EXHIBIT 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT, dated as of February 27, 2007, is made and entered into by and
between Payment Data Systems, Inc., a Nevada corporation, having an office
address at 12500 San Pedro, Suite 120, San Antonio, Texas 78216 ("Payment Data"
or the "Company") and the individual named in Schedule 1 hereto, residing at the
address listed in Schedule 1 (hereinafter referred to as the "Executive").

W I T N E S S E T H:

WHEREAS, the Company desires to hire and retain the Executive as an Executive to
perform certain services for the Company.

NOW, THEREFORE, in consideration of the mutual covenants contained herein and on
the attached Schedule, and for other good and valuable consideration the receipt
of which is hereby acknowledged, the Company and the Executive hereby agree as
follows:

1.

Employment of Executive.

(a)

Employment.  The Company hereby employs the Executive in the capacity and for
the position set forth on Schedule 1 attached hereto. Executive hereby accepts
such employment with the Company upon the terms and conditions hereinafter set
forth.  Executive further agrees to serve as the Chairman of the Board of
Directors of the Company (the "Board") during the term of this Agreement.

(b)

Duties.  The duties of the Executive shall include the duties and services
described in Schedule 1, which duties and services shall at all times be subject
to the direction, approval and control of the Board and shall include such other
duties, as may be assigned by the Board commensurate with the responsibilities
normally associated with Executive's position.

2.

Services to be Rendered.

(a)

Services.  Executive shall perform such duties as are usually performed by an
Executive with the position set forth in Schedule 1 of a business similar in
size and scope as the Company and such other reasonable additional duties as may
be prescribed from time to time by the Company which are reasonable and
consistent with the Company's operations, taking into account Executive's
expertise and job responsibilities.  During the term of this Agreement,
Executive agrees to devote his full time and attention to the business and
affairs of the Company to the extent necessary to discharge the responsibilities
assigned to Executive and to use reasonable efforts to perform faithfully and
efficiently such responsibilities.  The Executive will use Executive's best
efforts to promote the interests of the Company.

(b)

Other Activities.  During this Agreement, it shall not be a violation of this
Agreement for Executive to (i) serve on corporate, civic or charitable boards or
committees; (ii) deliver lectures, fulfill speaking engagements or teach at
educational institutions; or (iii) manage personal investments or companies in
which personal investments are made so long as such activities do not
significantly interfere with the performance of Executive's responsibilities
with the Company and which companies are not in direct competition with the
Company.  Any income incurred by Executive outside the scope of his employment
and permitted pursuant to the provisions hereof, shall inure to the benefit of
Executive, and the Company shall not claim any entitlement thereto; provided,
however, that any income derived by Executive related to the business of the
Company, including, without limitation, compensation for serving on boards of
directors of companies in which the Company has a significant investment, shall
be paid over to the Company as and when received.

(c)

Office and Facilities. During the term of this Agreement, the Company shall
furnish, at Executive's principal place of employment, an office, furnishings,
administrative assistant and such other facilities commensurate and suitable to
his position and adequate for the performance of his duties hereunder.

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3.

Term.

(a)

Term of Employment.  The term of this Agreement (the "Term") shall commence
effective as of the date hereof (the "Commencement Date"), and shall continue
until December 31, 2011, unless (i) extended by the mutual agreement of the
Company and the Executive or (ii) extended or terminated as hereinafter
provided.

(b)

Termination of Employment by the Company for Cause.  The Company may terminate
Executive's employment if such termination is for "Cause" (as defined herein)
and Cause is not cured by Executive within any available cure period provided
below.  Such notice must set forth in reasonable detail the facts underlying the
claim of Cause.  For the purposes of this Agreement, "Cause" shall be defined as
any of the following, which act or omission is in bad faith by Executive without
a reasonable belief that such act or omission would benefit the Company:

(i)

a default or breach by Executive of any of the provisions of this Agreement
materially detrimental to the Company which is not cured within 15 days
following written notice thereof;

(ii)

actions by Executive constituting fraud, embezzlement or dishonesty which result
in a conviction of a criminal offense not yet overturned on appeal;

(iii)

actions by Executive in intentionally furnishing materially false, misleading,
or omissive information to the Company's Board of Directors that is materially
detrimental to the Company;

(iv)

actions constituting a breach of the Sections 8 or 9 of this Agreement which is
materially detrimental to the Company;

(v)

acts or omissions which constitute willful failure to follow reasonable and
lawful directives of the Company's Board of Directors, which are consistent with
Executive's job responsibilities and performance which is not cured within 15
days following written notice thereof.

Upon termination for Cause, Executive shall immediately cease to have any power
of his position, but shall nevertheless be given a reasonable opportunity to
access his office with the Company for the purpose of retrieving his personal
goods and files.  If any conviction pursuant to Section 3(b) above is overturned
on appeal, Executive will be deemed to have been terminated without Cause as of
the effective date of his earlier termination.

(c)

Termination Without Cause.  The Company has the right to terminate this
Agreement without Cause upon written notice, subject to payment by the Company
of the Deferred Compensation described in Section 4(c) herein.  In such event,
Executive shall cease to have any power of his office as of the effective date
of the termination specified in such written notice.

(d)

Termination by Executive on Default By Company.  Executive may terminate this
Agreement upon 30 days' written notice after the occurrence of a material
default of this Agreement by the Company, which default is not cured within the
30- day notice period.  Such notice shall set forth in reasonable detail the
acts underlying the default.  If Executive terminates this Agreement under this
Section 3(d), Executive shall be entitled to the Deferred Compensation as
described in Section 4(c) herein.

Termination by Executive Upon Change of Control.  Upon a Change of Control,
Executive shall be entitled to the Deferred Compensation described in Section
4(c) herein. Change of Control is defined for the purposes of this Agreement as
any of the following acts:

(i)

The acquisition by any person, entity or "group" within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), other than a person, entity or "group" that includes Executive, of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of (A) more than 50% of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of the
Board of

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Directors or (B) more than 40% of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of the
Board of Directors ; or

(ii)

If the individuals who serve on the Board of Directors as of the Commencement
Date (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors; provided, however, any person who becomes a
director subsequent to the Commencement Date, whose election or nomination for
election was approved by a vote of at least a majority of the directors then
constituting the Incumbent Board, shall for purposes of this Agreement be
considered a member of the Incumbent Board; or

(iii)

Approval by the Company's equity holders of (A) a merger, reorganization or
consolidation whereby the Company's equity holders immediately prior to such
approval do not, immediately after consummation of such reorganization, merger
or consolidation own more than 50% of the combined voting power of the surviving
entity's then outstanding voting securities entitled to vote generally in the
election of directors; or (B) liquidation or dissolution of the Company; or (C)
the sale of all or substantially all of the assets of the Company.

(f)

Termination by Executive for Good Reason.  Executive may terminate this
Agreement upon 30 days' written notice for Good Reason.  Good Reason shall exist
if (i) Executive's duties are materially diminished or altered in a manner
contrary to Section 1 and 2 of this Agreement, (ii) Executive's title is altered
in a material and adverse manner, (iii) Executive's reporting relationship is
materially and adversely modified, (iv) Executive's Base Salary, as provided
hereunder, is diminished, (v) the methodology for calculating Executive's Bonus
Compensation, as provided hereunder, is adversely (from the Executive's point of
view) altered or (vi) the Company shall relocate its executive offices more than
40 miles from their current location (collectively "Good Reason").  Upon such
termination Executive shall be entitled to the Deferred Compensation described
in Section 4(c) herein.

(g)

Termination by Executive Without Good Reason.  Executive may terminate this
Agreement without Good Reason upon 30 days' written notice.  Upon the
termination date specified in such written notice (which date shall be not more
than 30 days following the date of such notice) Executive shall cease to have
any power of his office.

(h)

Automatic Extension.  This Agreement shall be automatically extended for
successive one-year periods at the end of the initial term and each extended
term thereafter, unless either party provides written notice of termination to
the other party at least three months prior to the expiration of the initial or
such extended term, respectively.  In the event the Company terminates this
Agreement or fails to renew this Agreement or does not permit the automatic
extension to occur at the end of any term hereof, Executive shall be entitled to
receive his Deferred Compensation under Section 4(c) hereof.

4.

Compensation.

(a)

Base Salary.

(i)

Executive shall receive a base salary as set forth on Part I of Schedule 4(a)
attached hereto.  

(ii)

Each January, the Board of Directors of the Company shall review Executive's
performance and the Board of Directors may in its sole discretion elect to
increase the salary then paid to Executive above the amount set forth on
Schedule 4(a)(i), however, there shall be absolutely no obligation to do so.

(b)

Bonus Compensation.

(i)

The Executive shall receive as "Bonus Compensation" each year, the amount
calculated in accordance with Schedule 4(b) attached hereto.

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(ii)

The Executive shall receive an additional bonus of $216,000.00 as of November
1st of each year during the Term of this Agreement.  The bonus may be paid, at
the sole discretion of the Company, either in cash or in shares of common stock
of the Company.  If the Company pays the bonus in the form of shares of common
stock, the number of shares to be issued shall be based upon the closing price
of the Company’s common stock as of October 15th (or the last trading day prior
to October15th) of the year the bonus due to be paid.

(iii)

If at anytime hereafter, the Company shall adopt a bonus program, an option
program or any other form of equity participation for senior executive officers
of the Company, the Executive shall be eligible to participate in such bonus
program, option program or other form of equity participation in a manner and
capacity commensurate with his position and duties.

(c)

Deferred Compensation.

(i)

When Due.  Executive (or his estate as the case may be) shall be entitled to the
Deferred Compensation as calculated below, the initial installment of which is
to be paid within 30 days after the event giving rise to the payout (except as
provided below) in the event that Executive's employment is terminated for any
of the following reasons herein:  (A) death of Executive; (B) termination by the
Company without cause pursuant to Section 3(c); (C) termination by Executive
upon default by the Company pursuant to Section 3(d); (D) termination by
Executive after a Change of Control pursuant to Section 3(e); (E) termination by
the Executive pursuant to Section 3(f); (F) termination by the Company pursuant
to Section 3(h); or (G) termination by the Company pursuant to Section 7(a).

(ii)

Amount.  The Deferred Compensation shall be the amount ("Base Deferred
Compensation") which is calculated as the greater of (A) the Base Salary
payments Executive would have received had his employment continued for the
remaining term of this Agreement (including yearly increases calculated at the
maximum increase for the prior two years); or (B) an amount equal to 2.95 times
the higher annual compensation earned by Executive in the past two years
(including both Base Salary and Bonus Compensation). In addition to the Base
Deferred Compensation, Executive shall be entitled to the following (which,
together with the Base Deferred Compensation and the Bonus Deferred Compensation
(as defined below) shall be collectively called the "Deferred Compensation") all
of the benefits otherwise provided in this Agreement (including automobile
expenses) during that period of time which is the greater of (X) the remaining
term of this Agreement, or (Y) one year (the "Deferral Period"), and an amount
equal to the pro rata portion of the Bonus Compensation for the year in which
executive's employment is terminated determined on the basis of the number of
days elapsed in such year prior to such termination (the "Bonus Deferred
Compensation").  The Deferred Compensation herein shall be deemed liquidated
damages resulting from the Company's termination of this Agreement and shall be
Executive's sole and exclusive remedy for any such termination.  Deferred
Compensation shall not be diminished or offset by reason of any earnings by
Executive subsequent to the date of termination.

(iii)

Acceleration of Vesting of Stock Options and Restricted Stock Grants. All stock
options issued to Executive and all restricted stock granted to Executive become
fully vested and all ownership, title, use are fully granted to Executive.
 Company agrees to execute all documents and provide all legal opinions to
Executive as requested by Executive or Executive’s authorized representative in
order for the Executive to sell, register, collateralize, transfer, etc.

(d)

Payment of Deferred Compensation.  Except as provided below, the Deferred
Compensation shall be paid in monthly installments over the 12 months following
the event giving rise to a Deferred Compensation.  If such termination is a
result of the death of Executive, the initial Deferred Compensation shall be
made within 15 days after the personal representative of Executive's estate
notifies the Company that Letters of Administration have been filed in the
probate proceeding.  The Company shall have the option at all times during the
term of this Agreement to maintain key man life insurance on Executive's life to
cover the cost

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of any Deferred Compensation due to Executive.  If such key man life insurance
is maintained, and the Deferred Compensation is due as a result of Executive's
death, the Deferred Compensation shall be paid 100% in cash upon Executive's
death.  The Bonus Deferred Compensation shall be paid in a single lump sum
within 90 days of the end of the year in which Executive's employment is
terminated.

5.

Benefits.

(a)

Vacation.  Executive shall be entitled to a minimum of 4 weeks paid vacation
during each 12-month period during the term of this Agreement.  In addition,
Executive shall be entitled to paid time off for the same holidays as other
employees of the Company as established by the Board.  All unused vacation will
accrue to the benefit of the Executive and will be paid to the Executive within
30 days of termination of this Agreement for any cause.

(b)

Reimbursements.  Executive shall be entitled to reimbursement for all
maintenance, repairs, insurance and gasoline expenses incidental to the use of
one automobile.

(c)

Benefit Plans.  Executive shall be entitled to participate (in a manner and
capacity commensurate with his position and duties), subject to eligibility and
other terms generally established by the Board, in any employee benefit plan
(including but not limited to life insurance plans, stock option plans, group
hospitalization, health, dental care (which health insurance shall also cover
Executive's dependents), profit sharing and pension, bonus and other benefit
plans), as may be adopted or amended by the Company from time to time.

(d)

Life Insurance.  The Company shall pay the premium on a "whole life" insurance
policy on the life of Executive in the initial face amount of seven times Base
Salary during the term hereof. Executive shall have the right to designate the
beneficiaries of such policies.  The Company shall pay timely all premiums on
such life insurance, and on demand provide Executive due proof of such payment.
 The insurance companies issuing such policies shall be authorized to give
Executive, upon his request, any information regarding the status of any such
policy. Any dividend declared upon such policy shall be applied to the premium.

(e)

Membership Fees.  The Company shall pay all initial membership fees on behalf of
Executive for Executive's membership in one country club, and one airline club.
 The Company shall pay all monthly dues on behalf of Executive for Executive's
membership in country clubs and airline clubs provided that the the annual
membership fees of such clubs in the aggregate do not exceed $15,000.  Executive
shall pay all expenses for such club use that is not otherwise reimbursable as a
Company business expense.

(f)

Tax Preparation.  The Company will reimburse Executive for the cost of
reasonable tax and financial preparation and planning, including services that
may be requested by Executive from time to time pertaining to this Agreement.

(g)

Additional Benefits.  Executive shall receive any such additional benefits that
any other executive officer may receive during the term of this Agreement at the
reasonable discretion of the Board.

6.

Expenses.

The Company shall reimburse the Executive against appropriate vouchers or other
receipts for business expenses reasonably incurred by Executive in the
performance of Executive's duties pursuant to the terms hereof.  Executive is
authorized to incur reasonable traveling and other expenses in connection with
the Company's business and in performance of his duties under this Agreement.
 When engaging in business related air travel, the executive may fly first class
on  domestic flights and business class on international flights.  In addition,
upon the submission of appropriate vouchers or other receipts the Company shall
reimburse Executive for tolls and reasonable business car phone charges.
 Executive shall submit vouchers or other receipts once per calendar month and
shall be reimbursed by Company within 30 days of submission.

7.

Death; Disability.

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(a)

Death or Disability.  In the event of the death of the Executive during the
Term, the Executive's employment hereunder shall automatically terminate.  In
the event that Executive shall become mentally or physically Disabled (as
hereinafter defined) so as to be unable to fully perform his duties herein,
Executive shall continue to receive his monthly salary for each of the first
nine months or any part thereof of any continuous Disability, less any amounts
received by him under any disability insurance paid for by the Company.  If upon
the expiration of nine months of continuous Disability, Executive remains
incapacitated (hereinafter, "Permanent Disability"), the Company shall have the
right to immediately terminate this Agreement.  Such "Permanent Disability"
shall be established by a written certification submitted by a medical doctor
agreed to by the Executive and the Company.  In the absence of agreement, the
Company and the Executive shall each nominate a qualified medical doctor and
these two doctors shall select a third qualified medical doctor, which third
doctor shall make the determination as to total disability.  After the
termination of these time periods, Executive will receive disability insurance
proceeds for the term of such disability.

(b)

Premium Reimbursement.  The Company shall reimburse Executive for the premiums
of all insurance policies covering the long and short-term disability and long
term care insurance of Executive and all insurance policies and insurance
coverage of the Executive and Executives dependents covering health, medical and
dental not to exceed $20,000 per annum (as adjusted for increases in the
Consumer Price Index) during the term hereof.

(c)

Disability Defined.  Disability for the purposes of this Agreement shall mean
that the Executive is judged disabled pursuant to the Company's long term
disability policy.

8.

Non-Competition, Non-Solicitation and Non-Disparagement.

(a)

Terms.  During the Term and for a period of two years thereafter:

(i)

 Non-Competition.  Executive shall not, directly or indirectly, enter into or
participate (whether as owner, partner, shareholder, officer, director,
salesman, consultant, employee, principal or in any other relationship or
capacity) in any business operating or providing services in the United States
within any State in which the Company or its affiliates are operating or
providing services as of the date of termination which is, or owns, manages or
performs Internet billing services, including without limitation as principal or
on behalf of others and the development or operation of any network to
accomplish same (a "Competing Entity").

(ii)

Time and Geographical Area.  Company and Executive understand and agree that the
scope and duration of the covenants contained in this Section 8 are reasonable
both in time and geographical area and are fairly necessary to protect the
Company's legitimate business interests.  Such covenants shall survive the
termination of Executive's employment except as otherwise provided herein.  The
parties further agree that such covenants shall be regarded as divisible and
shall be operative as to time and geographical area to the extent that they may
be made so and, if any part of such covenants is declared invalid or
unenforceable, the validity and enforceability of the remainder shall not be
affected.  Executive hereby warrants to Company that Executive's compliance with
each of the restrictive covenants set forth in this Agreement will not, upon the
termination, of Executive's employment with the Company for any reason
whatsoever, cause Executive to be unable to earn a living that is suitable and
acceptable to Executive.

(iii)

Breach.  Executive understands and agrees that, due to the highly competitive
nature of the Company's industry, the breach of any covenants set out in this
Section 8 will cause irreparable injury to the Company for which it will have no
adequate remedy at law.  Therefore, the Company shall be entitled, in addition
to such other remedies as it may have hereunder, to a temporary restraining
order and to preliminary and permanent injunctive relief in state or federal
court for any breach or threatened breach of Section 8.  Nothing herein,
however, shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of damages from Executive,

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(iv)

Non-Solicitation.  Executive shall not, without the prior written consent of the
Company, directly or indirectly, (i) solicit, request, cause or induce any
person who is at the time, or 12 months prior thereto had been, an employee of
or a consultant of the Company to leave the employ of or terminate such person's
relationship with the Company or (ii) employ, hire, engage or be associated
with, or endeavor to entice away from the Company any such person, or any
customer of the Company or its affiliates or (iii) attempt to limit or interfere
with any business agreement or relationship existing between the Company and/or
its affiliates with a third party.

(v)

Non-Disparagement.  Executive shall not disparage the business reputation of the
Company (or its management team) or take any actions that are harmful to the
Company's goodwill with its customers, content providers, bandwidth or other
network infrastructure providers, vendors, employees, the media or the public.
 Executive recognizes that such actions would cause irreparable harm for which
there is no adequate remedy at law and that the Company may seek in state or
federal court, and is entitled to a temporary restraining order and to
preliminary and permanent injunctive relief in state or federal court to stop
any such conduct or statements for any breach or threatened breach of this
Section 8(e) during the term of this Agreement and for a period of two years
thereafter.

(vi)

Protection of Good Will.  Company spends considerable amounts of time, money and
effort in developing and maintaining good will in its industry.  Executive
agrees the covenants contained within this Section 8:  (i) are reasonable and
necessary in all respects to protect the goodwill, trade secrets, confidential
information, and business interests of Company; (ii) are not oppressive to
Executive; and (iii) do not impose any greater restraint on Executive than is
reasonably necessary to protect the goodwill, trade secrets, confidential
information and legitimate business interests of Company.

(vii)

Acknowledgement of Consideration.  Executive acknowledges and agrees that
promises made by the Company in this Agreement such as (i) the establishment of
a term of employment (rather than employment at will) and (ii) the commitment to
provide severance compensation in the event of the termination of Executive's
employment for reasons other than Cause (subject to certain requirements on the
part of Executive), constitute one form of consideration for Executive's
agreement to and compliance with the restrictive covenants in this Agreement.
 Executive acknowledges and agrees that Company's agreement to provide Executive
with access to Company's confidential and proprietary information is a separate
form of consideration supporting the restrictive covenants in this Agreement.
 Executive acknowledges and agrees that the Company's agreement to permit the
use of the Company's goodwill with the Company's customers, investors and
content providers is a separate form of consideration supporting the restrictive
covenants in this Agreement.  Executive acknowledges and agrees that the
Company's commitment to providing Executive with unique skill development and
training is a separate form of consideration supporting the restrictive
covenants in this Agreement.

(b)

Compensation.  The Executive acknowledges that no additional compensation (other
than that described in Section 4) shall be payable during the Term on account of
the obligations described in this Section 8.  In consideration of Executive’s
obligations after the Term described above in this Section 8, Executive shall be
paid an amount equal to two (2) times the Base Salary paid to Executive in the
year prior to the expiration of the Term.  Such amount shall be paid in monthly
installments over the two (2) year period during which Executive is obligated
under this Section 8.

9.

Non-Disclosure of Confidential Information.

(a)

Confidential Information.  The Executive acknowledges that as a result of
Executive's employment by the Company, the Executive, both during and after the
Term, will obtain secret and confidential information concerning the business of
the Company and its affiliates, including, without limitation, financial
information, trade secrets, information concerning the operations, sales,
personnel, suppliers, customers,

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costs, profits and pricing policies, "know how" and certain business
methodologies (the "Confidential Information").

(b)

Protection of Confidential Information.  During the Term and thereafter, the
Executive shall exercise all due and diligent precautions to protect the
integrity of the customer lists, mailing lists and sources thereof, statistical
data and compilations, agreements, contracts, manuals, memoranda, notes,
records, reports or other documents and any and all other materials embodying
any Confidential Information (the "Confidential Materials") and, upon the
Company's request in writing, Executive shall immediately return to the Company
all such Confidential Materials (and copies thereof) then in Executive's
possession or control.

(c)

Nondisclosure.  Executive shall not at any time, either during the Term of this
Agreement or thereafter, divulge to any person or entity any Confidential
Information or deliver or permit any person or entity to obtain any Confidential
Materials except (i) when required in the course of performing Executive's
duties hereunder, (ii) with the Company's express written consent, (iii) where
required to be disclosed by court order, subpoena or other government process or
(iv) the Executive shall have no responsibility for the divulgence of any
information which is in the public domain.  If the Executive shall be required
to make disclosure pursuant to the provisions of clause (iii) of the preceding
sentence, the Executive promptly, but in no event more than 48 hours after
learning of such subpoena, court order or other governmental process, shall
notify, by personal delivery or by electronic means, confirmed by mail, the
Company and, at the Company's expense, Executive shall (x) take all reasonably
necessary steps required by the Company to defend against the enforcement of
such subpoena, court order or other government process and (y) permit the
Company to intervene and participate with counsel of its choice in any
proceeding relating to the enforcement thereof.

(d)

Return of Information Upon Termination.  Upon termination of Executive's
employment with the Company, the Executive shall promptly deliver to the Company
all Confidential Materials relating to the Company and its affiliates, which
Executive may then possess or have under Executive's control; provided, however,
that Executive shall be entitled to retain copies of such documents reasonably
necessary to document Executive's financial relationship (both past and future)
with the Company.

(e)

 Breach.  The Executive acknowledges that (i) any breach of the provisions of
these Sections 8 and 9 may cause substantial and irreparable harm to the Company
for which the Company would have no adequate remedy at law and (ii) the
provisions of this Agreement are reasonable and necessary for the protection of
the business of the Company and its affiliates.

10.

Outstanding Obligations.  Executive currently has an outstanding obligation to
the Company in the amount of $535,301.54 as a result of the Company’s pledge of
certain funds as a loan guarantee on behalf of Executive (“Obligation”).
 Executive has agreed to repay the Obligation in four (4) equal annual payments
of $133,825.39 due on December 31 of each calendar year beginning December 31,
2007.  The Obligation may be prepaid in full or in part at any time without
penalty.  Any payment of the Obligation may be made, at the discretion of
Executive, in the form of cash, shares of stock or the cancellation of
outstanding Company stock options.  If a payment is in the form of shares of
stock, the stock transferred to the Company shall be valued as of that date
which is 10 days before the date of payment or as of the last trading day prior
to 10 days before the date of payment.  If a payment is made in the form of the
cancellation of outstanding Company stock options, the cancelled options shall
be valued using the Black – Scholes theory of valuing options (or any other
theory mutually agreed upon by the Company and Executive) as of the date which
is 10 days before the date of payment or the last trading day prior to 10 days
before the date of payment.  If Executive’s employment with the Company is
terminated for any reason prior to the repayment of the entire Obligation, then
Executive shall remain liable for the repayment of the then outstanding balance
on the Obligation on the same payment terms contained in this Section 10.

11.

Remedies.

(a)

Company’s Rights and Remedies.  If Executive commits a breach, or threatens to
commit a breach, of any of the provisions of Sections 8 or 9, the Company shall
have the right and remedy:

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(i)

to have the provisions of this Agreement specifically enforced by any court
having equity jurisdiction or through arbitration as provided herein;

(ii)

cease any payments to Executive required under Section 8(b); and

(iii)

to require Executive to account for and to pay over the Company all damages
suffered by the Company (including consequential and incidental damages) as the
result of any transactions constituting a breach of any of the provisions of
Sections 8 and 9, and Executive hereby agrees to account for and pay over such
damages to the Company;

(b)

Equitable Remedies.  The Executive acknowledges that the services being rendered
hereunder to the Company are of a special, unique and extraordinary character
and that any such breach or threatened breach may cause substantial and
irreparable injury to the Company and that money damages will not provide an
adequate remedy to the Company.  In any equitable proceeding to enforce the
provisions hereof, the Company shall not have to prove irreparable harm.
 (However, in a suit for damages Company shall be required to prove the amount
of damages actually sustained.)

(c)

Independent and Several Remedies.  Each of the rights and remedies enumerated in
Section 11(a) shall be independent of the other, and shall be severally
enforceable, and such rights and remedies shall be in addition to, and not in
lieu of any other rights and remedies available to the Company under law or
equity.

(d)

Court Modification.  If any provision of Section 8 or 9 is held to be
unenforceable because of the scope, duration or area of its applicability, the
court making such determination shall have the power to modify such scope,
duration, or area, or all of them, and such provision or provisions shall then
be enforceable in such modified form.

(e)

Arbitration.  The Company and Executive agree that any dispute or controversy
arising between any of the parties to this Agreement, or any person or entity in
privity therewith, out of the transactions effected and relationships created in
connection herewith, including any dispute or controversy involving the
formation, terms or construction of this Agreement, regardless of kind or
character, will be resolved through binding arbitration held in Bexar County,
Texas.  The only disputes not subject to mandatory, binding arbitration are
requests for injunctive relief.  With respect to the arbitration of any dispute
or controversy, each party understands that:

(i)

arbitration is final and binding on the parties;

(ii)

each party is waiving its right to seek certain remedies in court, including to
right to a jury trial;

(iii)

discovery in arbitration is different and more limited than discovery in
litigation; and

(iv)

an arbitrator's award need not include factual findings or legal reasoning, and
any party's right to appeal or to seek modification of a ruling by the
arbitrator is strictly limited.

Each party to this Agreement will submit any dispute or controversy to
arbitration before the American Arbitration Association ("AAA") within five days
after receiving a written request to do so from the other party.  If any party
fails to submit a dispute or controversy to arbitration as requested, then the
requesting party may commence the arbitration proceeding.  The Federal
Arbitration Act will govern the proceeding and all issues raised by this
Agreement to be arbitrated.  Each party to this Agreement will be bound by the
determination of any arbitrator or arbitration panel impaneled by the AAA to
adjudicate the dispute.  Judgment on any arbitration award may be entered in any
court of competent jurisdiction.

Any party to this Agreement may bring an action including a summary or expedited
proceeding, to counsel arbitration of any such dispute or controversy in a court
of competent jurisdiction and, further, may seek provision or ancillary
remedies, including temporary or injunctive relief in connection with such
dispute or controversy in a court of competent jurisdiction, provided that the
dispute or controversy is ultimately resolved through binding arbitration
conducted in accordance with the terms and conditions of Section 11(e).  If any
party institutes legal proceedings in an effort to resist

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arbitration and is unsuccessful in doing so, the prevailing party is entitled to
recover, from the losing party, its legal fees and out-of-pocket expenses
incurred in connection with the defense of such legal proceedings.

12.

Indemnification.

(a)

Indemnification of Employee.  To the full extent allowed by law, the Company
shall hold harmless and indemnify the Executive, his executors, administrators
or assigns, against any and all judgments, penalties (including excise and
similar taxes), fines, settlements and reasonable expenses (including attorneys'
fees) actually incurred by the Executive (net of any related insurance proceeds
or other amounts received by the Executive or paid by or on behalf of the
Company on the Executive's behalf in compensation of such judgments, penalties,
fines, settlements or expenses) in connection with any threatened, actual or
completed action, suit or proceeding, whether civil, criminal, arbitral,
administrative or investigative, or any appeal in such action, suit or
proceeding, to which the Executive was, is or is threatened to be made a named
defendant or respondent (a "Proceeding"), because such person is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary (an "Affiliate Executive") of another
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise (each, a "Company Affiliate").  Upon
authorization of indemnification of the Executive by the Board of Directors in
accordance with the applicable provisions of the Nevada General Corporation Law
(the "NGCL"), the Executive shall be presumed to be entitled to such
indemnification under this Agreement upon submission of a Claim (as hereinafter
defined).  Thereafter, the Company shall have the burden of proof to overcome
the presumption that the Executive is so entitled.  Such presumption shall only
be overcome by a judgment or other final adjudication, after all appeals and all
time for appeals have expired ("Final Determination"), adverse to the Executive
establishing that such indemnification is not permitted hereunder or by law.  An
actual determination by the Company (including its Board of Directors, legal
counsel, or its stockholders) that the Executive has not met the applicable
standard of conduct for indemnification shall not be a defense to the action or
create a presumption that the Executive has not met the applicable standard of
conduct.  The purchase, establishment or maintenance of any Indemnification
Arrangement shall not in any way diminish, restrict, limit or affect the rights
and obligations of the Company or of the Executive under this Agreement except
as expressly provided herein, and the execution and delivery of this Agreement
by the Company and the Executive shall not in any way diminish, restrict, limit
or affect the Executive's right to indemnification from the Company or any other
party or parties under any other indemnification arrangement, the Certificate of
Incorporation or Bylaws of the Company, or the NGCL.

(b)

Insurance.  Subject only to the provisions of this Section 12(b), as long as the
Executive shall continue to serve as a director and/or officer of the Company
(or shall continue at the request of the Company to serve as an Affiliate
Executive) and, thereafter, as long as the Executive shall be subject to any
possible Proceeding by reason of the fact that the Executive was or is a
director and/or officer of the Company (or served in any of said other
capacities), the Company shall, unless no such policies are available in any
market, purchase and maintain in effect for the benefit of the Executive one or
more valid, binding and enforceable policies (the "Insurance Policies") of
directors' and officers' liability insurance ("D&O Insurance") providing
adequate liability coverage for the Executive's acts as a director and/or
officer of the Company or as an Affiliate Executive.  The Company shall promptly
notify the Executive of any lapse, amendment or failure to renew said policy or
policies or any provision thereof relating to the extent or nature of coverage
provided thereunder.  In the event the Company does not purchase and maintain in
effect said policy or policies of D&O Insurance pursuant to the provisions of
this Section 12(b), the Company shall, to the full extent permitted by law, in
addition to and not in limitation of the other rights granted the Executive
under this Agreement, hold harmless and indemnify the Executive to the full
extent of coverage which would otherwise have been provided for the benefit of
the Executive pursuant to the Insurance Policies.

(c)

Payment of Expenses.  The Executive shall have the right to receive from the
Company on demand, or at his option to have the Company pay promptly on his
behalf, in advance of a Final Determination of a Proceeding all expenses payable
by the Company pursuant to the terms of this Agreement as corresponding amounts
are expended or incurred by the Executive in connection with such Proceeding or

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otherwise expended or incurred by the Executive (such amounts so expended or
incurred being referred to as "Advanced Amounts").  In making any claim for
payment by the Company of any expenses, including any Advanced Amount, pursuant
to this Agreement, the Executive shall submit to the Company a written request
for payment (a "Claim"), which includes a schedule setting forth in reasonable
detail the dollar amount expended (or incurred or expected to be expended or
incurred).  Each item on such schedule shall be supported by the bill, agreement
or other documentation relating thereto, a copy of which shall be appended to
the schedule as an exhibit.

Where the Executive is requesting Advanced Amounts, the Executive must also
provide (i) written affirmation of such Executive's good faith belief that he
has met the standard of conduct required by law for indemnification, and (ii) a
written undertaking to repay such Advanced Amounts if a Final Determination is
made that the Executive is not entitled to indemnification hereunder.

(d)

Securities Exception.  The Company shall not be liable under this Agreement to
make any payment in connection with any claim made against the Executive for an
accounting of profits made from the purchase or sale by the Executive of
securities of the Company within the meaning of Section 16(b) of the Exchange
Act or similar provisions of any state statutory law or common law.

(e)

Duration.  All agreements and obligations of the Company contained herein shall
continue during the period the Executive is a director and/or officer of the
Company (or is serving at the request of the Company as an Affiliate Executive)
and shall continue thereafter so long as the Executive shall be subject to any
possible Proceeding by reason of the fact that the Executive was a director or
officer of the Company or was serving as such an Affiliate Executive.

(f)

Notification of Company.  Promptly after receipt by the Executive of notice of
the commencement of any Proceeding, the Executive shall, if a claim in respect
thereof is to be made against the Company under this Agreement, notify the
Company of the commencement thereof, but failure to so notify the Company will
not relieve the Company from any liability which it may have to the Executive.
 With respect to any such Proceeding:

(i)

The Company shall be entitled to participate therein at its own expense;

(ii)

Except with prior written consent of the Executive, the Company shall not be
entitled to assume the defense of any Proceeding; and

(iii)

The Company shall not settle any Proceeding in any manner, which would impose
any penalty or limitation on the Executive without the Executive's prior written
consent.  The Executive shall not settle any Proceeding with respect to which
the Executive has received indemnified amounts or Advanced Amounts without the
Company's prior written consent, nor will the Executive unreasonably withhold
consent to any proposed settlement.

13.

Notice.

Any notice required hereunder shall (a) be delivered by hand or (b) sent by
registered or certified mail addressed to the other party hereto at its address
set forth above for Company and on Item 1 of the Schedule for Executive or at
such other address as notice thereof shall have been given in accordance with
the provisions of this Section 13.  Any such notice shall become effective (i)
if mailed, on the date indicated on the receipt or if not accepted, the date
indicated that delivery was attempted, and (ii) in the case of delivery by hand,
upon delivery or attempted delivery as shown on the records of the deliveries.

14.

Entire Agreement; Amendments.

This Agreement supersedes any prior agreements or understandings, oral or
written, between the parties hereto and represents their entire understanding
and agreement with respect to the subject matter hereof.  This Agreement can be
amended, supplemented or changed, and any provision hereof can be waived, only
by written instrument making specific

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reference to this Agreement, which is executed by both parties to this
Agreement.  Any waiver of any breach of this Agreement shall not be construed to
be a continuing waiver or consent to any subsequent breach by any party hereto.

15.

Severability.

In the event of the invalidity or unenforceability of any one or more provisions
of this Agreement, such illegality or unenforceability shall not affect the
validity or enforceability of the other provisions hereof and such other
provisions shall be deemed to remain in full force and effect.

16.

Assignment; Binding Effect.

This Agreement is not assignable by Executive or the Company without the prior
written consent of the other party.  This Agreement shall be binding upon and
shall inure to the benefit of the Executive and the Company and their successors
and assigns.  It is agreed that in the event of the termination under this
Agreement for any reason, except as expressly provided in this Agreement, all
salary and benefits shall cease as of the date of termination provided that all
accrued salary, bonus and expenses shall be paid to Executive or Executive's
successors, assigns, estate or legal representative as the case may be.

17.

Section Headings.

The Section headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.

18.

Governing Law; Venue.

This Agreement shall be construed and governed in accordance with the laws of
the State of Texas.  The parties hereto agree that any actions or proceedings
instituted to enforce rights hereunder shall be initiated in Bexar County,
Texas.

19.

Execution in Counterparts.

This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instruments.

20.

Section 280G Protection.

The Company shall make a cash payment to the Executive at the time set forth
below equal to the amount of excise taxes (i.e., the "excise tax gross
payments") which Executive would be required to pay pursuant to Section 4999 of
the Internal Revenue Code of 1986, as amended ("Code"), as a result of any
payments (or any other transfer or deemed transfer of property including any
acceleration of stock options or similar instruments) made by or on behalf of
the Company or any successor thereto resulting in an "excess parachute payment"
within the meaning of Section 280G(b) of the Code.  In addition to the
foregoing, the cash payment due to the Executive under this Section 20 shall be
increased by the aggregate of the amount of federal, state and local income,
employment and excise taxes for which the Executive will be liable on account of
the cash payments to be made under this Section 20, such that the Executive will
receive the excise tax gross-up payment net of all income and excise taxes.  The
computation of this payment shall be determined, at the expense of the Company,
by an independent accounting, actuarial or consulting firm selected by the
Company (the “Accounting Firm”).  Payment of the cash amount set forth above
shall be made at such time as the Company shall determine, in its sole
discretion, but in no event later than the date five business days before the
due date, without regard to any extension, for filing the Executive's federal
income tax return for the calendar year which includes the date as of which the
aforementioned "excess parachute payments" are determined.  In the event that
the Executive is ultimately assessed with excise taxes under Section 4999 of the
Code as a result of payments made by the Company or any successor thereto which
exceed the amount of excise taxes used in computing the Executive's payment
under this Section 20, the Company or its successor shall indemnify the
Executive for such additional excise taxes plus any additional excise taxes,
income taxes, interest and penalties resulting from the additional excise taxes
and the indemnity hereunder.

21.

Tax-Related Reduction of Payments.

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(a)

Reduction. Notwithstanding any other provisions in this Agreement, if it shall
be determined that any payment or distribution by the Company to or for the
benefit of the Executive pursuant to the terms of their Agreement or otherwise
(a “Payment”), would constitute an “excess parachute payment”, and that there is
a Reduced Amount, the amount of Payment to the Executive shall be reduced to
such Reduced Amount.

(b)

Reduced Amount.  A “Reduced Amount” means the smallest aggregate  amount of
Payments that (i) is less than the sum of the all Payments (without regard to
this Section 21) and (ii) results in the greatest Net After-Tax Receipts to the
Executive. “Net After-Tax Receipts” means the present value (determined pursuant
to Section 280G(d)(4) of the Code) of Payments, net of (a) federal, state, and
local income taxes payable with respect to the Payments, determined by applying
the highest marginal income tax rate applicable to individuals in the year of
the Executive’s termination of employment and by calculating state and local
income taxes net of any federal income tax deduction for such taxes and (b) any
excise tax payable with respect to such Payments pursuant to Section 4999 of the
Code.

(c)

Determinations.  All determinations made under this Section 21 shall be made by
the Accounting Firm immediately prior to the Change of Control, which firm shall
provide its determinations and any supporting calculations both to the Company
and the Executive within 20 days after the date of termination of the
Executive’s employment.  Any such determinations by the Accounting Firm shall be
binding upon the Company and the Executive.  If the Accounting Firm determines
that there exists a Reduced Amount, any reduction or elimination in Payments
shall be applied first to those Payments that it is determined would otherwise
constitute “excess parachute payments” and that are payable to the Executive at
the furthest point in time after the date of termination of employment.

(d)

Fees and Expenses and Indemnification.  All of the fees and expenses of the
Accounting Firm in performing the determinations referred to in Section 21(c)
shall be borne solely by the Company.  The Company agrees to indemnify and hold
harmless the Accounting Firm of and from any and all claims, damages, and
expense of any nature resulting from or relating to its determinations pursuant
to Section 21(c), except for claims, damages, or expenses resulting from the
gross negligence or willful misconduct of the Accounting Firm.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the day and year first above written.

COMPANY:

PAYMENT DATA SYSTEMS, INC.

By:

/s/ Louis A. Hoch________

Name:

Louis A. Hoch

Title:

President & COO

EXECUTIVE

/s/ Michael R. Long ___________

     Michael R. Long

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SCHEDULE 1

EMPLOYMENT CONTRACT

1.

Executive:

Michael R. Long

25953 Bent Bluff

New Braunfels, TX 78132

2.

Positions:

(i)   Chief Executive Officer

(ii)  Chief Financial Officer

(iii) Chairman of the Board of Directors

3.

Duties:

Management, operations and administration as appropriate for the Chief

Executive Officer, Chief Financial Officer And Chairman of the Board

of Directors of the Company as further described in the Bylaws of the

Company.

SCHEDULE 4(a)(i)

$190,000 per annum for year 2007

$300,000 per annum for year 2008

$375,000 per annum and thereafter unless increased by the Company

In addition, Executive shall receive, upon execution hereof cash of $15,000.

500,000 shares of the Company’s common stock to be issued from the Company’s
comprehensive employee stock plan.

2,500,000 restricted shares of Company’s common stock to vest on 500,000 on
2/28/2009, 500,000 on 2/28/2010, 500,000 on 2/28/2011, 500,000 on 2/28/2012 and
500,000 on 2/28/2013 and will include employee demanded vesting deferment
rights.

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SCHEDULE 1

EMPLOYMENT CONTRACT

SCHEDULE 4(b)

BONUS:   Not to exceed 100% of the then-current annual salary,

     as authorized by the Board of Directors.

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