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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2003

Commission file number 000-50280

IPAYMENT INC. LOGO

iPayment, Inc.

(Exact Name of Registrant as Specified in Its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 62-1847043                          
|                                                               |  |                                     
|(State or Other Jurisdiction of Incorporation
or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|40 Burton Hills Boulevard, Suite 415
Nashville, Tennessee      |  | 37215                               
|                                                               |  |                                     
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

|                                                                    |  |               
|------------------------------------------------------------------- |  | --------------
|Registrants Telephone Number, Including Area Code:                 |  | (615) 665-1858
|                                                                    |  |               
|Former name, address and fiscal year, if changed since last
report: |  | Not Applicable

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES  [  ]  NO  [X]

Indicate the number of shares outstanding of each of the registrants classes
of common stock as of the latest practicable date.

|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at August 8, 2003
|                              |  |                              
|Common Stock, $0.01 par value |  | 16,362,917                   

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TABLE OF CONTENTS



|                            |                                                                                               |                                            |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|Part 1                     
|                            | Item 1. Financial Statements                                                                 
|                            |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                            |                                                                                               | CONSOLIDATED STATEMENTS of OPERATIONS     
|                            |                                                                                               | CONSOLIDATED STATEMENTS of CASH FLOWS     
|                            |                                                                                               | NOTES to CONSOLIDATED FINANCIAL STATEMENTS
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | Item 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                            | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION
|                            | Item 1. Legal Proceedings                                                                    
|                            | Item 2. Changes in Securities and Use of Proceeds.                                           
|                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                 
|EXHIBIT INDEX              
|CREDIT AGREEMENT           
|302 CERTIFICATION: CEO     
|302 CERTIFICATION: CFO     
|906 CERTIFICATION: CEO     
|906 CERTIFICATION: CFO     

INDEX

iPAYMENT, INC. and SUBSIDIARIES

|                              |                                                                                               |                                                                                                           |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                              |                                                                                               |                                                                                                           |    | Page
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                           |    |     
|                              | Item 1. Financial Statements                                                                  |                                                                                                           |    |      |  
|                              |                                                                                               | Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002                         |    |      | 3 | 
|                              |                                                                                               | Unaudited Consolidated Statements of Operations for the three and six months ended June 30,
2003 and 2002 |    |      | 4 | 
|                              |                                                                                               | Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002           |    |      | 5 | 
|                              |                                                                                               | Notes to Unaudited Consolidated Financial Statements                                                      |    |      | 6 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                           |    | 12   |  
|                              | Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                           |    | 18   |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                                           |    | 18   |  
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                           |    |     
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                           |    | 19   |  
|                              | Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                           |    | 19   |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                           |    | 20   |  
|SIGNATURES                    |                                                                                               |                                                                                                           | 20 |     
|EXHIBITS                      |                                                                                               |                                                                                                           | 21 |     

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Part 1.




Item 1. Financial Statements




iPAYMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |         |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------------------------------------------------------- | ------- | ------- | ----------- | ------- | ------------ | ------- |  |  | 
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         | June 30,    |         | December 31,
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         | 2003        |         | 2002        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |             
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         | (Unaudited) |         |              |         | 
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          | ASSETS  |         |             |         |              |         |  |  | 
|Current assets:                                                                                                                                                                                                                                        |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |             
|                                                                                                                                                                                                                                                       | Cash and cash equivalents                                                                                                                                                                                            |                            | $                                                                                        | 25,260  |         |             | $       | 1,831        |        
|                                                                                                                                                                                                                                                       | Accounts receivable, net of allowance for doubtful accounts of $46 and $93 at
June 30, 2003 and December 31, 2002, respectively                                                                                      |                            |                                                                                          | 9,152   |         |             |         | 6,687        |        
|                                                                                                                                                                                                                                                       | Prepaid expenses and other current assets                                                                                                                                                                            |                            |                                                                                          | 1,807   |         |             |         | 1,287        |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      | Total current assets       |                                                                                          |         | 36,219  |             |         |              | 9,805   | 
|Restricted cash                                                                                                                                                                                                                                        |                                                                                                                                                                                                                      |                            | 4,719                                                                                    |         |         |             | 3,070   |             
|Property and equipment, net                                                                                                                                                                                                                            |                                                                                                                                                                                                                      |                            | 1,679                                                                                    |         |         |             | 1,610   |             
|Intangible assets, net                                                                                                                                                                                                                                 |                                                                                                                                                                                                                      |                            | 28,796                                                                                   |         |         |             | 31,758  |             
|Goodwill, net                                                                                                                                                                                                                                          |                                                                                                                                                                                                                      |                            | 59,969                                                                                   |         |         |             | 60,790  |             
|Other assets                                                                                                                                                                                                                                           |                                                                                                                                                                                                                      |                            | 6,744                                                                                    |         |         |             | 9,948   |             
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      | Total assets               |                                                                                          | $       | 138,126 |             |         | $            | 116,981 | 
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            | LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK and STOCKHOLDERS EQUITY |         |         |             |         |              |         |  | 
|Current liabilities:                                                                                                                                                                                                                                   |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |             
|                                                                                                                                                                                                                                                       | Reserve for merchant losses                                                                                                                                                                                          |                            | $                                                                                        | 3,291   |         |             | $       | 4,411        |        
|                                                                                                                                                                                                                                                       | Accounts payable and accrued liabilities                                                                                                                                                                             |                            |                                                                                          | 7,900   |         |             |         | 12,192       |        
|                                                                                                                                                                                                                                                       | Current portion of long-term debt                                                                                                                                                                                    |                            |                                                                                          | 5,056   |         |             |         | 7,383        |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      | Total current liabilities  |                                                                                          |         | 16,247  |             |         |              | 23,986  | 
|Long term liabilities:                                                                                                                                                                                                                                 |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |             
|                                                                                                                                                                                                                                                       | Long-term debt                                                                                                                                                                                                       |                            |                                                                                          | 15,286  |         |             |         | 70,688       |        
|                                                                                                                                                                                                                                                       | Other long-term liabilities                                                                                                                                                                                          |                            |                                                                                          | 1,175   |         |             |         | 2,118        |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      | Total liabilities          |                                                                                          |         | 32,708  |             |         |              | 96,792  | 
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|Commitments and contingencies                                                                                                                                                                                                                          |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |             
|Series A mandatorily redeemable convertible preferred stock, no par value; 2,577,200
shares authorized and issued at June 30, 2003 and December 31, 2002; no shares
outstanding at June 30, 2003 and 2,577,200 shares outstanding at December 31, 2002 |                                                                                                                                                                                                                      |                            |                                                                                         |         |         |             | 6,670   |             
|Stockholders equity:                                                                                                                                                                                                                                  |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |             
|                                                                                                                                                                                                                                                       | Preferred stock, $0.01 par value; 17,422,800 shares authorized,
no shares issued and outstanding at June 30, 2003 and December 31, 2002                                                                              |                            |                                                                                          |        |         |             |         |             |        
|                                                                                                                                                                                                                                                       | Common stock, $0.01 par value; 180,000,000 shares authorized, 16,243,506 shares
issued and outstanding at June 30, 2003; 130,000,000 shares authorized, 6,736,075
shares issued and outstanding at December 31, 2002 |                            |                                                                                          | 121,956 |         |             |         | 29,736       |        
|                                                                                                                                                                                                                                                       | Accumulated deficit                                                                                                                                                                                                  |                            |                                                                                          | (16,538 | )       |             |         | (16,217      | )      
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      | Total stockholders equity |                                                                                          |         | 105,418 |             |         |              | 13,519  | 
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        
|Total liabilities and stockholders equity                                                                                                                                                                                                             |                                                                                                                                                                                                                      | $                          | 138,126                                                                                  |         |         | $           | 116,981 |             
|                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                      |                            |                                                                                          |         |         |             |         |              |        

See accompanying notes to consolidated financial statements.

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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of OPERATIONS
(In thousands, except per share data)
(Unaudited)

|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |        |        |  
|--------------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ---------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                |                                           |                          |        | Three months ended |        | Six months ended
|                                                                |                                           |                          |        | June 30,           |        | June 30,        
|                                                                |                                           |                          |        |                    |        |                 
|                                                                |                                           |                          |        | 2003               |        | 2002             |        | 2003   |        | 2002
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |     
|Revenues                                                        |                                           | $                        | 54,308 |                    |        | $                | 21,540 |        |        | $    | 100,983 |        |        | $ | 38,019 |       
|Operating expenses:                                             |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                | Interchange                               |                          |        | 28,336             |        |                  |        | 7,637  |        |      |         | 52,346 |        |   |        | 14,343 |       
|                                                                | Other costs of services                   |                          |        | 18,529             |        |                  |        | 11,631 |        |      |         | 34,806 |        |   |        | 19,592 |       
|                                                                | Selling, general and administrative       |                          |        | 1,909              |        |                  |        | 1,401  |        |      |         | 3,738  |        |   |        | 2,570  |       
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                |                                           | Total operating expenses |        |                    | 48,774 |                  |        |        | 20,669 |      |         |        | 90,890 |   |        |        | 36,505 |  
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                | Income from operations                    |                          |        | 5,534              |        |                  |        | 871    |        |      |         | 10,093 |        |   |        | 1,514  |       
|Interest expense                                                |                                           |                          | 6,366  |                    |        |                  | 1,305  |        |        |      | 9,656   |        |        |   | 2,511  |       
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                | Income (loss) before income taxes         |                          |        | (832               | )      |                  |        | (434   | )      |      |         | 437    |        |   |        | (997   | )     
|Income tax provision (benefit)                                  |                                           |                          | (250   | )                  |        |                  | 155    |        |        |      | 131     |        |        |   | 310    |       
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                | Net income (loss)                         |                          |        | (582               | )      |                  |        | (589   | )      |      |         | 306    |        |   |        | (1,307 | )     
|Accretion of mandatorily redeemable convertible preferred stock |                                           |                          | (214   | )                  |        |                  | (364   | )      |        |      | (652    | )      |        |   | (703   | )     
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                | Net loss allocable to common stockholders |                          | $      | (796               | )      |                  | $      | (953   | )      |      | $       | (346   | )      |   | $      | (2,010 | )     
|                                                                |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|Basic and diluted loss per common share:                        |                                           |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |       
|                                                                | Loss per share                            |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |        |       
|                                                                |                                           | Basic                    |        | $                  | (0.06  | )                |        | $      | (0.21  | )    |         | $      | (0.04  | ) |        | $      | (0.45  | )
|                                                                |                                           | Diluted                  |        | $                  | (0.06  | )                |        | $      | (0.21  | )    |         | $      | (0.04  | ) |        | $      | (0.45  | )
|                                                                | Weighted average shares outstanding       |                          |        |                    |        |                  |        |        |        |      |         |        |        |   |        |        |       
|                                                                |                                           | Basic                    |        |                    | 12,383 |                  |        |        | 4,480  |      |         |        | 9,870  |   |        |        | 4,480  |  
|                                                                |                                           | Diluted                  |        |                    | 12,383 |                  |        |        | 4,480  |      |         |        | 9,870  |   |        |        | 4,480  |  

See accompanying notes to consolidated financial statements.

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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
(Unaudited)

|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |       |        |  
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------- | ------- | ---------------- | ------ | ------ | ------ | ----- | ------ | -
|                                                                       |                                                                                          |                                                                       |                                                                       |         | Six months ended
|                                                                       |                                                                                          |                                                                       |                                                                       |         | June 30,        
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                 
|                                                                       |                                                                                          |                                                                       |                                                                       |         | 2003             |        | 2002  
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |       
|Cash flows from operating activities:                                  |                                                                                          |                                                                       |                                                                       |         |                  |        |        |       
|                                                                       | Net income (loss)                                                                        |                                                                       | $                                                                     | 306     |                  |        | $      | (1,307 | )    
|                                                                       | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                       |                                                                       |         |                  |        |        |        |      
|                                                                       |                                                                                          | Depreciation and amortization                                         |                                                                       |         | 3,925            |        |        |        | 2,387 |       
|                                                                       |                                                                                          | Noncash interest expense                                              |                                                                       |         | 6,366            |        |        |        | 414   |       
|                                                                       |                                                                                          | Changes in assets and liabilities, excluding effects of acquisitions: |                                                                       |         |                  |        |        |        |       |       
|                                                                       |                                                                                          |                                                                       | Accounts receivable                                                   |         |                  | (2,465 | )      |        |       | (1,344 | )
|                                                                       |                                                                                          |                                                                       | Prepaid expenses and other current assets                             |         |                  | (520   | )      |        |       | 495    |  
|                                                                       |                                                                                          |                                                                       | Other assets                                                          |         |                  | 2,785  |        |        |       | (1,636 | )
|                                                                       |                                                                                          |                                                                       | Reserve for merchant losses, accounts payable and accrued liabilities |         |                  | (3,754 | )      |        |       | 3,009  |  
|                                                                       |                                                                                          |                                                                       | Other liabilities                                                     |         |                  | 13     |        |        |       | 55     |  
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Net cash provided by operating activities                              |                                                                                          |                                                                       | 6,656                                                                 |         |                  |        | 2,073  |       
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Cash flows from investing activities:                                  |                                                                                          |                                                                       |                                                                       |         |                  |        |        |       
|                                                                       | Change in restricted cash                                                                |                                                                       |                                                                       | (1,649  | )                |        |        | (600   | )    
|                                                                       | Expenditures for property and equipment                                                  |                                                                       |                                                                       | (380    | )                |        |        | (126   | )    
|                                                                       | Acquisitions of businesses, portfolios and other intangibles, net of cash acquired       |                                                                       |                                                                       | (234    | )                |        |        | 1,320  |      
|                                                                       | Payments related to businesses previously aquired                                        |                                                                       |                                                                       | (2,099  | )                |        |        |       |      
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Net cash (used in) provided by investing activities                    |                                                                                          |                                                                       | (4,362                                                                | )       |                  |        | 594    |       
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Cash flows from financing activities:                                  |                                                                                          |                                                                       |                                                                       |         |                  |        |        |       
|                                                                       | Repayments of debt and capital lease obligations                                         |                                                                       |                                                                       | (53,728 | )                |        |        | (2,610 | )    
|                                                                       | (Repayments) borrowings on line of credit                                                |                                                                       |                                                                       | (1,050  | )                |        |        | 36     |      
|                                                                       | Proceeds from issuance of common stock                                                   |                                                                       |                                                                       | 75,913  |                  |        |        |       |      
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Net cash provided by (used in) financing activities                    |                                                                                          |                                                                       | 21,135                                                                |         |                  |        | (2,574 | )     
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Net increase in cash and cash equivalents                              |                                                                                          |                                                                       | 23,429                                                                |         |                  |        | 93     |       
|Cash and cash equivalents, beginning of period                         |                                                                                          |                                                                       | 1,831                                                                 |         |                  |        | 290    |       
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Cash and cash equivalents, end of period                               |                                                                                          | $                                                                     | 25,260                                                                |         |                  | $      | 383    |       
|                                                                       |                                                                                          |                                                                       |                                                                       |         |                  |        |        |        |      
|Supplemental disclosure of cash flow information:                      |                                                                                          |                                                                       |                                                                       |         |                  |        |        |       
|                                                                       | Cash paid during the period for income taxes                                             |                                                                       | $                                                                     | 57      |                  |        | $      | 34     |      
|                                                                       | Cash paid during the period for interest                                                 |                                                                       | $                                                                     | 3,262   |                  |        | $      | 2,454  |      
|Supplemental disclosure of noncash investing and financing activities: |                                                                                          |                                                                       |                                                                       |         |                  |        |        |       
|                                                                       | Accretion of mandatorily redeemable convertible preferred stock                          |                                                                       | $                                                                     | 652     |                  |        | $      | 703    |      
|                                                                       | Conversion of debt to common stock                                                       |                                                                       | $                                                                     | 9,000   |                  |        | $      |       |      
|                                                                       | Conversion of mandatorily redeemable convertible preferred stock to common stock         |                                                                       | $                                                                     | 7,322   |                  |        | $      |       |      

See accompanying notes to consolidated financial statements.

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iPAYMENT, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
UNAUDITED

(1)  Organization and Business and Basis of Presentation

Stock split

Immediately prior to our initial public offering (see Note 9) we effected
a reverse split of our outstanding common stock of 0.4627 shares for each share
outstanding. All shares and per share calculations included in the
accompanying unaudited consolidated financial statements of iPayment, Inc. have
been adjusted to reflect this reverse split.

Organization and Business

iPayment, Inc. (subsequently referred to as iPayment or the Company)
was originally incorporated as iPayment Holdings, Inc. in Tennessee and was
reincorporated in Delaware under the name iPayment, Inc. iPayment is a
provider of card-based payment processing services to small business merchants
located across the United States. We enable merchants to accept credit and
debit cards as payment for their products and services by providing card
authorization, data capture, settlement, risk management, fraud detection and
chargeback services. Our services also include data organization and retrieval,
ongoing merchant assistance and resolution support in connection with disputes
with cardholders. We market and sell our services primarily through independent
sales organizations (ISOs).

Basis of Presentation

The accompanying unaudited consolidated financial statements of iPayment
have been prepared in accordance with accounting principles generally accepted
in the United States of America and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, the unaudited consolidated financial statements
reflect all adjustments considered necessary for a fair presentation,
consisting only of normal and recurring adjustments. All significant
intercompany transactions have been eliminated in consolidation. Operating
results for the three and six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and notes thereto for the year ended December 31, 2002 (included in
our Registration Statement on Form S-1).

Certain prior year amounts have been reclassified to conform to the
current year presentation, including separate presentation of interchange fees
and classification of all depreciation and amortization expense as other cost
of services in the consolidated statement of operations. Interchange fees had
previously been included in cost of services and were $6.7 million, $7.6
million, $13.3 million and $24.2 million for the three months ended March 31,
June 30, September 30, and December 31, 2002, respectively. Other costs of
services include costs directly attributable to our provision of payment
processing and related services to our merchants such as residual payments to
ISOs, which are commissions we pay to our ISOs based upon a percentage of the
net revenues we generate from their merchant referrals, and assessment fees
payable to card associations, which are a percentage of the processing volume
we generate from Visa and MasterCard. In addition, other costs of services
includes telecommunications costs, personnel costs, occupancy costs, losses due
to merchant defaults, other miscellaneous merchant supplies and services
expenses, sponsorship costs and other third-party processing costs.

Stock-Based Compensation

We have adopted the disclosure-only provision of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure - an amendment of FASB Statement No. 123. SFAS No. 148 requires
prominent disclosures in annual and interim financial statements regarding the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. We measure compensation expense for our
stock option awards under the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) and related interpretations. APB 25 requires
compensation expense to be recognized based on the excess, if any, of the
quoted market price of the stock at the date of the grant over the amount an
employee must pay to acquire the stock. The following table presents the effect
on net loss and basic and diluted net loss per common share had the Company
adopted the fair value method of accounting for stock-based compensation under
SFAS No. 123 (in thousands, except per share data):

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iPAYMENT, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
UNAUDITED

|                                                                                                 |              |         |        |   |                |   |                |   |       |   |      |   |       |   |        |   |       |   | 
|------------------------------------------------------------------------------------------------ | ------------ | ------- | ------ | - | -------------- | - | -------------- | - | ----- | - | ---- | - | ----- | - | ------ | - | ----- | - | 
|                                                                                                 |              |         |        |   | Three Months   |   | Six Months    
|                                                                                                 |              |         |        |   | Ended June 30, |   | Ended June 30,
|                                                                                                 |              |         |        |   |                |   |               
|                                                                                                 |              |         |        |   | 2003           |   | 2002           |   | 2003  |   | 2002
|                                                                                                 |              |         |        |   |                |   |                |   |       |   |     
|Net loss allocable to common stockholders, as reported                                           |              | $       | (796   | ) |                | $ | (953           | ) |       | $ | (346 | ) |       | $ | (2,010 | )
|Deduct: Total stock-based employee compensation expense determined under fair-value-based method |              |         | (276   | ) |                |   | (119           | ) |       |   | (468 | ) |       |   | (238   | )
|                                                                                                 |              |         |        |   |                |   |                |   |       |   |      |   |       |   |        |   |       |  
|                                                                                                
|Pro
forma net loss                                                                               |              |         | (1,072 | ) |                |   | (1,072         | ) |       |   | (814 | ) |       |   | (2,248 | )
|                                                                                                 |              |         |        |   |                |   |                |   |       |   |      |   |       |   |        |   |       |  
|Earnings per share:                                                                              |              |         |        |   |                |   |                |   |       |   |      |   |       |   |        |  
|                                                                                                 | As reported: |         |        |   |                |   |                |   |       |   |      |   |       |   |        |   |      
|                                                                                                 |              | Basic   |        | $ | (0.06          | ) |                | $ | (0.21 | ) |      | $ | (0.04 | ) |        | $ | (0.45 | )
|                                                                                                 |              | Diluted |        | $ | (0.06          | ) |                | $ | (0.21 | ) |      | $ | (0.04 | ) |        | $ | (0.45 | )
|                                                                                                 | Pro Forma:   |         |        |   |                |   |                |   |       |   |      |   |       |   |        |   |      
|                                                                                                 |              | Basic   |        | $ | (0.09          | ) |                | $ | (0.24 | ) |      | $ | (0.08 | ) |        | $ | (0.50 | )
|                                                                                                 |              | Diluted |        | $ | (0.09          | ) |                | $ | (0.24 | ) |      | $ | (0.08 | ) |        | $ | (0.50 | )

The weighted-average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes
option-pricing model and is amortized over the vesting period of the underlying
options. Because additional options are expected to be granted each year, the
above pro forma disclosures may not be representative of pro forma effects on
reported results for future periods. The following assumptions were applied:
(i) no expected dividend yield for all periods, (ii) expected volatility of 50%
and 100% for 2003 and 2002, respectively (iii) expected lives of 3 years for
all periods, (iv) and risk-free interest rates ranging from 2% to 4% for all
periods.

(2) Acquisitions

The effective date of each of the acquisitions discussed in this Note are
the dates the acquisitions were recognized in our financial statements, unless
otherwise noted.

CardSync Processing, Inc.

On September 5, 2002, we entered into an Agreement and Plan of Merger (the
CardSync Agreement) with CardSync Processing, Inc. (CardSync), whereby
CardSync merged with a wholly owned subsidiary of the Company. CardSync is an
integrated provider of credit card transaction processing services. Under the
terms of the CardSync Agreement, we purchased CardSync for $1.1 million cash
and 670,915 shares of our common stock. The acquisition was accounted for as a
purchase. Debt assumed in the acquisition is pursuant to a settlement of
litigation between CardSync and NOVA Corporation (NOVA) under which CardSync
was required to pay NOVA $8.0 million. As of June 30, 2003, the entire balance
has been repaid.

First Merchants Bancard Services, Inc

On August 28, 2002, we entered into an Agreement and Plan of Merger (the
FMBS Agreement) with First Merchants Bancard Services, Inc. (FMBS), whereby
FMBS merged into a wholly owned subsidiary of the Company. FMBS is an
integrated provider of credit card transaction processing services. Under the
terms of the FMBS Agreement, we purchased FMBS for $3.4 million cash and
740,320 shares of our common stock. The acquisition was accounted for as a
purchase. Debt assumed in the acquisition included a note payable for $1.9
million (which also contained a one-time $250,000 loan fee due upon the
repayment of the note). The note was repaid in the second quarter of 2003
using proceeds from our initial public offering (see Note 9).

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iPAYMENT, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
UNAUDITED

Online Data Corporation

On August 22, 2002, we entered into an Agreement and Plan of Merger (the
Online Agreement) with Online Data Corporation (Online), whereby Online
merged with a wholly owned subsidiary of the Company. Online is an integrated
provider of credit card transaction processing services. Under the terms of
the Online Agreement, we purchased Online for $2.0 million cash, a note for
$5.0 million (the Online Note) and 844,428 shares of our common stock, as
well as a deferred cash payment of $2.1 million which was paid in February
2003. The acquisition was accounted for as a purchase. Debt assumed in the
acquisition included a note payable to Blueline Data Corporation (the Blueline
Note) for $1.3 million. The Online Note and the Blueline Note were repaid in
the second quarter of 2003 using proceeds from our initial public offering (see
Note 9).

E-Commerce Exchange

On March 19, 2002, we entered into an Agreement and Plan of Merger (the
ECX Agreement) with ECX, a card-payment processor, whereby ECX merged into a
wholly owned subsidiary of the Company. ECX is a provider of an end-to-end
solution which enables merchants to accept credit card payments via the
Internet. Under the terms of the ECX Agreement, we issued a series of
convertible notes (the ECX Notes) to the prior Series A Preferred
Stockholders of ECX (ECX Preferred Stockholders) in the aggregate amount of
$15.0 million in exchange for all of the outstanding common shares of ECX.
Subject to certain restrictions, such ECX Notes are convertible into 663,184
shares of our common stock, and the notes bear interest at 4.5 percent and are
due March 2007. The acquisition was accounted for as a purchase.

Other Acquisitions

We made various other purchases of certain merchant processing portfolios
totaling $1.6 million during the six months ended June 30, 2003. The
portfolios are accounted for as intangible assets and other assets in the
accompanying consolidated balance sheets and are amortized over their expected
useful lives of seven years.

On August 5, 2003, we entered into an asset purchase agreement with
CardPayment Solutions, Inc. See Note 10 for further information regarding this
acquisition.

(3) Intangible Assets

As of June 30, 2003, we had the following amortizable intangible assets
(in thousands):

|                               |  |          |        |              |  |     |         |   |  |   |        | 
|------------------------------ |  | -------- | ------ | ------------ |  | --- | ------- | - |  | - | ------ | 
|                               |  | Gross    |        |              |  |     |         |   |  |  
|                               |  | Carrying |        | Accumulated  |  |     |         |  
|                               |  | Amount   |        | Amortization |  | Net
|                               |  |          |        |              |  |    
|Merchant processing portfolios |  | $        | 34,386 |              |  |     | (7,603  | ) |  | $ | 26,783 | 
|Acquired software              |  |          | 3,510  |              |  |     | (2,692  | ) |  |   | 818    | 
|Bank contract costs and other  |  |          | 1,725  |              |  |     | (530    | ) |  |   | 1,195  | 
|                               |  |          |        |              |  |     |         |   |  |   |        | 
|Total                          |  | $        | 39,621 |              |  | $   | (10,825 | ) |  | $ | 28,796 | 
|                               |  |          |        |              |  |     |         |   |  |   |        | 

As of December 31, 2002, we had the following amortizable intangible
assets (in thousands):

|                               |  |          |        |              |  |     |         |   |  |   |        | 
|------------------------------ |  | -------- | ------ | ------------ |  | --- | ------- | - |  | - | ------ | 
|                               |  | Gross    |        |              |  |     |         |   |  |  
|                               |  | Carrying |        | Accumulated  |  |     |         |  
|                               |  | Amount   |        | Amortization |  | Net
|                               |  |          |        |              |  |    
|Merchant processing portfolios |  | $        | 34,236 |              |  |     | (5,110  | ) |  | $ | 29,126 | 
|Acquired software              |  |          | 2,593  |              |  |     | (1,973  | ) |  |   | 620    | 
|Bank contract costs and other  |  |          | 5,174  |              |  |     | (3,162  | ) |  |   | 2,012  | 
|                               |  |          |        |              |  |     |         |   |  |   |        | 
|Total                          |  | $        | 42,003 |              |  | $   | (10,245 | ) |  | $ | 31,758 | 
|                               |  |          |        |              |  |     |         |   |  |   |        | 

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iPAYMENT, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
UNAUDITED

For the three months ended June 30, 2003 and 2002, respectively,
amortization expense related to the merchant processing portfolios was
$1,315,000 and $788,000, amortization expense related to acquired software was
$249,000 and $241,000, and amortization expense related to bank contract costs
and other was $73,000 and $193,000. For the six months ended June 30, 2003 and 2002, respectively, amortization expense
related to the merchant processing portfolios was $2,627,000 and $1,488,000,
amortization expense related to acquired software was $492,000 and $482,000,
and amortization expense related to bank contract costs and other was $121,000
and $273,000.

(4) Long-Term Debt

On March 1, 2001, we obtained a secured line of credit from Bank of
America for $3.0 million in exchange for a note, personally guaranteed by a
member of our Board of Directors. Interest is payable at Prime rate (4.0
percent at June 30, 2003). A security interest was granted for substantially
all the assets of the Company. At June 30, 2003, no amounts were outstanding
under this line of credit. The line of credit contains certain financial and
non-financial covenants, including requirements that we maintain a leverage
ratio (as defined therein) of not greater than 1.5, and a net worth (as defined
therein) of not less than $10.0 million. We were in compliance with all debt
covenants as of June 30, 2003.

In May 2003, we completed an initial public offering (see Note 9) and used
$55.7 million of the proceeds to repay outstanding debt with a carrying value
of $52.1 million. Additionally, in conjunction with the offering we converted
$9.0 million of debt with a carrying value of $8.2 million into 562,500 shares
of common stock. These repayments and conversions resulted in a noncash
pre-tax charge of approximately $4.4 million which was recognized as interest
expense in the second quarter of 2003.

On August 1, 2003 we obtained a $20.0 million revolving line of credit
from Bank of America (see Note 10). The line of credit is expandable to $30.0
million and includes a $3.0 million letter of credit sublimit. Interest is
payable at an adjusted LIBOR rate (LIBOR Rate plus the Applicable Margin for
LIBOR, each as in effect at such time). The line of credit contains certain
financial and nonfinancial covenants (as defined therein) and replaces the
previous line of credit we had with Bank of America. The line of credit
expires on August 1, 2006.

(5) Mandatorily redeemable convertible preferred stock

As part of the initial public offering completed in May 2003 (see Note 9),
all of our Mandatorily Redeemable Convertible Preferred Stock was converted
into 1,192,470 shares of our common stock.

(6) Stockholders Equity

Earnings Per Share

We report net income or loss per share in accordance with SFAS No. 128,
Earnings per Share. Under SFAS No. 128, basic earnings per share (EPS), which
excludes dilution, is computed by dividing net income or loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Net income or loss available to common stockholders represents
reported net income or loss less accretion of mandatorily redeemable
convertible preferred stock.

Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Diluted EPS includes in-the-money stock options and warrants using the
treasury stock method and also includes the assumed conversion of preferred
stock and convertible debt using the if-converted method. During a loss period,
the assumed exercise of in-the-money stock options, warrants and conversion of
convertible securities has an anti-dilutive effect, and therefore are excluded
from the computation of diluted EPS. The following common stock equivalents
were excluded from the computation of diluted EPS because their inclusion would
have been anti-dilutive (in thousands):

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iPAYMENT, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
UNAUDITED

|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |  |  |  |       | 
|-------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                                   |  | Three months ended |       | Six months ended
|                                                   |  | June 30,           |       | June 30,        
|                                                   |  |                    |       |                 
|                                                   |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                   |  |                    |       |                  |  |      |       |     
|Stock options and warrants                         |  |                    | 1,212 |                  |  |      | 1,130 |      |  |  | 1,665 |  |  |  | 1,129 | 
|Mandatorily redeemable convertible preferred stock |  |                    | 537   |                  |  |      | 1,192 |      |  |  | 863   |  |  |  | 1,192 | 
|Convertible debt                                   |  |                    | 698   |                  |  |      | 650   |      |  |  | 715   |  |  |  | 373   | 
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |  |  |  |       | 
|                                                   |  |                    | 2,447 |                  |  |      | 2,972 |      |  |  | 3,243 |  |  |  | 2,694 | 
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |  |  |  |       | 

A reconciliation of basic to diluted weighted average common shares outstanding
is as follows (in thousands):

|                                                               |  |                    |        |                  |  |      |       |      |  |  |       |  |  |  |       | 
|-------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                                               |  | Three months ended |        | Six months ended
|                                                               |  | June 30,           |        | June 30,        
|                                                               |  |                    |        |                 
|                                                               |  | 2003               |        | 2002             |  | 2003 |       | 2002
|                                                               |  |                    |        |                  |  |      |       |     
|Basic weighted average common shares outstanding               |  |                    | 12,383 |                  |  |      | 4,480 |      |  |  | 9,870 |  |  |  | 4,480 | 
|Dilutive
weighted average common share equivalents
outstanding |  |                    |       |                  |  |      |      |      |  |  |      |  |  |  |      | 
|                                                               |  |                    |        |                  |  |      |       |      |  |  |       |  |  |  |       | 
|Diluted weighted average common shares outstanding             |  |                    | 12,383 |                  |  |      | 4,480 |      |  |  | 9,870 |  |  |  | 4,480 | 
|                                                               |  |                    |        |                  |  |      |       |      |  |  |       |  |  |  |       | 

(7) Revenue Recognition

Revenues are reported gross of amounts paid to association banks as well
as interchange and assessments paid by us to credit card associations pursuant
to which such parties receive payments based primarily on processing volume for
particular groups of merchants. Related interchange costs are also recognized
at that time, as are bank sponsorship fees and assessments, which are included
in other costs of services.

(8) Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of SFAS Nos. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34(FIN 45). Effective January 1, 2003, the Company
adopted FIN 45, which requires the recognition of a liability for the amount of
the fair value of a guarantee. A liability is required to be maintained until
the settlement or expiration of the guarantee for transactions occurring after
December 31, 2002. The Company recognizes a reserve for its merchant credit
risk, which is partially mitigated by the collateral the Company obtains from
those merchants considered at risk. Based on historical experience, ongoing
credit risk assessments, and the collateral held, the fair value of the
guarantee approximates the credit loss reserves. The adoption of FIN 45 did not
have a material impact on the Companys card merchant processing business, or
our financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirement of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We adopted
this statement and its adoption did not have any impact on our financial
position, results of operations or cashflows (see Note 1).

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iPAYMENT, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
UNAUDITED

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51(FIN 46). FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined in the interpretation. FIN 46 applies immediately to
variable interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities obtained after
January 31, 2003. FIN 46 requires certain disclosures in financial statements
issued after January 31, 2003 if it is reasonably possible that we will
consolidate or disclose information about variable interest entities when the
interpretation becomes effective. We do not have variable interests in variable
interest entities.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity, including mandatorily
redeemable equity instruments. The Statement is effective for all interim
periods beginning after June 15, 2003. We have classified our mandatorily
redeemable equity instruments in the mezzanine level between liabilities and
stockholders equity on its balance sheet. However, all of our mandatorily
redeemable equity instruments were converted to common stock in conjunction
with the initial public offering in May 2003 (see Note 9) and we, therefore, do
not anticipate this Statement will have a material effect on our consolidated
financial statements.

(9) Initial Public Offering

In May 2003, we completed an initial public offering whereby we sold
5,625,000 shares of common stock (which included underwriters overallotment)
and received net proceeds of $75.7 million (after underwriters discount of
$6.3 million and related offering expenses of $8.0 million). As described in
Note 4, during the second quarter of fiscal 2003 we used $55.7 million of the
proceeds to repay debt that had a carrying value of $52.1 million and converted
an additional $9.0 million of debt with a carrying value of $8.2 million into
562,500 shares of common stock. The repayment and conversion of debt resulted
in recognition of a non-cash pre-tax charge of approximately $4.4 million in
the second quarter of 2003 due to the acceleration of interest expense equal to
the unamortized discount balance at the date of repayment or conversion.
Immediately prior to the offering we effected a reverse split of our
outstanding common stock of 0.4627 shares for each share outstanding. All
shares and per share calculations included in the accompanying unaudited
consolidated financial statements of iPayment, Inc. have been adjusted to
reflect this reverse split.

(10) Subsequent Events

On August 5, 2003, we entered into an Asset Purchase Agreement (the
CardPayment Agreement) with CardPayment Solutions, Inc. (CardPayment),
whereby we acquired substantially all of the assets and assumed certain
liabilities of CardPayment for $12.0 million cash and 118,409 shares of our
common stock. CardPayment is an integrated provider of credit card transaction
processing services. The acquisition was recorded under the purchase method,
and we are currently in the process of allocating the total considerations to
the fair value of assets acquired and liabilities assumed. The operating
results of CardPayment from August 1, 2003 are included in our consolidated
statements of operations. For the period from January 1, 2003 to July 31,
2003, CardPayment recorded revenues of approximately $8.1 million.

On August 1, 2003 we obtained a $20.0 million revolving line of credit
from Bank of America. The line of credit is expandable to $30.0 million and
includes a $3.0 million letter of credit sublimit. Interest is payable at an
adjusted LIBOR rate (LIBOR Rate plus the Applicable Margin for LIBOR, each as
in effect at such time). The line of credit contains certain financial and
nonfinancial covenants (as defined therein) and replaces the previous line of
credit we had with Bank of America. The line of credit expires on August 1,
2006.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations

Forward-Looking Statements May Prove Inaccurate

This report includes various forward-looking statements regarding the
Company that are subject to risks and uncertainties, including, without
limitation, the factors set forth below and under the caption Risk Factors in
the prospectus filed with the Securities and Exchange Commission (the
Commission) on May 13, 2003, pursuant to Rule 424(b)(4) under the Securities
Act of 1933, as amended, in connection with the Companys Registration
Statement on Form S-1 (File No. 333-101705). Forward-looking statements
include, but are not limited to, discussions regarding our operating strategy,
growth strategy, acquisition strategy, cost savings initiatives, industry,
economic conditions, financial condition, liquidity and capital resources and
results of operations. Such statements include, but are not limited to,
statements preceded by, followed by or that otherwise include the words
believes, expects, anticipates, intends, estimates or similar
expressions. For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.

Certain important factors, which are discussed elsewhere in this document
and in our prospectus filed May 13, 2003, could affect our future financial
results and could cause actual results to differ materially from those
expressed in forward-looking statements contained or incorporated by reference
in this document.

Overview

We are one of the fastest growing providers of credit and debit card-based
payment processing services to small merchants. We currently provide our
services to approximately 66,000 active small merchants located across the
United States, and our merchant processing volume was $1,338 million and $2,895
million for the three and six months ended June 30, 2003, respectively
(compared to $415 million and $771 million for the three and six months ended
June 30, 2002, respectively). The small merchants we serve typically generate
less than $250,000 of charge volume per year and have an average transaction
value of approximately $75. These merchants have traditionally been underserved
by larger payment processors due to the difficulty in identifying, servicing
and managing the risks associated with these merchants. As a result, these
merchants have historically paid higher transaction fees than larger merchants.

Our payment processing services enable merchants to process both
traditional card-present, or swipe, transactions, as well as card-not-present
transactions. A card-not-present transaction occurs whenever a customer does
not physically present a payment card at the point-of-sale and may occur over
the Internet or by mail, fax or telephone. Our processing services include
evaluation and acceptance of card numbers, detection of fraudulent
transactions, receipt and settlement of funds and service and support. By
outsourcing some of these services to third parties, including the evaluation
and acceptance of card numbers and receipt and settlement of funds, we maintain
an efficient operating structure, which allows us to easily expand our
operations without significantly increasing our fixed costs. We derive the
majority of our revenues from fee income related to transaction processing,
which is primarily comprised of a percentage of the dollar amount of each
transaction we process, as well as a flat fee per transaction. In the event we
have outsourced any of the services provided in the transaction, we remit a
portion of the fee income to the third parties that have provided these
services.

We believe our experience and knowledge in providing payment processing
services to small merchants gives us the ability to effectively identify,
evaluate and manage the payment processing needs and risks that are unique to
small businesses.

We market and sell our services primarily through our relationships with
over 500 independent sales organizations, or ISOs, which we define as any party
that sells card-based payment processing services to merchants. ISOs act as a
non-employee, external sales force in communities throughout the United States.
By providing the same high level of service and support to our ISOs as we do to
our merchant customers, we maintain our access to an experienced sales force of
approximately 2,000 sales professionals who will market our services, with
minimal direct investment in sales infrastructure and management. After an ISO
refers a merchant to us and we execute a processing agreement with that
merchant, we pay the referring ISO a percentage of the revenues generated by
that merchant. Although our relationships with ISOs are mutually non-exclusive,
we believe that our understanding of the unique payment processing needs of
small merchants enables us to develop compelling incentives for ISOs to
continue to refer newly identified merchants to us. We also maintain an open
dialogue with our ISOs, allowing us to quickly address their concerns and any
problems facing the merchants they refer to us.

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Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require that management make numerous estimates and assumptions. Actual
results could differ from those estimates and assumptions, impacting our
reported results of operations and financial position. Our significant
accounting policies are more fully described in Note 3 of our financial
statements included in our prospectus filed with the Commission on May 13,
2003. The critical accounting policies described here are those that are most
important to the depiction of our financial condition and results of operations
and their application requires managements most subjective judgment in making
estimates about the effect of matters that are inherently uncertain.

Goodwill

We adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, in the first quarter of 2002 (certain
provisions of SFAS No. 142 were adopted in the third quarter of 2001). SFAS No.
142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets, and requires that goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment utilizing the fair value approach. If
facts and circumstances indicate goodwill may be impaired, we perform a
recoverability evaluation. The calculation of fair value includes a number of
estimates and assumptions, including projections of future income and cash
flows, the identification of appropriate market multiples and the choice of an
appropriate discount rate.

Merchant losses

Disputes between a cardholder and a merchant periodically arise as a
result of, among other things, cardholder dissatisfaction with merchandise
quality or merchant services. Such disputes may not be resolved in the
merchants favor. In these cases, the transaction is charged back to the
merchant, which means the purchase price is refunded to the customer through
the merchants acquiring bank and charged to the merchant. If the merchant has
inadequate funds, we or, under limited circumstances, together with the
acquiring bank, must bear the credit risk for the full amount of the
transaction. We evaluate the merchants risk for such transaction and estimate
its potential loss for chargebacks based primarily on historical experience and
other relevant factors. At June 30, 2003, our reserve for losses on merchant
accounts totaled $3.3 million, of which $1.5 million related to reserves from
one merchant.

Income taxes

We account for income taxes pursuant to the provisions of SFAS No. 109,
Accounting for Income Taxes.Under this method, deferred tax assets and
liabilities are recorded to reflect the future tax consequences attributable to
the effects of differences between the carrying amounts of existing assets and
liabilities for financial reporting and for income tax purposes. We have placed
a valuation allowance on our net deferred tax asset as a result of limitations,
it being more likely than not that we will not be able to utilize some or all of the net
deferred tax asset.

Stock warrants

We have historically issued debt securities with detachable stock warrants
at a ratio of 32,389 warrants for every $1 million borrowed. Accounting
Principles Board Opinion No. 14 requires that a portion of the proceeds of debt
securities issued with detachable stock purchase warrants which is allocable to
the warrants should be accounted for as paid-in capital. The allocation is
based on the relative fair values of the two securities at time of issuance.
The resulting discount on the debt securities is recorded initially as a
reduction to the carrying amount of the debt securities and is amortized as a
component of interest expense over the life of the debt securities. All
warrants have been exercised as of June 30, 2003.

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Components of Revenues and Expenses

All of our revenues are generated from fees charged to merchants for
card-based payment processing services. We typically charge these merchants a
bundled rate, primarily based upon the merchants monthly charge volume and
risk profile. Our fees principally consist of discount fees, which are a
percentage of the dollar amount of each credit or debit transaction. We charge
all merchants higher discount rates for card-not-present transactions than for
card-present transactions in order to compensate us for the higher risk of
underwriting these transactions. We derive the balance of our revenues from a
variety of fixed transaction or service fees, including fees for monthly
minimum charge volume requirements, statement fees, annual fees and fees for
other miscellaneous services, such as handling chargebacks. We recognize
discounts and other fees related to payment transactions at the time the
merchants transactions are processed. We recognize revenues derived from
service fees at the time the service is performed. We report revenues gross of
amounts paid to sponsoring banks, as well as interchange and assessments paid
by us to credit card associations pursuant to which these associations receive
payments based primarily on processing volume for particular groups of
merchants. Related interchange and assessment costs and bank processing fees
are also recognized at that time.

The most significant component of operating expenses is interchange fees,
which are amounts we pay to the card issuing banks. Interchange fees are based
on transaction processing volume and are recognized at the time transactions
are processed.

Other costs of services include costs directly attributable to our
provision of payment processing and related services to our merchants such as
residual payments to ISOs, which are commissions we pay to our ISOs based upon
a percentage of the net revenues we generate from their merchant referrals, and
assessment fees payable to card associations, which is a percentage of the
processing volume we generate from Visa and MasterCard. In addition, other
costs of services includes telecommunications costs, personnel costs, occupancy
costs, losses due to merchant defaults, other miscellaneous merchant supplies
and services expenses, bank sponsorship costs and other third-party processing
costs.

Other costs of services also includes depreciation and amortization
expenses, which are recognized on a straight-line basis over the estimated
useful life of the asset. Amortization of intangible assets resulted from our
acquisitions of portfolios of merchant accounts or acquisitions of a business
where we allocated purchase price to the existing merchant processing
portfolio.

Selling, general and administrative expenses consist primarily of salaries
and wages and other general administrative expenses.

From time to time, we enter into transactions with our ISOs. Sometimes, we
acquire from an ISO the right, title and interest to a merchant portfolio,
including the residual cash flow stream for merchants the ISOs have brought to
us. The accounting for those acquisitions is dependent on the ISOs
relationship with us. If the ISO is considered an agent, then we record prepaid
commission and amortize the asset through cost of sales. Otherwise, if we have
no ongoing agent relationship with the ISO, we will record an intangible asset
for that residual cash flow stream. Also, from time to time, we lend money to
ISOs, usually to assist the ISOs in establishing and growing their businesses.
This directly impacts the number, quality and type of merchants these ISOs are
able to bring to us.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34(FIN 45). Effective January 1, 2003, the Company
adopted FIN 45, which requires the recognition of a liability for the amount of
the fair value of a guarantee. A liability is required to be maintained until
the settlement or expiration of the guarantee for transactions occurring after
December 31, 2002. The Company recognizes a reserve for its merchant credit
risk, which is partially mitigated by the collateral the Company obtains from
those merchants considered at risk. Based on historical experience, ongoing
credit risk assessments, and the collateral held, the fair value of the
guarantee approximates the credit loss reserves. The adoption of FIN 45 did not
have a material impact on the Companys card merchant processing business.

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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirement of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We adopted
this statement and its adoption did not have a material impact on its financial
position, results of operations or cash flows (see Note 1).

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51(FIN 46). FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined in the interpretation. FIN 46 applies immediately to
variable interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities obtained after
January 31, 2003. FIN 46 requires certain disclosures in financial statements
issued after January 31, 2003 if it is reasonably possible that we will
consolidate or disclose information about variable interest entities when the
interpretation becomes effective. We do not have variable interests in variable
interest entities.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity, including mandatorily
redeemable equity instruments. The Statement is effective for all interim
periods beginning after June 15, 2003. We have classified our mandatorily
redeemable equity instruments in the mezzanine level between liabilities and
stockholders equity on its balance sheet. However, all of our mandatorily
redeemable equity instruments were converted to common stock in conjunction
with the initial public offering in May 2003 (see Note 9) and we, therefore, do
not anticipate this Statement will have a material effect on our consolidated
financial statements.

Results of Operations

The following table sets forth certain financial data as a percentage of
revenues for the periods indicated:

|                               |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |      |      | 
|------------------------------ | ----------------------------------- | ------------------------ | ----- | ------------------ | ---- | ---------------- | ----- | ---- | ---- | ---- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                               |                                     |                          |       | Three months ended |      | Six months ended
|                               |                                     |                          |       | June 30,           |      | June 30,        
|                               |                                     |                          |       | 2003               |      | 2002             |       | 2003 |      | 2002
|                               |                                     |                          |       |                    |      |                  |       |      |      |     
|                               |                                     |                          |       | (Unaudited)        |      | (Unaudited)     
|                               |                                     |                          |       |                    |      |                 
|Revenues                       |                                     |                          | 100.0 | %                  |      |                  | 100.0 | %    |      |      | 100.0 | %    |      |  | 100.0 | %   
|Operating expenses:            |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |     
|                               | Interchange                         |                          |       | 52.2               |      |                  |       | 35.5 |      |      |       | 51.8 |      |  |       | 37.7 |     
|                               | Other costs of services             |                          |       | 34.1               |      |                  |       | 54.0 |      |      |       | 34.5 |      |  |       | 51.5 |     
|                               | Selling, general and administrative |                          |       | 3.5                |      |                  |       | 6.5  |      |      |       | 3.7  |      |  |       | 6.8  |     
|                               |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |     
|                               |                                     | Total operating expenses |       |                    | 89.8 |                  |       |      | 96.0 |      |       |      | 90.0 |  |       |      | 96.0 | 
|                               |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |     
|                               | Income from operations              |                          |       | 10.2               |      |                  |       | 4.0  |      |      |       | 10.0 |      |  |       | 4.0  |     
|Interest expense, net          |                                     |                          | 11.7  |                    |      |                  | 6.0   |      |      |      | 9.6   |      |      |  | 6.6   |     
|                               |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |     
|                               | Income (loss) before income taxes   |                          |       | (1.5               | )    |                  |       | (2.0 | )    |      |       | 0.4  |      |  |       | (2.6 | )   
|Income tax provision (benefit) |                                     |                          | (0.5  | )                  |      |                  | 0.7   |      |      |      | 0.1   |      |      |  | 0.8   |     
|                               |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |     
|                               | Net income (loss)                   |                          |       | (1.0               | )    |                  |       | (2.7 | )    |      |       | 0.3  |      |  |       | (3.4 | )   
|                               |                                     |                          |       |                    |      |                  |       |      |      |      |       |      |      |  |       |     

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Three Months Ended June 30, 2003 (2003) Compared to Three Months Ended June
30, 2002 (2002)

Revenues.Revenues increased $32.8 million or 152.1% to $54.3 million in
2003 from $21.5 million in 2002. This increase was primarily attributable to
our acquisitions of four businesses since March 2002, which resulted in an
increase in revenues of $28.5 million, representing 86.9% of our total growth
in revenues over the prior period.

Interchange Expenses. Interchange expenses increased $20.7 million or
271.0% to $28.3 million in 2003 from $7.6 million in 2002. The increase was
primarily attributable to increased charge volume driven mainly by our
aforementioned acquisitions. Interchange expenses as a percentage of total
revenues increased to 52.2% in 2003 from 35.5% in 2002 as the portfolios
acquired through the acquisitions had higher average costs as a percentage of
revenues than our existing mix of business.

Other Costs of Services.Other costs of services increased $6.9 million or
59.3% to $18.5 million in 2003 from $11.6 million in 2002. The increase was due
primarily to costs associated with increased processing volume and salaries and
other costs associated with the addition of personnel as a result of our
acquisitions. Other costs of services as a percentage of revenues declined to
34.1% in 2003 from 54.0% in 2002. Other costs of services as a percentage of
revenues decreased primarily due to a $2.6 million loss recognized in 2002
attributable to chargebacks relating to one merchant, which caused total losses
to be 15.2% of revenues in 2002, compared to 2.1% of revenues in 2003.
Personnel costs, processing costs and depreciation and amortization were also
lower as a percentage of revenues.

Selling, General and Administrative.Selling, general and administrative
expenses increased $0.5 million or 36.3 % to $1.9 million in 2003 from $1.4
million in 2002. The increase was primarily due to an increase in personnel
cost resulting from our acquisitions. Selling, general and administrative
expenses as a percentage of revenues declined to 3.5% in 2003 from 6.5% in
2002, primarily due to the consolidation of the operations of acquired
entities, which allowed employee headcount to remain steady while revenues
increased.

Interest Expense.Interest expense increased $5.1 million or 387.8% to
$6.4 million in 2003 from $1.3 million in 2002. This increase was primarily due
to a $4.4 million charge resulting from early extinguishment of certain debt.

Income Tax. Income tax expense decreased $0.4 million to a benefit of $0.2
million in 2003 from a provision of $0.2 million in 2002 due to a decrease in
taxable income. Income tax benefit as a percentage of income before taxes was
30.0 % in 2003. This rate differs from our statutory rate, primarily as a
result of the utilization of previously unrecognized net operating losses.

Six Months Ended June 30, 2003 (2003) Compared to Six Months Ended June 30,
2002 (2002)

Revenues.Revenues increased $63.0 million or 165.6% to $101.0 million in
2003 from $38.0 million in 2002. This increase was primarily attributable to
our acquisitions of four businesses since March 2002, which resulted in an
increase in revenues of $54.9 million, representing 87.1% of our total growth
in revenues over the prior period.

Interchange Expenses. Interchange expenses increased $38.0 million or
265.0% to $52.3 million in 2003 from $14.3 million in 2002. The increase was
primarily attributable to increased charge volume driven mainly by our
aforementioned acquisitions. Interchange expenses as a percentage of total
revenues increased to 51.8% in 2003 from 37.7% in 2002 as the portfolios
acquired through the acquisitions had higher average costs as a percentage of
revenues than our existing mix of business.

Other Costs of Services.Other costs of services increased $15.2 million
or 77.7% to $34.8 million in 2003 from $19.6 million in 2002. The increase was
due primarily to costs associated with increased processing volume and salaries
and other costs associated with the addition of personnel as a result of our
acquisitions. Other costs of services as a percentage of revenues declined to
34.5% in 2003 from 51.5% in 2002. Other costs of services as a percentage of
revenues decreased primarily due to a $3.3 million loss recognized in 2002
attributable to chargebacks relating to one merchant, which caused total losses
to be 11.8% of revenues in 2002, compared to 2.2% of revenues in 2003.
Personnel costs, processing costs and depreciation and amortization were also
lower as a percentage of revenues.

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Selling, General and Administrative.Selling, general and administrative
expenses increased $1.1 million or 45.4% to $3.7 million in 2003 from $2.6
million in 2002. The increase was primarily due to an increase in personnel
cost resulting from our acquisitions. Selling, general and administrative
expenses as a percentage of revenues declined to 3.7% in 2003 from 6.8% in 2002
primarily due to the consolidation of the operations of acquired entities,
which allowed employee headcount to remain steady while revenues increased.

Interest Expense.Interest expense increased $7.1 million or 284.5% to
$9.7 million in 2003 from $2.6 million in 2002. This increase was primarily due
to a $4.4 million charge resulting from early extinguishment of certain debt.

Income Tax. Income tax expense decreased $0.2 million to $0.1 million in 2003
from a provision of $0.3 million in 2002 despite an increase in taxable
income, primarily as a result of the utilization of previously unrecognized net
operating losses. Income tax expense as a percentage of income before taxes
was 30.0 % in 2003. This rate differs from our statutory rate due to
recognition of the net operating losses as previously discussed.

Liquidity and Capital Resources

At June 30, 2003, we had cash and cash equivalents totaling $25.3 million,
compared to $1.8 million at December 31, 2002.

Net cash provided by operating activities was $6.7 million in the first
six months of 2003 (2003). Net income of $0.3 million, depreciation and
amortization of $3.9 million and noncash interest of $6.4 million related to
amortization of debt discounts and isuance costs were partially offset by $3.9
million of changes in operating assets and liabilities. Such changes
principally included increases in accounts receivable of $2.5 million, losses
of $1.0 million attributable to one merchant, and a litigation settlement of
$0.7 million. Net cash provided by operating activities was $2.1 million in the
first six months of 2002 (2002), primarily representing a net loss of $1.3
million which was offset by $2.4 million of depreciation and amortization, $0.4
million of noncash interest and a favorable change in operating assets and
liabilities of $0.6 million. We expect that our current cash and cash
equivalents and anticipated net positive cash flows from operations will
satisfy working capital, financing and capital expenditure requirements for the
next 12 months.

Net cash used in investing activities was $4.4 million for 2003 which was
primarily comprised of a $2.1 million payment of the final installment of the
cash purchase price of a business acquisition which occurred in the third
quarter of 2002 and a $1.5 million deposit for a new sponsor bank. During
2002, investing activities provided net cash of $0.6 million which was
primarily from the acquisition of a single business. Total capital
expenditures for 2003 and 2002 were $0.4 million and $0.1 million,
respectively, which were primarily related to the purchase of computers and
other equipment. We currently have no significant capital spending or purchase
commitments, but expect to continue to engage in capital spending in the
ordinary course of business.

We have historically funded our principal operations through private
placements of debt and equity securities to executive officers, directors and
third parties and a line of credit from Bank of America, as well as our recent
public equity offering.

Net cash provided by financing activities was $21.1 million in 2003, while
net cash used in financing activities was $2.6 million in 2002. During 2003
and 2002, we paid an aggregate principal amount of $54.8 million and $2.6
million, respectively, on outstanding debt balances (including net changes in
our line of credit). This was offset in 2003 by net proceeds from issuance of
common stock in connection with our IPO of $75.7 million.

As of June 30, 2003, we had notes, capital lease obligations and a line of
credit arrangement outstanding in an aggregate principal amount of $20.3
million, owed to executive officers and third parties. $15.0 million of the
notes are convertible into 663,184 shares of our common stock at the discretion
of the holders at a price per share of $23.16. Our notes mature between August
2003 and August 2007. These notes bear interest at rates ranging from 0% to
6%, and the weighted average interest rate of these notes was 4.8% as of June
30, 2003.

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As of June 30, 2003, we had a line of credit with Bank of America that
allows us to borrow up to an aggregate of $3.0 million. The line of credit
matures on March 1, 2004. The line of credit is personally guaranteed by our
Board of Directors. Borrowings under the line of credit bear interest at the
prime rate, which was 4.0% at June 30, 2003, are secured by a lien on our
assets and contain customary covenants and events of default. As of June 30,
2003, we had no outstanding indebtedness under our line of credit.

On August 1, 2003 we obtained a $20.0 million revolving line of credit
from Bank of America. The line of credit is expandable to $30.0 million and
includes a $3.0 million letter of credit sublimit. Interest is payable at an
adjusted LIBOR rate (LIBOR Rate plus the Applicable Margin for LIBOR, each as
in effect at such time). The line of credit contains certain financial and
nonfinancial covenants (as defined therein) and replaces the previous line of
credit we had with Bank of America. The line of credit expires on August 1,
2006.

In May 2003, we completed an initial public offering and used $55.7
million of the proceeds to repay outstanding debt with a carrying value of
$52.1 million. Additionally, in conjunction with the offering we converted
$9.0 million of debt with a carrying value of $8.2 million into 562,500 shares
of common stock. These repayments and conversions resulted in a noncash pre-tax
charge of approximately $4.4 million which was recognized as interest expense
in the second quarter of 2003.




Item 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in market risk from the information
provided under the caption Disclosures about Market Risk in Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in our final prospectus filed with the Commission on May 13, 2003.




Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-14(c) and 15d-14(c), as of a date within 90 days of the filing
date of this Form 10-Q. Based on this evaluation, they have concluded that
those disclosure controls and procedures were adequate. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of this evaluation.

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PART II  OTHER INFORMATION




Item 1. Legal Proceedings

We are party to various legal proceedings in the normal course of
business. Please see the description under the caption Legal Proceedings in
the prospectus filed with the Commission on May 13, 2003 pursuant to Rule
424(b)(4) under the Securities Act in connection with the Companys
Registration Statement on Form S-1 (File No. 333-101705)




Item 2. Changes in Securities and Use of Proceeds.



|(a) |  | Effective May 12, 2003, we amended and restated our certificate of
incorporation and bylaws. Please see Description of Capital Stock
included in our final prospectus filed with the Securities and Exchange
Commission on May 13, 2003, for a description of the rights of holders of
shares of our common stock.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | None                                                                                                                                                                                                                                                                                                                
|   
|(c) |  | During the three month period
ended June 30, 2003:                                                                                                                                                                                                                                                                  



| | (i)  |  | Pursuant to the exemption from registration provided in Rule
701 under the Securities Act of 1933, we issued 60,753 shares of our
common stock to our employees upon the exercise of options in
consideration for an aggregate exercise price of $62,000; and
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | Pursuant to the exemption from registration provided in Section
4(2) under the Securities Act of 1933, we issued 890,110 shares of
our common stock to holders of our warrants for an aggregate exercise
price of $81,000.                                   



|(d) |  | On May 15, 2003, we consummated the initial public offering of our common
stock, $0.01 par value. The managing underwriters were Bear, Stearns & Co.
Inc, Thomas Weisel Partners LLC and Wachovia Securities. The shares of
common stock sold in the offering were registered under the Securities Act
of 1933, as amended on a Registration Statement (Registration No.
333-101705) that was declared effective by the Securities and Exchange
Commission on May 8, 2003 (a post-effective amendment to which was
declared effective on May 12, 2003) and a Registration Statement
(Registration No. 333-105165) filed pursuant to Rule 462(b) under the
Securities Act of 1933. All 5,625,000 shares of common stock registered
under the registration statement, including an aggregate of 625,000 shares
of common stock covered by an over-allotment option granted to the
underwriters, were sold at a price to the public of $16.00 per share. All
of the shares of common stock were sold by us and there were no selling
stockholders in the offering. The offering did not terminate until after
the sale of all of the securities registered on the Registration
Statement. The aggregate gross proceeds from the shares of common stock
sold by us were $90.0 million. The aggregate net proceeds to us from the
offering were approximately $75.7 million after deducting an aggregate of
$6.3 million in underwriting discounts and commissions paid to the
underwriters and an estimated $8.0 million in other expenses incurred in
connection with the offering.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | We used $55.7 million of the net proceeds to repay debt that had a carrying
value of $52.1 million, including $11.4 million to repay in full promissory
notes held by our director, David Vandewater, and entities affiliated with
our directors, John Harrison, David Vandewater and David Wilds. We invested
the remaining net proceeds in short-term, investment-grade, interest bearing
instruments, pending their use to fund working capital and capital
expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|            |  |                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                        
|            |  |                                                                                                                    
|10.1        |  | Credit agreement dated August 1, 2003, by Bank of America, N.A. and
iPayment, Inc.                                 
|            |  |                                                                                                                    
|31.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350 (Section 302 of the Sarbanes-Oxley Act of 2002)
|            |  |                                                                                                                    
|31.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350 (Section 302 of the Sarbanes-Oxley Act of 2002)
|            |  |                                                                                                                    
|32.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
|            |  |                                                                                                                    
|32.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

(b) Reports on Form 8-K

None.




SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned party duly authorized.

|                      |  |                                                                                                              
|--------------------- |  | -------------------------------------------------------------------------------------------------------------
|                      |  | iPayment, Inc.                                                                                               
|                     
|Date: August 14, 2003 |  | By:   /s/ Gregory S. DailyGregory S. Daily
Chief Executive Officer
(Principal Executive Officer)             
|                     
|Date: August 14, 2003 |  | By:   /s/ Clay M. WhitsonClay M. Whitson
Chief Financial Officer
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

|            |  |                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                        
|            |  |                                                                                                                    
|10.1        |  | Credit agreement dated August 1, 2003, by Bank of America, N.A. and
iPayment, Inc.                                 
|            |  |                                                                                                                    
|31.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350 (Section 302 of the Sarbanes-Oxley Act of 2002)
|            |  |                                                                                                                    
|31.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350 (Section 302 of the Sarbanes-Oxley Act of 2002)
|            |  |                                                                                                                    
|32.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
|            |  |                                                                                                                    
|32.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

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