of our corporation for the years ended March 31, 2007, March 31, 2006 and March 31, 2005, together with the auditors report thereon. These matters do not require shareholder approval, and therefore shareholders will not be required to vote upon these matters.

Except for the above-noted matters, our board of directors does not intend to bring any other matters before the meeting and does not know of any matters that will be brought before the meeting by others.  If other matters properly come before the meeting, it is the intention of the persons named in the solicited proxy to vote the proxy on such matters in accordance with their good judgment.

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.  THEREFORE, SHAREHOLDERS ARE URGED TO MARK, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY.

	By Order of the Board of Directors:
	Patrick H. Gaines
	President and CEO
	Dated:  July 6, 2007

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Appendix A

(included only with electronic filing of Schedule 14A with the SEC;

Appendix A is not a part of the proxy statement)

LML PAYMENT SYSTEMS INC.

(formerly Leisureways Marketing Ltd.)

1996 STOCK OPTION PLAN

1.

PURPOSE

The purpose of the Stock Option Plan (the "Plan") of Leisureways Marketing Ltd., a body corporate incorporated under the Company Act (British Columbia) (the "Company"), is to advance the interests of the Company by encouraging the directors, management and employees of the Company to acquire shares in the Company, thereby increasing their proprietary interest in the Company, encouraging them to remain associated with the Company and furnishing them with additional incentive in their efforts on behalf of the Company in the conduct of their affairs.

2.	ADMINISTRATION AND GRANTING OF OPTIONS

The Plan shall be administered by the Executive Committee of directors appointed from time to time by the Board of Directors of the Company, or, if no Executive Committee is appointed, by the President of the Company (such Executive Committee or, if no such committee is appointed, the President of the Company, is hereinafter referred to as the "Committee"), in either case subject to approval by the Board of Directors of the Company pursuant to rules of procedure fixed by the Board of Directors.

The Committee may from time to time designate directors, officers and employees or consultants of the Company (the "Participants") to whom Options to purchase common shares of the Company may be granted and the number of common shares to be optioned to each, provided that the total number of common shares to be optioned shall not exceed the number provided in Clauses  and  hereof.

3.	SHARES SUBJECT TO PLAN

Subject to adjustment as provided in Clause hereof, the shares to be offered under the Plan shall consist of shares of the Company's authorized but unissued common shares.  The aggregate number of shares to be delivered upon the exercise of all Options granted under the Plan shall not exceed the maximum number of shares permitted under the rules of any stock exchange on which the common shares are then listed or other regulatory body having jurisdiction.  The maximum number of shares has been fixed with the approval of the disinterested shareholders of the Company in general meeting at up to 10% of the issued and outstanding common shares.  If any Option granted hereunder shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject thereto shall again be available for the purpose of this Plan.

4.	NUMBER OF OPTIONED SHARES

The number of shares subject to an Option to a Participant shall be determined by the Committee, but no Participant shall be granted an Option which exceeds the maximum number of shares permitted under the rules of any stock exchange on which the common shares are then listed or other regulatory body having jurisdiction, which maximum number of shares is presently 5% of the issued and outstanding shares of the Company (on a non-diluted basis).

5.

VESTING

The Committee may, in its sole discretion, determine the time during which Options shall vest and the method of vesting or that no vesting restriction shall exist.

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6.	MAINTENANCE OF SUFFICIENT CAPITAL

The Company shall at times during the term of the Plan reserve and keep available such numbers of shares as will be sufficient to satisfy the requirements of the Plan.

7.	PARTICIPATION

The Committee shall determine to whom Options shall be granted, the terms and provisions of the respective Option agreements, the time or times at which such Options shall be granted and the number of shares to be subject to each Option.  An individual who has been granted an Option may, if he is otherwise eligible, and if permitted by any stock exchange on which the common shares are then listed or other regulatory body having jurisdiction, be granted an additional Option or Options if the Committee shall so determine.

8.	EXERCISE PRICE

The exercise price of the shares covered by each Option shall be determined by the Committee.  The exercise price shall not be less than the price permitted by any stock exchange on which the common shares are then listed or other regulatory body having jurisdiction.

9.	DURATION OF OPERATION

Each Option and all rights thereunder shall be expressed to expire on the date set out in the Option agreements and shall be subject to earlier termination as provided in Clauses 11 and 12.

10.	OPTION PERIOD, CONSIDERATION AND PAYMENT

(a)

The Option Period shall be a period of time fixed by the Committee, not to exceed the maximum period permitted by any stock exchange on which the common shares are then listed or other regulatory body having jurisdiction, which maximum period is presently 10 years from the date the Option is granted, provided that the Option Period shall be reduced with respect to any Option as provided in Clauses  and  covering cessation as a director, officer, employee or consultant of the Company or death of the Participant.

(b)

Except as set forth in Clauses  and , no Option may be exercised unless the Participant is, at the time of such exercise, a director, officer, employee or consultant of the Company, and the requirements of the stock exchange upon which the Company's shares are listed for trading have been fulfilled.

(c)

The exercise of any Option will be contingent upon receipt by the Corporation at its head office of a written notice of exercise, specifying the number of shares with respect to which the Option is being exercised, accompanied by cash payment, certified cheque or bank draft for the full purchase price of such shares with respect to which the Option is exercised.  No Participant or his legal representatives, legatees or distributees will be, or will be deemed to be, a holder of any shares subject to an Option under this Plan unless and until the certificates for such shares are issued to such persons under the terms of the Plan.

11.	CEASING TO BE A DIRECTOR, OFFICER, EMPLOYEE OR CONSULTANT

Unless otherwise negotiated in writing by the Company, if a Participant shall cease to be a director, officer, employee or consultant of the Company for any reason (other than death), he may, but only within 30 days next succeeding his ceasing to be a director, officer, employee or consultant, exercise his Option to the extent that he was entitled to exercise it at the date of such cessation.

Nothing contained in the Plan, nor in any Option granted pursuant to the Plan, shall as such confer upon any Participant any right with respect to continuance as a director, officer, employee or consultant of the Company or of any affiliate.

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12.	DEATH OF A PARTICIPANT

In the event of the death of a Participant, the Option previously granted to him shall be exercisable only within the 12 months next succeeding such death and then only:

(a)

by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or the laws of descent and distribution; and

(b)

if and to the extent that he was entitled to exercise the Option at the date of his death.

13.	RIGHTS OF OPTIONEE

No person entitled to exercise any Option granted under the Plan shall have any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon exercise of such Option until certificates representing such shares shall have been issued and delivered.

14.	PROCEEDS FROM SALE OF SHARES

The proceeds from sale of shares issued upon the exercise of the Options shall be added to the general funds of the Company and shall thereafter be used from time to time for such corporate purposes as the Committee may determine and direct.

15.	ADJUSTMENTS

Appropriate adjustments in the number of common shares optioned and in the Option price per share, as regards, Options granted or to be granted, may be made by the Committee in its discretion to give effect to adjustments in the number of common shares of the Company resulting subsequent to the approval of the Plan by the Committee from subdivisions, consolidations or reclassification of the common shares of the Company, the payment of stock dividends by the Company or other relevant changes in the capital of the Company.

16.	TRANSFERABILITY

All benefits, rights and Options accruing to the Participant in accordance with the terms and conditions of the Plan shall not be transferrable or assignable unless specifically provided herein.  During the lifetime of a Participant any benefits, rights and Options may only be exercised by the Participant.

17.	AMENDMENT AND TERMINATION OF PLAN

The Committee may, at any time, suspend or terminate the Plan.  The Board of Directors may also at any time amend or revise the terms of the Plan, PROVIDED that no such amendment or revision shall alter the terms of any Options theretofore granted under the Plan.

18.	NECESSARY APPROVALS

The ability of the Options to be exercised and the obligation of the Company to issue and deliver shares in accordance with the Plan is subject to any approvals which may be required from the shareholders of the Company, any regulatory authority or stock exchange having jurisdiction over the securities of the Company.  If any shares cannot be issued to the Participant for whatever reason, the obligation of the Company to issue such shares shall terminate and any Option exercise price paid to the Company will be returned to the Participant.

19.	PRIOR PLANS

The Plan shall entirely replace and supersede any prior share option plans, if any, enacted by the Board of Directors of the Company or its predecessor corporations.

20.	EFFECTIVE DATE OF PLAN

The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company.

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LML PAYMENT SYSTEMS INC.

(formerly Leisureways Marketing Ltd.)

AMENDMENT TO 1996 STOCK OPTION PLAN

(Amended as at August 31, 1998)

The 1996 Stock Option Plan (the “Plan”) of Leisureways Marketing Ltd. (the “Company”) is hereby amended to reflect the change in the number of shares subject to the Plan.  Accordingly, paragraph 3 of the Plan is amended to read as follows:

3.           SHARES SUBJECT TO PLAN

The shares subject to this Plan shall be the Company's common shares, without par value (the "Common Shares"), presently authorized but unissued or subsequently acquired by the Company.  Subject to adjustment as provided in Section 15, the aggregate amount of Common Shares to be delivered upon the exercise of all options granted under this Plan shall not exceed 1,500,000 shares as such Common Shares were constituted on the effective date of this Plan.  If any option granted under this Plan shall expire or be cancelled or terminated for any reason without having been exercised in full, the unpurchased shares subject thereto shall thereupon again be available for purposes of this Plan.

In all other respects the Plan shall remain the same.

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LML PAYMENT SYSTEMS INC

AMENDMENT TO 1996 STOCK OPTION PLAN

(Amended as at September 30, 1999)

The 1996 Stock Option Plan (the “Plan”) of LML Payment Systems Inc. (formerly Leisureways Marketing Ltd. (the “Company”) is hereby amended to reflect the increase in the number of shares subject to the Plan.  Accordingly, paragraph 3 of the Plan is amended to read as follows:

3.           SHARES SUBJECT TO PLAN

The shares subject to this Plan shall be the Company's common shares, without par value (the "Common Shares"), presently authorized but unissued or subsequently acquired by the Company.  Subject to adjustment as provided in Section 15, the aggregate amount of Common Shares to be delivered upon the exercise of all options granted under this Plan shall not exceed 2,500,000 shares as such Common Shares were constituted on the effective date of this Plan.  If any option granted under this Plan shall expire or be cancelled or terminated for any reason without having been exercised in full, the unpurchased shares subject thereto shall thereupon again be available for purposes of this Plan.

In all other respects the Plan shall remain the same.

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LML PAYMENT SYSTEMS INC.

AMENDMENT TO 1996 STOCK OPTION PLAN

(Amended as at September 18, 2000)

The 1996 Stock Option Plan (the “Plan”) of LML Payment Systems Inc. (formerly Leisureways Marketing Ltd.) (the “Company”) is hereby amended to reflect the increase in the number of shares subject to the Plan.  Accordingly, paragraph 3 of the Plan is amended to read as follows:

3.           SHARES SUBJECT TO PLAN

The shares subject to this Plan shall be the Company's common shares, without par value (the "Common Shares"), presently authorized but unissued or subsequently acquired by the Company.  Subject to adjustment as provided in Section 15, the aggregate amount of Common Shares to be delivered upon the exercise of all options granted under this Plan shall not exceed 3,000,000 shares as such Common Shares were constituted on the effective date of this Plan.  If any option granted under this Plan shall expire or be cancelled or terminated for any reason without having been exercised in full, the unpurchased shares subject thereto shall thereupon again be available for purposes of this Plan.

In all other respects the Plan shall remain the same.

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Appendix B

(included only with electronic filing of Schedule 14A with the SEC;

Appendix B is not a part of the proxy statement)

LML PAYMENT SYSTEMS INC.

(formerly Leisureways Marketing Ltd.)

1998 STOCK INCENTIVE PLAN

1.	Purposes of the Plan.  The purposes of this Stock Incentive Plan are to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business.

 

 

2.	Definitions.  As used herein, the following definitions shall apply:

 

(a)

“Administrator” means the Board or any of the Committees appointed to administer the Plan.

 

(b)

“Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.

 

(c)

“Applicable Laws” means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein.

 

(d)

“Award” means the grant of an Option, SAR, Dividend Equivalent Right, Restricted Stock, Performance Unit, Performance Share, or other right or benefit under the Plan.

 

(e)

“Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

 

(f)

“Board” means the Board of Directors of the Company.

 

(g)

“Cause” means, with respect to the termination by the Company or a Related Entity of the Grantee’s Continuous Service, that such termination is for “Cause” as such term is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee’s:  (i) refusal or failure to act in accordance with any specific, lawful direction or order of the Company or a Related Entity; (ii) unfitness or unavailability for service or unsatisfactory performance (other than as a result of Disability); (iii) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or a Related Entity; (iv) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; or (v) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person.  At least 30 days prior to the termination of the Grantee’s Continuous Service pursuant to (i) or (ii) above, the Administrator shall provide the Grantee with notice of the Company’s or such Related Entity’s intent to terminate, the reason therefor, and an opportunity for the Grantee to cure such defects in his or her service to the Company’s or such Related Entity’s satisfaction.  During this 30 day (or longer) period, no Award issued to the Grantee under the Plan may be exercised or purchased.

 

(h)

“Change in Control” means a change in ownership or control of the Company effected through either of the following transactions:

 

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(i)

the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept, or

 

(ii)

a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors.

 

(i)

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

 

(j)

“Committee” means any committee appointed by the Board to administer the Plan.

 

(k)

“Common Stock” means the common stock of the Company.

 

(l)

“Company” means Leisureways Marketing Ltd., a Yukon corporation.

 

(m)

“Consultant” means any person (other than an Employee or, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

 

(n)

“Continuing Directors” means members of the Board who either (i) have been Board members continuously for a period of at least thirty-six (36) months or (ii) have been Board members for less than thirty-six (36) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board.

 

(o)

“Continuous Service” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant, is not interrupted or terminated.  Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers between locations of the Company or among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement).  An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave.  For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract.

 

(p)

“Corporate Transaction” means any of the following transactions:

 

(i)

a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the jurisdiction in which the Company is organized;

 

(ii)

the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company’s subsidiary corporations) in connection with the complete liquidation or dissolution of the Company; or

 

(iii)

any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger.

 

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(q)

“Covered Employee” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

 

(r)

“Director” means a member of the Board or the board of directors of any Related Entity.

 

(s)

“Disability” means that a Grantee is permanently unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment.  A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

 

(t)

“Dividend Equivalent Right” means a right entitling the Grantee to compensation measured by dividends paid with respect to Common Stock.

 

(u)

“Employee” means any person, including an Officer or Director, who is an employee of the Company or any Related Entity.  The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company.

 

(v)

“Exchange Act” means the U.S.  Securities Exchange Act of 1934, as amended.

 

(w)

“Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

 

(i)

Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a Share for the last market trading day prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

 

(ii)

In the absence of an established market for the Common Stock of the type described in (i), above, the Fair Market Value thereof shall be determined by the Administrator in good faith.

 

(x)

“Grantee” means an Employee, Director or Consultant who receives an Award pursuant to an Award Agreement under the Plan.

 

(y)

“Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

 

(z)

“Non-Qualified Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

 

(aa)

“Officer” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

 

(bb)

“Option” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

 

(cc)

“Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

 

(dd)

“Performance - Based Compensation” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code.

 

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(ee)

“Performance Shares” means Shares or an Award denominated in Shares which may be earned in whole or in part upon attainment of performance criteria established by the Administrator.

 

(ff)

“Performance Units” means an Award which may be earned in whole or in part upon attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator.

 

(gg)

“Plan” means this 1998 Stock Incentive Plan.

 

(hh)

“Related Entity” means any Parent, Subsidiary and any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly.

 

(ii)

“Restricted Stock” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator.

 

(jj)

“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

 

(kk)

“SAR” means a stock appreciation right entitling the Grantee to Shares or cash compensation, as established by the Administrator, measured by appreciation in the value of Common Stock.

 

(ll)

“Share” means a share of the Common Stock.

 

(mm)

“Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

 

(nn)

“Related Entity Disposition” means the sale, distribution or other disposition by the Company of all or substantially all of the Company’s interests in any Related Entity effected by a sale, merger or consolidation or other transaction involving that Related Entity or the sale of all or substantially all of the assets of that Related Entity.

 

 

3.	Stock Subject to the Plan.

 

(a)

Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is 1,000,000 Shares. The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.

 

(b)

Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan.  If any unissued Shares are retained by the Company upon exercise of an Award in order to satisfy the exercise price for such Award or any withholding taxes due with respect to such Award, such retained Shares subject to such Award shall become available for future issuance under the Plan (unless the Plan has terminated).  Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan.

 

4.	Administration of the Plan.

 

(a)

Plan Administrator.

 

(i)

Administration with Respect to Directors and Officers.  With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3, if applicable.  Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

 

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(ii)

Administration With Respect to Consultants and Other Employees.  With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws.  Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.  The Board may authorize one or more Officers to grant such Awards and may limit such authority as the Board determines from time to time.

 

(iii)

Administration With Respect to Covered Employees.  Notwithstanding the foregoing, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation.  In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

 

(iv)

Administration Errors.  In the event an Award is granted in a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws.

 

(b)

Powers of the Administrator.  Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

 

(i)

to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

 

(ii)

to determine whether and to what extent Awards are granted hereunder;

 

(iii)

to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

 

(iv)

to approve forms of Award Agreements for use under the Plan;

 

(v)

to determine the terms and conditions of any Award granted hereunder;

 

(vi)

to amend the terms of any outstanding Award granted under the Plan, including a reduction in the exercise price (or base amount on which appreciation is measured) of any Award to reflect a reduction in the Fair Market Value of the Common Stock since the grant date of the Award, provided that any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent;

 

(vii)

the Administrator shall have the right to suspend the right of a holder to exercise all or part of a stock option for any reason that the Administrator considers in the best interest of the Corporation;

 

(viii)

to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; and

 

(ix)

to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

 

(c)

Effect of Administrator’s Decision.  All decisions, determinations and interpretations of the Administrator shall be conclusive and binding on all persons.

 

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5.

Eligibility.  Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.  Incentive Stock Options may be granted only to Employees of the Company, a Parent or a Subsidiary.  An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards.  Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time.

 

6.	Terms and Conditions of Awards.

 

(a)

Type of Awards.  The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Shares.  Such awards include, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance Units or Performance Shares, and an Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative.

 

(b)

Designation of Award.  Each Award shall be designated in the Award Agreement.  In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option.  However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation,  shall be treated as Non-Qualified Stock Options.  For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is granted.

 

(c)

Conditions of Award.  Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria.  The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total stockholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measures of performance selected by the Administrator.  Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement.

 

(d)

Acquisitions and Other Transactions.  The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.

 

(e)

Deferral of Award Payment.  The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award.  The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

 

(f)

Award Exchange Programs.  The Administrator may establish one or more programs under the Plan to permit selected Grantees to exchange an Award under the Plan for one or more other types of Awards under the Plan on such terms and conditions as determined by the Administrator from time to time.

 

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(g)

Separate Programs.  The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.

 

(h)

Individual Option and SAR Limit.  The maximum number of Shares with respect to which Options and SARs may be granted to any Employee in any fiscal year of the Company shall be 500,000 Shares.  The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below.  To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitation with respect to an Employee, if any Option or SAR is canceled, the canceled Option or SAR shall continue to count against the maximum number of Shares with respect to which Options and SARs may be granted to the Employee.  For this purpose, the repricing of an Option (or in the case of a SAR, the base amount on which the stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Common Stock) shall be treated as the cancellation of the existing Option or SAR and the grant of a new Option or SAR.

 

(i)

Early Exercise.  The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award.  Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.

 

(j)

Term of Award.  The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term of an Incentive Stock Option shall be no more than ten (10) years from the date of grant thereof.  However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement.

 

(k)

Transferability of Awards.  Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee; provided, however, that the Grantee may designate a beneficiary of the Grantee’s Incentive Stock Option in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.  Other Awards shall be transferable to the extent provided in the Award Agreement.

 

(l)

Time of Granting Awards.  The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator.  Notice of the grant determination shall be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant.

 

7.	Award Exercise or Purchase Price, Consideration, Taxes and Reload Options.

 

(a)

Exercise or Purchase Price.  The exercise or purchase price, if any, for an Award shall be as follows:

 

(i)

In the case of an Incentive Stock Option:

 

(A)

granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or

 

(B)

granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

 

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(ii)

In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant unless otherwise determined by the Administrator.

 

(iii)

In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

 

(iv)

In the case of other Awards, such price as is determined by the Administrator.

 

(v)

Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the principles of Section 424(a) of the Code.

 

(b)

Consideration.  Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant).  In  addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following:

 

(i)

cash;

 

(ii)

check;

 

(iii)

surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator); or

 

(iv)

any combination of the foregoing methods of payment.

 

(c)

Taxes.  No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option.  Upon exercise of an Award, the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations.

 

(d)

Reload Options.  In the event the exercise price or tax withholding of an Option is satisfied by the Company or the Grantee’s employer withholding Shares otherwise deliverable to the Grantee, the Administrator may issue the Grantee an additional Option, with terms identical to the Award Agreement under which the Option was exercised, but at an exercise price as determined by the Administrator in accordance with the Plan.

 

8.	Exercise of Award.

 

(a)

Procedure for Exercise; Rights as a Stockholder.

 

(i)

Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement.

 

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(ii)

An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised.  Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to an Award, notwithstanding the exercise of an Option or other Award.  The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Award.  No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Award Agreement or Section 10, below.

 

(b)

Exercise of Award Following Termination of Continuous Service.

 

(i)

An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee’s Continuous Service only to the extent provided in the Award Agreement.

 

(ii)

Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee’s Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first.

 

(iii)

Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee’s Continuous Service shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement.

 

(c)

Buyout Provisions.  The Administrator may at any time offer to buy out for a payment in cash or Shares, an Award previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Grantee at the time that such offer is made.

 

9.	Conditions Upon Issuance of Shares.

 

(a)

Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

 

(b)

As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

 

10.

Adjustments Upon Changes in Capitalization.  Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”  Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive.  Except as the Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award.

 

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11.	Corporate Transactions/Changes in Control/Related Entity Dispositions.  Except as may be provided in an Award Agreement:

 

(a)

The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction, Change in Control or Related Entity Disposition or at the time of an actual Corporate Transaction, Change in Control or Related Entity Disposition and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction, Change in Control or Related Entity Disposition, on such terms and conditions as the Administrator may specify.  The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Corporate Transaction, Change in Control or Related Entity Disposition.  The Administrator may provide that any Awards so vested or released from such limitations in connection with a Change in Control or Related Entity Disposition, shall remain fully exercisable until the expiration or sooner termination of the Award.  Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate unless assumed by the successor company or its parent.

(b)

The portion of any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction, Change in Control or Related Entity Disposition shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded.  To the extent such dollar limitation is exceeded, the accelerated excess portion of such Option shall be exercisable as a Non-Qualified Stock Option.

12.

Effective Date and Term of Plan.  The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company.  It shall continue in effect for a term of ten (10) years unless sooner terminated.  Subject to Section 17, below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

 

13.	Amendment, Suspension or Termination of the Plan.

 

(a)

The Board may at any time amend, suspend or terminate the Plan. To the extent necessary to comply with Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required.

 

(b)

No Award may be granted during any suspension of the Plan or after termination of the Plan.

 

(c)

Any amendment, suspension or termination of the Plan (including termination of the Plan under Section 13(a), above) shall not affect Awards already granted, and such Awards shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the Grantee and the Administrator, which agreement must be in writing and signed by the Grantee and the Company.

 

14.	Reservation of Shares.

 

(a)

The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

 

(b)

The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

 

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15.

No Effect on Terms of Employment/Consulting Relationship.  The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the Company’s right to terminate the Grantee’s Continuous Service at any time, with or without cause.

 

16.

No Effect on Retirement and Other Benefit Plans.  Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation.  The Plan is not a “Retirement-Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

 

17.

Stockholder Approval. The Plan shall be subject to the Plan’s approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Company’s Board of Directors.  Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws.  The Administrator may grant Awards under the Plan prior to approval by the stockholders, but until such approval is obtained, no such Aware shall be exercisable.  In the event that stockholder approval is not obtained within the twelve (12) month period provided above, all Awards previously granted under the Plan shall be cancelled and of no force or effect.

 

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LML PAYMENT SYSTEMS INC

AMENDMENT TO 1998 STOCK INCENTIVE PLAN

(Amended as at September 18, 2000)

The 1998 Stock Incentive Plan (the “Plan”) of LML Payment Systems Inc. (formerly Leisureways Marketing Ltd.) (the “Company”) is hereby amended to reflect the increase in the number of shares subject to the Plan.  Accordingly, paragraph 3(a) of the Plan is amended to read as follows:

3.           Stock Subject to the Plan

 

Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is 3,000,000 Shares.  The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.

In all other respects the Plan shall remain the same.

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		Computershare
		9th Floor, 100 University Avenue
		Toronto,  Ontario  M5J 2Y1
		www.computershare.com

Form of Proxy - Annual and Special Meeting to be held on August 8, 2007

This Form of Proxy is solicited by and on behalf of Management.

Notes to proxy

1.

Every holder has the right to appoint some other person or company of their choice, who need not be a holder, to attend and act on their behalf at the meeting. If you wish to appoint a person or company other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided (see reverse)

2.

If the securities are registered in the name of more than one owner (for example, joint ownership, trustees, executors, etc.), then all those registered should sign this proxy. If you are voting on behalf of a corporation or another individual you may be required to provide documentation evidencing your power to sign this proxy with signing capacity stated.

3.	This proxy should be signed in the exact manner as the name appears on the proxy.

4.	If this proxy is not dated, it will be deemed to bear the date on which it is mailed by Management to the holder.

5.	The securities represented by this proxy will be voted as directed by the holder, however, if such a direction is not made in respect of any matter, this proxy will be voted as recommended by Management.

6.	The securities represented by this proxy will be voted or withheld from voting, in accordance with the instructions of the holder, on any ballot that may be called for and, if the holder has specified a choice with respect to any matter to be acted on, the securities will be voted accordingly.

7.	This proxy confers discretionary authority in respect of amendments to matters identified in the Notice of Meeting or other matters that may properly come before the meeting.

8.	This proxy should be read in conjunction with the accompanying documentation provided by Management.

Proxies submitted must be received by 5:00 pm, Eastern Time, on Monday, August 6, 2007.

VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!

To Vote Using the Telephone		To Vote Using the Internet
Call the number listed BELOW from  a touch-tone telephone		Got o the following web site:
1-866-732-VOTE (8683) Toll Fr		www.investorvote.com

If you vote by telephone or the Internet, DO NOT mail back this proxy.

Voting by mail may be the only method for securities held in the name of a corporation or securities being voted on behalf of another individual. Voting by mail or by Internet are the only methods by which a holder may appoint a person as proxyholder other than the Management nominees named on the reverse of this proxy. Instead of mailing this proxy, you may choose one of the two voting methods outlined above to vote this proxy.

To vote by telephone or the Internet, you will need to provide your CONTROL NUMBER, HOLDER ACCOUNT NUMBER and ACCESS NUMBER listed below.

CONTROL NUMBER

014249

HOLDER ACCOUNT NUMBER

C9999999999

ACCESS NUMBER

99999

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Appointment of Proxyholder
I/We, being holder(s) of LML Payment Systems Inc. hereby appoint: Patrick H. Gaines, or failing him, Greg A. MacRae	or	Enter the name of the person you are appointing if this person is someone other than the foregoing.

as my/our proxyholder with full power of substitution and to vote in accordance with the following direction (or if no directions have been given, as the proxyholder sees fit) and all other matters that may properly come before the Annual and Special Meeting of LML Payment Systems Inc. to be held at The Renaissance Vancouver Hotel, 1133 West Hastings Street, Vancouver, British Columbia on August 8, 2007 at 10:00 a.m. local time and at any adjournment thereof.

VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES

1. Election of Directors
	For	Withhold		For	Withhold		For	Withhold
01. Patrick H. Gaines	□	□	02. Greg A. MacRae	□	□	03. Jacqueline Pace	□	□
04. L. William Seidman	□	□

		For	Withhold
2.Appointment of Auditors
To appoint Grant Thornton LLP as Auditors of the Corporation for the ensuing year and authorizing the Directors to fix their remuneration.		□	□
		For	Against
3.Amending the Corporation's 1996 Stock Option Plan
To approve the amendment of the Corporation's 1996 Stock Option Plan to increase the number of common share purchase options granted or to be granted thereunder by 3,000,000 common shares.		□	□
		For	Against
4.Amending the Corporation's 1998 Stock Incentive Plan
To approve the amendment of the Corporation's 1998 Stock Incentive Plan to increase the number of common share purchase options granted or to be granted thereunder by 3,000,000 common shares.		□	□
		For	Against
5.Amending Corporation's Bylaws
To amend Section 8.05 of the Corporation's Bylaws to clarify the requirements with respect to the registration of transfers of the Corporation's shares for which a certificate has not been issued.		□	□

Authorized Signature(s) - This section must be completed- for your instructions to be executed.		Signature		Date
I/We authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Meeting. If no voting instructions are indicated above, this Proxy will be voted as recommended by Management.				Mm/dd/yy
Interim Financial Statements		Annual Report
Mark this box if you would like to receive interim financial statements and accompanying Management’s Discussion and Analysis by mail.	□	Mark this box if you would NOT like to receive the Annual Report and accompanying Management’s Discussion and Analysis by mail		□

If you are not mailing back your proxy, you may register online to receive the above financial report(s) by mail at www.computershare.com/mailinglist.

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