**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


x
              Annual
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 for the fiscal year
                  ended September 30, 2006


**Commission
      File Number 0-15245**





**ELECTRONIC
      CLEARING HOUSE, INC.**


(Exact
      name of registrant as specified in its charter)











**Nevada**
            **93-0946274**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)




**730
                Paseo Camarillo, Camarillo, California**
            **93010**(Address
                of principal executive offices)
            (Zip
                Code)






Registrant's
      telephone number, including area code: **(805)
      419-8700** ,
      fax
      number: **(805)
      419-8682**





Securities
      registered pursuant to Section 12(b) of the Act:





**Title
                of each class**
            **Name
                of each exchange on which registered**None
            None





Securities
      registered pursuant to Section 12(g) of the Act:


Common
      Stock, $0.01 par value


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes  ̈ No R





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes  ̈ No R





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days: Yes R No  ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K.  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of accelerated
      filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                accelerated filer ̈
            Accelerated
                filerR
            Non-accelerated
                filer ̈





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No R




Based
        on
        a closing price of $12.75 as reported by the NASDAQ Stock Market on March
        31,
        2006, the aggregate market value of the voting and non-voting common equity
        held
        by non-affiliates was $78,377,591.


As
      of
      November 30 , 2006, the Registrant had outstanding 6,824,814 shares of Common
      Stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE - None**




1




**ELECTRONIC
      CLEARING HOUSE, INC.**


**2006
      FORM 10-K ANNUAL REPORT**




TABLE
      OF CONTENTS




**PART
                1**
            
            **3**ITEM
                1.
            Business
            3ITEM
                1A.
            Risk
                Factors
            13ITEM
                1B.
            Unresolved
                Staff Comments
            19ITEM
                2.
            Properties
            20ITEM
                3.
            Legal
                Proceedings
            20ITEM
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            20**PART
                II**
            
            **21**ITEM
                5.
            Market
                for Registrant's Common Equity, Related Stockholder
                Matters and
                Issuer Purchases of Equity Securities
            21ITEM
                6.
            Selected
                Financial Data
            22ITEM
                7.
            Management's
                Discussion and Analysis of Financial Condition and
                Results of Operations
            23ITEM
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            31ITEM
                8.
            Financial
                Statements and Supplementary Data
            31ITEM
                9.
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosures
            31ITEM
                9A.
            Controls
                and Procedures
            32ITEM
                9B.
            Other
                Information
            32**PART
                III**
            
            **33**ITEM
                10.
            Directors
                and Executive Officers of the
                Registrant
            33ITEM
                11.
            Executive
                Compensation
            37ITEM
                12.
            Security
                of Certain Beneficial Owners and Management and
                Related Stockholder Matters
            41ITEM
                13.
            Certain
                Relationships and Related
                Transactions
            43ITEM
                14.
            Principal
                Accounting Fees and Services.
            43**PART
                IV**
            
            **44**ITEM
                15.
            Exhibits,
                Financial Statements, and Financial Statement
                Schedules
            44


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          of Contents


**PART
      I**





**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**





This
      2006
      Annual Report on Form 10-K contains statements which constitute forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      Those statements include statements regarding our intent, belief or current
      expectations. Examples of forward-looking statements include statements
      regarding our strategy, financial performance and revenue sources. Prospective
      investors are cautioned that any such forward-looking statements are not
      guarantees of future performance and involve risks and uncertainties, and that
      actual results may differ materially from those projected in the forward-looking
      statements as a result of various factors, including, but not limited to, those
      set forth elsewhere in this Annual Report. See “Item 7. Management’s Discussion
      and Analysis of Financial Condition and Results of Operations - Risk
      Factors.”





**ITEM
                1.**
            **Business******





**OVERVIEW**


Electronic
      Clearing House, Inc. is an electronic payment processor that provides for the
      payment processing needs of merchants, banks, technology partners and collection
      agencies. We
      derive
      the majority of our revenue from two main business segments: 1) bankcard and
      transaction processing services (“bankcard services”), whereby we provide
      solutions to merchants, banks and technology partners to allow them to accept
      credit and debit card payments from consumers; and 2) check-related products
      (“check services”), whereby we provide various services to merchants, banks,
      technology partners, and collection agencies to allow them to accept and process
      check payments from consumers. The principal services we offer within these
      two
      segments include, with respect to our bankcard services, debit and credit card
      processing, and with respect to our check services, check guarantee (where,
      if
      we approve a check transaction and a check is subsequently dishonored by the
      check writer's bank, the merchant is reimbursed by us), check verification
      (where, prior to approving a check, we search our negative and positive check
      writer database to determine whether the check writer has a positive record
      or
      delinquent check-related debts), electronic check conversion (the conversion
      of
      a paper check at the point of sale to a direct bank debit which is processed
      for
      settlement through the Federal Reserve System’s Automated Clearing House (“ACH”)
      network), check re-presentment (where we attempt to clear a check on multiple
      occasions via the ACH network prior to returning the check to the merchant
      so as
      to increase the number of cleared check transactions), and check collection
      (where we provide national scale collection services for a merchant or bank).
      We
      operate our services under the following brands:





Ÿ
            MerchantAmerica,
                our retail provider of all credit card, debit card and check payment
                processing services to both the merchant and bank markets;


Ÿ
            National
                Check Network (“NCN”), our proprietary database of negative and positive
                check writer accounts (i.e., accounts that show delinquent history
                in the
                form of non-sufficient funds and other negative transactions), for
                check
                verification and check conversion capture services;


Ÿ
            *XPRESSCHEX*,
                Inc. for check collection services; and


Ÿ
            *ECHO,*for wholesale credit card and check processing
                services.





We
      discuss our services in greater detail below. Overall, our ability to program
      and oversee the management of a merchant’s point-of-sale system, provide credit
      card and debit card processing, provide multiple services for the processing
      of
      checks, provide both electronic and traditional collection services, and
      integrate all of these services with an Internet-based reporting capability
      allows us to provide for the majority of the payment processing needs of our
      customers.





We
      were
      incorporated in Nevada in December 1981. Our executive offices are located
      at
      730 Paseo Camarillo, Camarillo, California 93010, and our telephone number
      is
      (805) 419-8700. Our common stock is traded on the NASDAQ Capital Market under
      the ticker symbol “ECHO.” Information on our website, www.echo-inc.com ,
      does
      not constitute part of this annual report. We make available, free of charge
      on
      our website, our annual report on Form 10-K, quarterly reports on Form 10-Q,
      current reports on Form 8-K, and amendments to those reports filed or furnished
      pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
      practicable after we electronically file such material with, or furnish it
      to
      the SEC through a link to the appropriate section of the SEC’s
      website.


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**HISTORY
      OF THE COMPANY**





*ECHO* has been
      offering bankcard and check services for over 20 years. We were incorporated
      in
      Nevada in 1981 under the name Bio Recovery Technology, Inc. and changed our
      name
      to Electronic Clearing House, Inc. with the acquisition of a credit card
      processing company, Electronic Financial Systems, Inc. in January 1986. In
      1986, *ECHO* developed the capability, utilizing the Federal Reserve System's Automated
      Clearing House ("ACH"), a network that serves as a nationwide, wholesale
      electronic payment and collection system by way of transferring funds between
      banks via the Federal Reserve System, to deposit funds into any U.S. bank of
      the
      merchant's choice. This development made it possible for remote banks and
      processors to provide the same processing services previously available only
      through the merchant's local bank.





In
      1999, *ECHO* acquired
      Magic Software Development, Inc., a check processing company located in
      Albuquerque, New Mexico, that serviced National Check Network (“NCN”), an
      association of approximately 60 affiliated collection agencies across the
      nation. At the time, we provided a check guarantee service that only served
      California merchants, but with the addition of Magic's check processing
      capabilities, our check guarantee services have been offered on a national
      basis
      since 1999. In fiscal 2000, Magic's corporate name was changed to *XPRESSCHEX.*





In
      November 1999, we acquired Peak Collection Services, a collection agency in
      Albuquerque, New Mexico, and incorporated Peak into our *XPRESSCHEX* operations as our Collection Division in December of 1999. The *XPRESSCHEX* Collection Division conducts collections on a national basis. Having a fully
      integrated, nationally approved collection service allows *XPRESSCHEX* to
      operate as a central check clearing facility for NCN's collection agencies
      without each agency having to authorize such activity.





In
      January 2000, we acquired Rocky Mountain Retail Systems (“RMRS”) located in
      Boulder, Colorado, which provided a national check verification service to
      over
      200 collection agencies across the nation. RMRS maintained a national check
      database of negative and positive check writer records.





In
      May
      2001, we acquired the assets of National Check Network (“NCN”) and combined the
      NCN positive and negative check writer records with the RMRS database, resulting
      in a combined database of over 120 million check writer records which identify
      the positive and negative check writing activities occurring with individual
      check writers (including information related to accepted checks, bounced checks,
      and the frequency of delinquent transactions). This database is ever-growing
      with additional contributions daily and as of September 30, 2006, contained
      over
      142 million records.





In
      May
      2001, *ECHO* launched
      MerchantAmerica.com, a web-based source of financial information whereby an *ECHO* merchant
      can access their transactional history, bank information, significant business
      and office-related services and build an online store and accept payment in
      the
      form of credit cards or checks. The site also contains a National Merchant
      Directory that is free to any merchant in the United States. Additionally,
      it
      provides any merchant in the United States with the ability to edit and enhance
      their directory listing. While we believe that MerchantAmerica.com is a valuable
      and cost-effective resource for merchants, it provides us with a low-cost method
      of keeping our merchants informed and involved with us.





**OUR
      SERVICES**





**Bankcard
      and Transaction Processing Services**





*Services*


With
      our
      bankcard and transaction processing services, we provide payment solutions
      to
      merchants, banks and technology partners to allow them to accept credit and
      debit card payments from consumers. Our bankcard and transaction processing
      services include the following:





*Debit
      and Credit Card Payment Processing*


*ECHO* currently provides 24-hour daily payment processing, "800" number access to
      customer service personnel and, as needed, various field support services.
      Utilizing one of several methods of access to us, the merchants' systems dial
      our host computers that are connected to all the major card authorizing centers,
      and receive credit card and debit card authorizations. At the end of each day,
      electronic files of authorized transactions are transmitted to the major credit
      card organizations. They withdraw the funds from the card issuing banks and
      deposit a lump sum for the day’s processing activity into our processing bank on
      the following morning. Using a distribution file that we provide to them daily,
      our processing bank then distributes and deposits the individual merchant’s
      funds into the bank account of the merchant's choice. On average, *ECHO* deposits
      funds to over 600 banks across the nation on behalf of its merchants each
      day.


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*Other
      Payment Processing Services*


We
      also
      provide various services related to our debit and credit card payment
      processing, including:





Ÿ
            Internet
                Processing -*ECHO*allows merchants to accept payment transactions online with immediate
                processing, online reporting and security services that protect the
                cardholder, merchant and Internet Service Provider (“ISP”) from
                fraud.


Ÿ
            Batch
                File Processing -*ECHO*allows mail order, telephone order or direct marketing merchants
                to
                process and transmit payments by using Microsoft Excel®, Access® or any
                other program that can create a "flat file" of data. In this process,
                the
                merchant can visit the*ECHO*Merchant Center, log on through a secure gateway, and upload the
                file to*ECHO's*processing center. The transactions are processed immediately, with
                reporting available almost immediately on each
                transaction.





*Deriving
      Revenue*


Bankcard
      and transaction processing services provide for the majority of our revenue.
      For
      the year ended September 30, 2006, bankcard and transaction processing accounted
      for approximately 75.7% of our revenue. Bankcard and transaction processing
      volume rose 49.6% in fiscal 2006, from $1,186,397,000 in fiscal 2005 to
      $1,775,063,000 in fiscal 2006, and revenue increased approximately 38.7%, from
      $41,093,000 in fiscal 2005 to $56,983,000 in fiscal 2006.





*ECHO’s* revenue
      for debit/credit card processing is derived primarily from three sources: the
      merchant's discount rate, the merchant's transaction fee and set monthly fees.





The
      discount rate is expressed as a percentage of the amount being processed and
      is
      deducted from the amount of each transaction submitted by the merchant, while
      the net amount is deposited into the merchant's bank account. Interchange,
      the
      fee charged by the card-issuing bank and paid each day when transactions are
      processed, normally constitutes 60% to 65% of the bankcard revenue. Other
      external costs, such as Visa and MasterCard dues and bank fees, increase
      external fees we pay to 67% to 70% of the total bankcard revenue.





A
      transaction fee is charged for each transaction processed and *ECHO’s* average
      transaction fee in fiscal 2006 was approximately $0.20 per transaction, the
      same
      as in fiscal 2005. Both Visa and MasterCard have instituted a $0.10 transaction
      fee on most transactions processed that *ECHO* and all
      processors are required to pay. In addition, on average, *ECHO* pays
      approximately $0.005 per transaction for communication costs, depending upon
      the
      duration and method of transmission.





In
      2005,
      the market size for credit card processing was approximately 30.2 billion
      transactions per year, which represented 13% growth from 2004 to 2005. *ECHO* has a
      very small percentage of this market, but we are among the top 50 largest credit
      card processors according to *The
      Nilson Report,* a
      monthly
      financial subscription-based newsletter. Our competitors include First Data
      Corporation, the biggest credit card processor in the United States, NPC/Bank
      of
      America, Total Systems, Global Payments, and a few other direct payment
      processors. The credit card processing market has undergone rapid consolidation,
      which has raised unique challenges, including supporting and integrating
      numerous processing methodologies, initiating quality customer support and
      field
      support services and maintaining merchant relationships. While merchant
      portfolios can be purchased by a processor or a credit card agent bank,
      merchants are generally under no contractual obligation to utilize the services
      of the new owner so many of the most active consolidators have been experiencing
      difficulty in maintaining their number of active merchants.





In
      an
      effort to enhance the bankcard transaction processing business segment’s
      processing infrastructure and control processing costs, we acquired three
      payment processing modules from Oasis Technologies/eFunds; Clearing, Merchant
      Accounting System (MAS) and Switch. Integration of the Clearing module was
      in
      its final testing phase in September 2006 and select merchants were moved to
      the
      new platform in October 2006. Full deployment of the total base is expected
      to
      occur by December 2006.


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Historically, *ECHO* has been
      effective in selling to merchants who operate in non-face-to-face, card not
      present environments, such as the Internet, mail order and telephone order
      types
      of businesses. Approximately 75% of our monthly credit card volume comes from
      these types of merchants. Our Agent Bank program brings retail, face-to-face,
      card present types of merchants to us so we intend to continue to promote this
      channel going forward. In the Technology Partner channel we see a good balance
      between both card present and card not present merchants. Our ability to
      effectively support this processing diversity should allow us to be more
      effective in attracting key technology companies as partners. Now that the
      Clearing module is installed and operational, we intend to broaden our marketing
      reach to actively pursue more retail types of business. Since there is more
      competition for this type of business, the price we charge to the merchant
      for
      our services will reflect lower margins than we have historically been
      accustomed to getting. While we intend to continue to pursue our historic higher
      margin merchant markets, the added scope of merchants we intend to pursue and
      the lower margins inherent in this market may compress our margins overall,
      depending upon how successful each channel is in bringing new merchant
      relationships.





In
      order
      to engage in Visa and MasterCard processing, a cooperative relationship is
      required with a Visa/MasterCard Primary Member Bank that sponsors the merchants
      to accept Visa and MasterCard transactions. *ECHO’s* primary
      processing bank relationship is with First Regional Bank of Los Angeles,
      California. As a result of its relationship, *ECHO* is a
      registered Independent Sales Organization and Merchant Service Provider with
      Visa and MasterCard, respectively, which allows us to solicit and support
      merchants utilizing our services. We have an agreement with First Regional
      Bank
      which continues our relationship through July 2010. Pursuant to the terms of
      the
      agreement, among other matters, we market and sell merchant services and the
      bank provides various support services in connection with individual
      transactions, in exchange for our payment to the bank, on a monthly basis,
      of a
      payment of $0.01 to $0.02 per transaction. The agreement does not allow either
      party to terminate other than for cause (as defined in the agreement) without
      incurring liability for breach of the agreement.





**Check-Related
      Products (or “Check Services”)**





*Overview*


*ECHO* has
      invested significant resources and management focus in its check services
      business. Check services revenue increased approximately 26.8% in fiscal 2006,
      from $14,458,000 in fiscal 2005 to $18,328,000 in fiscal 2006. Revenue from
      ACH
      and check conversion continues to increase. Growth has come primarily from
      four
      sources: Internet wallet providers, cross-selling electronic checks into the
      credit card merchant base we already serve, casino check cashing services and
      the Visa POS Check Program.





Internet
      wallet providers allow a customer to fund an online wallet with a lump sum
      and
      then the customer can use the wallet at various sites on the Internet. (Probably
      the best known wallet service on the Internet is PayPal, a service owned by
      eBay.) *ECHO* is
      assisting various providers of Internet wallet services to fund the initial
      Internet wallet transaction. Subsequent transactions of transferring funds
      from
      the Internet wallet are generally not handled by *ECHO* because
      the payment is typically handled online by the Internet wallet provider
      themselves.





In
      October 2006, the Unlawful Internet Gambling Enforcement Act was passed and
      signed into law. This new legislation prohibits gambling businesses from
      accepting any financial instrument in connection with inappropriate Internet
      gambling. Since many online gambling sites utilized Internet wallets as a form
      of payment, our Internet wallet transaction volume dropped approximately 30%
      immediately after the bill was signed and we anticipate that it will continue
      to
      decline over the coming months. The bill provided for a nine month period (270
      days) wherein new regulations will be written that define to what extent banks
      and financial processors, such as *ECHO* ,
      will be
      required to block transactions of this nature. Until these regulations are
      written, it is impossible to define how *ECHO* will
      ultimately be affected or even if it will continue to provide Internet wallet
      funding services.





The
      best
      estimate we have currently for the amount of revenue we will potentially lose
      if
      each of the current providers of Internet wallets cease funding gambling sites
      is $7 million annually. Because we are unable to differentiate between gaming
      and non-gaming transactions when funding an Internet wallet, the estimate
      includes all revenues, including those not associated with gaming.





Each
      current provider of Internet wallet service has advised *ECHO* that
      they 1) will adhere to any regulation once it is defined and 2) that they wish
      to continue promoting their Internet wallet use at other non-gambling sites. *ECHO* is
      committed to assisting them in their endeavor and, while any such non-gambling
      Internet wallet activity will offset the loss of the gambling site activity,
      it
      is impossible to ascertain to what extent they will be successful in their
      effort over the coming months and to what extent *ECHO* can
      diminish the impact the new law may have on future revenues.


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Based
        upon this fact and based upon our historic growth of approximately 20% annually
        of our ACH volume, we expect to remain profitable in the coming year and
        replace
        the lost business with new business and with new activity from the existing
        customers who provide Internet wallet services to the online market as they
        secure new sites who accept their wallet as a form of
        payment.




Approximately
      75% of *ECHO* ’s
      credit
      card processing merchants operate their businesses in non-face-to-face
      environments such as mail order, phone order and the Internet. These
      relationships historically have higher margins than those seen with normal
      retail merchants because of the higher risk of fraud. We are finding good
      success in selling electronic checks to these merchants because it is a
      significantly lower cost form of payment.





*ECHO* has
      established an integrated processing relationship with the largest land-based
      check cashing provider to the gaming and casino market. Our services are
      primarily centered on providing check verification (using our NCN data base),
      check conversion (moving paper checks to electronic transactions at the check
      cashing cage in the casino), and several sophisticated risk management services
      that are used to assist the provider in confidently accepting checks. Through
      this source, *ECHO* provides
      these services to many of the largest casinos and gaming customers in the
      industry.





*ECHO* is both
      a Third-Party Processor and an Acquirer Processor for the Visa POS Check
      Program. Visa officially released its POS Check Service as of December 2002
      and
      several national banks have entered the program since its inception to both
      sell
      the service to their merchants and to connect all of their checking accounts
      to
      the Visa network. Transactional growth in 2006 has been in the single digits
      and
      Visa’s connectivity to checking account balances has settled in over the past
      year to 30% in many metropolitan areas. (See the discussion of the Visa POS
      Check Service Program below.)





*Services*


With
      our
      check services, we provide various services to merchants and banks to allow
      them
      to accept and process check payments from consumers. Our check services include
      the following:





*Check
      Verification*


For
      a
      fee, we will search NCN, our proprietary database of negative and positive
      check
      writer accounts, attempting to match a specific piece of information, such
      as a
      driver's license number or Magnetic Ink Character Recognition (“MICR”) number
      (the numeric data along the bottom of a check), provided by a merchant. A match
      may identify whether the check writer has a positive record or a negative record
      of check cashing activity in the past. Upon notification of this match (via
      a
      coded response from the provider), the merchant decides whether to accept or
      decline the check. Verification reduces the risk of accepting a bad check for
      the merchant; however, in providing this program alone, we typically offer
      no
      guarantee that the check will be honored by the check writer's bank and make
      no
      promise of reimbursement if the check is dishonored by the bank. Revenue from
      check verification is derived from fees collected from the merchants when a
      check is verified against our positive and negative check database. This revenue
      is recognized when the transaction is processed, since we have no further
      performance obligations.





*Check
      Guarantee*


With
      this
      service, if we approve a check transaction and the check is subsequently
      dishonored by the check writer's bank, the merchant is reimbursed by us and
      we
      must undertake any effort to collect the delinquent amount from the check
      writer.





The
      principal risk of providing this service is the risk of collecting the amount
      we
      guarantee from a delinquent or a fraudulent check writer whose check transaction
      was dishonored by his or her own bank. If we are unable to collect the
      dishonored check, we incur a bad debt expense. On average, we collect 50-60%
      of
      the amounts on those checks that become delinquent. Given the risks associated
      with check guarantee, especially for large volume merchants, we exercise strict
      risk parameters with the merchants to which this service is offered. We
      typically apply several risk management approaches with this service, which
      include searching NCN’s database, and “scoring” each transaction. This includes
      several factors such as velocity (the number of times a check writer has been
      searched in a certain period of time), prior activity (historic negative or
      positive transactions with the check writer), check writer’s presence in other
      databases (these national databases are selectively searched based upon the
      size
      of the check and the prior activity with the check writer), size of the check,
      and historic bad check activity by geographic and/or merchant specific
      locations, to name a few. If our scoring system concludes that the risk is
      too
      high, we issue a coded response instructing the merchant that we will not
      guarantee the check. If our scoring system results in a positive result, a
      coded
      response advises the merchant that we have guaranteed payment on that item.


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*Electronic
      Check Conversion ("ECC")*


Check
      conversion is the ability to convert a paper check to an electronic item at
      the
      point of sale. ECC is a relatively new system of check settlement that is
      quickly gaining merchant acceptance. Under the program, the merchant slips
      a
      customer's completely filled-in check either through a check reader that reads
      the MICR line on the check or a check imager that records the total image of
      the
      face of the check and the merchant enters the amount of the check into the
      system. The merchant has the customer sign a receipt, much the same as in a
      credit card transaction, and gives a copy of the signed receipt along with
      the
      check to the customer. The electronic image, captured by the reader, is sent
      to
      our processing center and we settle the check transaction electronically.
      Merchants’ customers like this new system because they get their check back
      immediately and still have a hard copy receipt of the transaction. Banks like
      ECC because no paper has to be handled by the bank to settle the transaction.
      While most national merchants already have MICR check-reading equipment, small
      merchants will adopt the system only if their check volume justifies the capital
      investment in equipment, ranging from $125 to $150 per MICR reader and $300
      to
      $600 for an imager.





*Check
      Re-Presentment*


The
      Federal Reserve System's Automated Clearing House (“ACH”) provides the tools to
      electronically present, re-present and settle funds between banks. Our check
      re-presentment program allows a merchant to advise its bank that a returned
      check should be sent to the *XPRESSCHEX* data
      processing center in Albuquerque, New Mexico, rather than returned to the
      merchant. Upon receipt, *XPRESSCHEX* converts
      the check to an electronic ACH transaction for resubmission through the ACH
      network and marks the check for possible collection activity, should it become
      necessary. One feature a merchant may choose is to time the re-presentment
      so as
      to coincide with a check writer’s typical payday to better the odds of
      collection. Generally, the full face value of the check is returned to the
      merchant upon collection and a collection fee charged to the check writer,
      usually in the range of $15 to $25, is retained by *XPRESSCHEX* as
      payment for its services.





*Internet
      Check, Batch Check and Virtual Terminal*


A
      check
      can be presented as a form of payment over the Internet and we support the
      multiple types of ACH entry classes. *XPRESSCHEX* allows
      an e-commerce site to accept a check as payment, allows a batch of check data
      to
      be sent electronically for processing (this is commonly used by mail order
      or
      phone order businesses) and allows both verification-only and ACH transactions
      to be submitted by merchants via a secure logon and passcode connection over
      the
      Internet.





*Visa
      POS Check Service Program (“Visa Program”)*


The
      Visa
      POS Check Program enables merchants to receive direct online authorization
      for
      checks written against consumer checking accounts, similar to the authorizations
      provided for debit card transactions. The Visa Program was offered as a pilot
      program by Visa to its member banks from December of 2000 to December of 2002
      over which time several banks electronically connected their check writer data
      to the Visa network, making verification of the check writer’s bank account
      balance possible when checks drawn on these select banks were processed. In
      December of 2002, the program was officially released out of pilot and more
      banks have been added each year to the Visa network. As of September 2006,
      a
      national merchant could expect connection to around 20%-30% of the nation’s
      checking accounts from all locations and higher in some metropolitan
      locations





As
      described above, “check conversion” is the ability to convert a paper check to
      an electronic item at the point of sale. The Visa Program provides Visa member
      banks with a check conversion service that they can sell to their bank
      merchants. The Visa Program allows the merchant to get an immediate
      authorization or decline on a check while the check writer is at the checkout
      counter. If the check is approved, the service allows the merchant to
      immediately return the paper check to the check writer since the funds will
      be
      electronically withdrawn from the check writer’s account and deposited into the
      merchant’s account.


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Being
      able to approve or decline a check in real time at the point of sale requires
      some method to verify the check writer has either an adequate balance in the
      bank to cover the check or, if that is not possible, to verify if the check
      written is in a negative check account database. In order to provide this check
      service on 100% of the checks received by a merchant, Visa needed a solution
      to
      approve or decline (and for those approved, electronically deposit) the checks
      that processed through the program on a bank that had not yet connected its
      check writer data to the Visa network. We are currently one of two companies
      that provide this service to Visa as a Third-Party Processor. When a Visa member
      bank signs up to offer the Visa Program to its merchants, it chooses a
      Third-Party Processor from the certified providers.





When
      Visa
      receives electronic check data from a merchant and the bank upon which the
      check
      is drawn has not connected its check writer data to the Visa network, Visa
      routes that check to the Third-Party Processor that was chosen by the merchant’s
      bank when they set up the program. The Third-Party Processor authorizes or
      declines a check based upon the negative and positive data contained in several
      national check account databases that are commercially available and, for those
      transactions that are approved, the Third-Party Processor will electronically
      move the funds from the check writer’s account to either the merchant bank’s
      master clearing account or directly to the merchant’s banking account (depending
      on the bank’s desired settlement method) utilizing the ACH.





An
      Acquirer Processor in the Visa Program is the party who accepts transactions
      from the merchant’s point-of-sale system and reformats them for submission to
      the Visa network. We act as an Acquirer Processor for several banks in the
      Visa
      Program.





We
      entered into a sponsorship agreement with our primary credit card processing
      bank, First Regional Bank, to enable us to sell the Visa Program directly to
      merchants with an obligation to pay a transaction fee per check to the bank.
      This allows the bank to realize added revenue, allows us to realize higher
      revenue in a marked-up pricing model, and a portion of the mark-up to be used
      to
      compensate and motivate resellers of our products and services to offer the
      Visa
      Program to merchants in the marketplace. The balance of the mark-up after paying
      the bank and the sales organization would be additional revenue to us. This
      will
      also enable us to use our direct sales channels to provide the Visa Program
      to *ECHO’s* current
      and potential merchant base.




The
      Visa
      infrastructure requires *ECHO* to
      coordinate and integrate its services with several parties and systems. As
      part
      of the Visa Program, we have written, tested and installed special merchant
      terminal software that meets specified Visa Program requirements and certified
      our terminal and host response code with Vital Processing Services, a major
      provider of terminal services to many major banks. *ECHO* has also
      developed special add-on services and reporting for specific banks or select
      merchants that desired to participate in the Visa Program. Additionally, *ECHO* has
      designed and implemented several risk management tools that contribute to the
      significant reduction in net bad debt seen by retailers, making the Visa Program
      a true competitive alternative to guarantee services.





As
      a more
      mature product offering, we continue to see value in the Visa POS Program as
      a
      competitive differentiator. We will continue to leverage this unique capability
      throughout our direct and indirect sales channels.





*Deriving
      Revenue*


For
      the
      past several years, we have invested significant resources and management focus
      in our check services business. This business segment comprised approximately
      24.3% of our total revenue for the fiscal year ended September 30, 2006. As
      an
      individual segment, check-related revenue increased by 26.8% to $18,328,000
      in
      fiscal 2006 from $14,458,000 in fiscal 2005.





*ECHO’s* revenue
      in check services can come from several sources. Typically, the merchant pays
      either a fixed fee for each transaction (verification, conversion, etc.) or
      a
      fee based on the face amount of the check or both (check guarantee). In the
      Visa
      model, *ECHO* can
      receive transaction fees for providing Third-Party services to Visa banks,
      whereby *ECHO* assists
      them in processing checks from banks not participating in the Visa Program.
      In
      addition, *ECHO* may
      serve a Visa bank as a collector of the transaction data for the merchant and
      submitting such data to VisaNet, a process referred to as an Acquirer Processor. *ECHO* can also
      participate in the mark-up over cost that is charged to those merchants *ECHO* sells
      directly through its own primary sales channels. Additional revenue is earned
      if
      the merchant utilizes *ECHO’s* collection services and it is primarily derived from the collection fee
      associated with successful collection of an item. If *ECHO* refers a
      collection item to an NCN member, a small participation in the collection fee
      is
      returned to *ECHO* through
      agreement with the NCN member. Finally, when *ECHO* provides
      a guarantee service to a merchant directly or to a bank to offer to their
      merchants, it earns a percentage of every check processed from the merchant. *ECHO’s* earnings
      in this case are directly tied to its success in collection and its risk
      management capability.


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The
      NCN
      database includes approximately 15 million negative check account records and
      127 million positive records. Approximately 300 affiliated collection agencies
      continually contribute to the database to enrich its depth and value. Through
      its network of NCN members, *ECHO* can
      offer regional collection services and distribute collection items to one or
      more of a select group of NCN’s member agencies to maximize a merchant’s or
      bank’s ability to collect amounts on a local level. NCN provides an ongoing
      revenue stream for *ECHO* as
      collection agencies, major national merchants, banks, other transaction
      processors, and thousands of small merchants access the NCN database daily
      to
      verify the status of a check writer in real time. Check verification has been
      recognized as one of the lowest cost and most effective ways for retailers
      to
      lower the risks and losses experienced in accepting checks as a form of payment.
      Our NCN database is one of only four national databases that can serve this
      market need on a national scale. In addition to operating NCN, we provide a
      common platform where a business can also access other major negative check
      writer databases that are currently available in the nation.





*XPRESSCHEX* ** collection
      revenue comes from two sources: service fees and percentage of the check
      collection agreements. When *XPRESSCHEX* is
      engaged by a merchant or a bank to immediately collect on returned checks that
      were converted from paper to an electronic item, *XPRESSCHEX* normally
      receives the service fee of $15 to $25 that is charged to the check writer,
      not
      the merchant. Some merchants also engage *XPRESSCHEX* in
      the
      active collection of paper checks that have bounced or in the active collection
      of secondary efforts after all initial attempts at collection have been
      exhausted by the merchant. In these cases *,
      XPRESSCHEX* negotiates a percentage of the check amount, ranging from 10% to 30%, depending
      on several factors.





**STRATEGY**





*Overview*


*ECHO’s* service
      strategy is to provide merchants, banks, technology partners and collection
      agencies with electronic payment services that combine credit card, debit card
      and electronic check and collection services with quality customer support. *ECHO’s* services
      enable merchants to maximize revenue by offering a wide variety of payment
      options, minimize costs by dealing with one source and improve their bad debt
      collection rates through use of *ECHO* ’s
      integrated collection and risk management services.





Our
      sales
      strategy is four-fold: to target technology partners providing point-of-sale
      systems who serve various industries in the merchant marketplace; to continue
      to
      pursue community banks with the combined set of services we currently offer;
      to
      focus our direct sales team on specific associations and merchants in industries
      where both checks and credit cards are common forms of payment; and to continue
      to support and promote the Visa POS Check Program. We intend to capitalize
      on
      our advantage of being a full credit card and check processor by combining
      our
      products and using our lower overall processing costs to allow the technology
      partner, community bank or association to enjoy a financial benefit from their
      customers’ processing activity.





*Electronic
      Payment Services for Technology Partners Providing POS Systems*


We
      believe there are significant opportunities in working closely with those firms
      that specialize in certain industries and provide a point-of-sale (POS)
      capability to merchants of some nature. By aligning our processing with these
      parties, we believe we can leverage our sales activity and have longer term
      relationships with merchants than are historically the case for most processors.
      We also believe our full processing capability allows us to include the POS
      system provider with some economic benefit from the processing volume of the
      users of its system.





Along
      similar lines, we believe there are quality Independent sales organizations,
      many of which are focused on select markets, where we can establish a viable
      and
      mutually profitable relationship wherein they sell our processing
      services.


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*Promote
      Merchant Payment Processing for Regional and Community Banks*


*ECHO* pursues
      small regional and community banks for credit card and check payment programs
      that are characterized by having an asset base in the $500 million range or
      less, and/or equity capital in the $10 to $50 million range. *ECHO* has
      developed a service that allows smaller banks to offer credit card and check
      processing services on a private-label basis using our back-end infrastructure
      with little or no technical involvement by the bank. Much of the reporting
      to
      the merchant utilizes the Internet as a delivery channel, an environment in
      which we have significant experience and knowledge. Due to the high costs and
      the perceived high risk, most small banks are either unable or unwilling to
      compete with national banks in providing credit card and real time check
      processing services and Internet-based reporting tools to their merchants.
      We
      have designed the program to be adopted by a bank at little or no cost while
      it
      allows the bank to generate revenue and earnings in competition to those earned
      by much larger banks that have had to make major investments in the technology.





This
      merchant payment processing service, which is marketed under the MerchantAmerica
      name, incorporates all of *ECHO’s* web-based features and functionalities and our full set of services and payment
      options. We believe that our fully integrated payment and reporting system
      allows smaller banks to enjoy competitive equality with much bigger banks
      without making significant investments in technology. We, in turn, benefit
      from
      the increased processing and transaction revenue. Additional benefits of the
      MerchantAmerica program to regional and community banks include
      the:





Ÿ
            Ability
                for banks to set processing fees for each
                merchant;


Ÿ
            Assurance
                that the bank controls the merchant relationship;
                and


Ÿ
            Reduction
                of fraud risk.





In
      addition to the benefits that the bank receives from the MerchantAmerica
      program, the bank’s merchants also receive numerous benefits, including a retail
      merchant account for credit cards, debit cards and checks; an online shopping
      cart and check-out payment system; sales tracking and online transaction
      history; all returned checks being automatically referred to our collection
      agency; and dedicated customer service available 24 hours a day, seven days
      a
      week.





The
      program was launched in August 2002 and at the end of fiscal 2006 had 38
      participating banks. *ECHO* estimates that there are approximately 8,000 community banks in the United
      States. Based on third-party research, we estimate that approximately 57% of
      these banks offer payment solutions for their merchants. We believe these banks
      will be very responsive to the MerchantAmerica value proposition when a
      comparison of features and costs is reviewed.





*Promote
      to Associations and Guilds*


There
      are
      over 8,000 associations and guilds in the United States and many of the 4.1
      million merchants belong to one of these organizations. We believe our
      combination of services and our controlled cost structure will allow us to
      attract many of these organizations to actively refer their members to us for
      meeting their payment processing needs.





*Promote
      Visa POS Check Service Program*


Given *ECHO’s* role as
      a “first adopter” in the early stages of the Visa Program and our subsequent
      investment of significant resources and management focus with respect to the
      Visa Program, we expect to see increased growth in check services as the
      marketing efforts of participating banks in the Visa Program become more widely
      implemented.





While *ECHO* believes
      that the Visa Program has the potential to generate significant revenue for
      us
      in the future, the market potential of this service is still unproven and its
      success is largely dependent on the continuing marketing support of *ECHO* ,
      Visa
      and Visa’s member banks.


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**SALES
      AND MARKETING**





*ECHO* offers
      its payment services through several sales channels.




Ÿ
            *Primary
                Sales Channels*-
                Direct sales personnel are dedicated to various industries and/or
                services. We employ approximately 20 people who serve in either field
                or
                office positions that are dedicated to sales.


Ÿ
            *Secondary
                Sales Channels*-
                All or a portion of our services are sold through banks who sign
                up with
                our MerchantAmerica Agent Bank program, through banks who are selling
                the
                Visa POS Check Program, through authorized resellers, technology
                partners,
                independent sales organizations (ISOs) and through one of our 236
                NCN
                Collection Agency Members. These channels offer lower margins to
                us due to
                the added participation in the overall revenue such channels require.
                Currently,*ECHO*has 292 authorized resellers registered to sell*ECHO’s*check products.





Management
      believes that we are distinctive in the number of payment methods that we
      enable, the combination of transaction types that we manage directly, our
      ability to integrate additional services and our ability to support each
      merchant through one vertically integrated source.





Our
      marketing strategy is to pursue direct sales opportunities where there is a
      significant amount of card and check acceptance; to build processing
      relationships with certain providers of POS software/hardware that serve select
      merchant markets; to maximize cross-selling opportunities within our existing
      base of retail merchants and financial institutions; to sell integrated suites
      of check, credit and debit card processing services through small banks; to
      enhance and market MerchantAmerica.com; and to pursue associations aggressively.





**COMPETITION**





Bankcard
      processing and check processing services are highly competitive industries
      and
      are characterized by consolidation, rapid technological change, rapid rates
      of
      product obsolescence and introductions of competitive products often at lower
      prices and/or with greater functionality than those currently on the market.
      Credit card and debit card processors have similar direct costs and therefore
      their products are becoming somewhat of a commodity product where a natural
      advantage accrues to the highest volume processors. To offset this fact, we
      have
      focused on marketing to niche markets where we can maintain the margins we
      deem
      necessary to operate profitably but no assurance can be given that this strategy
      will be successful in the future.





*ECHO* is among
      the top 50 credit card processors in the nation when evaluated by processing
      volume. *ECHO* is among
      a much smaller group when evaluated by processing capability. Of the top 50
      firms, approximately 40 of them are independent sales organizations or banks
      that may manage the front-end authorization service but they outsource the
      back-end clearing and settlement services from a full service processor. There
      are probably 10 or fewer firms capable of full credit card processing and these
      would include First Data Corporation, Total Systems, NPC (Bank of America),
      Global Payments, Heartland Payments and RBS (Lynx). We believe we hold the
      distinction of being the smallest public company who, with the installation
      of
      the Oasis Clearing module in 2006, will serve as a full service processor in
      credit cards. All of our competitors have greater financial and marketing
      resources than us. As a result, they may be better able to respond more quickly
      to new or emerging technologies and changes in customer requirements.
      Competitors also may enjoy per transaction cost advantages due to their high
      processing volumes that may make it difficult for *ECHO* to
      compete.





There
      are
      a number of competitors in the check services industry, the largest of which
      are
      TeleCheck (the leading provider of conversion and guarantee services and a
      subsidiary of First Data Corporation), SCAN/eFunds (the largest verification
      provider in the nation), Certegy (purchased by Fidelity) and Global Payments.
      While all four have major national accounts, we have been successful in winning
      the processing relationships for national accounts when competing for such
      business against these parties. *ECHO* believes
      that it can effectively compete due to its ownership of the NCN database, its
      integrated set of check and collection services and the technological advantage
      of having been certified as both a Third-Party Processor and Acquirer Processor
      with the Visa POS Check Program.


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We
      believe that being the smallest processor also has some advantages. There are
      many merchants who are sizable to us that the larger processors do not consider
      to be major merchants. We are finding these merchants appreciate getting
      preferential treatment from their processor. Also, our willingness to send
      top
      management into the field to meet regularly with our major merchants at their
      location is a perceived distinction and we are using it as a merchant retention
      tool. While we understand that slightly lower costs can be generated by
      processing high volumes, we do not think the economic advantages that high
      volume affords are enough to eliminate *ECHO* as an
      acceptable and competitive processor in most cases. Despite these potential
      advantages, we believe that our success will depend largely on our ability
      to
      continuously exceed expectations in terms of performance, service, and price,
      on
      our ability to develop new products and services, and on how well and how
      quickly we enhance our current products and introduce them into the market.





**EMPLOYEES**





As
      of
      September 30, 2006, we employed 230 individuals, 211 of whom were full time
      employees.





**REPORTABLE
      SEGMENTS**





Refer
      to
      Note 15 “Segment Information” in the accompanying Notes to Consolidated
      Financial Statements for reportable segment information.





**ITEM
                1A.**
            **Risk
                Factors**





Our
      business, and accordingly, your investment in our common stock, is subject
      to a
      number of risks. These risks could affect our operating results and liquidity.
      You should consider the following risk factors, among others, before investing
      in our common stock:





**Risks
      Related to our Business**





**We
      rely on cooperative relationships with, and sponsorship by, banks, the absence
      of which may affect our operations.**





We
      currently rely on cooperative relationships with, and sponsorship by, banks
      in
      order to process our Visa, MasterCard and other bankcard transactions. We also
      rely on several banks for access to the Automated Clearing House (“ACH”) for
      submission of both credit card and check settlements. Our banking relationships
      are currently with smaller banks (with assets of less than $500,000,000). Even
      though smaller banks tend to be more susceptible to mergers or acquisitions
      and
      are therefore less stable, these banks find the programs we offer more
      attractive and we believe we cannot obtain similar relationships with larger
      banks at this time. A bank could at any time curtail or place restrictions
      on
      our processing volume because of its internal business policies or due to other
      adverse circumstances. If a volume restriction is placed on us, it could
      materially adversely affect our business operations by restricting our ability
      to process credit card transactions and receive the related revenue. Our
      relationships with our customers and merchants would also be adversely affected
      by our inability to process these transactions.





We
      currently maintain one primary bankcard processing and sponsorship relationship
      with First Regional Bank in Agoura Hills, California. Our agreement with First
      Regional Bank continues through July 2010. We also maintain several banking
      relationships for ACH processing. While we believe our current bank
      relationships are sound, we cannot assure that these banks will not restrict
      our
      increasing processing volume or that we will always be able to maintain these
      relationships or establish new banking relationships. Even if new banking
      relationships are available, they may not be on terms acceptable to us. With
      respect to First Regional Bank, while we believe their ability to terminate
      our
      relationship is cost-prohibitive, they may determine that the cost of
      terminating their agreement is less than the cost of continuing to perform
      in
      accordance with its terms, and may therefore determine to terminate their
      agreement prior to its expiration. Ultimately, our failure to maintain these
      banking relationships and sponsorships may have a material adverse effect on
      our
      business and results of operations.


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**Merchant
      fraud with respect to bankcard and ACH transactions could cause us to incur
      significant losses.**





We
      significantly rely on the processing revenue derived from bankcard and ACH
      transactions. If any merchants were to submit or process unauthorized or
      fraudulent bankcard or ACH transactions, depending on the dollar amount, *ECHO* could
      incur significant losses which could have a material adverse effect on our
      business and results of operations. *ECHO* assumes
      and compensates the sponsoring bank for bearing the risk of these types of
      transactions.





We
      have
      implemented systems and software for the electronic surveillance and monitoring
      of fraudulent bankcard and ACH use. As of September 30, 2006, we maintained
      a
      dedicated chargeback reserve of $830,000 at our primary bank specifically
      earmarked for such activity. Additionally, through our sponsoring bank, as
      of
      September 30, 2006, we had access to approximately $19.3 million in merchant
      deposits to cover any potential chargeback losses. Despite a long history of
      managing such risk, we cannot guarantee that these systems will prevent
      fraudulent transactions from being submitted and processed or that the funds
      set
      aside to address such activity will be adequate to cover all potential
      situations that might occur. We do not have insurance to protect us from these
      losses. There is no assurance that our chargeback reserve will be adequate
      to
      offset against any unauthorized or fraudulent processing losses that we may
      incur. Depending on the size of such losses, our results of operations could
      be
      immediately and materially adversely affected.





**Excessive
      chargeback losses could significantly affect our results of operations and
      liquidity.**





Our
      agreements with our sponsoring bank require us to assume and compensate the
      bank
      for bearing the risk of “chargeback” losses. Under the rules of Visa and
      MasterCard, when a merchant processor acquires card transactions, it has certain
      contingent liabilities for the transactions processed. This contingent liability
      arises in the event of a billing dispute between the merchant and a cardholder
      that is ultimately resolved in the cardholder’s favor. In such a case, the
      disputed transaction is charged back to the merchant and the disputed amount
      is
      credited or otherwise refunded to the cardholder. If we are unable to collect
      this amount from the merchant’s account, or if the merchant refuses or is unable
      to reimburse us for the chargeback due to merchant fraud, insolvency or other
      reasons, we will bear the loss for the amount of the refund paid to the
      cardholders.





A
      cardholder, through its issuing bank, generally has until the later of up to
      four months after the date a transaction is processed or the delivery of the
      product or service to present a chargeback to our sponsoring bank as the
      merchant processor. Therefore, management believes that the maximum potential
      exposure for the chargebacks would not exceed the total amount of transactions
      processed through Visa and MasterCard for the last four months and other
      unresolved chargebacks in the process of resolution. For the last four months
      through September 30, 2006, this potential exposure totaled approximately $609
      million. At September 30, 2006, we, through our sponsoring banks, had
      approximately $131,000 of unresolved chargebacks that were in the process of
      resolution. At September 30, 2006, we, through our sponsoring banks, had access
      to $19.3 million belonging to our merchants. This money has been deposited
      at
      the sponsoring bank by the merchants to cover any potential chargeback
      losses.





For
      the
      fiscal years 2006 and 2005, we processed approximately $1,775 million and $1,186
      million, respectively, of Visa and MasterCard transactions, which resulted
      in
      $9.8 million in gross chargeback activities for the fiscal year ended 2006
      and
      $7.1 million for the fiscal year ended 2005. Substantially all of these
      chargebacks were recovered from the merchants.





Nevertheless,
      if we are unable to recover these chargeback amounts from merchants, having
      to
      pay the aggregate of any such amounts would significantly affect our results
      of
      operations and liquidity.





**Failure
      to participate in the Visa POS Check Service Program would cause us to
      significantly shift our operating and marketing strategy.**





We
      have
      significantly increased our infrastructure, personnel and marketing strategy
      to
      focus on the potential growth of our check services through the Visa POS Check
      Service Program. We currently provide critical back-end infrastructure for
      the
      service, including our ** NCN
      database for verification and our access to the Federal Reserve System’s
      Automated Clearing House for funds settlement and for checks written on bank
      accounts with banks not participating in the program.





Because
      we believe the market will continue to gain acceptance of the Visa POS Check
      Service Program, we have expended significant resources to market our check
      conversion services and verification services to our merchant base, to solidify
      our strategic relationships with the various financial institutions that have
      chosen us as their Acquirer Processor and Third-Party processor under the
      program, and to sell our other check products such as electronic check
      re-presentments and check guarantee to the Visa member banks. We have also
      increased our personnel to handle the increased volume of transactions arising
      directly from our participation in the program.


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Our
      failure to adequately market our services through this relationship could
      materially affect our marketing strategy going forward. Additionally, if we
      fail
      to adequately grow our infrastructure to address increases in the volume of
      transactions, cease providing services as a Third-Party processor or Acquirer
      Processor or are otherwise removed or terminated from the Visa Program, this
      would require us to dramatically shift our current operating
      strategy.





**Our
      inability to implement, and/or the inability of third-party software vendors
      to
      continue to support and provide maintenance services with respect to, the
      third-party vendors’ products, could significantly affect our results of
      operations and financial condition.**





We
      utilize various third-party software applications and depend on the providers
      of
      such software applications to provide support and maintenance services to us.
      In
      the event that a third-party software vendor fails to continue to support and
      maintain its software application, or fails to do so in a timely manner, this
      could significantly affect our results of operations and financial
      condition.





Our
      inability to ultimately implement, or a determination to cease the
      implementation of various of our software technology initiatives will
      significantly adversely affect our results of operations and financial
      condition.





We
      have
      spent significant time and monetary resources implementing several software
      technologies, which resulted in significant cost being capitalized by us as
      non-current software assets. The implementation of these technologies will
      provide us with substantial operational advantages that would allow us to
      attract and retain larger merchants, as well as the small and mid-market
      merchants that have been our target market. Management believes that the
      implementation of these software technologies, and the technologies themselves,
      continues to be in the best interests of, and the most viable alternative for,
      the Company. However, the inability to ultimately implement, or a determination
      to cease the implementation of these software technologies would cause these
      assets to become impaired, and the corresponding impairment would significantly
      adversely affect our results of operations and financial condition.





**A
      significant amount of our bankcard processing revenue is dependent on
      approximately 100 merchant accounts, several of which are very large merchants.
      The loss of a substantial portion of these accounts would adversely affect
      our
      results of operations.**





We
      depend
      on approximately 100 key merchant accounts for our organic growth and
      profitability. Two merchants accounted for approximately 16% of our bankcard
      processing revenue during the year ended September 30, 2006. The loss of those
      accounts or the loss of merchants from this select group could adversely affect
      our results of operations.





**The
      business activities of our merchants could affect our business and results
      of
      operations.**





We
      provide direct and back-end bankcard and check processing services to merchants
      across many industries. Several of these merchants provide consumers access
      to
“Internet wallets,” which subsequently permit consumers to use funds in those
“Internet wallets” to participate in gaming activities over the Internet. Our
“Internet wallet” merchants collectively comprise approximately 38% of our check
      revenue, with one merchant who comprises approximately 17% and three merchants
      who comprise approximately 33% of our check revenue, respectively. To the extent
      any of these merchants conduct activities which are deemed illegal by future
      legislation (including regulations promulgated under the Unlawful Internet
      Gambling Enforcement Act) or otherwise become involved in activities that incur
      civil liability from third parties, legal authorities or those third parties
      could attempt to pursue claims against us for aiding the activities of those
      merchants. While we believe that the services we provide do not directly aid
      in
      the activities of our merchants, and while we have no intent to assist any
      such
      activities, other than to provide general processing services consistent with
      past practice, any claims by legal authorities or third parties would require
      us
      to expend financial and management resources to address and defend such claims,
      the aggregate effect of which could have an adverse impact on our business
      and
      results of operations. Additionally, even if those legal authorities or third
      parties do not pursue claims against us, legislation could significantly affect
      our business operations and the business operations of those merchants. 
The loss of any of those merchants would have a significant affect on our
      business and results of operations. With respect to the affects of the Unlawful
      Internet Gambling Enforcement Act on our “Internet wallet” merchants, and
      correspondingly, on our business and results of operations, please see our
      discussion in the “Business” section of this Annual Report on Form
      10-K.


15
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**The
      business in which we compete is highly competitive and there is no assurance
      that our current products and services will stay competitive or that we will
      be
      able to introduce new products and services to compete successfully.**





We ** are
      in
      the business of processing payment transactions and designing and implementing
      integrated systems for our customers so that they can better use our services.
      This business is highly competitive and is characterized by rapid technological
      change, rapid rates of product obsolescence, and rapid rates of new product
      introduction. Our market share is relatively small as compared to most of our
      competitors and most of these competitors have substantially more financial
      and
      marketing resources to run their businesses. While we believe our small size
      provides us the ability to move quickly in some areas, our competitors’ greater
      resources enable them to investigate and embrace new and emerging technologies,
      to quickly respond to changes in customers’ needs, and to devote more resources
      to product and services development and marketing. We may face increased
      competition in the future and there is no assurance that current or new
      competition will allow us to keep our customers. If we lose customers, our
      business operations may be materially adversely affected, which could cause
      us
      to cease our business or curtail our business to a point where we are no longer
      able to generate sufficient revenue to fund operations. There is no assurance
      that our current products and services will stay competitive with those of
      our
      competitors or that we will be able to introduce new products and services
      to
      compete successfully in the future.





**If
      we are unable to process significantly increased volume activity, this could
      affect our operations and we could lose our competitive
      position.**





We
      have
      built transaction processing systems for check verification, check conversion,
      ACH processing, and bankcard processing activities. While current estimates
      regarding increased volume are within the capabilities of each system, it is
      possible that a significant increase in volume in one of the markets would
      exceed a specific system’s capabilities. To minimize this risk, *ECHO* has
      redesigned and upgraded its check related processing systems and has purchased
      a
      high end system to process bankcard activity. This system is still in its final
      phase of deployment and no assurance can be given that it would be able to
      handle a significant increase in volume or that the operational enhancements
      and
      improvements will be completed in time to avoid such a situation. In the event
      we are unable to process increases in volume, this could significantly adversely
      affect our banking relationships, our merchant customers and our overall
      competitive position, and could potentially result in violations of service
      level agreements which would require us to pay penalty fees to the other parties
      to those agreements. Losses of such relationships, or the requirement to pay
      penalties, may severely impact our results of operations and financial
      condition.





**We
      incur financial risk from our check guarantee service.**




The
      check
      guarantee business is essentially a risk management business. Any limitation
      of
      a risk management system could result in financial obligations being incurred
      by *ECHO* relative
      to our check guarantee activity. While *ECHO* has
      provided check guarantee services for several years, there can be no assurance
      that our current risk management systems are adequate to assure against any
      financial loss relating to check guarantee. *ECHO* is
      enhancing its current risk management systems and it is being conservative
      with
      reference to the type of merchants to which it offers guarantee services in
      order to minimize this risk but no assurance can be given that such measures
      will be adequate. During the year ended September 30, 2006, we incurred $451,000
      in losses from uncollected guaranteed checks.




**Security
      breaches could impact our continued operations.**




We
      process confidential financial information and maintain several levels of
      security to protect this data. Security includes hand and card-based
      identification systems at our data center locations that restrict access to
      the
      specific facilities, various employee monitoring and access restriction
      policies, and various firewall and network management methodologies that
      restrict unauthorized access through the Internet. While these systems have
      worked effectively in the past, there can be no assurance that they will
      continue to operate without a security breach in the future. Depending upon
      the
      nature of the breach, the consequences of security breaches could be significant
      and dramatic to *ECHO* ’s
      continued operations.


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**The
      industry in which we operate involves rapidly changing technology and our
      failure to improve our products and services or to offer new products and
      services could cause us to lose customers.**





Our
      business industry involves rapidly changing technology. Recently, we have
      observed rapid changes in technology as evidenced by the Internet and
      Internet-related services and applications, new and better software, and faster
      computers and modems. As technology changes, *ECHO’s* customers desire and expect better products and services. Our success depends
      on
      our ability to improve our existing products and services and to develop and
      market new products and services. The costs and expenses associated with such
      an
      effort could be significant to us. There is no assurance that we will be able
      to
      find the funds necessary to keep up with new technology or that if such funds
      are available that we can successfully improve our existing products and
      services or successfully develop new products and services. Our failure to
      provide improved products and services to our customers or any delay in
      providing such products and services could cause us to lose customers to our
      competitors. Loss of customers could have a material adverse effect on *ECHO* .





**Our
      inability to protect or defend our trade secrets and other intellectual property
      could hurt our business.**





We
      have
      expended a considerable amount of time and money to develop information systems
      for our merchants. We regard these information systems as trade secrets that
      are
      extremely important to our payment processing operations. We rely on trade
      secret protection and confidentiality and/or license agreements with employees,
      customers, partners and others to protect this intellectual property and have
      not otherwise taken steps to obtain additional intellectual property protection
      or other protection on these information systems. We cannot be certain that
      we
      have taken adequate steps to protect our intellectual property. In addition,
      our
      third-party confidentiality agreements can be breached and, if they are, there
      may not be an adequate remedy available to us. If our trade secrets become
      known, we may lose our competitive position, including the loss of our merchant
      and bank customers. Such a loss could severely impact our results of operations
      and financial condition.





Additionally,
      while we believe that the technology underlying our information systems does
      not
      infringe upon the rights of any third parties, there is no assurance that third
      parties will not bring infringement claims against us. We also have the right
      to
      use the technology of others through various license agreements. If a third
      party claimed our activities and/or these licenses were infringing their
      technology, while we may have some protection from our third-party licensors,
      we
      could face additional infringement claims or otherwise be obligated to stop
      utilizing intellectual property critical to our technology infrastructure.
      If we
      are not able to implement other technology to substitute the intellectual
      property underlying a claim, our business operations could be severely effected.
      Additionally, infringement claims would require us to incur significant defense
      costs and expenses and, to the extent we are unsuccessful in defending these
      claims, could cause us to pay monetary damages to the person or entity making
      the claim. Continuously having to defend such claims or otherwise making
      monetary damages payments could materially adversely affect our results of
      operations.





**If
      we do not continue to invest in research and development, and/or otherwise
      improve our technology platforms, we could lose our competitive
      position.**





Because
      technology in the payment processing industry evolves rapidly, we need to
      continue to invest in research and development in both the bankcard processing
      business segment and the check-related products segment in order to remain
      competitive. This includes investments in our technology platforms to permit
      them to process higher transaction volumes, to transition some of these
      technologies to more commonly used platforms, to permit us to process foreign
      currency transactions, and to expand our point-of-sale connection capability
      for
      our bankcard processing services. Research and development expenses decreased
      from $1,609,000 in fiscal 2005 to $1,539,000 in fiscal 2006. Most of our
      development project costs were capitalized once we entered into coding and
      testing phases. We continue to evaluate projects, which we believe will assist
      us in our efforts to stay competitive. Although we believe that our investment
      in these projects will ultimately increase earnings, there is no assurance
      as to
      when or if these new products will show profitability or if we will ever be
      able
      to recover the costs invested in these projects. Additionally, if we fail to
      commit adequate resources to grow our technology on pace with market growth,
      we
      could quickly lose our competitive position, including the loss of our merchant
      and bank customers.


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**Failure
      to obtain additional funds can impact our operations and future
      growth.**





We
      use
      funds generated from operations, as well as funds obtained through credit
      facilities and equity financing, to finance our operations. In light of our
      recent financing efforts, and as a result of the cash flow generated from
      operations, we believe we have sufficient cash to support our business
      activities, including research, development and marketing costs. However, future
      growth may depend on our ability to continue to raise additional funds, either
      through operations, bank borrowings, or equity or debt financings. There is
      no
      assurance that we will be able to continue to raise the funds necessary to
      finance growth or continue to generate the funds necessary to finance
      operations, and even if such funds are available, that the terms will be
      acceptable to us. The inability to generate the necessary funds from operations
      or from third parties in the future may require us to scale back our research,
      development and growth opportunities, which could harm our overall operations.





**While
      we maintain insurance protection against claims related to our services, there
      is no assurance that such protection will be adequate to cover potential claims
      and our inability to otherwise pay such claims could harm our business.**





We
      maintain errors and omissions insurance for the services we provide. While
      we
      believe the limit on our errors and omissions insurance policy is adequate
      and
      consistent with industry practice, if claims are brought by our customers or
      other third parties, we could be required to pay the required claim or make
      significant expenditures to defend against such claims in amounts that exceed
      our current insurance coverage. There is no assurance that we will have the
      money to pay potential plaintiffs for such claims if they arise beyond the
      amounts insured by us. Making these payments could have a material adverse
      effect on our business.





**Involvement
      in litigation could harm our business.**





We
      are
      involved in various lawsuits arising in the ordinary course of business.
      Although we believe that the claims asserted in such lawsuits are without merit,
      the cost to us for the fees and expenses to defend such lawsuits could have
      a
      material adverse effect on our financial condition, results of operations or
      cash flow. In addition, there can be no assurance that we will not at some
      time
      in the future experience significant liability in connection with such claims.
      During 2006, we spent approximately $702,000 in legal fees and expenses
      defending these claims.





**Our
      inability to recover from natural disasters could harm our
      business.**




We
      currently maintain two data centers: one in Camarillo, California, and one
      in
      Albuquerque, New Mexico. Should a natural disaster occur in any of the
      locations, it is possible that *ECHO* would
      not be able to fully recover full functionality at one of its data centers.
      To
      minimize this risk, *ECHO* centralized its data processing functionality in Camarillo during fiscal 2005
      and completed a fully redundant site in Albuquerque in October of 2006. Despite
      such contingent capabilities, it is possible a natural disaster could limit
      or
      completely disable a specific service offered by *ECHO* until
      such time that the specific location could resume its functionality. Our
      inability to provide such service could have a material adverse effect on our
      business and results of operations.




**Increases
      in the costs and requirements of technical compliance could harm our
      business.**




The
      services which *ECHO* offers
      require significant technical compliance. This includes compliance to both
      Visa
      and MasterCard regulations and association rules, NACHA guidelines and
      regulations with regard to the Federal Reserve System’s Automated Clearing House
      and check related issues, and various banking requirements and regulations. *ECHO* has
      personnel dedicated to monitoring our compliance to the specific industries
      we
      serve and when
      possible, *ECHO* is
      moving the technical compliance responsibility to other parties. As the
      compliance issues become more defined in each industry, the costs and
      requirements associated with that compliance may present a risk to *ECHO* .
      These
      costs could be in the form of additional hardware, software or technical
      expertise that *ECHO* must
      acquire and/or maintain. Additionally, burdensome or unclear requirements could
      increase the cost of compliance. While *ECHO* currently has these costs under control, we have no control over those entities
      that set the compliance requirements so no assurance can be given that *ECHO* will
      always be able to underwrite the costs of compliance in each industry wherein
      we
      compete.


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          of Contents


**Risks
      Associated With Our Common Stock**




**If
      we need to sell or issue additional shares of common stock or assume additional
      debt to finance future growth, our stockholders’ ownership could be diluted or
      our earnings could be adversely impacted.**





Our
      business strategy may include expansion through internal growth, by acquiring
      complementary businesses or by establishing strategic relationships with
      targeted customers and suppliers. In order to do so, or to fund our other
      activities, we may issue additional equity securities that could dilute our
      stockholders’ stock ownership. We may also assume additional debt and incur
      impairment losses related to goodwill and other tangible assets if we acquire
      another company and this could negatively impact our results of operations.
      As
      of the date of this report, management has no plan to raise additional capital
      through the sale of securities and believes that our cash flow from operations
      together with cash on hand and our established line of credit with Bank of
      the
      West will be sufficient to meet our working capital and other
      commitments.





**We
      have adopted a number of anti-takeover measures that may depress the price
      of
      our common stock.**





Our
      rights agreement, our ability to issue additional shares of preferred stock
      and
      some provisions of our articles of incorporation and bylaws could make it more
      difficult for a third party to make an unsolicited takeover attempt of us.
      These
      anti-takeover measures may depress the price of our common stock by making
      it
      more difficult for third parties to acquire us by offering to purchase shares
      of
      our stock at a premium to its market price.





**Our
      stock price has been volatile.**





Our
      common stock is quoted on the NASDAQ Capital Market, and there can be
      substantial volatility in the market price of our common stock. Over the course
      of the quarter ended September 30, 2006, the market price of our common stock
      has been as high as $18.08, and as low as $13.16. Additionally, over the course
      of the year ended September 30, 2006, the market price of our common stock
      has
      been as high as $18.19 and as low as $9.00. The market price of our common
      stock
      has been, and is likely to continue to be, subject to significant fluctuations
      due to a variety of factors, including quarterly variations in operating
      results, operating results which vary from the expectations of securities
      analysts and investors, changes in financial estimates, changes in market
      valuations of competitors, announcements by us or our competitors of a material
      nature, loss of one or more customers, additions or departures of key personnel,
      future sales of common stock and stock market price and volume fluctuations.
      In
      addition, general political and economic conditions such as a recession, or
      interest rate or currency rate fluctuations may adversely affect the market
      price of our common stock.





**We
      have not paid and do not currently plan to pay dividends, and you must look
      to
      price appreciation alone for any return on your
      investment.**





Some
      investors favor companies that pay dividends, particularly in general downturns
      in the stock market. We have not declared or paid any cash dividends on our
      common stock. We currently intend to retain any future earnings for funding
      growth, and we do not currently anticipate paying cash dividends on our common
      stock in the foreseeable future. Because we may not pay dividends, your return
      on this investment likely depends on your selling our stock at a
      profit.





**ITEM
                1B.**
            **Unresolved
                Staff Comments**





None.




**ITEM
                2.**
            **Properties**





In
      March
      2004, we sold a building in Agoura Hills, California, which was previously
      our
      corporate headquarters, for $2,382,000, and paid off the two notes
      collateralized by this building. As a result of this sale, we recognized a
      gain
      of $1,319,000 on a pre-tax basis.





In
      October 2003, we leased 21,566 square feet of a 40,000 square foot building
      in
      Camarillo, California. Our principal executive offices, including customer
      support, data center and other operational departments were moved to this
      Camarillo location. We signed an addendum to the Camarillo lease in July 2004
      and added 11,103 square feet to the lease. We currently occupy 32,669 square
      feet of the Camarillo building. The lease payment for this facility as of
      September 2006 was $38,000 per month.


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We
      have
      additional real property leases in Albuquerque, New Mexico; Lakewood, Colorado;
      Provo, Utah; and South Jordan, Utah for sales, data center and other operations,
      under various agreements, which expire at various times over the next year.
      The
      total of these lease payments are approximately $18,000 per month.





**ITEM
                3.**
            **Legal
                Proceedings**





We
      are
      involved in various lawsuits arising in the ordinary course of business. Based
      upon current information, management, after consultation with legal counsel,
      believes the ultimate disposition of these lawsuits will have no material effect
      upon either our results of operations, financial position, or cash
      flows.





We
      are
      being sued by Premier Benefits, Inc. and Consumer Reward Network, Inc. (Premier
      Benefits, Inc. and Consumer Reward Network, Inc. v. First Regional Bank, et.al.
      - Los Angeles County Superior Court West District, Santa Monica Courthouse
      -
      Case NO: SC 085538, Filed on May 13, 2005, and Continuity Partners, Inc. v.
      First Regional Bank, et.al. - Los Angeles County Superior Court, West District,
      Santa Monica Courthouse - Case NO: SC086314, Filed on July 18, 2005) for
      withholding funds from the plaintiffs in this matter (bank accounts were frozen
      in May, 2005 when it was discovered that the plaintiffs were processing outbound
      telemarketing transactions through the ACH Network (illegal under NACHA rules)).
      We provided services to the plaintiffs pursuant to our agreement with Internet
      Transaction Services, Inc. (Intertrans). Under the terms of our agreement with
      Intertrans, Intertrans was obligated to, and has, reimburse us for all expenses
      incurred in this matter. The plaintiffs allege that we knowingly violated
      banking rules (NACHA rules) by allowing the plaintiffs to process ACH
      transactions for outbound telemarketing calls and wrongfully withheld the
      plaintiffs’ funds by freezing their bank accounts once First Regional Bank
      discovered that the plaintiffs were processing ACH transactions for outbound
      telemarketing calls. The United States District Court for the Central District
      of California in the case entitled Federal Trade Commission, Plaintiff v.
      Universal Premium Services, Inc., a California Corporation (also known as
      Premier Benefits, Inc.) has issued a Court Order authorizing the Receiver to
      enter into and approve a settlement agreement to which we are party. All funds
      held under attachment (in the amount of $447,862.49 held by the Court and
      $15,757.44 held by First Regional Bank) in connection with the two cases
      referenced above have been distributed to the Receiver. The Order that the
      two
      lawsuits will be dismissed with prejudice, and that we receive a full release
      from the plaintiffs, has been filed with the Los Angeles County Superior Court
      and the Order should be issued by the Court shortly.





**ITEM
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders**





No
      matters were submitted to a vote of *ECHO’s* shareholders in the quarter ended September 30, 2006.


20
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          of Contents


**PART
      II**





**ITEM
                5.**
            **Market
                for Registrant's Common Equity, Related Stockholder
                Matters****and Issuer Purchases of Equity
                Securities**





Since
      January 17, 1986, we have been trading on the over-the-counter market under
      the
      name Electronic Clearing House, Inc. On October 2, 1989, we were accepted for
      listing on the National Association of Securities Dealers Automated Quotation
      System ("NASDAQ") and trade under the symbol of *"ECHO"* on the
      NASDAQ Capital Market. The following table sets forth the range of high and
      low
      closing prices for each quarter for our common stock during the fiscal periods
      indicated, as reported on the NASDAQ Capital Market.





FISCAL
                YEAR ENDED
              SEPTEMBER
                30
            
            High
            
            Low2006First
                Quarter
            
            $
            11.00
            
            $
            9.00Second
                Quarter
            
            $
            13.66
            
            $
            10.01Third
                Quarter
            
            $
            18.19
            
            $
            12.51Fourth
                Quarter
            
            $
            18.08
            
            $
            13.162005First
                Quarter
            
            $
            9.65
            
            $
            7.42Second
                Quarter
            
            $
            9.22
            
            $
            7.99Third
                Quarter
            
            $
            10.35
            
            $
            7.10Fourth
                Quarter
            
            $
            9.36
            
            $
            8.00





The
      prices set forth above are not necessarily indicative of liquidity of the
      trading market. Trading in our common stock is limited and sporadic, as
      indicated by the average monthly trading volume of approximately 275,000 shares
      for the period from October 2005 to September 2006. On November 30, 2006, the
      closing representative price per share of our common stock, as reported on
      the
      NASDAQ Capital Market, was $13.00.





**Holders
      of Common Stock**





As
      of
      November 30, 2006, there were 799 record holders and 2,501 beneficial holders
      of
      our common stock, with 6,824,814 shares outstanding. The number of holders
      of
      record is based on the actual number of holders registered on the books of
      our
      transfer agent and does not reflect holders of shares in "street name" or
      persons, partnerships, associations, corporations or other entities identified
      in security position listings maintained by depository trust
      companies.





**Dividend
      Policy**





We
      have
      not paid any dividends in the past and have no current plan to pay any
      dividends. We intend to devote all funds to the operation of our
      businesses.





**Equity
      Compensation Plan Information**





The
      Equity Compensation Plan Information identified in Item 11 of this Annual Report
      on Form 10-K is incorporated herein by this reference.





**Purchases
      of Equity Securities**





We
      have
      not repurchased, nor has any affiliated purchaser repurchased, shares of our
      common stock during fiscal 2006.


21
 Table
          of Contents


**ITEM
                6.**
            **Selected
                Financial Data**





The
      following table sets forth certain selected consolidated financial data, which
      should be read in conjunction with the Consolidated Financial Statements and
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations included in Items 7 and 8 below. The following data, insofar as
      it
      relates to each of the five years ended September 30, has been derived from
      our
      annual financial statements, including the consolidated balance sheets at
      September 30, 2006 and 2005, and the related consolidated statements of
      operations and of cash flows for the three years ended September 30, 2006,
      2005
      and 2004, and notes thereto appearing elsewhere herein.





**Year
                Ended September 30****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(
                ---- Amounts in thousands, except per share ----
                )****Statement
                of Operations Data:**Revenue
            
            $
            75,311
            
            $
            55,551
            
            $
            48,320
            
            $
            41,149
            
            $
            33,291Costs
                and expenses
            
            
            71,157
            
            
            53,872
            
            
            44,863
            
            
            38,724
            
            
            36,960Income
                (loss) from operations
            
            
            4,154
            
            
            1,679
            
            
            3,457
            
            
            2,425
            
            
            (3,669
            )Interest
                income (expense), net
            
            
            197
            
            
            23
            
            
            (104
            )
            
            (172
            )
            
            (74
            )Gain
                on sale of assets
            
            
            -0-
            
            
            -0-
            
            
            1,319
            
            
            -0-
            
            
            -0-Income
                (loss) before income tax (provision) benefit and cumulative effect
                of an
                accounting change
            
            
            4,351
            
            
            1,702
            
            
            4,672
            
            
            2,253
            
            
            (3,743
            )(Provision)
                benefit for income taxes
            
            
            (2,034
            )
            
            (669
            )
            
            (1,823
            )
            
            (925
            )
            
            1,367Income
                (loss) before cumulative effect of an accounting change
            
            
            2,317
            
            
            1,033
            
            
            2,849
            
            
            1,328
            
            
            (2,376
            )Cumulative
                effect of an accounting change to adopt SFAS 142[1]
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            (4,707
            )
            
            -0-Net
                income (loss)
            
            $
            2,317
            
            $
            1,033
            
            $
            2,849
            
            $
            (3,379
            )
            $
            (2,376
            )Earnings
                (loss) per share-basic
            
            $
            0.35
            
            $
            0.16
            
            $
            0.45
            
            $
            (0.58
            )
            $
            (0.41
            )Earnings
                (loss) per share-diluted
            
            $
            0.33
            
            $
            0.15
            
            $
            0.41
            
            $
            (0.56
            )
            $
            (0.41
            )Weighted
                average number of common shares and equivalents
                outstanding-basic
            
            
            6,614
            
            
            6,485
            
            
            6,312
            
            
            5,812
            
            
            5,788Weighted
                average number of common shares and equivalents
                outstanding-diluted
            
            
            7,005
            
            
            6,939
            
            
            6,900
            
            
            6,024
            
            
            5,788**Balance
                Sheet Data:**Working
                capital
            
            $
            12,542
            
            $
            8,037
            
            $
            8,004
            
            $
            3,201
            
            $
            3,234Current
                assets
            
            
            41,893
            
            
            29,207
            
            
            29,869
            
            
            9,619
            
            
            5,728Total
                assets
            
            
            55,007
            
            
            40,714
            
            
            39,374
            
            
            18,748
            
            
            18,191Current
                liabilities
            
            
            29,351
            
            
            21,170
            
            
            21,865
            
            
            6,418
            
            
            2,494Long-term
                debt, and payables to stockholders and related parties, less current
                portion
            
            
            448
            
            
            705
            
            
            704
            
            
            1,961
            
            
            2,159Total
                stockholders' equity
            
            $
            22,286
            
            $
            17,772
            
            $
            16,240
            
            $
            10,369
            
            $
            13,538





[1]
            The
                Company completed the transitional impairment testing required by
                SFAS No.
                142 in the first quarter of fiscal 2003 and determined that its goodwill
                was fully impaired and a $4.7 million goodwill write-off was
                recognized.


22
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**ITEM
                7.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of Operations**





**OVERVIEW**


Electronic
      Clearing House, Inc. is an electronic payment processor that provides for the
      payment processing needs of merchants, banks and collection agencies. We
      derive
      the majority of our revenue from two main business segments, bankcard and
      transaction processing services (“bankcard services”), whereby we provide
      solutions to merchants and banks to allow them to accept credit and debit card
      payments from consumers, and check-related products (“check services”), whereby
      we provide various services to merchants and banks to allow them to accept
      and
      process check payments from consumers. The principal services we offer within
      these two segments include, with respect to our bankcard services, debit and
      credit card processing, and with respect to our check services, check guarantee,
      check verification, electronic check conversion, check re-presentment, and
      check
      collection.





We
      organize our service offerings under the following brand names:





Ÿ
            MerchantAmerica:*ECHO’s*retail provider of payment processing services to both merchant and
                bank
                markets;


Ÿ
            National
                Check Network (“NCN”): for check verification, check conversion capture
                services and for membership to collection
                agencies;


Ÿ
            *XPRESSCHEX*:
                for check collection services; and


Ÿ
            *ECHO*:
                for wholesale credit card and check processing
                services.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**


Management's
      discussion and analysis of financial condition and results of operations is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires management to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenue and expenses, and related disclosure of contingent assets and
      liabilities. On an on-going basis, management evaluates its estimates, including
      those related to revenue recognition, deferred taxes, reserve for doubtful
      accounts, capitalization of software costs, contingencies and litigation.
      Management bases its estimates on historical experience and on various other
      assumptions that are believed to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      Actual results may differ from these estimates.





Management
      applies the following critical accounting policies in the preparation of our
      consolidated financial statements:





**-**  **Revenue Recognition Policy.** We earn
      revenue from services which include the following: debit and credit card
      processing, check verification, ACH services, check conversion, check
      re-presentment, check collection, and check guarantee. All of these services
      are
      performed pursuant to a contract with customers which states the terms and
      fixed
      price for all contracted services. The price of a service may be a fixed fee
      for
      each transaction and/or a percentage of the transaction processed, depending
      on
      the service. We generally collect our fee at the time we process the transaction
      and accordingly, collectibility of the service fee is reasonably assured.





Revenue
      from debit and credit card (collectively called bankcards) and transaction
      processing revenue is based on a percentage of the transaction value, commonly
      referred to as a discount fee on a credit and debit card transaction processed
      by us. In addition, there is a per transaction fee associated with each bankcard
      transaction which is charged to the merchant. We recognize the processing and
      transaction revenue when the services are performed.





Revenue
      from check verification is derived from fees collected from the merchants when
      a
      check is verified against our own positive and negative check database and
      other
      check databases that we use. This revenue is recognized when the transaction
      is
      processed, since we have no further performance obligations.





Revenue
      from check conversion is derived from fees collected from merchants to convert
      the paper check received by merchants into an ACH transaction, which allows
      us
      to settle the transaction electronically for the merchant. We recognize the
      revenue related to check conversion fees when the services are
      performed.


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Revenue
      from check re-presentment is derived from fees charged to check writers. Check
      re-presentment is a service that allows merchants to collect a paper check
      through the ACH network after a check has previously been presented to the
      bank
      for collection unsuccessfully at least once. The fees earned from the check
      writer are recognized when collected, as collectibility is not reasonably
      assured until that point.





Revenue
      from check guarantee is derived from a percentage of the gross amount of the
      check and guarantees payment of the check to the merchant in the event the
      check
      is not honored by the check writer’s bank. Merchants typically present customer
      checks for processing on a regular basis and, therefore, dishonored checks
      are
      generally identified within a few days of the date the checks are guaranteed
      by
      us. We recognize revenue when the checks are processed at the point of sale.
      At
      the time the guarantee revenue is recognized, we provide a reserve for estimated
      guarantee losses based upon our historical loss experience. In the event the
      check is dishonored, we have the right to collect the full amount of the check
      from the check writer. We establish a receivable from the delinquent check
      writer for the full amount of the guaranteed check. The check guarantee service
      also earns revenue based on fees collected from delinquent check writers, which
      collection fee is recognized when collected, as collectibility is not reasonably
      assured until that point.





Revenue
      from check collection is derived from collection activities performed on behalf
      of a merchant on uncollected checks. The merchants usually keep the face amount
      of the uncollected checks if the collection effort is successful. Our revenue
      is
      derived from the collection fee collected from the check writer. If we refer
      the
      collection item to another collection agency, we will receive a fee from the
      collection agency upon its successful efforts. Collection fee revenue is
      recognized when collected, as collectibility is not reasonably assured until
      that point.





**-** **Deferred
      Taxes.** Deferred
      taxes are determined based on the differences between the financial statement
      and tax bases of assets and liabilities, using enacted tax rates in effect
      for
      the year in which the differences are expected to reverse. Valuation allowances
      are established when necessary to reduce deferred tax assets to the amounts
      expected to be realized. In assessing the need for a valuation allowance,
      management considers estimates of future taxable income and ongoing prudent
      and
      feasible tax planning strategies.





**-** **Chargeback
      Losses.** Chargeback losses occur when a credit card holder presents a valid claim against
      one of our merchants and the merchant has insufficient funds or is no longer
      in
      business resulting in the charge being absorbed by us. We record a receivable
      for those chargebacks for which the merchant is liable but has not made payment.
      We record a provision for estimated chargeback losses at the time bankcard
      transactions are processed. A reserve is estimated based upon a
      historically-determined percentage of gross credit card processing volume and
      actual losses experienced.





**-** **Research
      and Development Expense.** Expenditures for activities relating to product development and improvement
      are
      charged to expense as incurred. Such expenditures amounted to $1,539,000 in
      fiscal year 2006 and $1,609,000 in fiscal year 2005.





**-** **Capitalization
      of Software Costs.** The
      costs of purchased and internally developed software used to provide services
      to
      customers or for the process of internal administration are capitalized and
      amortized on a straight-line basis over the lesser of three years or estimated
      useful life. Under the provisions of Statement of Position 98-1, "Accounting
      for
      the Costs of Computer Software Developed or Obtained for Internal Use," we
      capitalize software costs when both the preliminary project stage is completed
      and management has authorized further funding for the completion of the project.
      Capitalization of costs ceases when the project is substantially complete and
      the software is ready for its intended use. Software developed or obtained
      for
      internal use is tested for impairment whenever events or changes in
      circumstances indicate that its carrying amount may not be
      recoverable.





**-** **Stock-Based
      Compensation.** Effective October 1, 2005, we began recording compensation expense associated
      with stock options in accordance with SFAS No. 123(R), Share-Based Payment.
      Prior to October 1, 2005, we accounted for stock-based compensation related
      to
      stock options under the recognition and measurement principles of Accounting
      Principles Board Opinion No. 25; therefore, we measured compensation expense
      for
      our stock option plan using the intrinsic value method, that is, as the excess,
      if any, of the fair market value of our stock at the grant date over the amount
      required to be paid to acquire the stock, and provided the disclosures required
      by SFAS Nos. 123 and 148. We have adopted the modified prospective transition
      method provided under SFAS No. 123(R), and as a result, have not retroactively
      adjusted results from prior periods. Under this transition method, compensation
      expense associated with stock options recognized in fiscal year 2006 includes
      expense related to the remaining unvested portion of all stock option awards
      granted prior to October 1, 2005, based on the grant date fair value estimated
      in accordance with the original provisions of SFAS No. 123. We have not issued
      any stock options since the adoption of SFAS No. 123(R).


24
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          of Contents


**RESULTS
      OF OPERATIONS**





**Fiscal
      years 2006 and 2005**





Financial
      highlights for fiscal 2006 as compared to fiscal 2005 were as
      follows:





--
            Total
                revenue increased 35.6% to $75.3
                million


--
            Gross
                margin from processing and transaction revenue decreased to 33.5%
                from
                35.4%


--
            Operating
                income increased from $1.7 million to $4.2 million


--
            Diluted
                earnings per share were $0.33 as compared to $0.15 per
                share


--
            Bankcard
                and transaction processing revenue increased by 38.7% to $57.0
                million


--
            Bankcard
                processing volume increased 49.6% to $1.8
                billion


--
            Check-related
                revenue increased by 26.8% to $18.3
                million


--
            ACH
                processing volume increased 18.3% to 38.0 million transactions





REVENUE.
      Total revenue increased 35.6% to $75,311,000 for fiscal 2006, from $55,551,000
      for fiscal 2005. The increase was primarily attributable to 38.7% growth in
      bankcard and transaction processing revenue and 26.8% growth in check services
      revenue year-over-year. This growth has occurred organically from our existing
      merchants and from our marketing initiatives during the year.





The
      bankcard and transaction processing revenue increase was mainly attributable
      to
      a 49.6% increase in bankcard processing volume as compared to fiscal 2005.
      This
      increase was the result of our organic growth and the growth from our various
      marketing channels such as the Agent Bank program.





The
      check-related processing revenue increase was attributable to a 19.3% increase
      in ACH services revenue and an 85.0% increase in check collection revenue.
      The
      high growth in ACH revenue was mainly due to Internet wallet funding activities
      and increases in overall ACH activities.





COST
      OF
      SALES. Bankcard processing expenses are directly related to the changes in
      processing revenue. A majority of our bankcard processing expenses are fixed
      costs and are reflected as a percentage of the total face amount of each
      bankcard transaction, and the remaining costs are based on a fixed rate applied
      to the number of transactions processed. Processing-related expenses, consisting
      of bankcard processing expense and transaction and check processing expense,
      increased 39.6% for the year, from $35,867,000 in fiscal 2005 to $50,072,000
      in
      fiscal 2006. The increase was primarily due to the 35.6% increase in total
      revenue for the year, and a $750,000 increase in amortization
      expense.





Total
      gross margin from processing and transaction services decreased from 35.4%
      in
      fiscal 2005 to 33.5% in fiscal 2006. Gross margin from bankcard and transaction
      processing decreased from 27.5% in fiscal 2005 to 25.0% in fiscal 2006. The
      decrease in gross margin was primarily attributable to several high volume
      merchants who negotiated lower than average discount rates due to the size
      of
      their accounts. Additionally, gross margin from check processing increased
      from
      58.0% in fiscal 2005 to 60.1% in fiscal 2006. The check services gross margin
      increase was mainly attributable to an increase in Internet wallet transactions,
      which yields higher margins.





EXPENSE.
      Other operating costs such as personnel costs, telephone, depreciation expenses
      and outside services increased 2.2%, from $5,653,000 in fiscal 2005 to
      $5,775,000 in fiscal 2006. This was primarily due to the increases to support
      the 35.6% revenue growth in fiscal 2006.





Research
      and development expenses decreased 4.4%, from $1,609,000 in fiscal 2005 to
      $1,539,000 in fiscal 2006. Research and development initiatives are critical
      for
      us to remain competitive with our peers. Several major development projects
      were
      completed during fiscal year 2006. However, given the rapid change in technology
      in our industry, we plan to continue to invest in product development in both
      the bankcard processing business segment and the check-related products segment
      in order to stay ahead of our competitors.


25
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Selling,
        general and administrative (SG&A) expenses increased 28.2% from $10,743,000
        in fiscal 2005 to $13,771,000 in fiscal 2006. This increase was primarily
        attributable to: 1) a $1,234,000 increase in salaries, bonus and payroll
        taxes
        due to the increase in employees to support the Company’s growth and the
        executive compensation expense approved by the Board of Directors for 2006,
        as
        well as an increase in bonus compensation; 2) a $1,357,000 increase in stock
        compensation expense as a result of the implementation of SFAS No. 123(R)
        starting this fiscal year, including $204,000 of additional stock compensation
        expense to correct certain prior year stock option errors of which $177,000
        related to prior periods (see Note 15); 3) a $648,000 increase in professional
        fees mainly related to Sarbanes-Oxley (“SOX”) expenses; and 4) $350,000 in
        professional expenses related to the Company exploring a strategic discussion
        with an unrelated party in the fourth quarter. As a percentage of total revenue,
        SG&A expenses decreased from 19.3% in fiscal 2005 to 18.3% in fiscal
        2006.


OPERATING
      INCOME. Operating income increased from $1,679,000 in fiscal 2005 to $4,154,000
      in fiscal 2006, an increase of 147.4%. The increase in operating income was
      primarily attributable to the 35.6% increase in revenue offset by the 1.9%
      decrease in gross margin and the increased selling, general and administrative
      expenses described above.




INTEREST
      INCOME AND EXPENSE. Interest expense decreased to $92,000 for fiscal 2006 from
      $113,000 for fiscal 2005. The decrease was due to the full repayment of one
      note
      and some capital leases during fiscal 2006. Interest income increased from
      $136,000 in fiscal 2005 to $289,000 in fiscal 2006 due to higher cash balances
      on hand throughout fiscal year 2006 and those balances earning higher rates
      as
      compared to 2005.





EFFECTIVE
      TAX RATE. The income tax provision was $2,034,000 for fiscal 2006 as compared
      to
      $669,000 for fiscal 2005. Our effective tax rate was 46.7% for fiscal 2006,
      as
      compared to 39.3% for fiscal 2005. The increase was primarily due to
      non-deductible stock compensation expense related to the adoption of SFAS No.
      123(R) in 2006. See Notes to Consolidated Financial Statements included
      elsewhere herein for a further explanation of the income tax expense and a
      reconciliation of reported income taxes to the amount utilizing the statutory
      rate.





NET
      INCOME. Net income for fiscal 2006 was $2,317,000, as compared to $1,033,000
      for
      fiscal 2005. This increase was primarily attributable to the increase in
      revenues.





SEGMENT
      RESULTS


*Bankcard
      and Transaction Processing.* For the
      year ended September 30, 2006, bankcard processing and transaction revenue
      accounted for approximately 75.7% of our revenue, compared to 74.0% in fiscal
      2005. Bankcard processing and transaction revenue increased 38.7%, from
      $41,093,000 in fiscal 2005 to $56,983,000 in fiscal 2006. This increase was
      mainly attributable to a 49.6% increase in bankcard processing volume as
      compared to fiscal 2005. We continue to increase our bankcard processing
      business primarily through organic growth and various sales and marketing
      programs.





In
      fiscal
      2006, the bankcard and transaction processing segment generated operating income
      of $8,495,000, or 14.9% of the related revenue, as compared to $5,829,000,
      or
      14.2% of the related revenue in fiscal 2005. This increase in operating income
      was primarily due to the increase in revenue offset by lower gross margin and
      SG&A expense.





We
      purchased a fully integrated, multi-modular bankcard processing system from
      Oasis Technologies for approximately $1.6 million which included three payment
      processing modules: Clearing, Merchant Accounting System (MAS) and Switch.
      We
      have incurred an additional $2.4 million of internal development costs thus
      far
      in implementing this system. The implementation of this system will give us
      greater flexibility to price our credit card processing services, allowing
      us to
      attract and retain larger merchants as well as the small and mid-market
      merchants that have been our target market. Integration of the Clearing module
      was in its final testing phase in September 2006 and select merchants were
      moved
      to the platform in October 2006. Full deployment of the total base is expected
      to occur by December of 2006.


26
 Table
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*Check
      Related Products.* Check-related revenue increased from $14,458,000 for fiscal 2005 to $18,328,000
      for fiscal 2006, an increase of 26.8%. Check verification revenue increased
      16.8% to $4,258,000 for fiscal 2006 from $3,645,000 for fiscal 2005. Check
      conversion, ACH services and check re-presentment revenue increased 19.3% to
      $9,842,000 for fiscal 2006, from $8,251,000 for fiscal 2005. Additionally,
      check
      collection revenue increased 85.0%, from $2,096,000 in fiscal 2005 to $3,879,000
      in fiscal 2006. The high growth in ACH revenue was due to Internet wallet
      activities and the overall increase in the ACH and conversion product. Total
      ACH
      transactions processed during fiscal 2006 were 38.0 million transactions, as
      compared to 32.1 million transactions processed in fiscal 2005, an increase
      of
      18.3%.


In
      October 2006, the Unlawful Internet Gambling Enforcement Act was passed and
      signed into law. The best estimate we have currently for the amount of revenue
      we will potentially lose if each of the current providers of Internet wallets
      cease funding gambling sites is $7 million annually. Because we are unable
      to
      differentiate between gaming and non-gaming transactions when funding an
      Internet wallet, the estimate includes all revenues, including those not
      associated with gaming.





Check
      services revenue made up 24.3% of the total processing and transaction revenue
      for fiscal 2006 as compared to 26.0% of the total processing and transaction
      revenue for fiscal 2005. Check-related operating income was $4,384,000 in fiscal
      2006, as compared to operating income of $2,204,000 in fiscal 2005, an increase
      of 98.9%. The increase in operating income was mainly due to the 26.8% increase
      in check-related revenue.





**Fiscal
      years 2005 and 2004**





Financial
      highlights for fiscal 2005 as compared to fiscal 2004 were as
      follows:





--
            Total
                revenue increased 15.0% to $55.6
                million


--
            Gross
                margin from processing and transaction revenue decreased to 35.6%
                from
                37.3%


--
            Operating
                income decreased from $3.5 million to $1.7 million


--
            Diluted
                earnings per share were $0.15 as compared to $0.41 per
                share


--
            Bankcard
                and transaction processing revenue increased by 11.4% to $41.1
                million


--
            Bankcard
                processing volume increased 12.7% to $1.2
                billion


--
            Check-related
                revenue increased by 26.6% to $14.5
                million


--
            ACH
                processing volume increased 24.6% to 32.1 million transactions





REVENUE.
      Total revenue increased 15.0% to $55,551,000 for fiscal 2005, from $48,320,000
      for fiscal 2004. The increase was primarily attributable to 11.4% growth in
      bankcard and transaction processing revenue and 26.6% growth in check services
      revenue year-over-year. This growth has occurred organically from our existing
      merchants and from our marketing initiatives during the year.





The
      bankcard and transaction processing revenue increase was mainly attributable
      to
      a 12.7% increase in bankcard processing volume as compared to fiscal 2004.
      This
      increase was the result of our organic growth and the growth from our various
      marketing channels such as the Agent Bank program and the MerchantAmerica
      marketing program.





The
      check-related processing revenue increase was attributable to a 41.8% increase
      in ACH services revenue and a 6.4% increase in check verification revenue.
      The
      high growth in ACH revenue was mainly due to Internet wallet funding activities
      and increases in overall ACH activities.





COST
      OF
      SALES. Bankcard processing expenses are directly related to the changes in
      processing revenue. A majority of our bankcard processing expenses are fixed
      costs and are reflected as a percentage of the total face amount of each
      bankcard transaction, and the remaining costs are based on a fixed rate applied
      to the number of transactions processed. Processing-related expenses, consisting
      of bankcard processing expense and transaction and check processing expense,
      increased 18.1% for the year, from $30,370,000 in fiscal 2004 to $35,867,000
      in
      fiscal 2005. The increase reflects the 15.0% increase in total revenue for
      the
      year, a $449,000 increase in amortization expense and a $1,020,000 increase
      in
      commission expense.


27
 Table
          of Contents


Total
      gross margin from processing and transaction services decreased from 37.3%
      in
      fiscal 2004 to 35.6% in fiscal 2005. Gross margin from bankcard and transaction
      processing decreased from 29.6% in fiscal 2004 to 27.5% in fiscal 2005. The
      decrease in gross margin was primarily attributable to several high volume
      merchants who negotiated lower than average discount rates due to the size
      of
      their accounts. Additionally, gross margin from check processing decreased
      from
      61.4% in fiscal 2004 to 58.0% in fiscal 2005. The check services gross margin
      decrease was mainly attributable to an increase in commission expense and
      amortization expense.





EXPENSE.
      Other operating costs such as personnel costs, telephone, depreciation expenses
      and outside services increased 9.1%, from $5,182,000 in fiscal 2004 to
      $5,653,000 in fiscal 2005. This was primarily due to the 9% increase in salaries
      to support the 15% growth in fiscal 2005.





Research
      and development expenses increased 9.8%, from $1,465,000 in fiscal 2004 to
      $1,609,000 in fiscal 2005. Research and development initiatives are critical
      for
      us to remain competitive with our peers. Several major development projects
      were
      completed during fiscal year 2005. However, given the rapid change in technology
      in our industry, we plan to continue to invest in product development in both
      the bankcard processing business segment and the check-related products segment
      in order to stay ahead of our competitors.





Selling,
      general and administrative (SG&A) expenses increased 36.9% from $7,846,000
      in fiscal 2004 to $10,743,000 in fiscal 2005. This increase was primarily
      attributable to: 1) greater personnel costs due to cost of living adjustments;
      2) growth in sales and marketing expenses to implement our sales and marketing
      strategies; 3) a $1,141,000 increase in legal expenses to defend several
      lawsuits; and 4) $150,000 increase in legal settlement expenses. Even though
      we
      were expecting legal expenses related to the LMLP lawsuit to decrease in the
      second half of 2005, legal expense continues to be higher than expected.





As
      a
      percentage of total revenue, SG&A expenses increased from 16.2% in fiscal
      2004 to 19.3% in fiscal 2005.





OPERATING
      INCOME. Operating income decreased from $3,457,000 in fiscal 2004 to $1,679,000
      in fiscal 2005, a decrease of 51.4%. The decrease in operating income was
      primarily attributable to the 1.7% decrease in gross margin and the increased
      selling, general and administrative expenses described above.




INTEREST
      EXPENSE. Interest expense decreased to $113,000 for fiscal 2005, from $175,000
      for fiscal 2004. The decrease was due to the full repayment of one note and
      some
      capital leases during fiscal 2005. Interest income increased from $71,000 in
      fiscal 2004 to $136,000 in fiscal 2005 due to higher than average cash balances
      on hand throughout fiscal year 2005.





GAIN
      ON
      SALE OF ASSETS. Fiscal 2004 results were favorably affected by a pre-tax gain
      of
      $1,319,000 resulting from the sale of the building that formerly held the
      Company's principal executive offices.





EFFECTIVE
      TAX RATE. The income tax provision was $669,000 for fiscal 2005 as compared
      to
      $1,823,000 for fiscal 2004. Our effective tax rate was 39.3% for fiscal 2005,
      as
      compared to 39.0% for fiscal 2004. See Notes to Consolidated Financial
      Statements included elsewhere herein for a further explanation of the income
      tax
      expense and a reconciliation of reported income taxes to the amount utilizing
      the statutory rate.





NET
      INCOME. Net income for fiscal 2005 was $1,033,000, as compared to $2,849,000
      for
      fiscal 2004. This decrease was primarily attributable to the gain on the sale
      of
      assets in fiscal 2004 and the 36.9% increase in selling, general and
      administrative expenses in fiscal 2005.





SEGMENT
      RESULTS


*Bankcard
      and Transaction Processing.* For the
      year ended September 30, 2005, bankcard processing and transaction revenue
      accounted for approximately 74.0% of our revenue, compared to 76.4% in fiscal
      2004. Bankcard processing and transaction revenue increased 11.4%, from
      $36,897,000 in fiscal 2004 to $41,093,000 in fiscal 2005. This increase was
      mainly attributable to a 12.7% increase in bankcard processing volume as
      compared to fiscal 2004. We continue to increase our bankcard processing
      business primarily through organic growth and various sales and marketing
      programs.


28
 Table
          of Contents


In
      fiscal
      2005, the bankcard and transaction processing segment generated operating income
      of $5,829,000, or 14.2% of the related revenue, as compared to $5,977,000,
      or
      16.2% of the related revenue in fiscal 2004. This decrease in operating income
      was primarily due to the lower gross margin combined with higher research and
      development expenses and SG&A expense.





We
      purchased a fully integrated, multi-modular bankcard processing system from
      Oasis Technologies for approximately $1.6 million. We incurred an additional
      $1.5 million of internal development costs in fiscal 2005 to implement this
      system. The implementation of this system will give us greater flexibility
      to
      price our credit card processing services, allowing us to attract and retain
      larger merchants as well as the small and mid-market merchants that have been
      our target market. This project experienced numerous implementation delays,
      mainly as a result of vendor software delivery issues and the vigorous testing
      required prior to implementation.





*Check
      Related Products.* Check-related revenue increased from $11,423,000 for fiscal 2004 to $14,458,000
      for fiscal 2005, an increase of 26.6%. Check verification revenue increased
      6.4%
      to $3,645,000 for fiscal 2005, from $3,425,000 for fiscal 2004. Check
      conversion, ACH services and check re-presentment revenue increased 41.8% to
      $8,251,000 for fiscal 2005, from $5,820,000 for fiscal 2004. Additionally,
      check
      collection revenue increased 15.4%, from $1,816,000 in fiscal 2004 to $2,096,000
      in fiscal 2005. The high growth in ACH revenue was due to Internet wallet
      funding activities and the overall increase in the ACH and conversion product.
      Total ACH transactions processed during fiscal 2005 were 32.1 million
      transactions, as compared to 25.8 million transactions processed in fiscal
      2004,
      an increase of 24.6%.





Check
      services revenue made up 26.0% of the total processing and transaction revenue
      for fiscal 2005 as compared to 23.6% in fiscal 2004. Check-related operating
      income was $2,204,000 in fiscal 2005, as compared to operating income of
      $1,644,000 in fiscal 2004, an increase of 34.1%. The increase in operating
      income was mainly due to the 26.6% increase in check-related revenue.





The
      Visa
      Program did not grow as much as we had expected in fiscal 2005. Even though
      we
      were getting new merchants to sign up under the Visa Program, some of the larger
      merchants have shown a rather significant decline in the total transactions
      processed for fiscal 2005 as compared to fiscal 2004. We attribute this to
      the
      overall decline in check usage in the market. Additionally, certain store
      branded credit cards from one of our major Visa POS Check merchants shifted
      some
      of the payment transactions away from check.





**LIQUIDITY
      AND CAPITAL RESOURCES**


As
        of
        September 30, 2006, we had available cash and cash equivalents of $11,604,000,
        restricted cash of $1,594,000 in reserve with our primary processing banks
        and
        working capital of $12,542,000.
 
 Accounts
        receivable, net of allowance for doubtful accounts, increased to $2,914,000
        at
        September 30, 2006 from $2,421,000 at the end of fiscal 2005. Allowance for
        doubtful accounts, which reflects chargeback losses increased to $392,000
        at the
        end of fiscal 2006 from $92,000 at September 30, 2005. The increase in accounts
        receivable was due to the higher processing revenue generated in fiscal 2006
        and
        therefore higher month-end balances. In addition, the increase in allowance
        for
        doubtful accounts was mainly due to the bankruptcy of one merchant.
 
 Net
        cash
        provided by operating activities for the year ended September 30, 2006 was
        $9,649,000, as compared to net cash provided by operating activities of
        $3,888,000 for fiscal 2005. The $5,761,000 increase in cash from operations
        was
        primarily attributable to the $1,284,000 increase in net income between fiscal
        2006 and 2005, an increase of $1,369,000 in stock-based compensation expense
        due
        to the adoption of SFAS No. 123(R) on October 1, 2005, an increase of $1,066,000
        in deferred income taxes, and a $867,000 increase in depreciation and
        amortization.





Net
      cash
      used in investing activities was $5,197,000 for fiscal 2006 as compared to
      $4,636,000 for the fiscal 2005. During fiscal 2006, we used $5,200,000 for
      purchases of equipment and capitalized software costs as compared to $4,640,000
      for fiscal 2005.





Net
      cash
      provided by financing activities was $420,000 for the current fiscal year as
      compared to net cash used in financing activities of $96,000 for fiscal year
      2005. We paid off $282,000 in notes payable, used $112,000 for the repayment
      of
      capitalized leases and received $580,000 from the exercise of employee stock
      options.


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During
      2006, we utilized the remainder of our net operating loss carryforwards for
      federal and state tax purposes. We expect our effective income tax rate to
      be
      approximately 46% in 2007, and expect to make tax cash payments accordingly.





As
      of
      September 2006, we had a $3,000,000 credit line with Bank of the West for
      working capital needs which have yet to be utilized. We were in compliance
      with
      our debt covenants at September 30, 2006.





At
      September, 2006, we had the following cash commitments:





Payments
      Due By Period




Contractual
              Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            More
                Than
              5
                yearsLong-term
                debt including interest
            
            $
            745,000
            
            $
            300,000
            
            $
            407,000
            
            $
            38,000
            
            $
            -0-Capital
                lease obligations
            
            
            71,000
            
            
            37,000
            
            
            34,000
            
            
            -0-
            
            
            -0-Operating
                leases
            
            
            1,093,000
            
            
            594,000
            
            
            499,000
            
            
            -0-
            
            
            -0-Minimum
                vendor commitments
            
            
            550,000
            
            
            300,000
            
            
            250,000
            
            
            -0-
            
            
            -0-Total
                contractual cash obligations
            
            $
            2,459,000
            
            $
            1,231,000
            
            $
            1,190,000
            
            $
            38,000
            
            $
            -0-




Our
      primary source of liquidity is expected to be cash flow generated from
      operations and cash and cash equivalents currently on hand. Management believes
      that our cash flow from operations together with cash on hand and our
      established line of credit with Bank of the West will be sufficient to meet
      our
      working capital and other commitments for a period of at least twelve months.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





At
      September 30, 2006, we did not have any off-balance sheet
      arrangements.





**NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      2006,
      the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157). SFAS No.
      157 provides guidance for using fair value to measure assets and liabilities.
      The standard expands required disclosures about the extent to which companies
      measure assets and liabilities at fair value, the information used to measure
      fair value, and the effect of fair value measurements on earnings. SFAS No.
      157
      applies whenever other standards require (or permit) assets or liabilities
      to be
      measured at fair value. SFAS No. 157 does not expand the use of fair value
      in
      any new circumstances. SFAS No. 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. We do not expect the impact to be material to our financial
      condition or results of operations.





In
      2006,
      the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108) which addresses
      quantifying the financial statement effects of misstatements, specifically,
      how
      the effects of prior year uncorrected errors must be considered in quantifying
      misstatements in the current year financial statements. SAB No. 108 is effective
      for fiscal years ending after November 15, 2006. We will adopt the provisions
      of
      SAB No. 108 as of October 1, 2006, and we do not expect it to have a material
      impact to our financial condition or results of operations.


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In
      2006,
      the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes - an interpretation of FASB Statement 109” (FIN 48). This interpretation
      clarifies the accounting for uncertain taxes recognized in a company’s financial
      statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The
      interpretation requires us to analyze the amount at which each tax position
      meets a “more likely than not” standard for sustainability upon examination by
      taxing authorities. Only tax benefit amounts meeting or exceeding this standard
      will be reflected in tax provision expense and deferred tax asset balances.
      The
      interpretation also requires that any differences between the amounts of tax
      benefits reported on tax returns and tax benefits reported in the financial
      statements be recorded in a liability for unrecognized tax benefits. The
      liability for unrecognized tax benefits is reported separately from deferred
      tax
      assets and liabilities and classified as current or noncurrent based upon the
      expected period of payment. Additional disclosure in the footnotes to the
      audited financial statements will be required concerning the income tax
      liability for unrecognized tax benefits, any interest and penalties related
      to
      taxes that are included in the financial statements, and open statutes of
      limitations for examination by major tax jurisdictions. FIN 48 is effective
      for
      annual periods beginning after December 15, 2006 and any cumulative effect
      of
      adopting FIN 48 will be recorded as a change in accounting principle in the
      financial statements for the three months ended March 31, 2007. We are currently
      evaluating the potential impact of FIN 48 on our consolidated financial
      statements.




**ITEM
                7A.**
            **Quantitative
                and Qualitative Disclosures About Market Risk******





We
      are
      currently not exposed to any significant financial market risks from changes
      in
      foreign currency exchange rates or changes in interest rates and do not use
      derivative financial instruments. All of our revenue and capital spending is
      transacted in U.S. dollars. However, in the future, we may enter into
      transactions in other currencies. An adverse change in exchange rates would
      result in a decline in income before taxes, assuming that each exchange rate
      would change in the same direction relative to the U.S. dollar. In addition
      to
      the direct effects of changes in exchange rates, such changes typically affect
      the volume of sales or foreign currency sales price as competitors’ products
      become more or less attractive.





**ITEM
                8.**
            **Financial
                Statements and Supplementary
                Data**





The
      Financial Statements and Supplementary Data are listed under "Item 15. Exhibits,
      Financial Statement Schedules".




**ITEM
                9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**





No
      disagreements with accountants on accounting and financial disclosure have
      occurred during the two most recent fiscal years.





On
      April
      14, 2006, our board and its audit committee engaged BDO Seidman LLP to serve
      as
      our independent registered public accounting firm for the year ending September
      30, 2006. PricewaterhouseCoopers, LLP previously served as our independent
      registered public accounting firm until April 13, 2006. From October 1, 2004
      through April 13, 2006, we did not consult with BDO Seidman LLP regarding any
      of
      the following:





1.
            The
                application of accounting principles to a specified transaction,
                either
                completed or proposed;





2.
            The
                type of audit opinion that might be rendered on our financial statements,
                and one of the following was provided to us by BDO Seidman LLP: (a)
                a
                written report, or (b) oral advice that BDO Seidman LLP concluded
                was an
                important factor considered by the company in reaching a decision
                as to an
                accounting, auditing or financial reporting issue;





3.
            Any
                matter that was the subject of a disagreement, as that term is defined
                in
                Item 304(a)(1)(iv) of Regulation S-K and the related instructions
                to Item
                304 of Regulation S-K; or





4.
            A
                reportable event, as that item is defined in Item 304(a)(1)(v) of
                Regulation S-K.





The
      reports of our former independent registered public accounting firm,
      PricewaterhouseCoopers, LLP, on our financial statements for 2004 and 2005
      contained no adverse opinion or disclaimer of opinion and were not qualified
      or
      modified as to uncertainty, audit scope or accounting principle. In connection
      with its audits for 2004 and 2005 and through April 13, 2006, there have been
      no
      disagreements with PricewaterhouseCoopers, LLP on any matter of accounting
      principle or practices, financial statement disclosure or auditing scope or
      procedure, which disagreements if not resolved to the satisfaction of
      PricewaterhouseCoopers, LLP would have caused it to make reference thereto
      in
      its reports on the financial statements for such years. From January 1, 2004
      through April 13, 2006, there have been no reportable events (as defined in
      Item
      304(a)(1)(v) of Regulation S-K).





We
      provided PricewaterhouseCoopers, LLP with a copy of the foregoing disclosures.
      A
      copy of PricewaterhouseCoopers, LLP’s letter, dated April 13, 2006, stating its
      agreement with such statements, is incorporated by reference to Exhibit 16.1
      attached to the previous report on Form 8-K filed with the SEC on April 18,
      2006.


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**ITEM
                9A.**
            **Controls
                and Procedures**





**Conclusion
      Regarding the Effectiveness of Disclosure Controls and
      Procedures**





As
      of
      September 30, 2006, the end of the period covered by this report, under the
      supervision and with the participation of management, including our Chief
      Executive Officer and our Chief Financial Officer, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
      Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer
      and our Chief Financial Officer have concluded that as of September 30, 2006,
      our disclosure controls and procedures were effective.





**Management’s
      Report on Internal Control over Financial Reporting**





The
      management of *ECHO* is responsible for establishing and maintaining
      adequate internal control over financial reporting. Internal control over
      financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the
      Securities Exchange Act of 1934, as amended, as a process designed by, or under
      the supervision of, the Company’s principal executive and principal financial
      officers and effected by the Company’s board of directors, management and other
      personnel to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with generally accepted accounting principles and includes those
      policies and procedures that:





(i) pertain
      to the maintenance of records that in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the
      Company;





(ii) provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company are
      being made only in accordance with authorizations of management and directors
      of
      the Company; and





(iii)  provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use or disposition of the Company's assets that could have a
      material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risks that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.





Our
      management assessed the effectiveness of the Company's internal control over
      financial reporting as of September 30, 2006. In making this assessment, our
      management used the criteria set forth by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
      Framework.





Based
      on
      our assessment, management believes that, as of September 30, 2006, the
      Company's internal control over financial reporting is effective.




Our
        management’s assessment of the effectiveness of the Company’s internal control
        over financial reporting as of September 30, 2006 has been audited by BDO
        Seidman, LLP, an independent registered public accounting firm, as stated
        in
        their report which appears on page F2 of this annual report on Form 10-K.


**Changes
      in Internal Control over Financial Reporting**





During
      the quarter ended September 30, 2006, there
      was
      no change in our internal control over financial reporting that materially
      affects, or that is reasonably likely to materially affect, our internal control
      over financial reporting .


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**ITEM
                9B.**
            **Other
                Information**





None.





**PART
      III**





**ITEM
                10.**
            **Directors
                and Executive Officers of the
                Registrant**





The
      officers and directors of *ECHO* are:





Name
            
            Position
            
            Date
                first became
              Officer
                or DirectorJoel
                M. Barry
            
            Chairman
                of the Board,
            
            1986Chief
              Executive OfficerCharles
                J. Harris
            
            Director,
                President, COO
            
            2005Chief
              Operating OfficerWilliam
                Wied
            
            Chief
                Information Officer
            
            2006Alice
                L. Cheung
            
            Chief
                Financial Officer,
            
            1996TreasurerKarl
                Asplund
            
            Senior
                Vice President
            
            2006Sharat
                Shankar
            
            Senior
                Vice President
            
            2003Patricia
                M. Williams
            
            Senior
                Vice President
            
            1997Jack
                Wilson
            
            Senior
                Vice President
            
            1994Kris
                Winckler
            
            Senior
                Vice President
            
            1999Steve
                Hoofring
            
            Senior
                Vice President
            
            2003Rick
                Slater
            
            Chief
                Technology
            
            1998Officer,
                Vice PresidentHerbert
                L. Lucas, Jr.
            
            Director
            
            1991Aristides
                W. Georgantas
            
            Director
            
            1999Carl
                R. Terzian
            
            Director
            
            2002Richard
                D. Field
            
            Director
            
            2004H.
                Eugene Lockhart
            
            Director
            
            2005





JOEL
      M.
      BARRY, age 56, has been a Director of *ECHO* since
      July 1986, and Chairman of the Board since December 1986. Mr. Barry served
      as
      Chief Financial Officer from May 1987 to June 1990, and Executive Vice President
      from October 1987 to June 1990, when he was designated Chief Executive Officer
      of *ECHO* .
      Mr.
      Barry is also a Director and Chief Executive Officer of the MerchantAmerica
      and *XPRESSCHEX* ,
      Inc.
      wholly owned subsidiaries. From August 1983 to June 1991, Mr. Barry was a
      lecturer and investment counselor for Basics Financial Planning and Investments,
      a firm he founded in 1983. From 1981 to 1983, Mr. Barry owned and operated
      Dynamic Seminars, a marketing company for Financial Dynamics, a financial
      planning firm located in Covina, California. From 1975 to 1981, Mr. Barry was
      manager of Quality Assurance and In-House Customer Service at Science Dynamics
      Corporation, a medical data processing firm. From 1972 to 1974, Mr. Barry owned
      and operated a gospel music recording business located in Anaheim, California.


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CHARLES
      J. HARRIS, age 44, joined *ECHO* in
      September 2005 as President, Chief Operating Officer and a Director to serve
      on
      the Board of Directors of *ECHO* .
      Prior
      to joining the Company, Mr. Harris served in executive, operational and sales
      leadership positions at prominent organizations including Paymentech and
      Electronic Data Systems. His last position was as President of Merchant Link,
      a
      wholly-owned subsidiary of Paymentech, which supplies electronic payment
      technologies and outsourced services to the point-of-sale market.





WILLIAM
      WIED, age 38, joined *ECHO* in
      January 2006 as the Company’s Chief Information Officer. Prior to joining *ECHO* ,
      Mr.
      Wied was the Director of Software Technology for TransCore LP/Roper Industries,
      Scottsdale, Arizona. Prior to that, he served as Vice President of Engineering
      for CarrierPoint, Inc., a division of the TransCore LP group of companies.
      Mr.
      Wied’s background includes responsibility in the areas of design, development
      and deployment of enterprise software solutions in a number of different
      industries including semiconductor, telecommunications, retail and
      transportation logistics.





ALICE
      L.
      CHEUNG, age 49, has served as Treasurer and Chief Financial Officer since July
      1996. Ms. Cheung became a Certified Public Accountant in May 1982. From February
      1988 to January 1996, Ms. Cheung was the Treasurer and Chief Financial Officer
      of American Mobile Systems (AMS). AMS merged with Nextel Communications, Inc.
      in
      1995. Ms. Cheung is an active member of the American Institute of Certified
      Public Accountants and Financial Executive Institute.





KARL
      ASPLUND, age 45, joined *ECHO* in May
      2006 in the newly established position of Senior Vice President of Sales. Before
      joining *ECHO* ,
      Mr.
      Asplund was the Senior Vice President of Genpass Technologies in Irving, Texas.
      Prior to that, he served as Group Manager of Business Development for First
      USA/Paymentech and was the Founder and President of Merchant Card Management
      Systems.





SHARAT
      SHANKAR, age 36, joined *ECHO* in June
      2003 as Vice President Risk Management and Business Intelligence and in December
      2003, he was promoted to Senior Vice President. In April 2005, Mr. Shankar
      was
      appointed to hold the position of General Manager Check Services. In January
      2006, he was given the additional responsibility of building and leading the
      strategic partnership group focused on growth through mutually beneficial
      alliances. Prior to joining *ECHO* ,
      Mr.
      Shankar worked at TeleCheck for approximately eight years where he held a
      variety of positions leading up to Vice President of Risk Management. Prior
      to
      TeleCheck, Mr. Shankar held positions at MetLife as well as Hong Kong and
      Shanghai Bank, Madras, India.





PATRICIA
      M. WILLIAMS, age 41, joined *ECHO* in
      September 1996, serving as Director of Program Management. Ms. Williams was
      appointed Vice President Corporate Program Management in October 1997 and Vice
      President Check Services in October 2001. In June of 2003, Ms. Williams was
      appointed to the position of Vice President Sales and Marketing and in December
      2003, was promoted to Senior Vice President. In April 2005 Ms. Williams was
      appointed to hold the position of General Manager of Credit Card Services.
      Prior
      to joining *ECHO* ,
      Ms.
      Williams was an Operations Manager for Bank of America Systems Engineering
      in
      San Francisco. Ms. Williams has also served as a Senior Program manager for
      the
      Los Angeles office of LANSystems, Inc., a nationwide systems integrator as
      well
      as a Senior Project Manager and Systems Engineer for Bank of America Systems
      Engineering in Los Angeles.





JACK
      WILSON, age 62, has served as Vice President of Merchant Services since June
      1994 and was Director of Bankcard Relations for *ECHO* from
      October 1992 until May 1994. In December 2003, he was promoted to Senior Vice
      President Merchant Services and in April 2005, he was appointed to the position
      of Senior Vice President Credit Card Services. Mr. Wilson served as Vice
      President for Truckee River Bank from August 1989 until September 1992.
      Previously, he was Senior Vice President/Cashier of Sunrise Bancorp and a Vice
      President of First Interstate Bank.





KRIS
      WINCKLER, age 41, joined *ECHO* in
      April, 1999, as Vice President of *ECHO* ’s *XPRESSCHEX* subsidiary. In December 2003, he was promoted to Senior Vice President Product
      and Strategic Planning and in April 2005, he was appointed to the position
      of
      Senior Vice President Check Services. Prior to joining *ECHO* ,
      Mr.
      Winckler was a consultant at Andersen Consulting and the President of Magic
      Software, a company specializing in check verification, conversion, and ACH
      software. Mr. Winckler has been active in the check and collection industry
      for
      over ten years and has been a member of the Electronic Check Council of NACHA
      since 1998. Mr. Winckler is an Accredited ACH Professional (AAP) and Certified
      Treasury Professional (CTP).





RICK
      SLATER, age 46, joined *ECHO* in May
      1995 as Vice President of Computer Based Controls, Inc. (“CBC”). Mr. Slater was
      appointed President of CBC in December 1995, Vice President of *ECHO* in
      November 1998 and Chief Technology Officer in October 1999, focusing on
      security, regulatory, process improvement, and strategic technical planning.
      Prior to joining *ECHO* ,
      Mr.
      Slater was President of Slater Research, which provided contract engineering
      services to various institutions. During this time, Mr. Slater directly
      participated in the U.S. Coast Guard COMSTA upgrade project including site
      surveys, systems design and system upgrade integration in a number of sites
      within the U.S. Prior to this position, Mr. Slater served as a group leader
      at
      Aiken Advanced Systems.


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STEVE
      HOOFRING, age 46, joined *ECHO* in
      October 2001 as Implementation Manager for the Check Services group and was
      appointed Vice President Visa POS Check and Client Services in October 2003
      and
      Senior Vice President Operations in August 2005. Mr. Hoofring was President
      of
      Running Dog Software, Inc., which developed ‘Enterprise’ software for small to
      medium size businesses. Prior to this, Mr. Hoofring held several management
      positions with Emerson Power Transmission, a subsidiary of Emerson Electric,
      Inc.





HERBERT
      L. LUCAS, JR., age 80, has been a Director since 1991. He served as President
      from 1972 to 1981 of Carnation International in Los Angeles and as a member
      of
      the Board of Directors of the Carnation Company. Since 1982, Mr. Lucas has
      managed his family investment business. He has served on the Board of Directors
      of various financial and business institutions including Wellington Trust
      Company, Arctic Alaska Fisheries, Inc., Scolr Pharma, Inc. and Sunworld
      International Airways, Inc. Mr. Lucas has served as a Trustee of The J. Paul
      Getty Trust, the Los Angeles County Museum of Art, The Morgan Library, National
      Association of Independent Schools and Winrock International. He was formerly
      a
      member of the Board of Trustees of Princeton University.





ARISTIDES
      W. GEORGANTAS, age 62, has served as a Director since February 1999. Mr.
      Georgantas, prior to his retirement, was Executive Vice President and Chief
      Operating Officer at Chase Manhattan Bank’s Global Asset Management/Private
      Banking Division. He serves as a director of Horizon Blue Cross Blue Shield
      of
      New Jersey, the Glenmede Corporation, the Glenmede Trust Company, the Foundation
      for Public Broadcasting in New Jersey, Mathematica Policy Research, Inc. and
      the
      Rita Allen Foundation.





CARL
      R.
      TERZIAN, age 71, has served as a Director since December, 2002. Following his
      education, Mr. Terzian served as an international good will ambassador for
      President Eisenhower and Secretary of State John Foster Dulles; director of
      public and church relations for the Lutheran Hospital Society of Southern
      California; civic affairs consultant to the California savings and loan
      industry; and dean and professor of government and speech at Woodbury
      University. In 1965, Mr. Terzian joined Charles Luckman Associates, an
      architectural firm, to handle its public relations throughout the United States
      and worldwide and began his own public relations firm, Carl Terzian Associates,
      in 1969. Mr. Terzian currently serves as a director on the board of Transamerica
      Investors, Inc., National Mercantile Bancorp and Mercantile National Bank along
      with various non-profit boards, commissions, advisory groups, and task
      forces.





RICHARD
      D. FIELD, age 66, became a Director of *ECHO* in July
      2004. Mr. Field has worked in the financial services industry for over 35 years
      as an executive of the Bank of New York, Chase, and Citigroup, and a director
      of
      Mastercard International and Chairman of its U.S. Board. Since retiring from
      full time employment in 1997, he has continued his career in the specialty
      financial areas as a co-founder and director of LendingTree, Inc. as well as
      serving on the boards of Providian Financial Corporation and HPSC, Inc.





H.
      EUGENE
      LOCKHART, age 57, was appointed as a member of *ECHO* ’s
      Board
      of Directors in May 2005. Mr. Lockhart is a partner with Diamond Castle
      Holdings, responsible for financial services. Previously, Mr. Lockhart was
      a
      Venture Partner with Oak Investment Partners responsible for the development
      and
      management of Oak’s Financial Services Technology Portfolio. Mr. Lockhart was
      previously President and CEO of MasterCard International, President of the
      Global Retail Bank, Senior Vice Chairman of BankAmerica Corporation, and
      President of Consumer Services at AT&T. Mr. Lockhart has previously sat on
      various public boards such as RJR/Nabisco Holdings, RadioShack Corporation, IMS
      Health, Inc. and Asset Acceptance Capital Corporation.





All
      directors are to be elected to three year terms by the stockholders and serve
      until their respective terms have expired. The Annual Meeting of Stockholders
      was held on February 6, 2006, and the election of directors was held at that
      time. All officers serve at the pleasure of our Board of
      Directors.


35
 Table
          of Contents


**Code
      of Ethical Conduct**





Our
      Board
      of Directors has adopted a Code of Ethical Conduct (the "Code of Conduct").
      We
      require all employees, directors and officers, including our Chief Executive
      Officer and Chief Financial Officer, to adhere to the Code of Conduct in
      addressing legal and ethical issues encountered in conducting their work. The
      Code of Conduct requires that these individuals avoid conflicts of interest,
      comply with all laws and other legal requirements, conduct business in an honest
      and ethical manner and otherwise act with integrity and in our best interest.
      The Code of Conduct contains additional provisions that apply specifically
      to
      our Chief Financial Officer and other financial officers with respect to full
      and accurate reporting. The Code of Conduct is available on our website at
      www.echo-inc.com.





**Audit
      Committee Financial Expert**





Our
      Board
      of Directors has determined that Aristides W. Georgantas, the Chairman of the
      Audit Committee of the Board of Directors, is an “audit committee financial
      expert” as defined in Item 401(h) of Regulation S-K. Mr. Georgantas is
“independent” for purposes of Rule 4200(a)(15) of the NASDAQ Marketplace
      Rules.





**Identification
      of Audit Committee**





Our
      Board
      of Directors has a separately standing Audit Committee. The Audit Committee
      currently consists of Richard D. Field, Aristides W. Georgantas, H. Eugene
      Lockhart, Herbert L. Lucas, Jr., and Carl R. Terzian. Messrs. Field, Georgantas,
      Lockhart, Lucas and Terzian are “independent directors” within the meaning of
      Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended,
      and the NASDAQ Marketplace Rules. The Audit Committee’s primary duties and
      responsibilities include appointment of the independent auditors, evaluation
      of
      the performance and independence of such auditors and review of the annual
      audited financial statements and the quarterly financial statements, as well
      as
      the adequacy of our internal controls.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
      and executive officers and the holders of 10% or more of our Common Stock to
      file with the Securities and Exchange Commission initial reports of ownership
      and reports of changes in ownership of our equity securities. Based solely
      on
      our review of the copies of the forms received by us and written representations
      from certain reporting persons that they have complied with the relevant filing
      requirements, we believe that, during the year ended September 30, 2006, all
      of
      our executive officers, directors and the holders of 10% or more of our Common
      Stock complied with all Section 16(a) filing requirements, except for H. Eugene
      Lockhart, our director, Patricia Williams, our Senior Vice President, and Kris
      Winckler, our Senior Vice President, who did not timely file a Form 4.


36
 Table
          of Contents


**ITEM
                11.**
            **Executive
                Compensation**




The
      following table sets forth the total compensation paid and stock options offered
      by us during the fiscal years ended September 30, 2006, September 30, 2005
      and
      September 30, 2004 to our Chief Executive Officer and to each of our five most
      highly compensated executive officers, other than the Chief Executive Officer
      (collectively with the Chief Executive Officer, the “Named Executive Officers”),
      whose compensation exceeded $100,000 during the fiscal year ended September
      30,
      2006.





**Summary
      Compensation Table**





Annual
              Compensation
            
            Long
                Term CompensationName
            
            Capacities
                in
              Which
                Served
            
            Year
            
            Salary
            
            Bonus
            
            Securities
              Underlying
              Options
            
            Restricted
              Stock
            
            Other[2]Joel
                M. Barry[1]
            
            
            Chairman/Chief
            
            
            2006
            
            $
            273,125
            
            $
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            -0-Executive
                Officer
            
            
            2005
            
            
            261,875
            
            
            50,000
            
            
            30,000
            
            
            -0-
            
            
            -0-2004
            
            
            241,500
            
            
            50,000
            
            
            60,000
            
            
            -0-
            
            
            -0-Charles
                Harris[1]
            
            
            President/Chief
            
            
            2006
            
            $
            275,000
            
            $
            60,000
            
            
            -0-
            
            
            15,000
            
            $
            -0-Operating
                Officer
            
            
            2005
            
            
            6,345
            
            
            -0-
            
            
            -0-
            
            
            50,0002004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Alice
                Cheung
            
            
            Chief
                Financial
            
            
            2006
            
            $
            157,500
            
            $
            40,000
            
            
            -0-
            
            
            -0-
            
            $
            6,385Officer/Treasurer
            
            
            2005
            
            
            147,500
            
            
            42,000
            
            
            30,000
            
            
            -0-
            
            
            5,3902004
            
            
            138,000
            
            
            40,000
            
            
            35,000
            
            
            -0-
            
            
            4,940Jack
                Wilson[1]
            
            
            Sr.
                Vice President
            
            
            2006
            
            $
            147,500
            
            $
            50,000
            
            
            -0-
            
            
            -0-
            
            $
            5,3322005
            
            
            136,250
            
            
            31,000
            
            
            21,000
            
            
            -0-
            
            
            5,1412004
            
            
            123,000
            
            
            35,000
            
            
            35,000
            
            
            -0-
            
            
            4,412Sharat
                Shankar
            
            
            Sr.
                Vice President
            
            
            2006
            
            $
            153,750
            
            $
            25,000
            
            
            -0-
            
            
            -0-
            
            $
            6,1002005
            
            
            143,750
            
            
            56,000
            
            
            21,000
            
            
            -0-
            
            
            5,8552004
            
            
            131,430
            
            
            47,500
            
            
            35,000
            
            
            -0-
            
            
            2,343Rick
                Slater
            
            
            Chief
                Technology
            
            
            2006
            
            $
            136,500
            
            $
            30,000
            
            
            -0-
            
            
            -0-
            
            $
            3,982Officer/Vice
            
            
            2005
            
            
            130,750
            
            
            13,500
            
            
            7,000
            
            
            -0-
            
            
            2,885President
            
            
            2004
            
            
            126,000
            
            
            10,000
            
            
            10,000
            
            
            -0-
            
            
            2,720


_______________________





[1]
            We
                provide Mr. Barry and Mr. Wilson with an automobile. In 2006, we
                provided
                Mr. Harris with relocation expenses in the amount of $22,858 and
                a housing
                allowance of $12,500 and in 2005, relocation expenses in the amount
                of
                $2,500. There has been no compensation paid other than that indicated
                in
                the above table.


[2]
            Represents
                our match of contributions to our 401(k) Plan. We contribute 50%
                of the
                first 6% of each employee’s contribution to the 401(k)
                Plan.


37
 Table
          of Contents


**Aggregated
      Option/SAR Exercises and Fiscal-Year Option/SAR Value
      Table**





The
      following table sets forth information concerning the exercise of stock options
      during the fiscal year ended September 30, 2006 by each of our Named Executive
      Officers and the number and value of unexercised options held by each of our
      Named Executive Officers as of the fiscal year ended September 30,
      2006.


Name
              
              Shares
                acquired
                  on
                0exercise
              
              Value
                realized
              
              Number
                  of
                unexercised
                options/SARS
                at
                  FY-end
              
              Value
                  of
                unexercised
                in-the-money
                Options/SARS
                at
                  FY-end[1]Joel
                  M. Barry
              
              
              15,000
              
              $
              93,750
              
              
              247,500
              
              $
              3,310,575Charles
                  Harris
              
              
              -0-
              
              $
              -0-
              
              
              -0-
              
              $
              -0-Alice
                  Cheung
              
              
              9,000
              
              $
              88,740
              
              
              97,500
              
              $
              1,211,075Jack
                  Wilson
              
              
              2,000
              
              $
              9,160
              
              
              90,500
              
              $
              1,142,625Sharat
                  Shankar
              
              
              10,000
              
              $
              110,400
              
              
              96,000
              
              $
              1,203,450Rick
                  Slater
              
              
              12,000
              
              $
              93,650
              
              
              34,000
              
              $
              430,950





[1]
            Based
                on the closing sales price of the Common Stock on September 30, 2006
                of
                $18.05 per share, less the option exercise
                price.


**Long-Term
        Incentive Plans - Awards in Last Fiscal Year**
 
 The
        following table sets forth information relating to long-term incentive grants
        awarded during the fiscal year ended September 30, 2006 to each of our Named
        Executive Officers. These long-term incentive grants were awarded under our
        Amended and Restated 2003 Incentive Stock Option Plan.
 
 Estimated
                  Future Payments under Non-Stock Price-Based PlansName
              Number
                  of
                Shares,
                Units
                  or
                Other
                  Rights
              Performances
                or
                  Other
                Period
                  Until
                Maturation
                  or
                Payout
              Threshold
              Target
              MaximumJoel
                  M. Barry
              25,000
                  (1)(2)
              3
                  years
              (2)(i)
              (2)(ii)
              (2)(iii)Charles
                  Harris
              20,000
                  (1)(3)
              3
                  years
              (3)(i)
              (3)(ii)
              (3)(iii)Charles
                  Harris
              30,000
                  (4)
              2
                  years
              -
              -
              -Alice
                  Cheung
              5,000
                  (1)(5)
              3
                  years
              (5)(i)
              (5)(ii)
              (5)(iii)Jack
                  Wilson
              5,000
                  (1)(6)
              3
                  years
              (6)(i)
              (6)(ii)
              (6)(iii)Sharat
                  Shankar
              5,000
                  (1)(7)
              3
                  years
              (7)(i)
              (7)(ii)
              (7)(iii)Rick
                  Slater
              5,000
                  (1)(8)
              3
                  years
              (8)(i)
              (8)(ii)
              (8)(iii)
 
 (1)  Each
        long-term incentive grant applies to the cumulative performance of the Company
        over the three fiscal years ended September 30, 2008. Each long-term incentive
        grant permits the identified Named Executive Officer to receive the number
        of
        shares of restricted stock set forth in the table, in addition to cash
        compensation under certain circumstances, based on the Company’s actual
        performance, as compared to a cumulative total EBITDA (Earnings before Interest,
        Taxes, Depreciation and Amortization) target set forth by the Board of Directors
        (the “Performance Target”), for the three fiscal years ended September 30, 2008.
 
 (2) In
        the
        event that, as of September 30, 2008, the Company achieves (i) between 70-75%
        of
        the Performance Target, the Threshold amount would be $0, and Mr. Barry would
        be
        entitled to receive 12,500 shares of restricted stock, (ii) between 90-110%
        of
        the Performance Target, the Target amount would be $0, and Mr. Barry would
        be
        entitled to receive 25,000 shares of restricted stock, and (iii) equal to
        or
        greater than 121% of the Performance Target, the Maximum amount would be
        an
        amount in cash equal to a pro rata portion of a $500,000 bonus pool (based
        on
        the proportion of Mr. Barry’s then current salary as compared to other officers
        in the bonus pool), and Mr. Barry would be entitled to receive 25,000 shares
        of
        restricted stock. The right to receive the Target amount accelerates in the
        event of a change of control of the Company (as defined in the 2003
        Plan).
 
 38
  (3)  In
        the
        event that, as of September 30, 2008, the Company achieves (i) between 70-75%
        of
        the Performance Target, the Threshold amount would be $0, and Mr. Harris
        would
        be entitled to receive 10,000 shares of restricted stock, (ii) between 90-110%
        of the Performance Target, the Target amount would be $0, and Mr. Harris
        would
        be entitled to receive 20,000 shares of restricted stock, and (iii) equal
        to or
        greater than 121% of the Performance Target, the Maximum amount would be
        an
        amount in cash equal to a pro rata portion of a $500,000 bonus pool (based
        on
        the proportion of Mr. Harris’ then current salary as compared to other officers
        in the bonus pool), and Mr. Harris would be entitled to receive 20,000 shares
        of
        restricted stock. The right to receive the Target amount accelerates in the
        event of a change of control of the Company (as defined in the 2003
        Plan).
 
 (4)  This
        is a
        time-based long-term incentive grant whereby Mr. Harris is entitled to receive
        on each of September 1, 2006 and September 1, 2007, respectively, a restricted
        stock grant equal to 15,000 shares of restricted stock, in each case to the
        extent he is still employed by the Company on such date. The first grant
        vested,
        and was issued, on September 1, 2006. This grant accelerates in the event
        of a
        change of control of the Company (as defined in the 2003 Plan).
 
 (5)  In
        the
        event that, as of September 30, 2008, the Company achieves (i) between 70-75%
        of
        the Performance Target, the Threshold amount would be $0, and Ms. Cheung
        would
        be entitled to receive 2,500 shares of restricted stock, (ii) between 90-110%
        of
        the Performance Target, the Target amount would be $0, and Ms. Cheung would
        be
        entitled to receive 5,000 shares of restricted stock, and (iii) equal to
        or
        greater than 121% of the Performance Target, the Maximum amount would be
        an
        amount in cash equal to a pro rata portion of a $500,000 bonus pool (based
        on
        the proportion of Ms. Cheung’s then current salary as compared to other officers
        in the bonus pool), and Ms. Cheung would be entitled to receive 5,000 shares
        of
        restricted stock. The right to receive the Target amount accelerates in the
        event of a change of control of the Company (as defined in the 2003
        Plan).
 
 (6)  In
        the
        event that, as of September 30, 2008, the Company achieves (i) between 70-75%
        of
        the Performance Target, the Threshold amount would be $0, and Mr. Wilson
        would
        be entitled to receive 2,500 shares of restricted stock, (ii) between 90-110%
        of
        the Performance Target, the Target amount would be $0, and Mr. Wilson would
        be
        entitled to receive 5,000 shares of restricted stock, and (iii) equal to
        or
        greater than 121% of the Performance Target, the Maximum amount would be
        an
        amount in cash equal to a pro rata portion of a $500,000 bonus pool (based
        on
        the proportion of Mr. Wilson’s then current salary as compared to other officers
        in the bonus pool), and Mr. Wilson would be entitled to receive 5,000 shares
        of
        restricted stock. The right to receive the Target amount accelerates in the
        event of a change of control of the Company (as defined in the 2003
        Plan).
 
 (7)  In
        the
        event that, as of September 30, 2008, the Company achieves (i) between 70-75%
        of
        the Performance Target, the Threshold amount would be $0, and Mr. Shankar
        would
        be entitled to receive 2,500 shares of restricted stock, (ii) between 90-110%
        of
        the Performance Target, the Target amount would be $0, and Mr. Shankar would
        be
        entitled to receive 5,000 shares of restricted stock, and (iii) equal to
        or
        greater than 121% of the Performance Target, the Maximum amount would be
        an
        amount in cash equal to a pro rata portion of a $500,000 bonus pool (based
        on
        the proportion of Mr. Shankar’s then current salary as compared to other
        officers in the bonus pool), and Mr. Shankar would be entitled to receive
        5,000
        shares of restricted stock. The right to receive the Target amount accelerates
        in the event of a change of control of the Company (as defined in the 2003
        Plan).
 
 (8)  In
        the
        event that, as of September 30, 2008, the Company achieves (i) between 70-75%
        of
        the Performance Target, the Threshold amount would be $0, and Mr. Slater
        would
        be entitled to receive 2,500 shares of restricted stock, (ii) between 90-110%
        of
        the Performance Target, the Target amount would be $0, and Mr. Slater would
        be
        entitled to receive 5,000 shares of restricted stock, and (iii) equal to
        or
        greater than 121% of the Performance Target, the Maximum amount would be
        an
        amount in cash equal to a pro rata portion of a $500,000 bonus pool (based
        on
        the proportion of Mr. Slater’s then current salary as compared to other officers
        in the bonus pool), and Mr. Slater would be entitled to receive 5,000 shares
        of
        restricted stock. The right to receive the Target amount accelerates in the
        event of a change of control of the Company (as defined in the 2003
        Plan).
  39




**Equity
      Compensation Plan Information**





The
      following table sets forth information concerning our equity compensation plans
      as of September 30, 2006.





Plan
                Category
            
            (a)
                Number of
              securities
                to be
              issued
                upon
              exercise
                of
              outstanding
                options
            
            (b)
                Weighted-average
              exercise
                price of
              outstanding
                options
            
            (c)
                Number of securities
              remaining
                available for
              future
                issuance under
              equity
                compensation
              (excluding
                securities
              reflected
                in column (a))Equity
                compensationplans
                approved bysecurity
                holders[1]
            
            
            972,275
            
            $
            5.61
            
            
            227,912




[1]
              Plan
                  represents the 1992 Officers and Key Employees Incentive Stock
                  Option
                  Plan, which expired in May 2002, and our 2003 Incentive Stock Option
                  Plan.





**Compensation
      Committee Interlocks and Insider Participation**





The
      Compensation Committee of our Board of Directors is currently composed of
      Richard D. Field, Aristides W. Georgantas, H. Eugene Lockhart, Herbert L. Lucas,
      Jr., who serves as the Chairman of the Committee, and Carl R. Terzian. No
      interlocking relationship exists between our Board of Directors, Compensation
      Committee or executive officers and the board of directors, compensation
      committee or executive officers of any other company.





**Director
      Compensation**





In
      fiscal
      2006, Messrs. Georgantas, Lucas and Field each received $55,000 and Mr. Terzian
      received $50,000. Mr. Lockhart received 4,514 shares of restricted stock
      pursuant to a Non-Qualified Deferred Compensation Plan adopted by the Company
      on
      June 28, 2005. In fiscal 2005, Messrs. Georgantas, Lucas and Field each received
      $55,000.00 and Mr. Terzian received $52,500. Mr. Lockhart, appointed on May
      5,
      2005, to fill a vacancy on the Board of Directors, received $8,333 in fiscal
      2005. Each outside director received $48,250 in fiscal 2004. Directors are
      compensated for all reasonable expenses and are not compensated for special
      meetings other than regular meetings.


40
 Table
          of Contents


**Employment
      Agreements**





On
      May
      11, 2006, we entered into separation agreements with each of our principal
      executive officers (CEO, CFO and COO) and each of our senior vice presidents
      whereby, in the event of a change in control of *ECHO* (as
      defined in each agreement) each such executive officer would be entitled, to
      the
      extent they remain employed by us at the time of such change in control, to
      the
      following: (i) an acceleration of vesting with respect to all stock option
      and
      restricted stock grants then outstanding and not yet vested, (ii) a portion
      of
      such executive’s anticipated cash or sales commission-based bonus, as
      applicable, for the fiscal year in which the change in control occurred, and
      (iii) in the event that the executive is terminated without cause (as defined
      in
      each agreement), or ceases to provide services to us (or our successor) as
      a
      result of an involuntary termination (as defined in each agreement) within
      the
      two year period following the change in control, then the executive would be
      entitled to a one-time lump sum cash payment equal to a percentage of the
      executive’s anticipated total compensation for the fiscal year in which the
      change in control occurred, plus continued medical benefits for a period of
      time
      following such termination.





With
      respect to each of Messrs. Barry and Harris, our Chief Executive Officer and
      Chief Operating Officer, respectively, in the event of their termination without
      cause or involuntary termination within the two year period following the change
      in control, they would each be entitled to a one-time lump sum payment equal
      to
      two times their anticipated total compensation for the fiscal year in which
      the
      change in control occurred, plus continued medical benefits for a period of
      two
      years following such termination.





With
      respect to Ms. Cheung, our Chief Financial Officer, in the event of her
      termination without cause or involuntary termination within the two year period
      following the change in control, she would be entitled to a one-time lump sum
      payment equal to one and one-half times her anticipated total compensation
      for
      the fiscal year in which the change in control occurred, plus continued medical
      benefits for a period of one and one-half years following such termination.





With
      respect to our senior vice presidents, in the event of their termination without
      cause or involuntary termination within the two year period following the change
      in control, they would each be entitled to a one-time lump sum payment equal
      to
      one and one-half times the respective executive’s anticipated total compensation
      for the fiscal year in which the change in control occurred, plus continued
      medical benefits for a period of one and one-half years following such
      termination.





The
      provision regarding the acceleration of vesting for previously issued stock
      option grants is consistent with the standard terms and conditions of our 2003
      Incentive Stock Option Plan, as amended, which already provides for such
      accelerated vesting.





For
      purposes of the separation agreements, (a) “change in control” means the
      consummation of (i) a merger or consolidation of the Company with or into
      another entity or any other corporate reorganization, if more than 50% of the
      combined voting power (which voting power shall be calculated by assuming the
      conversion of all equity securities convertible (immediately or at some future
      time) into shares entitled to vote, but not assuming the exercise of any warrant
      or right to subscribe to or purchase those shares) of the continuing or
      surviving entity’s securities outstanding immediately after such merger,
      consolidation or other reorganization is owned, directly or indirectly, by
      persons who were not shareholders of the Company immediately prior to such
      merger, consolidation or other reorganization; provided, however, that in making
      the determination of ownership by the shareholders of the Company, immediately
      after the reorganization, equity securities which persons own immediately before
      the reorganization as shareholders of another party to the transaction shall
      be
      disregarded; or (ii) the sale, transfer or other disposition of all or
      substantially all of the Company’s assets; (b) Termination for “cause” means
      termination by reason of: (i) any act or omission knowingly undertaken or
      omitted by the executive with the intent of causing damage to the Company or
      its
      affiliates, its properties, assets or business, or its shareholders, officers,
      directors or employees, (ii) any act of the executive involving a material
      personal profit to the executive, including, without limitation, any fraud,
      misappropriation or embezzlement, involving properties, assets or funds of
      the
      Company or any of its subsidiaries, (iii) the Executive's consistent failure
      to
      perform his normal duties or any obligation under any provision of this
      Agreement, in either case, as directed by our Board of Directors, (iv) the
      conviction of, or pleading nolo contendere to, (A) any crime or offense
      involving monies or other property of the Company; (B) any felony offense;
      or
      (C) any crime of moral turpitude, or (v) the chronic or habitual use or
      consumption of drugs or alcoholic beverages; and (c) “involuntary termination”
means the executive's cessation of the provision of services to the Company
      following (i) a material reduction in the executive's function, authority,
      duties, or responsibilities, without the executive's express written consent;
      or
      (ii) a material reduction in salary.


41
 Table
          of Contents


**Bonus,
      Profit-Sharing and Other Remuneration Plans and Pension and Retirement
      Plans**





In
      addition to salary, the Compensation Committee, from time to time, grants stock
      options and restricted stock grants to executive officers and key personnel
      pursuant to the 2003 Incentive Stock Option Plan. The Compensation Committee
      thus views equity-based compensation as an important component of its long-term,
      performance-based compensation philosophy. Since the value of stock options
      and
      grants of restricted stock bears a direct relationship to our stock price,
      the
      Compensation Committee believes that stock options and grants of restricted
      stock motivate executive officers and key personnel to manage us in a manner
      which will also benefit shareholders. As such, stock options and grants of
      restricted stock are granted at the current market price. One of the principal
      factors considered in granting stock options and grants of restricted stock
      to
      executive officers or key personnel is their ability to influence our long-term
      growth and profitability.





The
      Compensation Committee has also established a bonus program to reward
      extraordinary performance that exceeds pre-set goals established for executive
      officers and key personnel. We believe that such a bonus program provides the
      incentive to exceed such goals, thereby building shareholder value.





We
      have a
      contributory 401(k) Retirement Pension Plan, which covers all employees who
      are
      qualified under the plan provisions. In fiscal 2005, we adopted a non-qualified
      deferred compensation plan that provides additional retirement investment
      alternatives for eligible employees and directors and is complementary to our
      contributory 401(k) Retirement Pension Plan.





**Stock
      Option Plans**


On
        May
        13, 1992, our Board of Directors authorized adoption of the 1992 Officers
        and
        Key Employees Incentive Stock Option Plan (the "1992 Plan"), ratified by
        the
        shareholders at the Annual Meeting held July 10, 1992. The 1992 Plan provided
        for the issuance of up to 81,250 shares of our Common Stock to be subject
        to
        stock options, each to purchase one share of the Common Stock for $3.40 per
        share, subject to adjustment in the event of stock splits, combinations of
        shares, stock dividends or the like.


On
      November 18, 1996, our Board of Directors authorized an increase in the 1992
      Plan to 843,750 shares to be subject to stock options, which action was ratified
      by the shareholders at the Annual Meeting held in February 1997.





On
      February 4, 1999, our Board of Directors authorized an increase in the 1992
      Plan
      to 1,343,750 shares to be subject to stock options, which action was ratified
      by
      the shareholders at the Annual Meeting held in February 1999.





On
      May
      13, 2002, the 1992 Plan expired. The 2003 Incentive Stock Option Plan, which
      provided for the issuance of up to 900,000 shares of Common Stock underlying
      stock options, was approved by our Board of Directors and by our shareholders
      at
      the Annual Meeting of Shareholders held on February 3, 2003.





On
      April
      19, 2004, our Compensation Committee approved certain non-material changes
      to
      our 2003 Incentive Stock Option Plan.





On
      December 21, 2004, our Compensation Committee authorized an amendment and
      restatement of the 2003 Incentive Stock Option Plan to, among other matters,
      (i)
      increase the number of shares to be issued under the 2003 Incentive Stock Option
      Plan from 900,000 to 1,150,000 shares, and (ii) permit the grant of restricted
      stock under the plan.





With
      the
      exception of the foregoing, we have no stock option plans or other similar
      or
      related plans in which any of our officers or directors
      participate.


42
 Table
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**ITEM
                12.**
            **Security
                Ownership of Certain Beneficial Owners and Management****and Related Stockholder
                Matters**





As
      of
      November 30, 2006, there were 6,824,814 shares of our Common Stock outstanding.
      Based on our review of Schedules 13D and 13G filed with the Securities and
      Exchange Commission on the dates noted, the following persons have beneficial
      ownership or control over 5% or more of our outstanding Common
      Stock:




Name
                and Address
            
            Amount
                and
              Nature
                of Beneficial
              Ownership
            
            Percentage
                of
              Outstanding
                Stock
              At
                11/30/06Melvin
                Laufer
            
            
            519,839
            
            
            7.62
            %136
                Beach 140thStreetFar
                Rockaway, NY 11694Schedule
                13D/A filed September 3, 2004William
                Blair and Company LLC
            
            
            795,554
            
            
            11.66
            %222
                W. Adams StreetChicago,
                IL 60606Schedule
                13G/A filed February 14, 2006Discovery
                Equity Partners LP; Discovery
            
            
            644,588
            
            
            9.44
            %Group
                I LLC; Daniel J. Donoghue;Michael
                R. Murphy71
                South Wacker DriveChicago,
                IL 60606Schedule
                13G filed February 7, 2006Continental
                Advisors LLC;
            
            
            360,783
            
            
            5.29
            %David
                P. PurcellOne
                North Wacker Drive, Suite 4140Chicago,
                IL 60606Schedule
                13G/A filed February 13, 2006





The
      following table sets forth the number of shares of Common Stock owned
      beneficially by our (i) directors, (ii) the Named Executive Officers (as defined
      below), and (iii) the executive officers and directors as a group, as of
      November 30, 2006. Such figures are based upon information furnished by the
      persons named.





Name
                and Address
            
            Amount
                and
              Nature
                of Beneficial
              Ownership
            
            Percentage
                of
              Outstanding
                Stock[1]
              At
                11/30/06Joel
                M. Barry
            
            
            320,119
            [2]
            
            4.57
            %730
                Paseo CamarilloCamarillo,
                CA 93010Charles
                Harris
            
            
            65,000
            [2]
            
            0.95
            %730
                Paseo CamarilloCamarillo,
                CA 93010Alice
                L. Cheung
            
            
            82,500
            [2]
            
            1.20
            %730
                Paseo CamarilloCamarillo,
                CA 93010Jack
                Wilson
            
            
            66,945
            [2][5]
            
            0.97
            %730
                Paseo CamarilloCamarillo,
                CA 93010




43
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Sharat
                Shankar
            
            
            49,400
            [2]
            
            0.72
            %730
                Paseo CamarilloCamarillo,
                CA 93010Rick
                Slater
            
            
            37,300
            [2]
            
            0.54
            %730
                Paseo CamarilloCamarillo,
                CA 93010Richard
                Field
            
            
            203,696
            [3]
            
            2.98
            %49
                Locust AvenueNew
                Canaan, CT 06840Aristides
                W. Georgantas
            
            
            16,521
            
            
            0.24
            %180
                Springdale RoadPrinceton,
                NJ 08540H.
                Eugene Lockhart
            
            
            4,514
            
            
            0.07
            %280
                Park AvenueNew
                York, NY 10017Herbert
                L. Lucas, Jr.
            
            
            57,880
            [4]
            
            0.85
            %12011
                San Vicente Blvd.Los
                Angeles, CA 90049Carl
                R. Terzian
            
            
            3,031
            
            
            0.04
            %12400
                Wilshire Blvd.Los
                Angeles, CA 90025All
                executive officers and directorsas
                a group (17 persons)
            
            
            1,121,513
            [6]
            
            15.27
            %





______________________________





[1]
            Under
                Rule 13d-3, certain shares may be deemed to be beneficially owned
                by more
                than one person (if, for example, persons share the power to vote
                or the
                power to dispose of the shares). In addition, shares are deemed to
                be
                beneficially owned by a person if the person has the right to acquire
                the
                shares (for example, upon exercise of an option) within 60 days of
                the
                date as of which the information is provided. In computing the percentage
                ownership of any person, the amount of shares outstanding is deemed
                to
                include the amount of shares beneficially owned by such person (and
                only
                such person) by reason of these acquisition rights. As a result,
                the
                percentage of outstanding shares of any person as shown in this table
                does
                not necessarily reflect the person’s actual ownership or voting power with
                respect to the number of shares of Common Stock actually outstanding
                at
                November 30, 2006.


[2]
              Includes
                  stock options according to the terms of the 1992 Officers and Key
                  Employees Incentive Stock Option Plan and the 2003 Incentive Stock
                  Option
                  Plan, which for the following number of shares and for the following
                  individuals could be acquired within 60 days through the exercise
                  of stock
                  options: Joel M. Barry, 174,500 shares; Alice Cheung, 61,500 shares;
                  Jack
                  Wilson, 60,900 shares; Sharat Shankar, 49,400 shares; and Rick
                  Slater,
                  25,300.
 [3]
              Includes
                  103,400 shares which are in an IRA account in Mr. Field’s
                  name.
 [4]
              Includes
                  17,972 shares indirectly owned by Mr. Lucas through a trust for
                  his
                  wife.
 [5]
              Includes
                  530 shares indirectly owned by Mr. Wilson through his
                  wife.
 [6]
              Includes
                  shares and stock options according to the terms of the 1992 Officers
                  and
                  Key Employees Incentive Stock Option Plan and the 2003 Incentive
                  Stock
                  Option Plan, which for the following number of shares and for the
                  following individuals could be acquired within 60 days through
                  the
                  exercise of stock options: Patricia Williams, 40,400 shares; Steven
                  Hoofring, 36,000 shares; and Kris Winckler, 42,400
                  shares.




44
 Table
          of Contents


**Changes
      in Control**





We
      do not
      have any arrangements which may at a subsequent date result in a change in
      control.





**ITEM
                13.**
            **Certain
                Relationships and Related
                Transactions**





There
      were no related-party transactions since the beginning of fiscal 2006.





**ITEM
                14.**
            **Principal
                Accounting Fees and
                Services**





**Audit
      Fees**


BDO
        Seidman LLP, our independent registered public accountanting firm (“BDO”) billed
        us an aggregate of approximately $725,000 in fees for professional services
        rendered for the audit of our annual financial statements and audit the
        effectivness of our internal controls over financial reporting for the fiscal
        year ended September 30, 2006, and the reviews of the financial statements
        included in our Form 10-Q for the second and third quarters of fiscal
        2006.


PricewaterhouseCoopers,
      LLP, our former independent accountants (“PricewaterhouseCoopers”) billed us an
      aggregate of approximately $30,500 for the review of the financial statements
      included in our Form 10-Q for the first quarter of fiscal 2006 and $190,000
      in
      fees for professional services rendered for the audit of our annual financial
      statements for the fiscal year ended September 30, 2005.





**Audit-Related
      Fees**


BDO
      billed us an aggregate of approximately $25,000 in fees for assurance and
      related services related to the audit of our annual financial statements for
      the
      fiscal year ended September 30, 2006.





PricewaterhouseCoopers
      billed us an aggregate of approximately $5,000 in fees for assurance and related
      services related to the audit of our annual financial statements for the fiscal
      year ended September 30, 2005.





We
      did
      not incur any tax or other fees from BDO or PricewaterhouseCoopers for the
      fiscal years ended September 30, 2006 or September 30, 2005,
      respectively.





Our
      Audit
      Committee is directly responsible for interviewing and retaining our independent
      accountant, considering the accounting firm’s independence and effectiveness,
      and pre-approving the engagement fees and other compensation to be paid to,
      and
      the services to be conducted by, the independent accountant. The Audit Committee
      does not delegate these responsibilities. During each of the fiscal years ended
      September 30, 2006 and 2005, respectively, our Audit Committee pre-approved
      100%
      of the services described above.


45
 Table
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**PART
      IV**





**ITEM
                15.**
            **Exhibits, Financial
                Statements, and Financial Statement
                Schedules**





(a)
            The
                following documents are filed as part of this
                report:




(1)
            Consolidated
                Financial Statements


PageReports
                of Independent Registered Public Accounting Firms
            F-1Consolidated
                Balance Sheets at September 30, 2006 and 2005
            F-4Consolidated
                Statements of Operations for each of the three years in the period
                ended
                September 30, 2006
            F-5Consolidated
                Statements of Changes in Stockholders' Equity for each of the three
                years
                in the period ended September 30, 2006
            F-6Consolidated
                Statements of Cash Flows for each of the three years in the period
                ended
                September 30, 2006
            F-7Notes
                to Consolidated Financial Statements
            F-8





(2)
            Financial
                Statement Schedule:




Report
                on Financial Statement Schedule
            S-1Schedule
                II - Valuation and Qualifying Accounts and Reserves
            S-2




All
      other
      schedules are omitted because they are not applicable or the required
      information is shown in the Consolidated Financial Statements or Notes
      thereto.





Exhibits:


Exhibit
 Number
              Description
                  of Document
 
 2.1
              Copy
                  of Merger Agreement and Plan of Reorganization between Electronic
                  Clearing
                  House, Inc.,*ECHO*Acquisition Corporation, and Magic Software Development, Inc.,
                  dated April
                  20, 1999.[4]
 2.2
              Copy
                  of Merger Agreement and Plan of Reorganization between Electronic
                  Clearing
                  House, Inc.,*ECHO*Acquisition Corporation, and Rocky Mountain Retail Systems, Inc.,
                  dated
                  January 4, 2000.[5]
 3.1
              Articles
                  of Incorporation of Bio Recovery Technology, Inc., filed with the
                  Nevada
                  Secretary of State on December 11, 1981.[1]
 3.1.1
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on June 21, 1990.[16]
 3.1.2
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on September 27, 1991.[16]
 3.1.3
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on August 5, 1993.[16]
 3.1.4
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on April 7, 1995.[16]
 3.1.5
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on April 7, 1997.[16]
  46
 Table
            of Contents
  3.1.6
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on March 13, 1998.[16]
 3.1.7
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on June 21, 1999.[16]
 3.1.8
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on September 6, 2001.[16]
 3.2
              By-Laws
                  of Bio Recovery Technology, Inc.[1]
 3.2.1
              Amendment
                  to the By-Laws of Electronic Clearing House, Inc., dated April
                  25, 2005.[16]
 3.2.2
              Amendment
                  to the By-Laws of Electronic Clearing House, Inc., dated September
                  9,
                  2005.[16]
 4.1
              Amended
                  and Restated Rights Agreement between Electronic Clearing House,
                  Inc. and
                  OTR, Inc., dated January 29, 2003.[11]
 4.1.1
              Amendment
                  Number One to Amended and RestatedRights
                  Agreement dated September 27, 2004.[12]
 4.2
              Specimen
                  Common Stock Certificate.[2]
 4.3
              Amended
                  and Restated 2003 Incentive Stock Option Plan.[13]
 4.4
              Amended
                    and Restated 1992 Officers and Key Employees Incentive Stock
                    Option
                    Plan..[14]
 10.35
              Copy
                  of Merchant Marketing and Processing Services Agreement between
                  Electronic
                  Clearing House, Inc. and First Regional Bank, dated June 24, 1997.[3]
 10.42
              Copy
                  of Addendum to Agreement between Electronic Clearing House, Inc.
                  and
                  U-Haul International, dated January 1, 2000.[5]
 10.46
              Copy
                  of Amended and Restated Merchant Marketing and Processing Services
                  Agreement between Electronic Clearing House, Inc. and First Regional
                  Bank,
                  dated August 1, 2000.[5]
 10.47
              Copy
                  of Addendum to Amended and Restated Merchant Marketing and Processing
                  Services Agreement between Electronic Clearing House, Inc. and
                  First
                  Regional Bank, dated August 1, 2000.[5]
 10.48
              Copy
                  of POS Check Third-Party Services Agreement between Visa U.S.A.,
                  Inc. and
                  Electronic Clearing House, Inc., dated December 12, 2000.[6]
 10.49
              Copy
                  of Asset Purchase Agreement between National Check Network, Inc.
                  and
                  Electronic Clearing House, Inc., dated April 19, 2001.[6]
 10.50
              Copy
                  of Addendum to Agreement between U-Haul International and Electronic
                  Clearing House, Inc., dated October 1, 2001.[6]
 10.51
              Copy
                  of First Amendment to the POS Check Third-Party Servicer Agreement
                  between
                  Visa U.S.A., Inc. and Electronic Clearing House, Inc. dated December
                  12,
                  2000.[7]
 10.52
              Copy
                  of Second Amendment to the POS Check Third-Party Servicer Agreement
                  between Visa U.S.A., and Electronic Clearing House, Inc. dated
                  December
                  12, 2000.[7]
 10.53
              Copy
                  of Third Amendment to the POS Check Third-Party Servicer Agreement
                  between
                  Visa U.S.A., and Electronic Clearing House, Inc. dated December
                  12, 2000.[7]
 10.54
              Form
                  of Securities Purchase Agreement by and among the Registrant and
                  the
                  Purchasers identified therein.[8]
 10.55
              Form
                  of Registration Rights Agreement by and among the Registrant and
                  the
                  Purchasers identified therein.[8]
 10.56
              Office
                  Lease dated May 21, 2003, by and between the Registrant and the
                  1989
                  Sheehan Family Trust dated October 24, 1989, with respect to principal
                  executive offices located at 730 Paseo Camarillo, Camarillo, California
                  93010.[9]
 10.57
              First
                  Amendment to Lease dated July 10, 2003, by and between the Registrant
                  and
                  the 1989 Sheehan Family Trust dated October 24, 1989, with respect
                  to
                  principal executive offices located at 730 Paseo Camarillo, Camarillo,
                  California 93010.[16]
 10.58
              Addendum
                  to Office Lease dated July 7, 2004, by and between the Registrant
                  and the
                  1989 Sheehan Family Trust dated October 24, 1989, with respect
                  to
                  principal executive offices located at 730 Paseo Camarillo, Camarillo,
                  California 93010.[10]
 10.59
              Sample
                  Separation Agreement between Electronic Clearing House, Inc. and
                  Company
                  Executives.[17]
 11.1
              Statement
                  re computation of per share earnings, incorporated herein by reference
                  to
                  Note 10 of the Notes to Consolidated Financial
                  Statements.
 21.0
              Subsidiaries
                  of Registrant as of September 30, 2006.[16]
 23.1
              Consent
                  of PricewaterhouseCoopers LLP
 23.2
              Consent
                  of BDO Seidman LLP
 24.1
              Power
                  of Attorney[15]
 31.1
              Certificate
                  of Joel M. Barry, Chief Executive Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of
                  1934, as amended.
  47
 Table
            of Contents
  31.2
              Certificate
                  of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of
                  1934, as amended.
 32.1
              Certificate
                  of Joel M. Barry, Chief Executive Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of
                  1934, as amended.
 32.2
              Certificate
                  of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of 1934, as amended.


_________________________________





[1]
            Filed
                as an Exhibit to Registrant's Annual Report on Form 10-K for the
                fiscal
                year ended September 30, 1988 and incorporated herein by
                reference.


[2]
            Filed
                as an Exhibit to Registrant's Form S-1, Amendment No. 3, effective
                November 13, 1990 and incorporated herein by
                reference.


[3]
            Filed
                as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal
                year
                ended September 30, 1997 and incorporated herein by
                reference.


[4]
            Filed
                as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal
                year
                ended September 30, 1999 and incorporated herein by
                reference.


[5]
            Filed
                as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal
                year
                ended September 30, 2000 and incorporated herein by
                reference.


[6]
            Filed
                as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                ended September 30, 2001 and incorporated herein by
                reference.


[7]
            Filed
                as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                ended September 30, 2002 and incorporated herein by
                reference.


[8]
            Filed
                as an Exhibit to Registrant’s Current Report on Form 8-K dated October 30,
                2003 and incorporated herein by
                reference.


[9]
            Filed
                as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                ended September 30, 2003 and incorporated herein by
                reference.


[10]
            Filed
                as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                ended September 30, 2004 and incorporated herein by
                reference.


[11]
            Filed
                as an Exhibit to Registrant’s Form 8-A dated February 10, 2003 and
                incorporated herein by reference.


[12]
            Filed
                as an Exhibit to Registrant’s Form 8-K dated September 30, 2004 and
                incorporated herein by reference.


[13]
            Filed
                as an Exhibit to Registrant’s Notice of Annual Meeting of Shareholders
                dated February 7, 2005 and incorporated herein by
                reference.


[14]
            Filed
                as an Exhibit to Registrant’s Notice of Annual Meeting of Shareholders
                dated February 4, 1999 and incorporated herein by
                reference.


[15]
            Included
                on signature page.


[16]
            Filed
                as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                ended September 30, 2005 and incorporated herein by
                reference.


[17]
            Filed
                as an Exhibit to Registrant’s Quarterly Report on Form 10-Q for fiscal
                quarter ended June 30, 2006 and incorporated herein by
                reference.


48
 Table
          of Contents


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this Report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





ELECTRONIC
                CLEARING HOUSE, INC.By:
            /s/
                Joel M. BarryJoel
                M. Barry, Chief ExecutiveOfficer
                and Chairman





POWER
      OF
      ATTORNEY





Each
      person whose signature appears below constitutes and appoints Joel M. Barry
      and
      Alice L. Cheung, and each of them, as their true and lawful attorneys-in-fact
      and agents with full power of substitution and resubstitution, for them and
      in
      their name, place and stead, in any and all capacities, to sign any or all
      amendments to this Annual Report on Form 10-K and to file the same, with all
      exhibits thereto, and other documents in connection therewith, with the
      Securities and Exchange Commission, granting unto said attorneys-in-fact and
      agents, and each of them, full power and authority to do and perform each and
      every act and thing requisite and necessary to be done in and about the
      foregoing, as fully to all intents and purposes as he might or could do in
      person, hereby ratifying and confirming all that said attorneys-in-fact and
      agents, or either of them, or their substitutes, may lawfully do or cause to
      be
      done by virtue hereof.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Report has
      been
      signed by the following persons in the capacities and on the dates
      indicated.




**Signature**
            
            **Title**
            
            **Date**/s/  
                Joel M. Barry
            
            Chairman
                of the Board
            )
            December
                14, 2006Joel
                M. Barry
            
            and
                Chief Executive Officer
            ))/s/  
                Charles J. Harris
            
            Director,
                President and
            )Charles
                J. Harris
            
            Chief
                Operating Officer
            ))/s/  
                Aristides W. Georgantas
            
            Director
            )Aristides
                W. Georgantas
            
            
            ))/s/  
                Herbert L. Lucas, Jr.
            
            Director
            )Herbert
                L. Lucas, Jr.
            
            
            ))/s/  
                Carl R. Terzian
            
            Director
            )Carl
                R. Terzian
            
            
            ))/s/  
                Richard D. Field
            
            Director
            )Richard
                D. Field
            
            
            ))/s/  
                H. Eugene Lockhart
            
            Director
            )H.
                Eugene Lockhart
            
            
            ))/s/  
                Alice L. Cheung
            
            Chief
                Financial Officer
            )Alice
                L. Cheung
            
            and
                Treasurer
            ))/s/  
                Marjan Hewson
            
            Controller
            )Marjan
                Hewson
            
            
            )


49
 Table
          of Contents


**REPORT
      OF INDEPENDENT REGUSTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Stockholders and Board of Directors of


Electronic
      Clearing House, Inc.


Camarillo,
      California





We
      have
      audited the accompanying consolidated balance sheet of Electronic Clearing
      House, Inc. and subsidiaries (the “Company”) as of September 30, 2006 and the
      related consolidated statements of operations, stockholders’ equity and cash
      flows for the year ended September 30, 2006. These financial statements are
      the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit also includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements, assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall financial
      statement presentation. We believe that our audit provides a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements present fairly, in all material
      respects, the financial position of Electronic Clearing House, Inc. and
      subsidiaries as of September 30, 2006 and the results of their operations and
      their cash flows for the year ended September 30, 2006 in conformity with
      accounting principles generally accepted in the United States of
      America.





As
      more
      fully described in Note 1 to the consolidated financial statements, effective
      October 1, 2005, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment.”





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company’s internal
      control over financial reporting as of September 30, 2006, based on criteria
      established in *Internal
      Control — Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      and
      our report dated December 14, 2006 expressed an unqualified opinion
      thereon.





/s/
      BDO
      Seidman LLP











BDO
      Seidman, LLP


Los
      Angeles, CA


December
      14, 2006


F1
 Table
          of Contents


To
      the
      Stockholders and Board of Directors of


Electronic
      Clearing House, Inc.


Camarillo,
      California








We
      have
      audited management’s assessment, included in *Management’s
      Report on Internal Control Over Financial Reporting* appearing
      in Item 9A of the accompanying Annual Report on Form 10−K, that Electronic
      Clearing House, Inc. and subsidiaries ** (the
      “Company”) maintained effective internal control over financial reporting as of
      September 30, 2006, based on criteria ** established
      in *Internal
      Control−Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. The
      Company’s management is responsible for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting. Our responsibility is to express an opinion
      on
      management’s assessment and an opinion on the effectiveness of the Company’s
      internal control over financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with accounting principles generally accepted in the United States of America.
      A
      company’s internal control over financial reporting includes those policies and
      procedures that (i) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the company; (ii) provide reasonable assurance that transactions
      are
      recorded as necessary to permit preparation of financial statements in
      accordance with accounting principles generally accepted in the United States
      of
      America, and that receipts and expenditures of the company are being made only
      in accordance with authorizations of management and directors of the company;
      and (iii) provide reasonable assurance regarding prevention or timely detection
      of unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that the Company maintained effective internal
      control over financial reporting as of September 30, 2006 is fairly stated,
      in
      all material respects, based on the criteria established in *Internal
      Control−Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. Also,
      in
      our opinion, the Company maintained, in all material respects, effective
      internal control over financial reporting as of September 30, 2006, based on
      the
      criteria established in *Internal
      Control−Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway
      Commission.




We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the Company’s balance sheet as of September 30,
        2006 and the related statements of operations, stockholders’ equity, and cash
        flows for the year ended September 30, 2006 and our report dated December
        14,
        2006 expressed an unqualified opinion on those financial
        statements.


/s/
      BDO
      Seidman LLP








BDO
      Seidman, LLP


Los
      Angeles, California


December
      14, 2006


F2
 Table
          of Contents


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Board of Directors and Shareholders:








In
      our
      opinion, the accompanying consolidated balance sheet and the related
      consolidated statements of operations, stockholders’ equity (deficit) and cash
      flows present fairly, in all material respects, the financial position of
      Electronic Clearing House, Inc. and its subsidiaries at September 30, 2005,
      and
      the results of their operations and their cash flows for each of the two years
      in the period ended September 30, 2005, in conformity with accounting principles
      generally accepted in the United States of America. In addition, in our opinion,
      the financial statement schedule listed in the index appearing under Item 15(a)
      2 for each of the two years in the period ended September 30, 2005 presents
      fairly, in all material respects, the information set forth therein when read
      in
      conjunction with the related consolidated financial statements. These financial
      statements and financial statement schedule are the responsibility of the
      Company’s management; our responsibility is to express an opinion on these
      financial statements and financial statement schedule based on our audits.
      We
      conducted our audits of these statements in accordance with the standards of
      the
      Public Company Accounting Oversight Board (United States). Those standards
      require that we plan and perform the audit to obtain reasonable assurance about
      whether the financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.








/s/
      PRICEWATERHOUSE COOPERS LLP





PricewaterhouseCoopers
      LLP


Los
      Angeles, California


December
      7, 2005


F3
 Table
          of Contents


**ELECTRONIC
      CLEARING HOUSE, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





September
                30,2006
            
            2005ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            11,604,000
            
            $
            6,732,000Restricted
                cash
            
            
            1,594,000
            
            
            1,448,000Settlement
                deposits and funds held in trust
            
            
            23,282,000
            
            
            17,094,000Settlement
                receivables less allowance of $16,000 and $25,000
            
            
            1,499,000
            
            
            878,000Accounts
                receivable less allowance of $392,000 and $92,000
            
            
            2,914,000
            
            
            2,421,000Prepaid
                expenses and other assets
            
            
            494,000
            
            
            385,000Deferred
                tax asset
            
            
            506,000
            
            
            249,000Total
                current assets
            
            
            41,893,000
            
            
            29,207,000Noncurrent
                assets:Property
                and equipment, net
            
            
            2,521,000
            
            
            2,337,000Capitalized
                software, net
            
            
            10,340,000
            
            
            8,876,000Other
                assets, net
            
            
            253,000
            
            
            294,000Total
                assets
            
            $
            55,007,000
            
            $
            40,714,000LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Short-term
                borrowings and current portion of long-term debt
            
            $
            291,000
            
            $
            426,000Accounts
                payable
            
            
            352,000
            
            
            305,000Settlement
                payable and trust payable
            
            
            24,781,000
            
            
            17,972,000Accrued
                expenses
            
            
            2,257,000
            
            
            1,586,000Accrued
                compensation expenses
            
            
            1,670,000
            
            
            881,000Total
                current liabilities
            
            
            29,351,000
            
            
            21,170,000Noncurrent
                liabilities:Long-term
                debt
            
            
            448,000
            
            
            705,000Deferred
                tax liability
            
            
            2,922,000
            
            
            1,067,000Total
                liabilities
            
            
            32,721,000
            
            
            22,942,000Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock, $.01 par value, 500,000 shares authorized, none outstanding
                in 2006
                and 2005
            
            
            -0-
            
            
            -0-Common
                stock, $.01 par value, 36,000,000 shares authorized; 6,839,333 and
                6,620,531 shares issued, respectively; 6,801,064 and 6,582,262 shares
                outstanding, respectively
            
            
            68,000
            
            
            66,000Additional
                paid-in capital
            
            
            27,350,000
            
            
            25,574,000Accumulated
                deficit
            
            
            (4,666,000
            )
            
            (6,983,000
            )Less
                treasury stock at cost, 38,269 and 38,269 common shares
            
            
            (466,000
            )
            
            (466,000
            )Less
                unearned stock compensation
            
            
            -0-
            
            
            (419,000
            )Total
                stockholders' equity
            
            
            22,286,000
            
            
            17,772,000Total
                liabilities and stockholders' equity
            
            $
            55,007,000
            
            $
            40,714,000





See
      accompanying notes to consolidated financial statements.


F4
 Table
          of Contents


**ELECTRONIC
      CLEARING HOUSE, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**








Year
                ended September 30,2006
            
            2005
            
            2004REVENUES
            
            $
            75,311,000
            
            $
            55,551,000
            
            $
            48,320,000COSTS
                AND EXPENSES:Processing
                and transaction expense
            
            
            50,072,000
            
            
            35,867,000
            
            
            30,370,000Other
                operating costs
            
            
            5,775,000
            
            
            5,653,000
            
            
            5,182,000Research
                and development expense
            
            
            1,539,000
            
            
            1,609,000
            
            
            1,465,000Selling,
                general and administrative expenses
            
            
            13,771,000
            
            
            10,743,000
            
            
            7,846,00071,157,000
            
            
            53,872,000
            
            
            44,863,000Income
                from operations
            
            
            4,154,000
            
            
            1,679,000
            
            
            3,457,000Interest
                income
            
            
            289,000
            
            
            136,000
            
            
            71,000Interest
                expense
            
            
            (92,000
            )
            
            (113,000
            )
            
            (175,000
            )Gain
                on sale of building
            
            
            -0-
            
            
            -0-
            
            
            1,319,000Income
                before provision for income tax
            
            
            4,351,000
            
            
            1,702,000
            
            
            4,672,000Provision
                for income taxes
            
            
            (2,034,000
            )
            
            (669,000
            )
            
            (1,823,000
            )Net
                income
            
            $
            2,317,000
            
            $
            1,033,000
            
            $
            2,849,000Basic
                net earnings per share
            
            $
            0.35
            
            $
            0.16
            
            $
            0.45Diluted
                net earnings per share
            
            $
            0.33
            
            $
            0.15
            
            $
            0.41





See
      accompanying notes to consolidated financial statements.


F5
 Table
          of Contents


**ELECTRONIC
      CLEARING HOUSE, INC.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**





Stock
            
            
            
            Additional
            
            
            
            UnearnedCommon
            
            Paid-in
            
            Treasury
            
            Stock
            
            AccumulatedTreasury
            
            Common
            
            Stock
            
            Capital
            
            Stock
            
            Compensation
            
            Deficit
            
            TotalBalance
                at September 30, 2003
            
            
            38,269
            
            
            5,920,174
            
            $
            59,000
            
            $
            21,641,000
            
            $
            (466,000
            )
            $
            -0-
            
            $
            (10,865,000
            )
            $
            10,369,000Private
                Placement
            
            
            
            
            
            437,957
            
            
            4,000
            
            
            2,689,000
            
            
            
            
            
            
            
            
            
            
            
            2,693,000Exercise
                of stock options
            
            
            
            
            
            93,200
            
            
            1,000
            
            
            220,000
            
            
            
            
            
            
            
            
            
            
            
            221,000Expense
                related to stock option issuance
            
            
            
            
            
            
            
            
            
            
            
            33,000
            
            
            
            
            
            
            
            
            
            
            
            33,000Tax
                benefit from exercise of stock option
            
            
            
            
            
            
            
            
            
            
            
            75,000
            
            
            
            
            
            
            
            
            
            
            
            75,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,849,000
            
            
            2,849,000Balance
                at September 30, 2004
            
            
            38,269
            
            
            6,451,331
            
            
            64,000
            
            
            24,658,000
            
            
            (466,000
            )
            
            -0-
            
            
            (8,016,000
            )
            
            16,240,000Exercise
                of stock options
            
            
            
            
            
            119,200
            
            
            1,000
            
            
            393,000
            
            
            
            
            
            
            
            
            
            
            
            394,000Issuance
                of restricted stock
            
            
            
            
            
            50,000
            
            
            1,000
            
            
            424,000
            
            
            
            
            
            (419,000
            )
            
            
            
            
            6,000Expense
                related to stock option issuance
            
            
            
            
            
            
            
            
            
            
            
            8,000
            
            
            
            
            
            
            
            
            
            
            
            8,000Tax
                benefit from stock exercise
            
            
            
            
            
            
            
            
            
            
            
            91,000
            
            
            
            
            
            
            
            
            
            
            
            91,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,033,000
            
            
            1,033,000Balance
                at September 30, 2005
            
            
            38,269
            
            
            6,620,531
            
            
            66,000
            
            
            25,574,000
            
            
            (466,000
            )
            
            (419,000
            )
            
            (6,983,000
            )
            
            17,772,000Exercise
                of stock options
            
            
            
            
            
            131,200
            
            
            1,000
            
            
            579,000
            
            
            
            
            
            
            
            
            
            
            
            580,000Issuance
                of restricted stock
            
            
            
            
            
            83,088
            
            
            -
            
            
            -0
            
            
            
            
            
            
            
            
            
            
            
            -0-Amortization
                of restricted stock grants
            
            
            
            
            
            
            
            
            
            
            
            207,000
            
            
            
            
            
            
            
            
            
            
            
            207,000Issuance
                of restricted stock to outside director
            
            
            
            
            
            4,514
            
            
            1,000
            
            
            49,000
            
            
            
            
            
            
            
            
            
            
            
            50,000Share-based
                compensation expense - options
            
            
            
            
            
            
            
            
            
            
            
            909,000
            
            
            
            
            
            
            
            
            
            
            
            909,000Share-based
                compensation expense - performance
            
            
            
            
            
            
            
            
            
            
            
            217,000
            
            
            
            
            
            
            
            
            
            
            
            217,000Reclassification
                in connection with adopting SFAS No. 123(R)
            
            
            
            
            
            
            
            
            
            
            
            (419,000
            )
            
            
            
            
            419,000
            
            
            
            
            
            -0-Tax
                benefit from stock options exercise
            
            
            
            
            
            
            
            
            
            
            
            234,000
            
            
            
            
            
            
            
            
            
            
            
            234,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,317,000
            
            
            2,317,000Balance
                at September 30, 2006
            
            
            38,269
            
            
            6,839,333
            
            $
            68,000
            
            $
            27,350,000
            
            $
            (466,000
            )
            $
            -0-
            
            $
            (4,666,000
            )
            $
            22,286,000





See
      accompanying notes to consolidated financial statements.


F6
 Table
          of Contents


**ELECTRONIC
      CLEARING HOUSE, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Year
                ended September 30,2006
            
            2005
            
            2004Cash
                flows from operating activities:Net
                income
            
            $
            2,317,000
            
            $
            1,033,000
            
            $
            2,849,000Adjustments
                to reconcile net income to net cash provided by operating
                activities:(Gain)
                loss on sale of assets
            
            
            84,000
            
            
            -0-
            
            
            (1,319,000
            )Depreciation
            
            
            891,000
            
            
            776,000
            
            
            634,000Amortization
                of software
            
            
            2,617,000
            
            
            1,865,000
            
            
            1,350,000Provisions
                for losses on accounts and notes receivable
            
            
            380,000
            
            
            43,000
            
            
            92,000Provision
                for obsolete inventory
            
            
            -0-
            
            
            10,000
            
            
            46,000Deferred
                income taxes
            
            
            1,598,000
            
            
            532,000
            
            
            1,628,000Stock-based
                compensation
            
            
            1,383,000
            
            
            14,000
            
            
            33,000Tax
                benefit from exercise of stock option
            
            
            -0-
            
            
            91,000
            
            
            75,000Excess
              tax benefit from stock-based compensation
            
            $
            234,000
            
            
            -0-
            
            
            -0-Changes
                in assets and liabilities:Restricted
                cash
            
            
            (146,000
            )
            
            (424,000
            )
            
            (47,000
            )Settlement
                deposits and funds held in trust
            
            
            (6,188,000
            )
            
            1,188,000
            
            
            (15,549,000
            )Accounts
                receivable
            
            
            (882,000
            )
            
            (518,000
            )
            
            (95,000
            )Settlement
                receivable
            
            
            (612,000
            )
            
            (484,000
            )
            
            271,000Accounts
                payable
            
            
            47,000
            
            
            -0-
            
            
            (474,000
            )Settlement
                payable and trust payable
            
            
            6,809,000
            
            
            (707,000
            )
            
            15,277,000Accrued
                compensation expenses
            
            
            789,000
            
            
            181,000
            
            
            165,000Accrued
                expenses
            
            
            905,000
            
            
            283,000
            
            
            496,000Prepaid
                expenses
            
            
            (109,000
            )
            
            5,000
            
            
            (107,000
            )Net
                cash provided by operating activities
            
            
            9,649,000
            
            
            3,888,000
            
            
            5,325,000Cash
                flows from investing activities:Other
                assets
            
            
            3,000
            
            
            4,000
            
            
            141,000Purchase
                of equipment
            
            
            (1,084,000
            )
            
            (781,000
            )
            
            (744,000
            )Purchased
                and capitalized software
            
            
            (4,116,000
            )
            
            (3,859,000
            )
            
            (3,534,000
            )Proceeds
                from sale of assets
            
            
            -0-
            
            
            -0-
            
            
            2,233,000Net
                cash used in investing activities
            
            
            (5,197,000
            )
            
            (4,636,000
            )
            
            (1,904,000
            )Cash
                flows from financing activities:Proceeds
                from issuance of notes payable
            
            
            -0-
            
            
            400,000
            
            
            811,000Repayment
                of notes payable
            
            
            (282,000
            )
            
            (438,000
            )
            
            (1,916,000
            )Repayment
                of capitalized leases
            
            
            (112,000
            )
            
            (452,000
            )
            
            (562,000
            )Proceeds
                from private placement
            
            
            -0-
            
            
            -0-
            
            
            2,693,000Proceeds
                from exercise of stock options
            
            
            580,000
            
            
            394,000
            
            
            221,000Excess
                tax benefit from stock-based compensation
            
            
            234,000
            
            
            -0-
            
            
            -0-Net
                cash provided by (used in) financing activities
            
            
            420,000
            
            
            (96,000
            )
            
            1,247,000Net
                increase (decrease) in cash and cash equivalents
            
            
            4,872,000
            
            
            (844,000
            )
            
            4,668,000Cash
                and cash equivalents at beginning of period
            
            
            6,732,000
            
            
            7,576,000
            
            
            2,908,000Cash
                and cash equivalents at end of period
            
            $
            11,604,000
            
            $
            6,732,000
            
            $
            7,576,000




See
      accompanying notes to consolidated financial statements.


F7
 Table
          of Contents


**ELECTRONIC
      CLEARING HOUSE, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







NOTE
      1
      - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES :





Electronic
      Clearing House, Inc. ( *ECHO* or the
      Company) is a Nevada corporation. The Company provides bankcard authorizations,
      electronic deposit services, check guarantee, check verification, check
      conversion, and check collection services.





The
      following comments describe the more significant accounting
      policies.





Principles
      of Consolidation





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiaries. All significant intercompany
      transactions and accounts have been eliminated.





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents consist of unrestricted balances only. The Company considers
      all highly liquid investments with original maturities of three months or less
      to be cash equivalents.





Restricted
      Cash





Under
      the
      terms of the processing agreements with the Company's primary processing banks,
      the Company maintains several cash accounts as a reserve against chargeback
      losses. As processing fees are received by the processing banks, they are
      allocated per the processing agreement to the reserve accounts.





Chargeback
      Losses





Chargeback
      losses occur when a credit card holder presents a valid claim against one of
      the
      Company's merchants and the merchant has insufficient funds or is no longer
      in
      business, resulting in the charge being absorbed by the Company. The Company
      records a receivable for those chargebacks for which the merchant is liable
      but
      has not made payment. The Company records a provision for estimated chargeback
      losses at the time bankcard transactions are processed. A reserve is estimated
      based upon a historically-determined percentage of gross credit card processing
      volume and actual losses experienced.





Settlement
      Deposits, Receivables and Payables





Settlement
      receivable/payable results from timing differences in the Company’s settlement
      process with merchants. These timing differences are primarily due to the timing
      between the funds received in the Company’s bank accounts and settlement
      payments made to the merchants. Cash held by the Company associated with this
      settlement process is classified as settlement deposits in the consolidated
      balance sheets. Cash held by the Company in trust for others is classified
      in
      settlement deposits with the related liability included in settlement and
      trust payable.





Allowance
      for Doubtful Accounts




We
      make
      ongoing assumptions relating to the collectibility of our accounts receivable.
      The accounts receivable amount on our balance sheet includes an allowance for
      accounts that might not be paid. We regularly review the allowance by
      considering factors such as historical experience, credit quality, age of the
      accounts receivable balances and current economic conditions that may affect
      a
      customer's ability to pay. Our reserves have generally been adequate to cover
      our actual credit losses. However, since we cannot predict future changes in
      the
      financial stability of our customers, we cannot guarantee that our reserves
      will
      continue to be adequate. If actual credit losses are significantly greater
      than
      the allowance we have established, our estimates of the recoverability of
      amounts due to us could be overstated, and additional allowances could be
      required, which could have an adverse impact on our operations. Conversely,
      if
      actual credit losses are significantly less than our allowance, this would
      eventually have a positive impact on our operations.


F8
 Table
          of Contents


NOTE
      1 :
      (Continued)




Property
      and Equipment





Property
      and equipment are stated at cost, less accumulated depreciation and
      amortization. Expenditures for additions and major improvements are capitalized.
      Repair and maintenance costs are expensed as incurred. When property and
      equipment are retired or otherwise disposed of, the related cost and accumulated
      depreciation are removed from the accounts. Gains or losses from retirements
      and
      disposals are credited or charged to income. Depreciation and amortization
      are
      computed using the straight-line method over the shorter of the estimated useful
      lives of the respective assets or terms of the related leases. The useful lives
      and lease terms for depreciable assets are as follows:





Computer
                equipment and software
            3-5
                years


Furniture,
                fixtures and equipment
            5
                years


Building
                improvements
            5-10
                years





Other
      Assets





Other
      assets consist primarily of deposits and intangible assets such as patents
      and
      trademarks. Costs related to obtaining a patent and trademark are capitalized
      and amortized over the estimated life of the patent and trademark. Disclosures
      regarding intangible assets as required under SFAS No. 142 are included in
      Note
      5.





Software
      Development Costs





Under
      the
      provisions of Statement of Position 98-1, "Accounting for the Costs of Computer
      Software Developed or Obtained for Internal Use," the Company capitalizes costs
      associated with software developed for internal use when both the preliminary
      project stage is completed and management has authorized further funding for
      the
      completion of the project. Capitalized costs include only (1) external direct
      costs of materials and services consumed in developing or obtaining internal-use
      software, (2) payroll and payroll-related costs for employees who are directly
      associated with the software project, and (3) interest costs incurred, when
      material, while developing internal-use software. Capitalization of such costs
      ceases no later than the point at which the project is substantially complete
      and ready for its intended purpose. Software developed or obtained for internal
      use is tested for impairment whenever events or changes in circumstance
      indicates that its carrying amount may not be recoverable. Capitalized software
      development costs are amortized using the straight-line method over the lesser
      of three years or estimated useful life.





Costs
      incurred to establish the technological feasibility of software and other
      computer software maintenance costs are recorded as research and development
      costs and are charged to expense when incurred.





Long-Lived
      Assets





The
      Company assesses potential impairments to its long-lived assets in accordance
      with the provisions of SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-lived Assets.” An impairment review is performed whenever
      events or changes in circumstances indicate that the carrying value may not
      be
      recoverable. Factors considered by the Company include, but are not limited
      to:
      significant underperformance relative to expected historical or projected future
      operating results; significant changes in the manner of use of the acquired
      assets or the strategy for the Company’s overall business; significant negative
      industry or economic trends; a significant decline in the Company’s stock price
      for a sustained period of time; and the Company’s market capitalization relative
      to net book value. When the Company determines that the carrying value of a
      long-lived asset may not be recoverable based upon the existence of one or
      more
      of the above indicators of impairment, the Company estimates the future
      undiscounted cash flows expected to result from the use of the asset and its
      eventual disposition. If the sum of the expected future undiscounted cash flows
      is less than the carrying amount of the asset, the Company recognizes an
      impairment loss to reduce the carrying amount of the asset to its fair
      value.


F9
 Table
          of Contents


NOTE
      1 :
      (Continued)




Revenue
      Recognition





The
      Company earns revenue from services which include the following: debit and
      credit card processing, check guarantee, check verification, check conversion,
      check re-presentment, check collection and inventory tracking. All of these
      services are performed pursuant to a contract with customers which states the
      terms and fixed price for all contracted services. The price of a service may
      be
      a fixed fee for each transaction and/or a percentage of the transaction
      processed, depending on the service. At the time the guarantee revenue is
      recognized, the Company provides a reserve for estimated guarantee losses based
      upon its historical loss experience. The Company generally collects its fee
      at
      the time it processes the transaction and accordingly, collectibility is
      assured. Based on the Company’s underwriting criteria and ongoing credit
      monitoring of customers, collectibility on service transactions is reasonably
      assured.





Revenue
      from debit and credit card (collectively called “bankcards”) and transaction
      processing revenue is based on a percentage of the transaction value, commonly
      referred to as a discount fee on a credit and debit card transaction processed
      by the Company. In addition, there is a per transaction fee associated with
      each
      bankcard transaction which is charged to the merchant. The Company recognizes
      the processing and transaction revenue when the services are
      performed.





Revenue
      from check guarantee is derived from a percentage of the gross amount of the
      check and guarantees payment of the check to the merchant in the event the
      check
      is not honored by the check writer’s bank. Merchants typically present customer
      checks for processing on a regular basis and, therefore, dishonored checks
      are
      generally identified within a few days of the date the checks are guaranteed
      by
      the Company. The Company recognizes revenue when the checks are processed at
      the
      point of sale. In the event a check is dishonored, the Company has the right
      to
      collect the full amount of the check from the check writer. The Company
      establishes a receivable from the delinquent check writer for the full amount
      of
      the guaranteed check. The Company establishes a reserve against these
      receivables based on historical loss experience. The check guarantee service
      also earns revenue based on fees collected from delinquent check writers, which
      collection fee is recognized when collected, as collectibility is not reasonably
      assured until that point.





Revenue
      from check verification is derived from fees collected from the merchants when
      a
      check is verified against the Company’s positive and negative check database.
      This revenue is recognized when the transaction is processed, since the Company
      has no further performance obligations.





Revenue
      from check conversion is derived from fees collected from merchants to convert
      the paper check received by merchants into an ACH transaction, which allows
      the
      Company to settle the transaction electronically for the merchant. The Company
      recognizes the revenue related to check conversion fees when the services are
      performed.





Revenue
      from check re-presentment is derived from fees charged to check writers. Check
      re-presentment is a service that allows merchants to collect a paper check
      through the Automated Clearing House (“ACH”) network after a check has
      previously been presented to the bank for collection unsuccessfully at least
      once. The fees earned from check writer are recognized when collected, as
      collectibility is not reasonably assured until that point.





Revenue
      from check collection is derived from collection activities performed on behalf
      of a merchant on uncollected checks. The merchant usually keeps the face amount
      of the uncollected checks if the collection effort is successful. The Company’s
      revenue is derived from the collection fee collected from the check writer.
      If
      the Company refers the collection item to another collection agency, the Company
      will receive a fee from the collection agency upon its successful efforts.
      Collection fee revenue is recognized when collected, as collectibility is not
      reasonably assured until that point.


F10
 Table
          of Contents


NOTE
      1 :
      (Continued)




Income
      Taxes





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
      109
      requires the recognition of deferred tax liabilities and assets for the expected
      future tax consequences of temporary differences between the carrying amounts
      and the tax bases of assets and liabilities. A valuation allowance is
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.





Earnings
      (Loss) Per Share





Earnings
      (loss) per share are based on the weighted average number of common shares
      and
      dilutive common equivalent shares outstanding during the period. The shares
      issuable upon conversion of preferred stock and exercise of options and warrants
      are included in the weighted average for the calculation of diluted net income
      per share except where it would be anti-dilutive.





Stock-Based
      Compensation


Effective
        October 1, 2005, the Company began recording compensation expense associated
        with stock options in accordance with SFAS No.123(R), Share-Based Payment.
        Prior
        to October 1, 2005, the Company accounted for stock-based compensation related
        to stock options under the recognition and measurement principles of Accounting
        Principles Board Opinion No. 25; therefore, the Company measured compensation
        expense for its stock option plan using the intrinsic value method, that
        is, as
        the excess, if any, of the fair market value of the Company’s stock at the grant
        date over the amount required to be paid to acquire the stock, and provided
        the
        disclosures required by SFAS Nos. 123 and 148. The Company has adopted the
        modified prospective transition method provided under SFAS No. 123(R), and
        as a
        result, has not retroactively adjusted results from prior periods. Under
        this
        transition method, compensation expense associated with stock options recognized
        in fiscal year 2006 includes expense related to the remaining unvested portion
        of all stock option awards granted prior to October 1, 2005, based on the
        grant
        date fair value estimated in accordance with the original provisions of SFAS
        No.
        123. The Company has not issued any stock options since the adoption of SFAS
        No.
        123(R). See Note 11 for information on the impact of our adoption of SFAS
        No.
        123(R) and the assumptions we use to calculate the fair value of stock-based
        compensation.


Accounting
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities,
      the
      disclosure of contingent liabilities, and the reported amounts of revenues
      and
      expenses during the reporting period. Significant estimates include allowance
      for chargeback losses and deferred tax assets. Actual results could differ
      from
      those estimates.





Fair
      Value of Financial Instruments





The
      amount recorded for financial instruments in the Company's consolidated
      financial statements approximates their fair value as defined in SFAS No. 107,
      "Disclosures about Fair Value of Financial Instruments".





Reclassifications





Certain
      amounts in the September 30, 2005 and 2004 consolidated financial statements
      have been reclassified to conform to the current year
      presentation.


F11
 Table
          of Contents


NOTE
      1 :
      (Continued)




At
      September 30, 2005, the Company reclassified a small portion of Settlement
      Receivable relating to an accrual resulting in a corresponding reduction of
      Settlement Payable. The Statement of Cash Flows was also adjusted accordingly
      for the affected periods.





New
      Accounting Pronouncements





In
      2006,
      the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157). SFAS No.
      157 provides guidance for using fair value to measure assets and liabilities.
      The standard expands required disclosures about the extent to which companies
      measure assets and liabilities at fair value, the information used to measure
      fair value, and the effect of fair value measurements on earnings. SFAS No.
      157
      applies whenever other standards require (or permit) assets or liabilities
      to be
      measured at fair value. SFAS No. 157 does not expand the use of fair value
      in
      any new circumstances. SFAS No. 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Management of the Company does not expect the impact to
      be
      material to its financial condition or results of operations.





In
      2006,
      the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108) which addresses
      quantifying the financial statement effects of misstatements, specifically,
      how
      the effects of prior year uncorrected errors must be considered in quantifying
      misstatements in the current year financial statements. SAB No. 108 is effective
      for fiscal years ending after November 15, 2006. The Company will adopt the
      provisions of SAB No. 108 as of October 1, 2006, and does not expect it to
      have
      a material impact to its financial condition or results of
      operations.





In
      2006,
      the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes - an interpretation of FASB Statement 109” (FIN 48). This interpretation
      clarifies the accounting for uncertain taxes recognized in a company’s financial
      statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The
      interpretation requires us to analyze the amount at which each tax position
      meets a “more likely than not” standard for sustainability upon examination by
      taxing authorities. Only tax benefit amounts meeting or exceeding this standard
      will be reflected in tax provision expense and deferred tax asset balances.
      The
      interpretation also requires that any differences between the amounts of tax
      benefits reported on tax returns and tax benefits reported in the financial
      statements be recorded in a liability for unrecognized tax benefits. The
      liability for unrecognized tax benefits is reported separately from deferred
      tax
      assets and liabilities and classified as current or noncurrent based upon the
      expected period of payment. Additional disclosure in the footnotes to the
      audited financial statements will be required concerning the income tax
      liability for unrecognized tax benefits, any interest and penalties related
      to
      taxes that are included in the financial statements, and open statutes of
      limitations for examination by major tax jurisdictions. FIN 48 is effective
      for
      annual periods beginning after December 15, 2006 and any cumulative effect
      of
      adopting FIN 48 will be recorded as a change in accounting principle in the
      financial statements for the three months ended March 31, 2007. Management
      is
      currently evaluating the potential impact of FIN 48 on the Company’s
      consolidated financial statements.





Concentration
      of business and credit risks





The
      company operates in the market for electronic payment processing in the United
      States. The industry is characterized by ongoing technological developments,
      frequent new product introductions and changes in end user
      requirements. The Company’s future success will depend on its ability to
      develop, introduce and market enhancements to its existing products and
      services, to introduce new products and services in a timely manner that meet
      customer requirements, and to respond to competitive pressures and technological
      advances. Further, the emergence of new industry standards, whether through
      adoption by regulatory agencies or widespread use by financial institutions
      or
      other financial institution data processing vendors, could require the Company
      to redesign its products and services.


F12
 Table
          of Contents


NOTE
      1 :
      (Continued)




During
      the years ended September 30, 2006, 2005 and 2004, no customer accounted for
      10%
      or more of total revenue.





The
      Company performs ongoing credit evaluations of its customers’ financial
      condition and limits the amount of credit extended when deemed necessary, and
      in
      certain instances, requires collateral. Management believes that any risk of
      loss is significantly reduced due to the nature of the customers as well as
      the
      number of its customers and geographic areas. The Company maintains an allowance
      for doubtful accounts for estimated losses associated with the potential
      inability of its customers to make required payments or for resolution of
      potential billing disputes. Receivables are charged against the allowance when
      management believes the uncollectibility of a receivable balance, or portion
      thereof, has been confirmed.





The
      Company has cash in financial institutions that is insured by the Federal
      Deposit Insurance Corporation (“FDIC”) up to $100,000 per institution. At
      September 30, 2006 and 2005, the Company had cash and cash equivalent accounts
      in excess of the FDIC insured limits in the amount of $ 11,644,000.





NOTE
      2
      - STATEMENT
      OF CASH FLOWS :




September
                302006
            
            2005
            
            2004Cash
                paid for:Interest
            
            $
            92,000
            
            $
            113,000
            
            $
            175,000Income
                taxes
            
            
            126,000
            
            
            154,000
            
            
            8,000




Significant
      non-cash transactions for fiscal 2006 are as follows:





Ÿ
            Restricted
                stock valued at $1,060,000 was issued to certain executives and
                employees.





Ÿ
            Capital
                equipment of $2,000 was acquired under a capital
                lease.





Significant
      non-cash transactions for fiscal 2005 are as follows:





Ÿ
            A
                note was issued for $39,000 for the purchase of capital
                equipment.





Ÿ
            Restricted
                stock valued at $425,000 was issued to an executive of the
                company.





Significant
      non-cash transactions for fiscal 2004 are as follows:





Ÿ
            Software
                purchases of $285,000 and capital equipment of $152,000 were acquired
                under capital leases.


F13
 Table
          of Contents


NOTE
      3
      - PROPERTY AND EQUIPMENT:





Property
      and equipment are comprised of the following:




September
                302006
            
            2005Computer
                equipment
            
            $
            5,052,000
            
            $
            4,231,000Furniture,
                fixtures and equipment
            
            
            1,066,000
            
            
            1,051,000Building
                improvements
            
            
            195,000
            
            
            119,000Auto
            
            
            56,000
            
            
            56,000Cost
            
            
            6,369,000
            
            
            5,457,000Less:
                accumulated depreciation and amortization
            
            
            (3,848,000
            )
            
            (3,120,000
            )Net
                book value
            
            $
            2,521,000
            
            $
            2,337,000








Included
      in property and equipment are assets under capital lease of $155,000 and
      $627,000 at September 30, 2006 and 2005, with related accumulated depreciation
      of $92,000 and $276,000. Amortization of assets recorded under capital leases
      is
      included with depreciation expense.





In
      March
      2004, the Company sold a building, which formerly held the Company’s corporate
      offices. The total sales price was $2,382,000, which resulted in a pre-tax
      gain
      of $1,319,000. Proceeds from the sale were used in part to pay off the two
      notes
      collateralized by the building.





NOTE
      4
      - CAPITALIZED SOFTWARE





The
      following table sets forth information regarding the costs associated with
      software purchased and developed for internal use:




September
                302006
            
            2005Capitalized
                software
            
            $
            18,775,000
            
            $
            14,864,000Less:
                accumulated amortization
            
            
            (8,435,000
            )
            
            (5,988,000
            )Net
                book value
            
            $
            10,340,000
            
            $
            8,876,000




Included
      in capitalized software costs are assets under capital lease of $26,000 at
      September 30, 2005, and related accumulated amortization of
      $13,000.


F14
 Table
          of Contents


NOTE
      5
      - OTHER ASSETS





Other
      assets consist of the following:





September
                302006
            
            2005Patents
            
            $
            173,000
            
            $
            173,000Trademarks
            
            
            280,000
            
            
            280,000Other
            
            
            160,000
            
            
            163,000Cost
            
            
            613,000
            
            
            616,000Less:
                accumulated amortization
            
            
            (360,000
            )
            
            (322,000
            )Net
                Book Value
            
            $
            253,000
            
            $
            294,000





Amortization
      expense for each of the years ended September 30, 2006 and 2005 was $38,000.
      Based on the current amount of intangible assets subject to amortization, the
      estimated amortization expense for each of the five succeeding years is
      $38,000.


NOTE
        6
        - INCOME TAXES
 
 The
        provision for income taxes consists of the following components:
 
 September
                  302006
              
              2005
              
              2004CurrentFederal
              
              $
              258,000
              
              $
              -0-
              
              $
              19,000State
              
              
              193,000
              
              
              5,000
              
              
              87,000Total
                  current provision
              
              
              451,000
              
              
              5,000
              
              
              106,000DeferredFederal
              
              
              1,369,000
              
              
              537,000
              
              
              1,443,000State
              
              
              214,000
              
              
              127,000
              
              
              274,000Total
                  deferred provision
              
              
              1,583,000
              
              
              664,000
              
              
              1,717,000Income
                  tax provision
              
              $
              2,034,000
              
              $
              669,000
              
              $
              1,823,000
  The
        effective tax rate varies from the U.S. Federal statutory tax rate principally
        due to the following:
 
 September
                  302006
              
              2005
              
              2004U.S.
                  Federal statutory tax rate
              
              
              34.00
              %
              
              34.00
              %
              
              34.00
              %Add
                  (deduct):Stock-based
                  compensation
              
              
              4.70
              %
              
              -0-
              
              
              -0-State
                  and local taxes
              
              
              6.20
              %
              
              5.10
              %
              
              5.10
              %All
                  other
              
              
              1.80
              %
              
              0.20
              %
              
              (0.10
              %)Effective
                  tax rate
              
              
              46.70
              %
              
              39.30
              %
              
              39.00
              %
  F15
 Table
            of Contents
  NOTE
        6 :
        (Continued)
 
 Components
        of the deferred tax asset (liabilities) include:
 
 September
                  302006
              
              2005Deferred
                  tax assets:Net
                  operating loss carryforwards
              
              $
              -0-
              
              $
              1,316,000Reserve
                  for bad debts
              
              
              41,000
              
              
              72,000Performance
                  stock grant
              
              
              99,000
              
              
              -0-Accrued
                  bonus
              
              
              317,000
              
              
              94,000State
                  tax expense
              
              
              32,000
              
              
              129,000Stock
                  option exercise
              
              
              -0-
              
              
              83,000Business
                  credit
              
              
              25,000
              
              
              113,000AMT
                  credit
              
              
              90,000
              
              
              89,000Other
              
              
              20,000
              
              
              -0-Deferred
                  tax assets
              
              
              624,000
              
              
              1,896,000Deferred
                  tax liabilities:Capitalized
                  software
              
              
              (3,039,000
              )
              
              (2,714,000
              )Deferred
                  tax liabilities
              
              $
              (3,039,000
              )
              $
              (2,714,000
              )
 
 The
        Company has utilized the remainder of its federal net operating loss
        carryforward during 2006. The Company has not recorded a valuation allowance
        against deferred tax assets because it expects to have future taxable income
        to
        recognize these assets.
 
 NOTE
        7
        - SHORT-TERM BORROWINGS AND LONG-TERM DEBT :
 
 Short-term
        borrowings and long-term debt consist of the following:
 
 September
                  302006
              
              2005Term
                  loan, collateralized by various assets of the Company, due November,
                  2005,
                  bearing interest at prime rate plus 1%, 7.50% at September 30,
                  2005 paid
                  in full during fiscal year 2006
              
              $
              -0-
              
              $
              26,000Term
                  loan, collateralized by various assets of the Company, due October
                  2008,
                  interest at prime rate plus .50%, 8.75% at September 30,
                  2006
              
              
              312,000
              
              
              462,000Term
                  loan, collateralized by various assets of the Company, due January
                  2010,
                  interest at 7.32%
              
              
              333,000
              
              
              400,000Term
                  loan, collateralized by an asset of the Company, due March 2010,
                  interest
                  at 2%
              
              
              28,000
              
              
              36,000Capital
                  leases
              
              
              66,000
              
              
              207,000739,000
              
              
              1,131,000Less:
                  current portion
              
              
              (291,000
              )
              
              (426,000
              )Long-term
                  debt
              
              $
              448,000
              
              $
              705,000
  F16
 Table
            of Contents
  NOTE
        7 :
        (Continued)
 
 The
        weighted average interest rate on the prime rate term loans for the period
        they
        were outstanding during the year ended September 30, 2006 was
        7.90%.
 
 The
        term
        loans contain restrictive debt covenants consisting of quick ratio, cash
        flow to
        debt ratio, debt service coverage ratio and tangible net worth requirements.
        As
        of September 30, 2006, the Company is in compliance with all such covenants.
        The
        Company has a $3,000,000 credit line with a bank, which was unused during
        fiscal
        year 2006. The
        credit line matures in January 2007 and is collateralized by assets of the
        Company. The credit line also contains restrictive covenants, including quick
        ratio, cash flow to debt ratio, debt service coverage ratio and tangible
        net
        worth requirements.
 
 Future
        maturities of debt are as follows:
 
 Fiscal
                  year ended September 302007
              
              $
              291,0002008
              
              
              291,0002009
              
              
              120,0002010
              
              
              37,000$
              739,000
  NOTE
        8
        - SETTLEMENTS PAYABLE AND DEPOSITS
 
 Settlement
        receivable/payable results from timing differences in the Company’s settlement
        process with merchants. These timing differences are primarily due to the
        timing
        between the funds received in the Company’s bank accounts and settlement
        payments made to the merchants. Cash held by the Company associated with
        this
        settlement process is classified as settlement deposits in the consolidated
        balance sheets. Cash held by the Company in trust for others is classified
        in
        settlement deposits with the related liability included in trust
        payable.
 
 Included
        in settlement deposits was $983,000 and $277,000 of funds held in trust at
        September 30, 2006 and 2005, respectively. In addition, included in settlement
        payable was $983,000 and $277,000 of trust payable at September 30, 2006
        and
        2005, respectively.
 
 NOTE
        9
        - ACCRUED EXPENSES :
 Accrued
          expenses are comprised of the following:
  September
                  30Accrued
                  expenses are comprised of the following:
              
              2006
              
              2005Accrued
                  bankcard fees
              
              $
              435,000
              
              $
              293,000Accrued
                  communication costs
              
              
              113,000
              
              
              124,000Accrued
                  professional fees
              
              
              614,000
              
              
              498,000Accrued
                  commission
              
              
              294,000
              
              
              310,000Accrued
                  merchant deposits
              
              
              565,000
              
              
              250,000Income
                  tax payable
              
              
              54,000
              
              
              -0-Other
              
              
              182,000
              
              
              111,000$
              2,257,000
              
              $
              1,586,000
  F17
 Table
            of Contents
  NOTE
        10 - 401(K) PLAN
 
 Employees
        who are eligible to participate in the Electronic Clearing House, Inc. 401(k)
        Plan may contribute up to 90% of their pre-tax salary to the Plan, subject
        to
        limitations imposed by the Internal Revenue Code. Full-time and part-time
        employees who work at least 500 hours per year are eligible to enroll if
        they
        are at least 21 years of age and have worked for the Company for six months.
        The
        Plan allows the Company to make matching contributions. During fiscal 2006,
        we
        matched employee contributions of 50% of the first 6% of salary contributed
        by
        the employee, subject to IRS limitations. Twenty percent of matching
        contributions vest after two years of service by the employee and 20% of
        matching contributions vests yearly thereafter. Matching contributions were
        $195,900 in fiscal 2006, $157,600 in fiscal 2005 and $140,900 in fiscal 2004.
        Participating employees who are age 50 or older may also make catch-up
        contributions; however, these contributions are not matched.
 
 NOTE
        11 - STOCKHOLDERS' EQUITY :
 
 Stockholders'
        Rights Plan
 
 The
        Company has a Stockholders' Rights Plan, which was amended in September 2004.
        As
        amended, the rights plan provides that all stockholders have two preferred
        share
        purchase rights (each a "Right") for each outstanding share of common stock
        of
        the Company. Each Right entitles the registered holder to purchase from the
        Company four one-hundredths of a share of series A Junior Participating
        Preferred Stock, no par value ("Preferred Stock") of the Company at a price
        of
        $2.00 per one one-hundredth of a share of Preferred Stock ("Purchase Price").
        The description and terms of the Rights are set forth in a Rights Agreement
        dated as of September 30, 1996 ("Rights Agreement"), as amended in January
        2003
        and September 2004.
 
 The
        Rights will separate from the Common Stock and a Distribution Date will occur
        upon the earlier of (i) 10 days following a public announcement that, without
        consent of the Board of Directors, a person or group of affiliated or associated
        persons ("Acquired Person") have acquired beneficial ownership of twenty-percent
        (20%) or more of the outstanding Common Stock, or (ii) 10 business days (or
        such
        later date as may be determined by action of the Board of Directors prior
        to
        such time as any person becomes an Acquired Person) following the commencement
        of, or announcement of an intention to make a tender offer or exchange offer
        the
        consummation of which would result in the beneficial ownership by a person
        or
        group of twenty-percent (20%) or more of such outstanding Common
        Stock.
 
 In
        the
        event that any person becomes the beneficial owner of twenty-percent (20%)
        or
        more of the Common Stock of the Company, ten (10) days thereafter ("Flip-In
        Event") each Right would permit the holder of such Right to thereafter have
        the
        right to receive, upon exercise thereof at the then current Purchase Price
        of
        the Right, Common Stock which has a value of eight times the Purchase Price
        of
        the Right (such right being called the "Flip-In Right"). In the event the
        Company is acquired in a merger or other business combination transaction
        where
        the Company is not the surviving corporation or in the event that 50% or
        more of
        its assets or earning power is sold, proper provision shall be made so that
        each
        Right would permit the holder of such Right to thereafter have the right
        to
        receive, upon the exercise thereof at the then current Purchase Price of
        the
        Right, common stock of the acquiring entity which has a value of eight times
        the
        Purchase Price of the Right. Upon the occurrence of the Flip-In Event, any
        Rights that are or were at any time owned by an Acquiring Person shall become
        null and void insofar as they relate to the Flip-In Right.
 
 The
        Rights are not exercisable until the Distribution Date. One of the Rights
        expired on September 30, 2006 and the other Right will expire on January
        29,
        2013, unless such Right is earlier redeemed or exchanged by the Company as
        described in the Rights Agreement.
  F18
 Table
            of Contents
  NOTE
        11 :
        (Continued)
 
 Earnings
        Per Share
 
 The
        following table sets forth the computation of basic and diluted earnings
        per
        share:
 
 September
                  302006
              
              2005
              
              2004Numerator:Net
                  income
              
              $
              2,317,000
              
              $
              1,033,000
              
              $
              2,849,000Denominator:Weighted
                  average shares outstanding for basic earnings per share
              
              
              6,613,541
              
              
              6,485,125
              
              
              6,311,643Effect
                  of dilutive stock options
              
              
              391,016
              
              
              454,256
              
              
              588,608Adjusted
                  weighted average shares outstanding for diluted earnings per
                  share
              
              
              7,004,557
              
              
              6,939,381
              
              
              6,900,251Basic
                  net earnings per share
              
              $
              0.35
              
              $
              0.16
              
              $
              0.45Diluted
                  net earnings per share
              
              $
              0.33
              
              $
              0.15
              
              $
              0.41
  For
        the
        years ended September 30, 2006, 2005 and 2004, approximately 14,000, 72,500,
        and
        77,500 shares, respectively, attributable to the exercise of outstanding
        options
        and restricted stock grants, were excluded from the calculation of diluted
        EPS
        because the effect was antidilutive.
 
 NOTE
        12 - COMMON STOCK OPTIONS AND RESTRICTED STOCK :
  As
          a
          result of the adoption of SFAS No. 123(R), the Company’s net income for the year
          ended September 30, 2006 includes $1,371,000 of compensation expense and
          includes $13,000 of income tax benefits related to the Company’s stock options
          for the year then ended. The effect of adopting SFAS No. 123(R) had a negative
          effect to the basic and diluted earnings per common share for the year
          ended
          September 30, 2006 of $0.17 and $0.16, respectivley. The compensation expense
          related to all of the Company’s stock-based compensation arrangements is
          recorded as a component of selling, general and administrative expenses.
          Prior
          to the Company’s adoption of SFAS No. 123(R), the Company presented tax benefits
          resulting from the disqualified dispositions of stock options as cash flows
          from
          operating activities on the Company’s consolidated statements of cash flows.
          SFAS No. 123(R) requires that cash flows resulting from tax deductions
          in excess
          of the cumulative compensation cost recognized for options exercised (excess
          tax
          benefits) be classified as cash inflows from financing activities and cash
          outflows from operating activities.
 **Stock
        Options:**
 
 At
        September 30, 2006, the Company had one stock option plan. Under the Company’s
        current stock option plan, the Board of Directors may grant options to purchase
        up to 1,150,000 shares of the Company’s common stock to officers, key employees
        and non-employee directors of the Company. At September 30, 2006, options
        for
        227,912 shares remained available for future grant under the plan. Options
        cancelled due to forfeiture or expiration return to the pool available for
        grant. The plan is administered by the Board of Directors or its designees
        and
        provides that options granted under the plan will be exercisable at such
        times
        and under such conditions as may be determined by the Board of Directors
        at the
        time of grant of such options; however, options
        may not be granted
        for terms in excess of ten years. Compensation expense related to stock options
        granted is recognized ratably over the service vesting period for the entire
        option award. The total number of stock option awards expected to vest is
        adjusted by estimated forfeiture rates. The terms of the plan provide for
        the
        granting of options at an exercise price not less than 100% of the fair market
        value of the stock at the date of grant, as determined by the closing market
        value stock price on the grant date. All options outstanding at September
        30,
        2006 were issued at 100% of the fair market value of the stock at the date
        of
        grant (except for certain option grants with measurement date errors - see
        Note
        14) and have five-year vesting terms.
  F19
 Table
            of Contents
  NOTE
        12 :
        (Continued)
  The
        estimated fair value of each option award granted was determined on the date
        of
        grant using the Black-Scholes option valuation model with the following
        weighted-average assumptions for option grants during the year ended September
        30, 2005. There were no options granted during the year ended September 30,
        2006.
  Year
                  EndedSeptember
                  30, 2005Risk-free
                  interest rate
              
              
              3%Expected
                  volatility of common stock
              
              
              76.6%Dividend
                  yield
              
              
              -0-Expected
                  option term
              
              
              7
                  years
  The
        computation of the expected term is based on a weighted average calculation
        combining the average life of options that have already been exercised or
        cancelled with the estimated life of all unexercised options. The expected
        volatility is based on the historical volatility of the Company’s stock. The
        risk-free interest rate is based on the implied yield on U.S. Treasury constant
        maturities with a remaining term equal to the expected term of the option.
        The
        dividend yield is projected to be zero.
 
 A
        summary
        of the status of the Company’s stock option plan as of September 30, 2006 and of
        changes in options outstanding under the plan during the year ended September
        30, 2006 is as follows:
  Number
                    of
                  Shares
                
                Weighted-
                  Average
                  Exercise
                  Price
                    per
                  Share
                
                Weighted-
                  Average
                    Remaining
                  Contractual
                    Term
                  (in
                    years)
                
                Aggregate
                  Intrinsic
                  ValueOptions
                    outstanding at September 30, 2005
                
                
                1,116,125
                
                $
                5.51Options
                    granted
                
                
                -0-Options
                    exercised
                
                
                (131,200
                )
                $
                4.42Options
                    forfeited or expired
                
                
                (12,650
                )
                $
                9.00Options
                    outstanding at September 30, 2006
                
                
                972,275
                
                $
                5.61
                
                
                6.4
                
                $
                12,099,000Options
                    vested and exercisable at September 30, 2006
                
                
                481,675
                
                $
                5.03
                
                
                5.3
                
                $
                6,272,000
  F20
 Table
            of Contents
  NOTE
        12 :
        (Continued)
 
 Nonvested
        share activity under our Stock Option Plan for the year ended September 30,
        2006
        is summarized as follows:
  Nonvested
                Number
                Of
                  Shares
              
              Weighted
                Average
                Grant-Date
                Fair
                  ValueNonvested
                  balance at October 1, 2005
              
              
              684,625
              
              $
              4.28Vested
              
              
              (193,625
              )
              $
              3.80Forfeited
              
              
              (400
              )
              $
              0.93Nonvested
                  balance at September 30, 2006
              
              
              490,600
              
              $
              4.47
 
 The
        weighted-average fair value of each option granted during fiscal year 2005,
        estimated as of the grant date using the Black-Scholes option valuation model,
        was $5.20 per option. The total intrinsic value of options exercised was
        $282,000 during fiscal year 2005.
 
 As
        of
        September 30, 2006, there was $2,194,000 of unamortized compensation cost
        related to non-vested stock option awards, which is expected to be recognized
        over a remaining weighted-average vesting period of 7.5 years.
 
 Cash
        received from stock option exercises for the year ended September 30, 2006
        and
        2005 was $580,000 and $394,000, respectively. The income tax benefits from
        stock
        option exercises totaled $234,000, $91,000, and $75,000 for the years ended
        September 30, 2006, 2005, and 2004, respectively.
 
 For
        stock
        options granted prior to the adoption of SFAS No. 123(R), the following table
        illustrates the pro forma effect on net income and earnings per common share
        as
        if the Company had applied the fair value recognition provisions of SFAS
        No.
        123(R) in determining stock-based compensation for awards under the
        plan:
  For
                      the Fiscal Years Ended
                    September
                      30,2005
                  
                  2004Net
                      income, as reported
                  
                  $
                  1,033,000
                  
                  $
                  2,849,000Add:
                      Stock-based compensation expense included in reported net income,
                      net of
                      related tax effects
                  
                  
                  5,000
                  
                  
                  20,000Deduct:
                      Total stock-based compensation expense determined under fair
                      value-based
                      method for all awards, net of related tax effects
                  
                  
                  (529,000
                  )
                  
                  (395,000
                  )Pro
                      forma net income
                  
                  $
                  509,000
                  
                  $
                  2,474,000Earnings
                      per common share:Basic
                      - as reported
                  
                  $
                  0.16
                  
                  $
                  0.45Basic
                      - pro forma
                  
                  $
                  0.08
                  
                  $
                  0.39Diluted
                      - as reported
                  
                  $
                  0.15
                  
                  $
                  0.41Diluted
                      - pro forma
                  
                  $
                  0.07
                  
                  $
                  0.36
  F21
 Table
            of Contents
  NOTE
        12 :
        (Continued)
 
 **Restricted
        Stock:**
 
 Restricted
        Stock is granted under the 2003 Plan. Compensation expense related to restricted
        stock issued is recognized ratably over the service vesting period. Restricted
        stock grants are normally vested over a five-year period.
 
 In
        accordance with SFAS No. 123(R), the fair value of restricted stock awards
        is
        estimated based on the closing market value stock price on the date of share
        issuance. The total number of restricted stock awards expected to vest is
        adjusted by estimated forfeiture rates. As of September 30, 2006, there was
        $1,272,000 of unamortized compensation cost related to non-vested restricted
        stock awards, which is expected to be recognized over a remaining
        weighted-average vesting period of 4.31 years. The unamortized compensation
        cost
        related to non-vested restricted stock awards was recorded as unearned
        stock-based compensation in shareholders equity at September 30, 2005. As
        part
        of the adoption of SFAS No. 123(R), such unamortized compensation cost was
        reclassified as a component of paid-in capital.
 
 A
        summary
        of the status of the Company’s restricted stock awards as of September 30, 2006,
        and of changes in restricted stock outstanding under the plan during the
        year
        ended September 30, 2006 is as follows:
 
 Number
                Of
                  Shares
              
              Weighted-Averate
                Grant
                Fair
                  Value
                Per
                  ShareRestricted
                  stock awards outstanding at September 30, 2005
              
              
              50,000
              
              $
              8.50Shares
                  issued
              
              
              83,088
              
              $
              12.75Shares
                  forfeited
              
              
              -0-
              
              $
              -0-Restricted
                  stock awards outstanding at September 30, 2006
              
              
              133,088
              
              $
              11.16
  The
        Company issued 4,514 shares of restricted stock as compensation in lieu of
        cash
        payments to one outside director during 2006. The outside director’s restricted
        share issuance is not included in the above restricted stock award
        table.
  The
        Company had a 1992 Officers and Key Employees Incentive Stock Option Plan
        (the "1992 Plan"), which provided for the issuance of up to 1,343,750 stock
        options, each to purchase one share of the common stock at a price not less
        than
        100% of the market price at the date of grant. In May 2002, the 1992 Plan
        expired. The 2003 Incentive Stock Option Plan was approved at the Annual
        Shareholders’ Meeting in February 2003. The 2003 Incentive Stock Option Plan has
        similar provisions as the 1992 Plan. In February 2005, the shareholders approved
        an amendment and restatement of the 2003 Incentive Stock Option Plan to,
        among
        other matters, (i) increase the number of shares to be issued under the 2003
        Incentive Stock Option Plan from 900,000 shares to 1,150,000 shares, and
        (ii)
        permit the grant of restricted stock under the plan.
  F22
 Table
            of Contents
  NOTE
        12 :
        (Continued)
 Stock
            option and restricted stock activity during 2006, 2005, and 2004 was
            as
            follows:
 Exercise
                  PriceOptions
                    outstanding September 30, 2003
                
                
                808,875
                
                $
                1.29
                
                
                -
                
                $
                16.48Granted
                
                
                425,000
                
                
                6.85
                
                
                -
                
                
                9.56Forfeited
                
                
                (6,750
                )
                
                1.30
                
                
                -
                
                
                8.48Exercised
                
                
                (93,200
                )
                
                1.29
                
                
                -
                
                
                7.00Options
                    outstanding September 30, 2004
                
                
                1,133,925
                
                $
                1.29
                
                
                -
                
                $
                16.48
 Granted
              
              
              260,000
              
              
              7.60
              
              
              -
              
              
              9.16Forfeited
              
              
              (158,600
              )
              
              1.29
              
              
              -
              
              
              9.56Exercised
              
              
              (119,200
              )
              
              1.30
              
              
              -
              
              
              7.00Options
                  outstanding September 30, 2005
              
              
              1,116,125
              
              $
              1.30
              
              
              -
              
              $
              16.48Granted
              
              
              -0-Forfeited
              
              
              (12,650
              )
              
              1.30
              
              
              -
              
              
              16.48Exercised
              
              
              (131,200
              )
              
              1.30
              
              
              -
              
              
              9.56Options
                  outstanding September 30, 2006
              
              
              972,275
              
              $
              1.30
              
              
              -
              
              $
              16.48Options
                  exercisable at September 30, 2004
              
              
              355,035
              
              $
              1.29
              
              
              -
              
              $
              16.48Options
                  exercisable at September 30, 2005
              
              
              440,500
              
              $
              1.30
              
              
              -
              
              $
              16.48Options
                  exercisable at September 30, 2006
              
              
              481,675
              
              $
              1.30
              
              
              -
              
              $
              16.48Restricted
                  stock outstanding
              
              
              50,000
              
              $
              8.50September
                  30, 2005Granted
              
              
              83,088
              
              $
              10.25
              
              
              -
              
              $
              17.45Restricted
                  stock outstandingSeptember
                  30, 2006
              
              
              133,088
              
              $
              8.50
              
              
              -
              
              $
              17.45Authorized
                  shares available for grant at September 30, 2004
              
              
              193,000Authorized
                  shares available for grant at September 30, 2005
              
              
              285,600Authorized
                  shares available for grant at September 30, 2006
              
              
              227,912
 
 All
        officer and key employee options were granted under the 1992 Plan. Both options
        and restricted stock are granted under the 2003 Plan. The exercise price
        of the
        incentive stock options shall be 100% of the fair market value on the date
        the
        option is granted. Options granted to officers and employees are normally
        vested
        over a five-year period. Options are exercisable for a period of five years
        from
        date of vest. Restricted stock grants are normally vested over a five-year
        period.
 
 The
        following table summarizes information about stock options outstanding at
        September 30, 2006:
 
 Options
                  Outstanding
              
              Options
                  ExercisableWeightedAverage
              
              Weighted
              
              
              
              WeightedNumber
              
              Remaining
              
              Average
              
              Number
              
              AverageRange
                  of
              
              Outstanding
                  at
              
              Contractual
              
              Exercise
              
              Exercisable
                  at
              
              ExerciseExercise
                  Prices
              
              Sept.
                  30, 2006
              
              Life
              
              Price
              
              Sept.
                  30, 2006
              
              Price$
              1.30
              
              
              -
              
              $
              1.63
              
              
              81,400
              
              
              6.13
              
              $
              1.32
              
              
              41,200
              
              $
              1.33$
              2.15
              
              
              -
              
              $
              3.50
              
              
              224,325
              
              
              5.60
              
              $
              2.54
              
              
              154,125
              
              $
              2.48$
              4.00
              
              
              -
              
              $
              5.88
              
              
              66,250
              
              
              1.92
              
              $
              4.12
              
              
              66,250
              
              $
              4.12$
              6.85
              
              
              -
              
              $
              16.48
              
              
              600,300
              
              
              7.17
              
              $
              7.50
              
              
              220,100
              
              $
              7.78972,275
              
              
              6.36
              
              $
              5.61
              
              
              481,675
              
              $
              5.03
 
 In
        May
        2006, the Company entered into an agreement with certain of its executives
        to
        potentially grant 90,000 shares of restricted stock, with 10,000 shares payable
        in cash. The restricted stock will only be granted if the Company achieves
        predetermined cumulative Earnings Before Income Taxes and Depreciation and
        Amortization (“EBITDA”) for the fiscal years ending 2006, 2007 and 2008.
        Cumulative EBITDA results must be reached or a reduced number of shares will
        be
        granted, if any. As required by SFAS No. 123(R), 80,000 shares of this award
        will be treated as an equity award, with the fair value measured at the grant
        date and 10,000 shares will be treated as a liability award, with the fair
        value
        measured at the grant date and remeasured at the end of each reporting period
        (marked to market). In conjunction with this award, the Company recognized
        $255,000 of compensation expense for the year ended September 30,
        2006.
  F23
 Table
            of Contents
  NOTE
        13 - COMMITMENTS, CONTINGENT LIABILITIES, AND GUARANTEES:
 
 The
        Company currently relies on cooperative relationships with, and sponsorship
        by,
        one bank in order to process its Visa, MasterCard and other bankcard
        transactions. The agreement between the bank and the Company requires the
        Company to assume and compensate the bank for bearing the risk of “chargeback”
losses. Under the rules of Visa and MasterCard, when a merchant processor
        acquires card transactions, it has certain contingent liabilities for the
        transactions processed. This contingent liability arises in the event of
        a
        billing dispute between the merchant and a cardholder that is ultimately
        resolved in the cardholder’s favor. In such a case, the disputed transaction is
        charged back to the merchant and the disputed amount is credited or otherwise
        refunded to the cardholder. If the Company is unable to collect this amount
        from
        the merchant’s account, and if the merchant refuses or is unable to reimburse
        the Company for the chargeback due to merchant fraud, insolvency or other
        reasons, the Company will bear the loss for the amount of the refund paid
        to the
        cardholders. The Company is also exposed to financial risk in providing
        Automated Clearing House (“ACH”) services to the merchants. As the Third-Party
        processor for multiple originating banks, the Company is liable for any
        fraudulent activities committed by the merchants initiating the ACH activities. The
        Company utilizes stringent underwriting guidelines combined with a number
        of
        systems and procedures to manage merchant risk. In addition, the Company
        requires cash deposits by certain merchants, which are held by the Company’s
        sponsoring banks to minimize the risk related to merchant frauds and
        chargebacks.
 
 A
        cardholder, through its issuing bank, generally has until the later of up
        to
        four months after the date a transaction is processed or the delivery of
        the
        product or service to present a chargeback to the Company’s sponsoring bank as
        the merchant processor. Therefore, management believes that the maximum
        potential exposure for the chargebacks would not exceed the total amount
        of
        transactions processed through Visa and MasterCard for the last four months
        and
        other unresolved chargebacks in the process of resolution. For the last four
        months through September 30, 2006, this potential exposure totaled approximately
        $609 million. At September 30, 2006, the Company, through its sponsoring
        banks,
        had approximately $131,000 of unresolved chargebacks that were in the process
        of
        resolution. At September 30, 2006, the Company, through its sponsoring banks,
        had access to $19.3 million belonging to our merchants. This money has been
        deposited at the sponsoring bank by the merchants to cover any potential
        chargeback losses.
 
 For
        the
        fiscal years 2006 and 2005, the Company processed approximately $1.8 billion
        (2006) and $1.2 billion (2005) of Visa and MasterCard transactions, which
        resulted in $9.8 million in gross chargeback activities for the fiscal year
        ended 2006 and $7.1 million in gross chargeback activities for the fiscal
        year
        ended 2005. Substantially all of these chargebacks were recovered from the
        merchants.
 
 The
        Company’s contingent obligation with respect to chargebacks constitutes a
        guarantee as defined in Financial Accounting Interpretation No. 45, “Guarantor’s
        Accounting and Disclosure requirements for Guarantees, Including Indirect
        Guarantees of Others” (“FIN 45”). FIN 45 requires that guarantees issued or
        modified subsequent to December 31, 2002 be initially recorded as liabilities
        in
        the Statement of Financial Position at fair value. Since the Company’s agreement
        with its sponsoring bank which establishes the guarantee obligation was entered
        into prior to December 31, 2002 and has not been modified since that date,
        the
        measurement provisions of FIN 45 are not applicable to this guarantee
        arrangement.
  F24
 Table
            of Contents
  NOTE
        13 :
        (Continued)
  In
        accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records
        a reserve for chargeback losses based on its processing volume and historical
        trends and data. As of September 30, 2006 and 2005, the allowance for chargeback
        losses, which is classified as a component of the allowance for uncollectible
        accounts receivable, was $304,000 and $29,000, respectively. The
        expense associated with the chargeback allowance is included in processing
        and
        transaction expense in the accompanying consolidated statements of income.
        The
        Company expensed $315,000, $13,000, and $50,000 for the years ended September
        30, 2006, 2005 and 2004, respectively for bankcard processing chargeback
        losses.
  The
        Company has a small check guarantee business. The Company charges the merchant
        a
        percentage of the face amount of the check and guarantees payment of the
        check
        to the merchant in the event the check is not honored by the check writer’s
        bank. Merchants typically present customer checks for processing on a regular
        basis and, therefore, dishonored checks are generally identified within a
        few
        days of the date the checks are guaranteed by the Company. Accordingly,
        management believes that its best estimate of the Company’s maximum potential
        exposure for dishonored checks at any given balance sheet date would not
        exceed
        the total amount of checks guaranteed in the last 10 days prior to the balance
        sheet date. As of September 30, 2006, the Company estimates that its maximum
        potential dishonored check exposure was approximately $2,315,000.
 
 For
        the
        fiscal years ended 2006 and 2005, the Company guaranteed approximately
        $67,855,000 (2006) and $40,413,000 (2005) of merchant checks, which resulted
        in
        $561,000 (2006) and $279,000 (2005) of dishonored checks presented to the
        Company for payments. The Company has the right to collect the full amount
        of
        the check from the check writer. The Company establishes a reserve for this
        activity based on historical and projected loss experience. The
        expense associated with the guarantee costs is included in processing and
        transaction expense in the accompanying consolidated statements of
        income.
 
 In
        May
        2006, we entered into separation agreements with each of our principal executive
        officers (CEO, CFO and COO) and each of our senior vice presidents whereby,
        in
        the event of a change in control of *ECHO* (as
        defined in each agreement) each such executive officer would be entitled,
        to the
        extent they remain employed by us at the time of such change in control,
        to the
        following: (i) an acceleration of vesting with respect to all stock option
        and
        restricted stock grants then outstanding and not yet vested, (ii) a portion
        of
        such executive’s anticipated cash or sales commission-based bonus, as
        applicable, for the fiscal year in which the change in control occurred,
        and
        (iii) in the event that the executive is terminated without cause (as defined
        in
        each agreement), or ceases to provide services to us (or our successor) as
        a
        result of an involuntary termination (as defined in each agreement) within
        the
        two year period following the change in control, then the executive would
        be
        entitled to a one-time lump sum cash payment equal to a percentage of the
        executive’s anticipated total compensation for the fiscal year in which the
        change in control occurred, plus continued medical benefits for a period
        of time
        following such termination. The amount of lump sum payout ranges from 1 1⁄2 to 2
        years of anticipated total compensation, and duration of continued medical
        benefits ranges between 1 1⁄2 and 2 years depending on position held by the
        principal executive or senior vice president.
 
 Lease
        Commitments
 
 The
        Company leases equipment and real property under agreements, which expire
        at
        various times over the next five years. The Company's future minimum rental
        payments for capital and operating leases at September 30, 2006 are as follows:
  F25
 Table
            of Contents
  NOTE
        13 :
        (Continued)
 
 Fiscal
                  Year
              
              Capital
                  Leases
              
              Operating
                  Leases2007
              
              $
              37,000
              
              $
              594,0002008
              
              
              34,000
              
              
              499,000Total
                  minimum lease payments
              
              
              71,000
              
              $
              1,093,000Less:
                  imputed interest of 7.23%
              
              
              (5,000
              )Present
                  value of net minimum lease payment
              
              $
              66,000
  Rent
        expense for the years ended September 30, 2006, 2005, and 2004 totaled $775,000,
        $663,000 and $572,000, respectively. Certain operating leases have renewal
        options at the end of the lease term solely at the Company’s discretion. In May
        2003, the Company leased new corporate office space in Camarillo, California.
        The lease is for a period of five years at a current monthly rate of $38,000.
 
 At
        September 30, 2006, the Company had long-term contracts with minimum commitments
        with vendors that provide various services. These contracts include minimum
        annual commitments as follows:
  2006
                
                $
                300,0002007
                
                
                250,000Total
                    vendor commitments
                
                $
                550,000
 Payments
        made under these contracts amounted to $300,000 and $50,000 for the years
        ended
        September 30, 2006 and 2005, respectively.
 
 NOTE
        14 - LEGAL PROCEEDINGS
 
 The
        Company is involved in various lawsuits arising in the ordinary course of
        business. Based upon current information, management, after consultation
        with
        legal counsel, believes the ultimate disposition of these lawsuits will have
        no
        material effect upon either the Company's results of operations, financial
        position, or cash flows.
  The
        Company is being sued by Premier Benefits, Inc. and Consumer Reward Network,
        Inc. (Premier Benefits, Inc. and Consumer Reward Network, Inc. v. First Regional
        Bank, et.al. - Los Angeles County Superior Court West District, Santa Monica
        Courthouse - Case NO: SC 085538, Filed on May 13, 2005, and Continuity Partners,
        Inc. v. First Regional Bank, et.al. - Los Angeles County Superior Court,
        West
        District, Santa Monica Courthouse - Case NO: SC086314, Filed on July 18,
        2005)
        for withholding funds from the plaintiffs in this matter (bank accounts were
        frozen in May, 2005 when it was discovered that the plaintiffs were processing
        outbound telemarketing transactions through the ACH Network (illegal under
        NACHA
        rules)). The Company provided services to the plaintiffs pursuant to its
        agreement with Internet Transaction Services, Inc. (Intertrans). Under the
        terms
        of its agreement with Intertrans, Intertrans was obligated to, and has,
        reimbursed the Company for all expenses incurred in this matter. The plaintiffs
        allege that the Company knowingly violated banking rules (NACHA rules) by
        allowing the plaintiffs to process ACH transactions for outbound telemarketing
        calls and wrongfully withheld the plaintiffs’ funds by freezing their bank
        accounts once First Regional Bank discovered that the plaintiffs were processing
        ACH transactions for outbound telemarketing calls. The United States District
        Court for the Central District of California in the case entitled Federal
        Trade
        Commission, Plaintiff v. Universal Premium Services, Inc., a California
        Corporation (also known as Premier Benefits, Inc.) has issued a Court Order
        authorizing the Receiver to enter into and approve a settlement agreement
        to
        which the Company is a party. All funds held under attachment (in the amount
        of
        $447,862.49 held by the Court and $15,757.44 held by First Regional Bank)
        in
        connection with the two cases referenced above have been distributed to the
        Receiver. The Order that the two lawsuits will be dismissed with prejudice,
        and
        that the Company receive a full release from the plaintiffs, has been filed
        with
        the Los Angeles County Superior Court and the Order should be issued by the
        Court shortly.
  F26
 Table
            of Contents
  NOTE
        15 - SIGNIFICANT FOURTH QUARTER ADJUSTMENT
 In
          the
          fourth quarter of fiscal 2006, management determined that the Company had
          certain stock options which were granted from 1997 through 2003 with measurement
          date errors that were previously undetected. After a full investigation
          by
          management of all of its past option grant practices, subsequently reviewed
          by
          the Company’s Audit Committee and outside counsel, management determined that
          the errors were unintentional and resulted from errors in documentation.
          Based
          on management’s analysis, management concluded that the amounts of the errors
          were not material to the Consolidated Financial Statements for any of the
          periods previously reported or for the year ended September 30, 2006. As
          a
          result, management made an adjustment to its Consolidated Financial Statements
          in the year ended September 30, 2006 to correct the cumulative errors.
          The
          adjustment related to the prior period Consolidated Financial Statements
          through
          September 30, 2005 reflected in the 2006 financial statements was approximately
          $177,000 on a pre-tax basis and approximately $103,000 net of tax effect.
 
 NOTE
        16 - SEGMENT INFORMATION
 
 The
        Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
        and Related Information" (FAS 131). FAS 131 established revised standards
        for
        public companies related to the reporting of financial and descriptive
        information about their operating segments in financial statements.
 
 Certain
        information is disclosed, per FAS 131, based on the way management organizes
        financial information for making operating decisions and assessing
        performance.
 
 The
        Company currently operates in two business segments: Bankcard and Transaction
        Processing and Check Related Products, all of which are located in the United
        States. The Company also has certain corporate expenses such as salaries
        and
        benefits, legal and professional fees, rent, and litigation accrual expenses
        which are not allocated to the two business segments.
 
 The
        Company's reportable operating segments have been determined in accordance
        with
        the Company's internal management structure, which is organized based on
        operating activities. The accounting policies of the operating segments are
        the
        same as those described in the summary of significant accounting policies.
        The
        Company evaluates performance based upon two primary factors, one is the
        segment's operating income and the other is based on the segment's contribution
        to the Company's future strategic growth.
  September
                  30,Business
                  Segments
              
              2006
              
              2005
              
              2004Revenues:Bankcard
                  and Transaction Processing
              
              $
              56,983,000
              
              $
              41,093,000
              
              $
              36,897,000Check
                  Related Products
              
              
              18,328,000
              
              
              14,458,000
              
              
              11,423,000$
              75,311,000
              
              $
              55,551,000
              
              $
              48,320,000Income
                  from Operations:Bankcard
                  and Transaction Processing
              
              $
              8,495,000
              
              $
              5,829,000
              
              $
              5,977,000Check
                  Related Products
              
              
              4,384,000
              
              
              2,204,000
              
              
              1,644,000Other
                  - Corporate Expenses
              
              
              (8,725,000
              )
              
              (6,354,000
              )
              
              (4,164,000
              )$
              4,154,000
              
              $
              1,679,000
              
              $
              3,457,000Depreciation
                  and Amortization:Bankcard
                  and Transaction Processing
              
              $
              1,009,000
              
              $
              954,000
              
              $
              966,000Check
                  Related Products
              
              
              2,499,000
              
              
              1,702,000
              
              
              1,255,000$
              3,508,000
              
              $
              2,656,000
              
              $
              2,221,000
 Capital
                    Expenditures:Bankcard
                    and Transaction Processing
                
                $
                3,386,000
                
                $
                2,167,000
                
                $
                2,258,000Check
                    Related Products
                
                
                1,829,000
                
                
                2,505,000
                
                
                2,513,000$
                5,215,000
                
                $
                4,672,000
                
                $
                4,771,000Total
                    Assets:Bankcard
                    and Transaction Processing
                
                $
                12,707,000
                
                $
                9,452,000
                
                $
                8,014,000Check
                    Related Products
                
                
                31,412,000
                
                
                24,616,000
                
                
                23,879,000Other
                
                
                10,888,000
                
                
                6,646,000
                
                
                7,481,000$
                55,007,000
                
                $
                40,714,000
                
                $
                39,374,000
 F27
 Table
            of Contents
  NOTE
        17 - QUARTERLY FINANCIAL DATA (Unaudited)
 
 The
        following summarizes the quarterly financial results of the Company for the
        fiscal years ended September 30, 2006 and September 30, 2005 (in thousands,
        except share data):
 
 Year
                  Ended September 30, 2006First
              
              Second
              
              Third
              
              FourthQuarter
              
              Quarter
              
              Quarter
              
              Quarter[1]Net
                  revenues
              
              $
              16,926
              
              $
              19,228
              
              $
              19,869
              
              $
              19,288Gross
                  profit
              
              
              5,783
              
              
              6,313
              
              
              6,570
              
              
              6,573Profit
                  from operations
              
              
              1,061
              
              
              781
              
              
              1,785
              
              
              527Net
                  income
              
              
              592
              
              
              424
              
              
              1,010
              
              
              291Earnings
                  per share - basic
              
              $
              0.09
              
              $
              0.06
              
              $
              0.15
              
              $
              0.04Earnings
                  per share - diluted
              
              $
              0.09
              
              $
              0.06
              
              $
              0.14
              
              $
              0.04
 
 Year
                  Ended September 30, 2005First
              
              Second
              
              Third
              
              FourthQuarter
              
              Quarter
              
              Quarter
              
              Quarter[1]Net
                  revenues
              
              $
              12,760
              
              $
              13,321
              
              $
              14,281
              
              $
              15,189Gross
                  profit
              
              
              4,469
              
              
              4,688
              
              
              5,164
              
              
              5,075Profit
                  from operations
              
              
              87
              
              
              238
              
              
              703
              
              
              651Net
                  income
              
              
              52
              
              
              144
              
              
              433
              
              
              404Earnings
                  per share - basic
              
              $
              0.01
              
              $
              0.02
              
              $
              0.07
              
              $
              0.06Earnings
                  per share - diluted
              
              $
              0.01
              
              $
              0.02
              
              $
              0.06
              
              $
              0.06
 
 [1]
              See
                  Note 14 - Significant Fourth Quarter
                  Adjustment.
  F28
 Table
            of Contents
  **REPORT
        ON FINANCIAL STATEMENT SCHEDULE**
 
 Board
        of
        Directors and Stockholders
 Electronic
        Clearing House, Inc.
 
 The
        audit
        referred to in our report dated December 14, 2006 relating to the consolidated
        financial statements of Electronic Clearing House, Inc., which is presented
        on
        the page set forth in Item 15 of this Form 10−K, included the audit of the
        financial statement schedule presented on page S-2 of this Form 10-K. This
        financial statement schedule is the responsibility of the Company’s management.
        Our responsibility is to express an opinion on this financial statement schedule
        based upon our audit.
 
 In
        our
        opinion, such financial statement schedule presents fairly, in all material
        respects, the information set forth therein.
  /s/
        BDO
        Seidman, LLP
  
 BDO
        Seidman, LLP
 Los
        Angeles, California
 December
        14, 2006
  S-1
  **ELECTRONIC
        CLEARING HOUSE, INC. AND CONSOLIDATED SUBSIDIARIES**
 **SCHEDULE
        II TO FORM 10K**
 **RULE
        12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**
  DESCRIPTION
              
              BALANCE
                  AT
                09/30/2003
              
              CHARGED
                TO
                EXPENSE
              
              REDUCTION
                  IN RESERVE AND ACCOUNTS
                RECEIVABLE
              
              BALANCE
                  AT
                09/30/2004
              
              CHARGED
                  TO
                EXPENSE
              
              REDUCTION
                  IN
                RESERVE
                  AND
                ACCOUNTS
                RECEIVABLE
              
              BALANCE
                  AT
                09/30/2005
              
              CHARGED
                  TO
                EXPENSE
              
              REDUCTION
                  IN
                RESERVE
                  AND
                ACCOUNTS
                RECEIVABLE
              
              BALANCE
                  AT
                09/30/2006Allowance
                  fortrade
                  receivables/chargebackreceivables
              
              $
              91,000
              
              $
              218,000
              
              $
              176,000
              
              $
              133,000
              
              $
              295,000
              
              $
              311,000
              
              $
              117,000
              
              $
              380,000
              
              $
              89,000
              
              $
              408,000Allowance
                  forobsolete
                  inventories
              
              $
              -0-
              
              $
              46,000
              
              $
              -0-
              
              $
              46,000
              
              $
              10,000
              
              $
              56,000
              
              $
              -0-
              
              $
              -0-
              
              $
              -0-
              
              $
              -0-
  S-2
 Table
            of Contents
  Exhibit
 Number
              Description
                  of Document
 2.1
              Copy
                  of Merger Agreement and Plan of Reorganization between Electronic
                  Clearing
                  House, Inc.,*ECHO*Acquisition Corporation, and Magic Software Development, Inc.,
                  dated April
                  20, 1999.[4]
 2.2
              Copy
                  of Merger Agreement and Plan of Reorganization between Electronic
                  Clearing
                  House, Inc.,*ECHO*Acquisition Corporation, and Rocky Mountain Retail Systems, Inc.,
                  dated
                  January 4, 2000.[5]
 3.1
              Articles
                  of Incorporation of Bio Recovery Technology, Inc., filed with the
                  Nevada
                  Secretary of State on December 11, 1981.[1]
 3.1.1
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on June 21, 1990.[16]
 3.1.2
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on September 27, 1991.[16]
 3.1.3
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on August 5, 1993.[16]
 3.1.4
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on April 7, 1995.[16]
 3.1.5
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on April 7, 1997.[16]
 3.1.6
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on March 13, 1998.[16]
 3.1.7
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on June 21, 1999.[16]
 3.1.8
              Amendment
                  to the Articles of Incorporation of Electronic Clearing House,
                  Inc. filed
                  with the Nevada Secretary of State on September 6, 2001.[16]
 3.2
              By-Laws
                  of Bio Recovery Technology, Inc.[1]
 3.2.1
              Amendment
                  to the By-Laws of Electronic Clearing House, Inc., dated April
                  25, 2005.[16]
 3.2.2
              Amendment
                  to the By-Laws of Electronic Clearing House, Inc., dated September
                  9,
                  2005.[16]
 4.1
              Amended
                  and Restated Rights Agreement between Electronic Clearing House,
                  Inc. and
                  OTR, Inc., dated January 29, 2003.[11]
 4.1.1
              Amendment
                  Number One to Amended and RestatedRights
                  Agreement dated September 27, 2004.[12]
 4.2
              Specimen
                  Common Stock Certificate.[2]
 4.3
              Amended
                  and Restated 2003 Incentive Stock Option Plan.[13]
 4.4
              Amended
                  and Restated 1992 Officers and Key Employees Incentive Stock Option
                  Plan.[14]
 10.35
              Copy
                  of Merchant Marketing and Processing Services Agreement between
                  Electronic
                  Clearing House, Inc. and First Regional Bank, dated June 24, 1997.[3]
 10.42
              Copy
                  of Addendum to Agreement between Electronic Clearing House, Inc.
                  and
                  U-Haul International, dated January 1, 2000.[5]
 10.46
              Copy
                  of Amended and Restated Merchant Marketing and Processing Services
                  Agreement between Electronic Clearing House, Inc. and First Regional
                  Bank,
                  dated August 1, 2000.[5]
 10.47
              Copy
                  of Addendum to Amended and Restated Merchant Marketing and Processing
                  Services Agreement between Electronic Clearing House, Inc. and
                  First
                  Regional Bank, dated August 1, 2000.[5]
 10.48
              Copy
                  of POS Check Third-Party Services Agreement between Visa U.S.A.,
                  Inc. and
                  Electronic Clearing House, Inc., dated December 12, 2000.[6]
 10.49
              Copy
                  of Asset Purchase Agreement between National Check Network, Inc.
                  and
                  Electronic Clearing House, Inc., dated April 19, 2001.[6]
 10.50
              Copy
                  of Addendum to Agreement between U-Haul International and Electronic
                  Clearing House, Inc., dated October 1, 2001.[6]
 10.51
              Copy
                  of First Amendment to the POS Check Third-Party Servicer Agreement
                  between
                  Visa U.S.A., Inc. and Electronic Clearing House, Inc. dated December
                  12,
                  2000.[7]
 10.52
              Copy
                  of Second Amendment to the POS Check Third-Party Servicer Agreement
                  between Visa U.S.A., and Electronic Clearing House, Inc. dated
                  December
                  12, 2000.[7]
 10.53
              Copy
                  of Third Amendment to the POS Check Third-Party Servicer Agreement
                  between
                  Visa U.S.A., and Electronic Clearing House, Inc. dated December
                  12, 2000.[7]
 10.54
              Form
                  of Securities Purchase Agreement by and among the Registrant and
                  the
                  Purchasers identified therein.[8]
   
 10.55
              Form
                  of Registration Rights Agreement by and among the Registrant and
                  the
                  Purchasers identified therein.[8]
 10.56
              Office
                  Lease dated May 21, 2003, by and between the Registrant and the
                  1989
                  Sheehan Family Trust dated October 24, 1989, with respect to principal
                  executive offices located at 730 Paseo Camarillo, Camarillo, California
                  93010.[9]
 10.57
              First
                  Amendment to Lease dated July 10, 2003, by and between the Registrant
                  and
                  the 1989 Sheehan Family Trust dated October 24, 1989, with respect
                  to
                  principal executive offices located at 730 Paseo Camarillo, Camarillo,
                  California 93010.[16]
 10.58
              Addendum
                  to Office Lease dated July 7, 2004, by and between the Registrant
                  and the
                  1989 Sheehan Family Trust dated October 24, 1989, with respect
                  to
                  principal executive offices located at 730 Paseo Camarillo, Camarillo,
                  California 93010.[10]
 10.59
              Sample
                  Separation Agreement between Electronic Clearing House, Inc. and
                  Company
                  Executives.[17]
 11.1
              Statement
                  re computation of per share earnings, incorporated herein by reference
                  to
                  Note 10 of the Notes to Consolidated Financial
                  Statements.
 21.0
              Subsidiaries
                  of Registrant as of September 30, 2006.[16]
 23.1
              Consent
                  of PricewaterhouseCoopers LLP
 23.2
              Consent
                  of BDO Seidman LLP
 24.1
              Power
                  of Attorney[15]
 31.1
              Certificate
                  of Joel M. Barry, Chief Executive Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of
                  1934, as amended.
 31.2
              Certificate
                  of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of
                  1934, as amended.
 32.1
              Certificate
                  of Joel M. Barry, Chief Executive Officer of Electronic Clearing
                  House,
                  Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
                  Act of
                  1934, as amended. 32.2
              Certificate of Alice L. Cheung, Chief Financial
                Officer
                of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under
                the
                Securities and Exchange Act of 1934, as amended.
 _________________________________
 
 [1]
              Filed
                  as an Exhibit to Registrant's Annual Report on Form 10-K for the
                  fiscal
                  year ended September 30, 1988 and incorporated herein by
                  reference.
 [2]
              Filed
                  as an Exhibit to Registrant's Form S-1, Amendment No. 3, effective
                  November 13, 1990 and incorporated herein by
                  reference.
 [3]
              Filed
                  as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal
                  year
                  ended September 30, 1997 and incorporated herein by
                  reference.
 [4]
              Filed
                  as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal
                  year
                  ended September 30, 1999 and incorporated herein by
                  reference.
 [5]
              Filed
                  as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal
                  year
                  ended September 30, 2000 and incorporated herein by
                  reference.
 [6]
              Filed
                  as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                  ended September 30, 2001 and incorporated herein by
                  reference.
 [7]
              Filed
                  as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                  ended September 30, 2002 and incorporated herein by
                  reference.
 [8]
              Filed
                  as an Exhibit to Registrant’s Current Report on Form 8-K dated October 30,
                  2003 and incorporated herein by
                  reference.
 [9]
              Filed
                  as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                  ended September 30, 2003 and incorporated herein by
                  reference.
 [10]
              Filed
                  as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                  ended September 30, 2004 and incorporated herein by
                  reference.
 [11]
              Filed
                  as an Exhibit to Registrant’s Form 8-A dated February 10, 2003 and
                  incorporated herein by reference.
 [12]
              Filed
                  as an Exhibit to Registrant’s Form 8-K dated September 30, 2004 and
                  incorporated herein by reference.
 [13]
              Filed
                  as an Exhibit to Registrant’s Notice of Annual Meeting of Shareholders
                  dated February 7, 2005 and incorporated herein by
                  reference.
 [14]
              Filed
                  as an Exhibit to Registrant’s Notice of Annual Meeting of Shareholders
                  dated February 4, 1999 and incorporated herein by
                  reference.
 [15]
              Included
                  on signature page.
 [16]
              Filed
                  as an Exhibit to Registrant’s Annual Report on Form 10-K for fiscal year
                  ended September 30, 2005 and incorporated herein by
                  reference.
 [17]
              Filed
                  as an Exhibit to Registrant’s Quarterly Report on Form 10-Q for fiscal
                  quarter ended June 30, 2006 and incorporated herein by
                  reference.