##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2009

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 001-32594





HEARTLAND PAYMENT SYSTEMS, INC.

(Exact name of registrant as specified in its
charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 22-3755714                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

90 Nassau Street, Princeton, New Jersey 08542

(Address of principal executive offices) (Zip Code)

(609) 683-3831

(Registrants telephone number, including area code)





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.    x  YES     ̈  NO

Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ̈  YES     ̈  NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                            |  |   |  |                           |  |  
|------------------------------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer                     |  |  ̈ |  | Accelerated filer         |  | x
|                                            |  |   | 
|Non-accelerated filer                       |  |  ̈ |  | Smaller reporting company |  |  ̈
|(Do not check if smaller reporting company) |  |   |  |                          

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

As of August 3, 2009, there were 37,461,310 shares of the registrants Common Stock, $0.001 par value, outstanding.









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##### Table of Contents

INDEX



|                                        |  |                                                                                                                                  |  |   
|--------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | --
|                                        |  | Page                                                                                                                            
|PART I. CONDENSED FINANCIAL INFORMATION |  |                                                                                                                                 
|                                        | 
|Item 1. Financial Statements            |  |                                                                                                                                 
|                                        |  | Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008                                                            |  | 1 
|                                        |  | Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 
30, 2009 and 2008 |  | 2 
|                                        |  | Consolidated Statements of Stockholders Equity for the six months ended June 30, 2009 and
2008                                  |  | 3 
|                                        |  | Consolidated Statements of Cash Flow for the six months ended June 30, 2009 and 2008                                             |  | 4 
|                                        |  | Notes to Consolidated Financial Statements                                                                                       |  | 5 
|                                        |  |                                                                                                                                 
|Item 2.                                 |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                            |  | 28
|Item 3.                                 |  | Quantitative and Qualitative Disclosures about Market Risk                                                                       |  | 57
|Item 4.                                 |  | Controls and Procedures                                                                                                          |  | 58
|                                        | 
|PART I I. OTHER INFORMATION             |  |                                                                                                                                 
|                                        |  |                                                                                                                                 
|Item 1.                                 |  | Legal Proceedings                                                                                                                |  | 59
|Item 1A.                                |  | Risk Factors                                                                                                                     |  | 64
|Item 2.                                 |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                      |  | 64
|Item 3.                                 |  | Defaults Upon Senior Securities                                                                                                  |  | 64
|Item 4.                                 |  | Submission of Matters to a Vote of Security Holders                                                                              |  | 64
|Item 5.                                 |  | Other Information                                                                                                                |  | 64
|Item 6.                                 |  | Exhibits                                                                                                                         |  | 65



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##### Table of Contents

PART I. CONDENSED FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)



|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                   |  | June 30,2009 |         |   | December 31,2008 |  
|Assets                                                                                                                                                                                                                             |  |              |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Cash                                                                                                                                                                                                                               |  | $            | 31,473  |   |                  | $ | 27,589  |  
|Funds held for payroll customers                                                                                                                                                                                                   |  |              | 25,164  |   |                  |   | 22,002  |  
|Receivables, net                                                                                                                                                                                                                   |  |              | 151,536 |   |                  |   | 140,145 |  
|Investments held to maturity                                                                                                                                                                                                       |  |              | 1,396   |   |                  |   | 1,410   |  
|Inventory                                                                                                                                                                                                                          |  |              | 8,735   |   |                  |   | 8,381   |  
|Prepaid expenses                                                                                                                                                                                                                   |  |              | 4,757   |   |                  |   | 6,662   |  
|Current tax asset                                                                                                                                                                                                                  |  |              | 5,046   |   |                  |   | 2,440   |  
|Current deferred tax assets, net                                                                                                                                                                                                   |  |              | 11,073  |   |                  |   | 6,723   |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                                                               |  |              | 239,180 |   |                  |   | 215,352 |  
|Capitalized customer acquisition costs, net                                                                                                                                                                                        |  |              | 75,246  |   |                  |   | 77,737  |  
|Property and equipment, net                                                                                                                                                                                                        |  |              | 92,778  |   |                  |   | 75,443  |  
|Goodwill                                                                                                                                                                                                                           |  |              | 59,050  |   |                  |   | 58,456  |  
|Intangible assets, net                                                                                                                                                                                                             |  |              | 34,012  |   |                  |   | 36,453  |  
|Deposits and other assets, net                                                                                                                                                                                                     |  |              | 1,642   |   |                  |   | 178     |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                                       |  | $            | 501,908 |   |                  | $ | 463,619 |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                                                   |  |             
|Liabilities and stockholders equity                                                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Due to sponsor banks                                                                                                                                                                                                               |  | $            | 84,535  |   |                  | $ | 68,212  |  
|Accounts payable                                                                                                                                                                                                                   |  |              | 29,158  |   |                  |   | 25,864  |  
|Deposits held for payroll customers                                                                                                                                                                                                |  |              | 25,164  |   |                  |   | 22,002  |  
|Current portion of borrowings                                                                                                                                                                                                      |  |              | 58,540  |   |                  |   | 58,522  |  
|Current portion of accrued buyout liability                                                                                                                                                                                        |  |              | 9,726   |   |                  |   | 10,547  |  
|Merchant deposits and loss reserves                                                                                                                                                                                                |  |              | 33,873  |   |                  |   | 16,872  |  
|Accrued expenses and other liabilities                                                                                                                                                                                             |  |              | 22,966  |   |                  |   | 26,196  |  
|Reserve for processing system intrusion                                                                                                                                                                                            |  |              | 14,399  |   |                  |   |        |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                                                          |  |              | 278,361 |   |                  |   | 228,215 |  
|Deferred tax liabilities, net                                                                                                                                                                                                      |  |              | 5,453   |   |                  |   | 6,832   |  
|Reserve for unrecognized tax benefits                                                                                                                                                                                              |  |              | 1,704   |   |                  |   | 1,732   |  
|Long-term portion of borrowings                                                                                                                                                                                                    |  |              | 12,698  |   |                  |   | 16,984  |  
|Long-term portion of accrued buyout liability                                                                                                                                                                                      |  |              | 31,486  |   |                  |   | 30,493  |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                                  |  |              | 329,702 |   |                  |   | 284,256 |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Commitments and contingencies (Note 12)                                                                                                                                                                                            |  |              |        |   |                  |   |        |  
|                                                                                                                                                                                                                                   |  |             
|Equity                                                                                                                                                                                                                             |  |              |         |   |                  |   |         |  
|Common Stock, $0.001 par value, 100,000,000 shares authorized, 37,461,310 and 37,675,543 shares issued at June 30, 2009 and
December 31, 2008; 37,461,310 and 37,675,543 shares outstanding at June 30, 2009 and December 31, 2008 |  |              | 38      |   |                  |   | 38      |  
|Additional paid-in capital                                                                                                                                                                                                         |  |              | 167,729 |   |                  |   | 167,337 |  
|Accumulated other comprehensive loss                                                                                                                                                                                               |  |              | (1,663  | ) |                  |   | (2,145  | )
|Retained earnings                                                                                                                                                                                                                  |  |              | 5,987   |   |                  |   | 14,014  |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                                                         |  |              | 172,091 |   |                  |   | 179,244 |  
|Noncontrolling minority interests                                                                                                                                                                                                  |  |              | 115     |   |                  |   | 119     |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total equity                                                                                                                                                                                                                       |  |              | 172,206 |   |                  |   | 179,363 |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Total liabilities and equity                                                                                                                                                                                                       |  | $            | 501,908 |   |                  | $ | 463,619 |  
|                                                                                                                                                                                                                                   |  |              |         |   |                  |   |         |  

See accompanying notes to condensed consolidated financial statements.



1



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share data)

(unaudited)



|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                     |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                                     |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Total Revenues                                                                       |  | $                          | 417,373 |   |                          | $ | 394,554 |      |  | $ | 789,545 |   |  | $ | 734,173 |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Costs of Services:                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interchange                                                                          |  |                            | 291,235 |   |                          |   | 283,830 |      |  |   | 548,607 |   |  |   | 529,107 |  
|Dues, assessments and fees                                                           |  |                            | 19,586  |   |                          |   | 17,340  |      |  |   | 35,866  |   |  |   | 31,843  |  
|Processing and servicing                                                             |  |                            | 49,866  |   |                          |   | 42,827  |      |  |   | 97,922  |   |  |   | 79,283  |  
|Customer acquisition costs                                                           |  |                            | 12,757  |   |                          |   | 12,274  |      |  |   | 25,332  |   |  |   | 23,724  |  
|Depreciation and amortization                                                        |  |                            | 3,874   |   |                          |   | 2,465   |      |  |   | 7,608   |   |  |   | 4,375   |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total costs of services                                                              |  |                            | 377,318 |   |                          |   | 358,736 |      |  |   | 715,335 |   |  |   | 668,332 |  
|General and administrative                                                           |  |                            | 24,430  |   |                          |   | 16,747  |      |  |   | 49,463  |   |  |   | 32,228  |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                                                                       |  |                            | 401,748 |   |                          |   | 375,483 |      |  |   | 764,798 |   |  |   | 700,560 |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                                     |  |                            |         |  
|Income from operations                                                               |  |                            | 15,625  |   |                          |   | 19,071  |      |  |   | 24,747  |   |  |   | 33,613  |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Other income (expense):                                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                                      |  |                            | 28      |   |                          |   | 169     |      |  |   | 57      |   |  |   | 469     |  
|Interest expense                                                                     |  |                            | (545    | ) |                          |   | (751    | )    |  |   | (1,086  | ) |  |   | (1,097  | )
|Provision for processing system intrusion                                            |  |                            | (19,380 | ) |                          |   |        |      |  |   | (31,970 | ) |  |   |        |  
|Other, net                                                                           |  |                            | 2       |   |                          |   | 1       |      |  |   | 4       |   |  |   | (79     | )
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                                         |  |                            | (19,895 | ) |                          |   | (581    | )    |  |   | (32,995 | ) |  |   | (707    | )
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                                                    |  |                            | (4,270  | ) |                          |   | 18,490  |      |  |   | (8,248  | ) |  |   | 32,906  |  
|Provision for (benefit from) income taxes                                            |  |                            | (1,669  | ) |                          |   | 6,994   |      |  |   | (3,170  | ) |  |   | 12,428  |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                                    |  |                            | (2,601  | ) |                          |   | 11,496  |      |  |   | (5,078  | ) |  |   | 20,478  |  
|Less: Net income (loss) attributable to noncontrolling minority interests            |  |                            | 14      |   |                          |   | 27      |      |  |   | (8      | ) |  |   | 32      |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss) attributable to Heartland                                          |  | $                          | (2,615  | ) |                          | $ | 11,469  |      |  | $ | (5,070  | ) |  | $ | 20,446  |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                                     |  |                            |         |  
|Net income (loss)                                                                    |  | $                          | (2,601  | ) |                          | $ | 11,496  |      |  | $ | (5,078  | ) |  | $ | 20,478  |  
|Other comprehensive income:                                                          |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Unrealized gains (losses) on investments, net of income tax of $14, $(3), $7 and $9  |  |                            | 24      |   |                          |   | (6      | )    |  |   | 13      |   |  |   | 15      |  
|Foreign currency translation adjustment, net of income tax of $37 and $(124) in 2008 |  |                            | 727     |   |                          |   | 54      |      |  |   | 469     |   |  |   | (205    | )
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income (loss)                                                          |  |                            | (1,850  | ) |                          |   | 11,544  |      |  |   | (4,596  | ) |  |   | 20,288  |  
|Less: Net Income (loss) attributable to noncontrolling minority interests            |  |                            | 14      |   |                          |   | 27      |      |  |   | (8      | ) |  |   | 32      |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income (loss) attributable to Heartland                                |  | $                          | (1,864  | ) |                          | $ | 11,517  |      |  | $ | (4,588  | ) |  | $ | 20,256  |  
|                                                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                                     |  |                            |         |  
|Earnings (loss) per common share:                                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                |  | $                          | (0.07   | ) |                          | $ | 0.31    |      |  | $ | (0.14   | ) |  | $ | 0.55    |  
|Diluted                                                                              |  | $                          | (0.07   | ) |                          | $ | 0.30    |      |  | $ | (0.14   | ) |  | $ | 0.53    |  
|                                                                                     |  |                            |         |  
|Weighted average number of common shares outstanding:                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                |  |                            | 37,458  |   |                          |   | 37,387  |      |  |   | 37,496  |   |  |   | 37,464  |  
|Diluted                                                                              |  |                            | 37,748  |   |                          |   | 38,688  |      |  |   | 37,795  |   |  |   | 38,755  |  

See accompanying notes to condensed consolidated financial statements.



2



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders Equity

(In thousands)

(unaudited)



|                                                                  |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------------ | - |  | ------------------ | -- | - | ------------------------------ | - | ------- | ---------------------------- |  | - | -------- | - |  | ----------------------- | ------- | - | --------- | - | ------- | ------ |  | - | --- | - |  | - | ------- | -
|                                                                  |  | Heartland Stockholders Equity |   |  |                    |   
|                                                                  |  | Common Stock                   |   |  | Additional Paid-In |    |   | Accumulated OtherComprehensive |   |         | (AccumulatedDeficit)Retained |  |   | Treasury |   |  | Noncontrolling Minority |         |   | Total     |  
|                                                                  |  | Shares                         |   |  | Amount             |    |   | Capital                        |   |         | Loss                         |  |   | Earnings |   |  | Stock                   |         |   | Interests |   |         | Equity | 
|Six Months Ended June 30, 2008:                                   |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Balance, January 1, 2008                                          |  | 37,990                         |   |  | $                  | 40 |   |                                | $ | 173,346 |                              |  | $ | (62      | ) |  | $                       | 36,729  |   |           | $ | (44,384 | )      |  | $ |    |   |  | $ | 165,669 |  
|Issuance of Common Stock  options exercised                      |  | 241                            |   |  |                    |   |   |                                |   | 1,783   |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 1,783   |  
|Excess tax benefit on stock options exercised under SFAS No. 123R |  |                               |   |  |                    |   |   |                                |   | 562     |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 562     |  
|Repurchase of Common Stock                                        |  | (782                           | ) |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         |        |   |           |   | (17,995 | )      |  |   |    |   |  |   | (17,995 | )
|Retirement of Treasury Stock                                      |  |                               |   |  |                    | (2 | ) |                                |   | (11,311 | )                            |  |   |         |   |  |                         | (51,066 | ) |           |   | 62,379  |        |  |   |    |   |  |   |        |  
|Stock-based compensation under SFAS No. 123R                      |  |                               |   |  |                    |   |   |                                |   | 775     |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 775     |  
|Accumulated other comprehensive income:                           |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Unrealized losses on available for sale investments               |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   | 15       |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 15      |  
|Foreign currency translation adjustment                           |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   | (205     | ) |  |                         |        |   |           |   |        |        |  |   | (4  | ) |  |   | (209    | )
|Dividends on Common Stock                                         |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         | (6,724  | ) |           |   |        |        |  |   |    |   |  |   | (6,724  | )
|Noncontrolling minority interests in subsidiary acquired          |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   | 117 |   |  |   | 117     |  
|Net income for the period                                         |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         | 20,446  |   |           |   |        |        |  |   | 32  |   |  |   | 20,478  |  
|                                                                  |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Balance June 30, 2008                                             |  | 37,449                         |   |  | $                  | 38 |   |                                | $ | 165,155 |                              |  | $ | (252     | ) |  | $                       | (615    | ) |           | $ |        |        |  | $ | 145 |   |  | $ | 164,471 |  
|                                                                  |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Six Months Ended June 30, 2009:                                   |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Balance, January 1, 2009                                          |  | 37,676                         |   |  | $                  | 38 |   |                                | $ | 167,337 |                              |  | $ | (2,145   | ) |  | $                       | 14,014  |   |           | $ |        |        |  | $ | 119 |   |  | $ | 179,363 |  
|Issuance of Common Stock  options exercised                      |  | 135                            |   |  |                    |   |   |                                |   | 530     |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 530     |  
|Excess tax benefit on stock options exercised under SFAS No. 123R |  |                               |   |  |                    |   |   |                                |   | 322     |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 322     |  
|Repurchase of Common Stock                                        |  | (350                           | ) |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         |        |   |           |   | (3,202  | )      |  |   |    |   |  |   | (3,202  | )
|Retirement of Treasury Stock                                      |  |                               |   |  |                    |   |   |                                |   | (1,556  | )                            |  |   |         |   |  |                         | (1,646  | ) |           |   | 3,202   |        |  |   |    |   |  |   |        |  
|Stock-based compensation under SFAS No. 123R                      |  |                               |   |  |                    |   |   |                                |   | 1,096   |                              |  |   |         |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 1,096   |  
|Accumulated other comprehensive income:                           |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Unrealized gain on available for sale investments                 |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   | 13       |   |  |                         |        |   |           |   |        |        |  |   |    |   |  |   | 13      |  
|Foreign currency translation adjustment                           |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   | 469      |   |  |                         |        |   |           |   |        |        |  |   | 4   |   |  |   | 473     |  
|Dividends on Common Stock                                         |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         | (1,311  | ) |           |   |        |        |  |   |    |   |  |   | (1,311  | )
|Net (loss) for the period                                         |  |                               |   |  |                    |   |   |                                |   |        |                              |  |   |         |   |  |                         | (5,070  | ) |           |   |        |        |  |   | (8  | ) |  |   | (5,078  | )
|                                                                  |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  
|Balance June 30, 2009                                             |  | 37,461                         |   |  | $                  | 38 |   |                                | $ | 167,729 |                              |  | $ | (1,663   | ) |  | $                       | 5,987   |   |           | $ |        |        |  | $ | 115 |   |  | $ | 172,206 |  
|                                                                  |  |                                |   |  |                    |    |   |                                |   |         |                              |  |   |          |   |  |                         |         |   |           |   |         |        |  |   |     |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flow

(In thousands)

(unaudited)



|                                                                                  |  |                          |         |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                  |  | Six Months EndedJune 30, |        
|                                                                                  |  | 2009                     |         |   | 2008 |  
|Cash flows from operating activities                                              |  |                          |         |   |      |   |          |  
|Net income (loss) attributable to Heartland                                       |  | $                        | (5,070  | ) |      | $ | 20,446   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |          |  
|Amortization of capitalized customer acquisition costs                            |  |                          | 28,451  |   |      |   | 25,873   |  
|Other depreciation and amortization                                               |  |                          | 10,204  |   |      |   | 5,882    |  
|Provision for processing system intrusion                                         |  |                          | 31,970  |   |      |   |         |  
|Addition to loss reserves                                                         |  |                          | 3,203   |   |      |   | 2,767    |  
|Provision for doubtful receivables                                                |  |                          | 548     |   |      |   | 1,395    |  
|Stock-based compensation                                                          |  |                          | 1,096   |   |      |   | 775      |  
|Deferred taxes                                                                    |  |                          | (5,757  | ) |      |   | 2,292    |  
|Net income (loss) attributable to noncontrolling minority interests               |  |                          | (8      | ) |      |   | 32       |  
|Loss on investments                                                               |  |                          |        |   |      |   | 103      |  
|Other                                                                             |  |                          |        |   |      |   | 4        |  
|Changes in operating assets and liabilities:                                      |  |                          |         |   |      |   |          |  
|Increase in receivables                                                           |  |                          | (11,924 | ) |      |   | (15,686  | )
|(Increase) decrease in inventory                                                  |  |                          | (347    | ) |      |   | 899      |  
|Payment of signing bonuses, net                                                   |  |                          | (17,765 | ) |      |   | (24,104  | )
|Increase in capitalized customer acquisition costs                                |  |                          | (8,195  | ) |      |   | (7,647   | )
|Decrease (increase) in prepaid expenses                                           |  |                          | 1,906   |   |      |   | (600     | )
|(Increase) decrease in current tax asset                                          |  |                          | (2,287  | ) |      |   | 1,286    |  
|Increase in deposits and other assets                                             |  |                          | (1,482  | ) |      |   | (43      | )
|Excess tax benefits on options exercised under SFAS No. 123R                      |  |                          | (322    | ) |      |   | (811     | )
|(Decrease) increase in reserve for unrecognized tax benefits                      |  |                          | (27     | ) |      |   | 160      |  
|Increase in due to sponsor bank                                                   |  |                          | 16,324  |   |      |   | 48,383   |  
|Increase in accounts payable                                                      |  |                          | 3,284   |   |      |   | 4,697    |  
|Decrease in accrued expenses and other liabilities                                |  |                          | (13,117 | ) |      |   | (856     | )
|Increase (decrease) in merchant deposits and loss reserves                        |  |                          | 13,798  |   |      |   | (706     | )
|Reserve for processing system intrusion                                           |  |                          | (7,681  | ) |      |   |         |  
|Payouts of accrued buyout liability                                               |  |                          | (4,904  | ) |      |   | (3,250   | )
|Increase in accrued buyout liability                                              |  |                          | 5,076   |   |      |   | 5,498    |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                          | 36,974  |   |      |   | 66,789   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|                                                                                  |  |                         
|Cash flows from investing activities                                              |  |                          |         |   |      |   |          |  
|Purchase of investments held to maturity                                          |  |                          | (569    | ) |      |   | (46      | )
|Maturities of investments held to maturity                                        |  |                          | 589     |   |      |   | 250      |  
|(Increase) decrease in funds held for payroll customers                           |  |                          | (3,139  | ) |      |   | 1,245    |  
|Increase (decrease) in deposits held for payroll customers                        |  |                          | 3,162   |   |      |   | (1,549   | )
|Acquisition of business, net of cash acquired                                     |  |                          |        |   |      |   | (102,544 | )
|Purchases of property and equipment                                               |  |                          | (25,222 | ) |      |   | (12,375  | )
|                                                                                  |  |                          |         |   |      |   |          |  
|Net cash used in investing activities                                             |  |                          | (25,179 | ) |      |   | (115,019 | )
|                                                                                  |  |                          |         |   |      |   |          |  
|                                                                                  |  |                         
|Cash flows from financing activities                                              |  |                          |         |   |      |   |          |  
|Proceeds from borrowings                                                          |  |                          |        |   |      |   | 95,000   |  
|Principal payments on borrowings                                                  |  |                          | (4,269  | ) |      |   | (20,000  | )
|Proceeds from exercise of stock options                                           |  |                          | 530     |   |      |   | 1,783    |  
|Excess tax benefits on options exercised under SFAS No. 123R                      |  |                          | 322     |   |      |   | 811      |  
|Repurchase of common stock                                                        |  |                          | (3,202  | ) |      |   | (17,995  | )
|Dividends paid on common stock                                                    |  |                          | (1,311  | ) |      |   | (6,724   | )
|                                                                                  |  |                          |         |   |      |   |          |  
|Net cash (used in) provided by financing activities                               |  |                          | (7,930  | ) |      |   | 52,875   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|                                                                                  |  |                         
|Net increase in cash                                                              |  |                          | 3,865   |   |      |   | 4,645    |  
|Effect of exchange rates on cash                                                  |  |                          | 19      |   |      |   | (11      | )
|Cash at beginning of year                                                         |  |                          | 27,589  |   |      |   | 35,508   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Cash at end of period                                                             |  | $                        | 31,473  |   |      | $ | 40,142   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|                                                                                  |  |                         
|Supplemental cash flow information:                                               |  |                          |         |   |      |   |          |  
|Cash paid during the period for:                                                  |  |                          |         |   |      |   |          |  
|Interest                                                                          |  | $                        | 1,117   |   |      | $ | 959      |  
|Income taxes                                                                      |  |                          | 4,945   |   |      |   | 8,467    |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Operations

Basis of Financial Statement PresentationThe accompanying condensed consolidated financial statements include those of Heartland
Payment Systems, Inc. (the Company) and its wholly-owned subsidiaries, Heartland Payroll Company (HPC), Debitek, Inc. (Debitek) and Heartland Acquisition LLC (Network Services), and its 70% owned
subsidiary Collective POS Solutions Ltd. (CPOS). The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances
and transactions with the Companys subsidiaries have been eliminated upon consolidation.

The accompanying condensed consolidated
financial statements are unaudited. In the opinion of the Companys management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Companys financial
position at June 30, 2009, its results of operations, changes in stockholders equity and cash flows for the six months ended June 30, 2009 and 2008. Results of operations reported for interim periods are not necessarily indicative of
the results to be expected for the year ended December 31, 2009. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form
10-K for the year ended December 31, 2008, as amended. The December 31, 2008 condensed consolidated balance sheet was derived from the audited 2008 consolidated financial statements.

In 2008, certain amounts for prior periods have been reclassified to conform with current presentation. Prior period amounts presented on the
consolidated income statements reflect a change in classification of certain charges from VISA and MasterCard from Processing and Servicing expenses, to Dues, Assessments and Fees. This classification reflects the nature of these additional VISA and
MasterCard bank card transaction authorization fees, which the Company passes through to its merchants. The Company believes that this change in presentation provides a more meaningful measure of its net revenue, which is a useful measure of
profitability and operating performance. The Company defines net revenue as total revenues less interchange fees and dues, assessments and fees. These reclassifications had no effect on reported consolidated income before income taxes, net income or
per share amounts. The amounts of Processing and Servicing expenses, which have been reclassified to Dues, Assessments and Fees for the three and six months ended June 30, 2008 were $4.6 million and $6.8 million, respectively.

Additionally, prior period amounts presented on the consolidated income statements reflect a change in classification of payroll tax expense incurred on
up-front signing bonuses, residual commissions and buyouts of Accrued Buyout Liabilities from General and Administrative expenses, to Processing and Servicing expenses. This classification reflects these payments of payroll taxes as additional costs
of services, rather than overhead. The Company believes that this presentation provides a more meaningful measure of the costs of providing services to its merchants. These reclassifications had no effect on reported consolidated income before
income taxes, net income or per share amounts. The amounts of General and Administrative expenses, which have been reclassified to Processing and Servicing expenses for the three and six months ended June 30, 2008 were $1.5 million and $3.2
million, respectively.

Business DescriptionThe Company provides payment processing services related to bank card
transactions for merchants throughout the United States and some parts of Canada. In addition, the Company provides certain other merchant services, including check processing, the sale and rental of terminal equipment, and the sale of terminal
supplies. HPC provides payroll and related tax filing services throughout the United States. Debitek provides prepaid cards and stored-value card solutions throughout the United States. The Company and Debitek also provide campus payment solutions
throughout the United States. CPOS is a Canadian provider of payment processing services and secure point-of-sale solutions.

Substantially
all of the Companys revenue is derived from processing and settling Visa and MasterCard bank card transactions for its merchant customers. Because the Company is not a member bank as defined by Visa and MasterCard, in order to
process and settle these bank card transactions for its



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



merchants the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds
settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship agreement permits the Company to route Visa and MasterCard bank card transactions
under the member banks control and identification numbers to clear credit bank card transactions through Visa and MasterCard. A sponsorship agreement also enables the Company to settle funds between cardholders and merchants by delivering
funding files to the member bank, which in turn transfers settlement funds to the merchants bank accounts. These restrictions place the settlement assets and obligations under the control of the member bank.

The sponsorship agreements with the member banks require, among other things, that the Company abide by the by-laws and regulations of the Visa and
MasterCard networks, and in certain cases maintain a certificate of deposit with the bank sponsors. If the Company breaches the sponsorship agreements, the bank sponsors may terminate the agreement and, under the terms of the agreement, the Company
would have 180 days to identify an alternative bank sponsor. The Company is dependent on its bank sponsors, Visa and MasterCard for notification of any compliance breaches.

The Company entered into the sponsorship agreement with KeyBank on April 1, 1999 and the agreement expires in March 2012. The acquisition of Network
Services in May 2008 resulted in the addition of World Financial Network National Bank as the sponsor bank for Network Services large national merchant processing. In August 2008, the Company entered into a sponsorship agreement with SunTrust
Banks to replace World Financial Network National Bank as its sponsor bank for Network Services large national merchant processing. In February 2009, the sponsorship of the large national merchants processing was transferred from World
Financial Network National Bank to SunTrust Banks.

In 2007, the Company entered into a sponsor bank agreement with Heartland Bank, which
is based in Saint Louis, Missouri. Heartland Bank is not affiliated with Heartland Payment Systems. Our agreement with Heartland Bank involves substantially the same terms as apply with KeyBank and it expires in September 2010.

Of the Companys total Visa and MasterCard bank card processing volume for the month of June 2009, 67.3% was processed under its sponsorship
agreement with KeyBank N.A., 16.9% was processed under its sponsorship agreement with Heartland Bank (an unrelated third party), and 15.8% was processed under its sponsorship arrangement with SunTrust Banks.

Processing System IntrusionOn January 20, 2009, the Company publicly announced the discovery of a criminal breach of its payment
systems environment (the Processing System Intrusion). The Processing System Intrusion involved malicious software that appears to have been used to collect in-transit, unencrypted payment card data while it was being processed by the
Company during the transaction authorization process. Such data is not required to be encrypted while in transit under current payment card industry guidelines. The Company had received confirmation of its compliance with the Payment Card Initiative
Data Security Standard (PCI-DSS) from a third-party assessor each year since the standard was announced, including most recently in April 2008, before the discovery of the Processing System Intrusion. Subsequent to the discovery of the
Processing System Intrusion, we were advised by Visa that based on Visas investigation of the Processing System Intrusion, Visa had removed us from Visa published list of PCI-DSS compliant service providers. In April 2009, we were
re-certified as PCI- DSS compliant and the assessors report attesting to such re-certification has been reviewed and approved by Visa. As such, the Company was returned to Visas Global List of PCI DSS Validated Service Providers. Card
data that could have been exposed by the Processing System Intrusion included card numbers, expiration dates, and certain other information from the magnetic stripe on the back of the payment card (including, for a small percentage of transactions,
the cardholders name). However, the cardholder information that the Company processes does not include addresses or Social Security numbers. Also, the Company believes that no unencrypted PIN data was captured. The Company believes the breach
has been contained and did not extend beyond 2008.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



For the three and six months ended June 30, 2009, the Company expensed a total of $19.4 million and
$32.0 million, respectively, or about $0.32 and $0.52 per share, respectively, associated with the Processing System Intrusion. Over the six months ended June 30, 2009, the majority of these charges, or $22.1 million, related to fines imposed by
certain card brands in April 2009 against the Company and its sponsor banks and a settlement offer made by the Company in an attempt to resolve certain of the claims asserted against its sponsor banks (who have asserted rights to indemnification
from the Company pursuant to the Companys agreements with them) relating to the Processing System Intrusion. Notwithstanding its belief that the Company and its sponsor banks have strong defenses against the claims that are the subject of the
settlement offer, the Company decided to make the settlement offer in an attempt to avoid the costs and uncertainty of litigation. The Company is prepared to vigorously defend itself against all the claims relating to the Processing System Intrusion
that have been asserted against it and its sponsor banks to date. In particular, the Company is prepared to vigorously contest (and it has recommended to its sponsor banks that they vigorously contest) through all available means, including
litigation if necessary, any liability that may be asserted or assessments that may be imposed against the Company or its sponsor banks by certain card brands.

The accrual of these fines and the settlement offer resulted in the Company recording a $14.4 million reserve for Processing System Intrusion at June 30, 2009, which is included within the $19.4 million expensed for
the three months ended June 30, 2009. To date, the Company has not received any response to the settlement offer and it should not be assumed that the Company will resolve the claims that are the subject of the settlement offer for the amount of the
settlement offer. The Company understands that the portion of this reserve related to the settlement offer is required by SFAS No. 5, Accounting for Contingencies (SFAS No. 5), based solely on the fact the Company
tendered an offer of settlement in the amount it has accrued. The ultimate cost of resolving the claims that are the subject of the settlement offer may substantially exceed the amount the Company has accrued. Moreover, even if the claims that are
the subject of the settlement offer were resolved for the amount the Company has accrued, that would still leave unresolved most of the claims that have been asserted against the Company or its sponsor banks relating to the Processing System
Intrusion. The Company feels it has strong defenses to all the claims that have been asserted against it and its sponsor banks relating to the Processing System Intrusion, including those claims that are not the subject of the settlement offer.
However, it is possible the Company will end up resolving the claims that are not the subject of the settlement offer, either through settlements or pursuant to litigation, for amounts that are significantly greater than the amount it has reserved
to date in respect of those claims. The Company may also be required to reserve significant additional amounts in the future, either in respect of the claims that are the subject of the settlement offer or in respect of the other claims that have
been asserted against the Company and its sponsor banks relating to the Processing System Intrusion (or in respect of both categories of claims).

The remainder of the expenses and accruals related to the Processing System Intrusion recorded in the three and six months ended June 30, 2009 were primarily for legal fees and costs the Company incurred for investigations, remedial
actions and crisis management services.

While the Company has determined that the Processing System Intrusion has triggered other loss
contingencies, to date an unfavorable outcome is not believed by it to be probable on those claims that are pending or have been threatened against it, or that the Company considers to be probable of assertion against it, and the Company does not
have sufficient information to reasonably estimate the loss it would incur in the event of an unfavorable outcome on any such claim. Therefore, in accordance with SFAS No. 5, no reserve/liability has been recorded as of June 30, 2009 with
respect to any such claim, except for the fines actually assessed by MasterCard and Visa and the amount of the settlement offer by the Company. As more information becomes available, if the Company should determine that an unfavorable outcome is
probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, it will record a reserve for the claim in question. If and when, the Company records such a reserve, it could be material
and could adversely impact its results of operations, financial condition and cash flow.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



Additional costs the Company expects to incur for investigations, remedial actions, legal fees, and
crisis management services related to the Processing System Intrusion will be recognized as incurred. Such costs are expected to be material and could adversely impact the Companys results of operations, financial condition and cash flow.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements,
and the reported amounts of revenues and expenses during the reporting period. Estimates include, among other things, the accrued buyout liability, capitalized customer acquisition costs, loss reserves, certain accounts payable and accrued expenses
and certain tax assets and liabilities as well as the related valuation allowances, if any. Actual results could differ from those estimates.

2.
Summary of Significant Accounting Policies

ReceivablesReceivables are stated net of allowance for doubtful
accounts. The Company estimates its allowance based on experience with its merchants, customers, and sales force and its judgment as to the likelihood of their ultimate payment. The Company also considers collection experience and makes estimates
regarding collectability based on trends in aging. Historically, the Company has not experienced significant charge offs for its merchant receivables.

The Companys primary receivables are due from its bank card processing merchants. These receivables result from the Companys practice of advancing interchange fees to most of its small and midsized
merchants (referred to as Small and Midsized Enterprises, or SME) during the month and collecting those fees at the beginning of the following month, as well as from transaction fees the Company charges its merchants for processing
transactions. The Company does not advance interchange fees to its Network Services merchants.

Generally, the Company uses cash available
for investment to fund these advances to SME merchants; when available cash has been expended, the Company directs its sponsor banks to make these advances, thus generating a payable to the sponsor banks. We pay our sponsor banks the prime rate on
these payables. To help fund the purchase price for Network Services, during the second quarter of 2008 we suspended using our available cash to fund merchant advances and borrowed $75.0 million. During the first quarter of 2009, we re-established
our practice of partially funding merchant advances with our cash, but at reduced amounts. At June 30, 2009, the Company used $10.0 million of its available cash to fund merchant advances and at December 31, 2008, the Company used $17.5
million of its cash to fund merchant advances. The amount due to sponsor banks for funding advances was $84.5 million at June 30, 2009 and $68.2 million at December 31, 2008. The payable to sponsor banks is repaid at the beginning of the
following month out of the fees the Company collects from its merchants. Receivables from merchants also include receivables from the sale of point of sale terminal equipment and check processing terminals.

Receivables also include amounts resulting from the sale, installation, training and repair of payment system hardware and software for prepaid card and
stored-value card payment systems and campus payment solutions. These receivables are mostly invoiced on terms of 30 days net from date of invoicing and are typically funded from working capital.

Receivables also include amounts advanced to employees, primarily the Companys sales force, to cover certain expenses. These receivables are
recovered from sales and residual commissions earned by the sales force.

Investments and Funds Held for Payroll
CustomersInvestments, including those carried on the consolidated balance sheet as Funds Held for Payroll Customers, consist primarily of fixed income



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



bond funds, corporate and U.S. Government debt securities, certificates of deposit and cost basis equity securities. Funds Held for Payroll Customers also
include overnight bank deposits. The majority of investments carried in Funds Held for Payroll Customers are available-for-sale and recorded at the fair value based on quoted market prices. Certificates of deposit are classified as held to maturity
and recorded at cost. Cost basis equity securities are recorded at cost and periodically evaluated for impairment. In the event of a sale, cost is determined on a specific identification basis. At June 30, 2009, Funds Held for Payroll Customers
included cash and cash equivalents of $23.9 million and investments available for sale of $1.3 million.

Capitalized Customer
Acquisition Costs, netCapitalized customer acquisition costs consist of (1) up-front signing bonus payments made to Relationship Managers and sales managers (the Companys sales force) for the establishment of new merchant
relationships, and (2) a deferred acquisition cost representing the estimated cost of buying out the commissions of vested sales employees. Pursuant to Staff Accounting Bulletin Topic 13, Revenue Recognition, and Financial Accounting
Standards Board (FASB) Technical Bulletin No. 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, capitalized customer acquisition costs represent incremental, direct customer
acquisition costs that are recoverable through gross margins associated with merchant contracts. The capitalized customer acquisition costs are amortized using a method which approximates a proportional revenue approach over the initial three-year
term of the merchant contract.

The up-front signing bonus is based on the estimated gross margin for the first year of the SME merchant
contract. The signing bonus, amount capitalized, and related amortization are adjusted after one year to reflect the actual gross margin generated by the merchant contract during that year. The deferred customer acquisition cost asset is accrued
over the first year of merchant processing, consistent with the build-up in the accrued buyout liability, as described below.

Management
evaluates the capitalized customer acquisition costs for impairment at each balance sheet date by comparing, on a pooled basis by vintage month of origination, the expected future net cash flows from underlying SME merchant relationships to the
carrying amount of the capitalized customer acquisition costs. If the estimated future net cash flows are lower than the recorded carrying amount, indicating an impairment of the value of the capitalized customer acquisition costs, the impairment
loss will be charged to operations. The Company believes that no impairment has occurred as of June 30, 2009 and December 31, 2008.

Merchant Deposits and Loss ReservesThe Company maintains merchant deposits to offset potential liabilities from merchant chargeback processing, which is discussed below, as well as deposits representing debit processing
and check processing funds in transit. Previously, the debit processing funds in transit were netted against receivables. Disputes between a cardholder and a merchant periodically arise due to the cardholders dissatisfaction with merchandise
quality or the merchants service, and the disputes may not always be resolved in the merchants favor. In some of these cases, the transaction is charged back to the merchant and the purchase price is refunded to the
cardholder by the credit card-issuing institution. If the merchant is unable to fund the refund, the Company is liable for the full amount of the transaction. Under FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other (FIN 45), the Companys obligation to stand ready to perform is minimal. The Company maintains a deposit or the pledge of a letter of credit
from certain merchants as an offset to potential contingent liabilities that are the responsibility of such merchants. The Company evaluates its ultimate risk and records an estimate of potential loss for chargebacks related to merchant fraud based
upon an assessment of actual historical fraud loss rates compared to recent bank card processing volume levels. The Company believes that the liability recorded as loss reserves approximates fair value.

Accrued Buyout LiabilityThe Companys historic focus has been on SME merchants, and it has a sales compensation arrangement in
this market that has been essentially unchanged since its inception. Under this approach, Relationship Managers and sales managers are paid residual commissions based on the gross margin generated by monthly SME merchant processing activity. The
Company has the right, but is not obligated, to buy out some or all of these commissions, and intends to do so periodically.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



Such purchases of the commissions are at a fixed multiple of the last twelve months commissions. Because of the Companys intent and ability to
execute purchases of the residual commissions, and the mutual understanding between the Company and the Relationship Managers and sales managers, the Company has accounted for this deferred compensation arrangement pursuant to the substantive nature
of the plan. The Company therefore records the amount that it would have to pay (the settlement cost) to buy out non-servicing related commissions in their entirety from vested Relationship Managers and sales managers, and an accrual,
based on their progress towards vesting, for those unvested Relationship Managers and sales managers who are expected to vest in the future. As noted above, as the liability increases over the first year of a SME merchant contract, the Company also
records a related deferred acquisition cost asset for currently vested Relationship Managers and sales managers. The accrued buyout liability associated with unvested Relationship Managers and sales managers is not included in the deferred
acquisition cost asset since future services are required in order to vest. Subsequent changes in the settlement cost, due to account attrition, same-store sales growth and changes in gross margin are included in the same income statement caption as
customer acquisition cost amortization expense.

The accrued buyout liability is based on the SME merchants under contract at the balance
sheet date, the gross margin generated by those merchants over the prior twelve months, and the contractual buyout multiple. The liability related to a new SME merchant is therefore zero when the merchant is installed, and increases over the twelve
months following the installation date. The same procedure is applied to unvested commissions over the expected vesting period, but is further adjusted to reflect the Companys experience that 31% of unvested Relationship Managers and sales
managers become vested.

The classification of the accrued buyout liability between current and non-current liabilities on the consolidated
balance sheets is based upon the Companys estimate of the amount of the accrued buyout liability that it reasonably expects to pay over the next twelve months. This estimate is developed by calculating the cumulative annual average percentage
that total historical buyout payments represent of the accrued buyout liability. That percentage is applied to the period-end accrued buyout liability to determine the current portion.

RevenueRevenues are mainly comprised of gross processing revenue, payroll processing revenue and equipment-related income. Gross
processing revenue primarily consists of discount fees and per-transaction and periodic (primarily monthly) fees from the processing of Visa and MasterCard bank card transactions for merchants. The Company passes through to its customers any changes
in interchange or network fees. Gross processing revenue also includes American Express and Discover fees, customer service fees, fees for processing chargebacks, termination fees on terminated contracts, check processing fees, gift and loyalty card
fees and other miscellaneous revenue. Payroll processing revenue includes periodic and annual fees charged by HPC for payroll processing services, and interest earned from investing tax impound funds held for our customers. Revenue is recorded as
bank card and other processing transactions are processed or payroll services are performed.

Equipment-related income includes revenues
from the sale, rental and deployment of bank card and check processing terminals, from the sale of hardware, software and associated services for prepaid card and stored-value card payment systems, and campus payment solutions. Revenues are recorded
at the time of shipment, or the provision of service.

Income TaxesThe Company accounts for income taxes by recognizing
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference
between the financial statements and the tax basis of assets and liabilities using enacted tax rates.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



The provision for/(benefit from) income taxes for the three and six months ended June 30, 2009
and 2008 and the resulting effective tax rates were as follows:



|                                          |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                          |  | 2009                       |        |   | 2008                     |   |       | 2009 |  |   | 2008   |  
|                                          |  | (In thousands)             |       
|Provision for/(benefit from) income taxes |  | $                          | (1,669 | ) |                          | $ | 6,994 |      |  | $ | (3,170 | ) |  | $ | 12,428 |  
|Effective tax rate                        |  |                            | 39.09  | % |                          |   | 37.80 | %    |  |   | 38.43  | % |  |   | 37.80  | %

At June 30, 2009, our reserve for unrecognized tax benefits related to uncertain tax
positions was $1.7 million, of which $1.3 million would, if recognized, impact the effective tax rate.

Stock
OptionsThe Company adopted SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123R) on January 1, 2006.

In the third quarter of 2008, the Companys Board of Directors approved a performance-based stock option program. Under this program, the Company granted 2.5 million performance-based stock options to its
employees. These stock options were granted to those employees who the Board of Directors determined could have significant impact on successfully integrating the recently acquired Network Services business and effectively executing the
Companys growth plan. These stock options have a five-year term and will vest in equal amounts in 2011, 2012 and 2013 only if, over the term of the stock options, both of the following performance conditions are achieved:



| |  |  | Consolidated net revenue grows at a compound annual rate of at least 15%; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | Fully diluted EPS grows at a compound annual rate of at least 25%.
| | - |  | ------------------------------------------------------------------

As of December 31, 2008, management believed that achieving these performance conditions was not more likely than not to occur; therefore, no share-based compensation expense was recorded for these
stock options in 2008. As of June 30, 2009, management continues to believe that achieving these performance conditions is not more likely than not to occur; therefore, no share based compensation expense has been recorded for these
stock options in 2009. The evaluation of the likelihood of achieving these performance conditions will be repeated quarterly, and at such point that vesting of some or all of the options becomes more likely than not, share-based compensation expense
will be recorded.

In the second quarter of 2009, the Companys Board of Directors approved grants of 930,000 stock options subject to
multiple vesting conditions. Under these stock options, the employee must provide continuous service over four years and a market price condition must be satisfied within those four years. These stock options have a five-year term and could vest in
equal amounts in 2010, 2011, 2012 and 2013 only if during the four-year service period, the price of the Companys common stock as reported by the New York Stock Exchange exceeds two or three times the exercise price for 30 consecutive trading
days. The grant date fair values of these multiple vesting condition options are recognized as compensation expense over their four-year service periods.

Also in the second quarter of 2009, the Companys Board of Directors approved grants of 336,000 Restricted Share Units. These Restricted Share Units are nonvested share awards which will vest over a four-year
service period as employees perform service. The closing price of the Companys common stock on the grant date equals the grant date fair value of these nonvested share awards and will be recognized as compensation expense over their four-year
service periods.

Diluted earnings per share for the three and six months ended June 30, 2009 and 2008 were computed based on the
weighted average outstanding common shares plus equivalent shares assuming exercise of stock options, where dilutive.

Foreign
CurrencyThe Canadian dollar is the functional currency of CPOS, which operates in Canada. CPOS revenues and expenses are translated at the average exchange rates prevailing during the period. The foreign currency assets and
liabilities of CPOS are translated at the period-end rate of exchange. The resulting translation adjustment is recorded as a component of other comprehensive income



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



and is included in stockholders equity. At June 30, 2009, the cumulative foreign currency translation loss was $1.7 million. The Company intends
to indefinitely reinvest undistributed earnings of CPOS and has not tax affected the cumulative foreign currency translation loss. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not
material.

Noncontrolling Minority InterestsNoncontrolling minority interests represent noncontrolling minority
stockholders share of the equity and after-tax net income or loss of consolidated subsidiaries. Noncontrolling minority stockholders share of after-tax net income or loss of consolidated subsidiaries is included in Net income
(loss) attributable to noncontrolling minority interests in the Consolidated Income Statement. The minority stockholders interests included in Noncontrolling minority interests in the June 30, 2009 Consolidated Balance
Sheet were $115,000 and reflect the investments by these minority shareholders in the consolidated subsidiaries, along with their proportionate share of the earnings or losses of the subsidiaries.

Subsequent EventsThe Company evaluated subsequent events with respect to the Consolidated Financial Statements as of and for the six
months ended June 30, 2009 through August 7, 2009, the date of issuance. See Note 16, Subsequent Events, for references to reportable items evaluated during this period.

New Accounting PronouncementsIn December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
No. 141(R)), which replaces SFAS No. 141. SFAS No. 141(R) applies the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses and establishes principles and
requirements for how the acquirer recognizes and measures identifiable assets acquired and liabilities assumed, including assets and liabilities arising from contingencies, any noncontrolling interest in the acquiree and goodwill acquired or gain
realized from a bargain purchase. SFAS No. 141(R) is effective prospectively for business combinations for which the acquisition date is on or after the first annual reporting period beginning after December 15, 2008. The adoption of SFAS
No. 141 (R) will impact the Companys Consolidated Financial Statements prospectively in the event of any business combinations entered into after the effective date in which the Company is the acquirer and retroactively for any
business combinations entered into before the effective date in regards to deferred income and contingency adjustments.

In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS
No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS No. 160 requires a noncontrolling interest in a subsidiary to be
reported as equity, separate from the parents equity, in the consolidated statement of financial position and the amount of net income or loss and comprehensive income or loss attributable to the parent and noncontrolling interest to be
presented separately on the face of the consolidated financial statements. Changes in a parents ownership interest in its subsidiary in which a controlling financial interest is retained are accounted for as equity transactions. If a
controlling financial interest in the subsidiary is not retained, the subsidiary is deconsolidated and any retained noncontrolling equity interest is initially measured at fair value. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008 and is to be applied prospectively, except that presentation and disclosure requirements are to be applied retrospectively for all periods presented. The adoption of SFAS No. 160 did not have a material effect on the
Companys Consolidated Financial Statements.

In December 2007, the SEC issued SAB No. 110, Certain Assumptions Used in
Valuation Methods (SAB 110). SAB 110 amends SAB 107 to allow the continued use, under certain circumstances, of the simplified method in developing the expected term for stock options. SAB 110 was effective January 1, 2008.
The adoption of SAB 110 will impact the Companys Consolidated Financial Statements prospectively in the event circumstances provide for application of the simplified method to future stock option grants made by the Company.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and is to be applied
prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. Early adoption is not permitted. The
adoption of FSP FAS 142-3 did not have a material effect on the Companys Consolidated Financial Statements.

In April 2009, the FASB
issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and FSP APB 28-1). FSP FAS 107-1 and FSP APB 28-1 require the disclosure of fair value for
interim and annual reporting periods for all financial instruments for which it is practicable to estimate the value, whether recognized or not recognized in the statement of financial position. FSP FAS 107-1 and FSP APB 28-1 are effective for
financial statements issued for interim periods ending after June 15, 2009. This guidance applies only to financial statement disclosures, the adoption will not have a material effect on the Companys Consolidated Financial Statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). The objective of
SFAS No. 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 introduces the concept
of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events as well as the rationale for why that date was selected, that is, whether that date
represents the date the financial statements were issued or were available to be issued. SFAS No. 165 should not result in significant changes in the subsequent events that an entity reportseither through recognition or disclosurein
its financial statements. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material effect on the Companys Consolidated Financial Statements.

3. Acquisitions

Chockstone, Inc.

As of November 14, 2008, the Company acquired the assets of Chockstone, Inc. for a cash payment of $4.1 million. Chockstone
expands our ability to equip businesses nationwide with enhanced gift card and loyalty programs. This acquisition is not expected to have a material impact on earnings in the near term. Pro forma results of operations have not been presented because
the effect of the acquisition was not material. The transaction was accounted for under the purchase method of accounting. The fair values of the Chockstone assets acquired and the liabilities assumed were estimated at the acquisition date. The fair
values are preliminary, based on estimates, and may be adjusted in accordance with Statement of Financial Accounting Standards No. 141(SFAS No. 141), Business Combinations, as more information becomes available and
valuations are finalized. Beginning November 14, 2008, Chockstones results of operations were included in the Companys results of operations. The total purchase price was allocated as follows: $2.4 million to intangible assets, $1.6
million to goodwill, and $0.1 million to net tangible assets. The entire amount of goodwill is expected to be deductible for income tax reporting.

Network Services

As of May 31, 2008, the Company closed its acquisition of Network Services. Network Services
is a provider of payment processing solutions, serving a variety of industries such as petroleum, convenience store, parking and retail. Services include payment processing, prepaid services, POS terminal, helpdesk services and merchant bankcard
services. The Network Services acquisition will provide the Company with a substantial portfolio of merchants in the petroleum industry segment. Network Services settled over $17



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



billion of total annual Visa and MasterCard bank card processing volume representing 604 million annual Visa and MasterCard transactions in 2007. In
addition to Visa and MasterCard transactions, Network Services handles a wide range of payment transactions for its predominantly petroleum customer base, including providing approximately 2.6 billion transaction authorizations in 2007.

The Company acquired the Network Services business, including tangible personal property, intellectual property, licenses, contracts and related
assets, and assumed certain liabilities related to Network Services, for a cash payment of $92.5 million. The Company funded the cash purchase price using $25.0 million it borrowed under its term loan facility, $50.0 million it borrowed under its
revolving credit facility, and the balance from its available cash position. Beginning June 1, 2008, Network Services results of operations were included in the Companys results of operations

The acquisition was accounted for under the purchase method of accounting. The following table summarizes the allocation of the acquisition costs,
including direct transaction costs, to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values on May 31, 2008. The excess of the acquisition costs over the fair value of net assets acquired
was allocated to goodwill. The goodwill acquired is expected to be deductible for tax purposes.



|                                                                                                                                |  |                                |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | -
|                                                                                                                                |  | Allocation ofAcquisition Costs |       
|                                                                                                                                |  | (in thousands)                 |       
|Net fair value of assets acquired and liabilities assumed:                                                                      |  |                                |        |  
|Receivables                                                                                                                     |  | $                              | 18,160 |  
|Other current assets                                                                                                            |  |                                | 3,660  |  
|Property and equipment                                                                                                          |  |                                | 1,822  |  
|Accrued expenses and other liabilities                                                                                          |  |                                | (7,653 | )
|                                                                                                                                |  |                                |        |  
|Total net assets acquired                                                                                                       |  |                                | 15,989 |  
|                                                                                                                                |  |                                |        |  
|Intangible assets acquired:                                                                                                     |  |                                |        |  
|Customer relationships                                                                                                          |  |                                | 26,100 |  
|Software                                                                                                                        |  |                                | 7,900  |  
|Non-competition agreement                                                                                                       |  |                                | 400    |  
|                                                                                                                                |  |                                |        |  
|Total intangible assets                                                                                                         |  |                                | 34,400 |  
|                                                                                                                                |  |                                |        |  
|Goodwill                                                                                                                        |  |                                | 43,800 |  
|                                                                                                                                |  |                                |        |  
|Total acquisition costs (a)                                                                                                     |  | $                              | 94,189 |  
|                                                                                                                                |  |                                |        |  
|                                                                                                                                | 
|(a)    Total acquisition costs include $92.5 million of cash consideration paid, plus $1.7 million of direct
transaction costs. | 

The following unaudited pro forma operating results for the six months ended June 30, 2008
assume that the Network Services acquisition occurred on January 1, 2007. The pro forma results of operations are based on historical results of operations, adjusted for the impacts of purchase price allocations and financing costs, and are not
necessarily indicative of the actual results which would have been achieved had the Network Services acquisition occurred as of January 1, 2007, or the results which may be achieved in the future.



|                                    |  |                               |        
|----------------------------------- |  | ----------------------------- | -------
|                                    |  | Six Months EndedJune 30, 2008
|(in thousands, except per share)    |  |                              
|Total revenues                      |  | $                             | 780,278
|Costs of services                   |  |                               | 700,768
|General and administrative expenses |  |                               | 45,805 
|Total expenses                      |  |                               | 746,672
|Income from operations              |  |                               | 33,606 
|Net income                          |  |                               | 19,763 
|Diluted earnings per share          |  | $                             | 0.51   



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



Collective Point of Sale Solutions Ltd.

On March 3, 2008 the Company acquired a majority interest in Collective Point of Sale Solutions Ltd. (CPOS) for a cash payment of $10.5
million plus transaction costs of approximately $0.4 million. CPOS is a Canadian provider of payment processing services and secure point-of-sale solutions. This acquisition provides the Company an entrée into the Canadian credit and debit
card processing market. The Company and CPOS are now able to service merchants that have locations in both the United States and Canada. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

The transaction was accounted for under the purchase method of accounting. Beginning March 3, 2008, CPOS results of operations
were included in the Companys results of operations. The allocation of the total purchase price was as follows: $9.4 million to goodwill, $1.5 million to intangible assets and net tangible liabilities, which were immaterial. Under Canada tax
regulations, the goodwill acquired is not expected to be deductible for tax purposes.

4. Receivables

A summary of receivables by major class was as follows at June 30, 2009 and December 31, 2008:



|                                     |  |                |         |   |                  |   |         |  
|------------------------------------ |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                     |  | June 30,2009   |         |   | December 31,2008 |  
|                                     |  | (In thousands) |        
|Accounts receivable from merchants   |  | $              | 147,545 |   |                  | $ | 132,699 |  
|Accounts receivable from others      |  |                | 4,551   |   |                  |   | 7,945   |  
|                                     |  |                |         |   |                  |   |         |  
|                                     |  |                | 152,096 |   |                  |   | 140,644 |  
|Less allowance for doubtful accounts |  |                | (560    | ) |                  |   | (499    | )
|                                     |  |                |         |   |                  |   |         |  
|Total receivables, net               |  | $              | 151,536 |   |                  | $ | 140,145 |  
|                                     |  |                |         |   |                  |   |         |  

Included in accounts receivable from others are $1,879,000 and $1,497,000 which are due from
employees at June 30, 2009 and December 31, 2008, respectively.

A summary of the activity in the allowance for doubtful accounts
for the three and six months ended June 30, 2009 and 2008 was as follows:



|                                     |  |                            |      |   |                          |   |       |      |  |   |      |   |  |   |        |  
|------------------------------------ |  | -------------------------- | ---- | - | ------------------------ | - | ----- | ---- |  | - | ---- | - |  | - | ------ | -
|                                     |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                                     |  | 2009                       |      |   | 2008                     |   |       | 2009 |  |   | 2008 |  
|                                     |  | (In thousands)             |     
|Beginning balance                    |  | $                          | 463  |   |                          | $ | 146   |      |  | $ | 499  |   |  | $ | 165    |  
|Balance of acquired entity allowance |  |                            |     |   |                          |   | 87    |      |  |   |     |   |  |   | 87     |  
|Additions to allowance               |  |                            | 552  |   |                          |   | 1,049 |      |  |   | 548  |   |  |   | 1,309  |  
|Charges against allowance            |  |                            | (455 | ) |                          |   | (966  | )    |  |   | (487 | ) |  |   | (1,245 | )
|                                     |  |                            |      |   |                          |   |       |      |  |   |      |   |  |   |        |  
|Ending balance                       |  | $                          | 560  |   |                          | $ | 316   |      |  | $ | 560  |   |  | $ | 316    |  
|                                     |  |                            |      |   |                          |   |       |      |  |   |      |   |  |   |        |  



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



5. Funds Held for Payroll Customers and Investments

A summary of Funds Held for Payroll Customers and Investments, including the cost, gross unrealized gains (losses) and estimated fair value for
investments held to maturity and investments available-for-sale by major security type and class of security were as follows at June 30, 2009 and December 31, 2008:



|                                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|---------------------------------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                                                           |  | Cost           |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                                           |  | (In thousands)
|June 30, 2009                                              |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Funds Held for Payroll Customers:                          |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Fixed income bond fund                                     |  | $              | 965    |                      | $ | 29                    |  | $ |                    |   |  | $ | 994   
|Debt securities of the U.S. Government                     |  |                |       |                      |   |                      |  |   |                    |   |  |   |      
|Corporate debt securities                                  |  |                | 335    |                      |   |                      |  |   | (29                 | ) |  |   | 306   
|                                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total investments available-for-sale                       |  |                | 1,300  |                      |   | 29                    |  |   | (29                 | ) |  |   | 1,300 
|Cash held for payroll customers                            |  |                | 23,864 |                      |   |                      |  |   |                    |   |  |   | 23,864
|                                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total Funds Held for Payroll Customers                     |  | $              | 25,164 |                      | $ | 29                    |  | $ | (29                 | ) |  | $ | 25,164
|                                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|                                                           |  |                |        |                     
|Investments:                                               |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Investments held to maturity  Certificates of deposit (a) |  | $              | 1,396  |                      | $ |                      |  | $ |                    |   |  | $ | 1,396 
|                                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total investments                                          |  | $              | 1,396  |                      | $ |                      |  | $ |                    |   |  | $ | 1,396 
|                                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       



|(a) | Certificates of deposits have remaining terms ranging from 2 months to 14 months.
|--- | ---------------------------------------------------------------------------------



|                                                       |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|------------------------------------------------------ |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                                                       |  | Cost           |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                                       |  | (In thousands)
|December 31, 2008                                      |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Funds Held for Payroll Customers:                      |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Fixed income bond fund                                 |  | $              | 965    |                      | $ |                      |  | $ |                    |   |  | $ | 965   
|Debt securities of the U.S. Government                 |  |                |       |                      |   |                      |  |   |                    |   |  |   |      
|Corporate debt securities                              |  |                | 335    |                      |   |                      |  |   | (23                 | ) |  |   | 312   
|                                                       |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total investments available-for-sale                   |  |                | 1,300  |                      |   |                      |  |   | (23                 | ) |  |   | 1,277 
|Cash held for payroll customers                        |  |                | 20,725 |                      |   |                      |  |   |                    |   |  |   | 20,725
|                                                       |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total Funds Held for Payroll Customers                 |  | $              | 22,025 |                      | $ |                      |  | $ | (23                 | ) |  | $ | 22,002
|                                                       |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|                                                       |  |                |        |                     
|Investments:                                           |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Investments held to maturity  Certificates of deposit |  | $              | 1,410  |                      | $ |                      |  | $ |                    |   |  | $ | 1,410 
|                                                       |  |                |        |                      |   |                       |  |   |                     |   |  |   |       
|Total investments                                      |  | $              | 1,410  |                      | $ |                      |  | $ |                    |   |  | $ | 1,410 
|                                                       |  |                |        |                      |   |                       |  |   |                     |   |  |   |       

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The framework provides a three-level hierarchy, which prioritizes the factors (inputs) used to
calculate the fair value of assets and liabilities as follows:



| |  |  | Level 1. Level 1 inputs are unadjusted quoted prices, such as a New York Stock Exchange closing price, in active markets for identical assets. Level 1
is the highest priority in the hierarchy.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as other significant inputs that are
observable at commonly quoted intervals, such as interest rates, foreign exchange rates, and yield curves.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3. Level 3 are unobservable inputs which are based on company assumptions due to little, if any, observable market information. Level 3 is the
lowest priority in the hierarchy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



As of June 30, 2009, all investments in available-for-sale securities held by the Company were measured using
Level 1 inputs.

During the six months ended June 30, 2009, the Company did not experience any other-than-temporary losses on its
investments. During the twelve months ended December 31, 2008, the Company recognized $258,000 of other-than-temporary impairment losses on its investment in the fixed income bond fund and $137,000 of realized losses on a sale of corporate debt
securities.

The maturity schedule of all available-for-sale and held to maturity investments along with amortized cost and estimated fair
value as of June 30, 2009 is as follows:



|                                      |  |                |       |                     |   |      
|------------------------------------- |  | -------------- | ----- | ------------------- | - | -----
|                                      |  | AmortizedCost  |       | EstimatedFair Value
|                                      |  | (In thousands)
|Due in one year or less               |  | $              | 2,329 |                     | $ | 2,359
|Due after one year through five years |  |                | 367   |                     |   | 337  
|                                      |  |                |       |                     |   |      
|                                      |  | $              | 2,696 |                     | $ | 2,696
|                                      |  |                |       |                     |   |      

6. Capitalized Customer Acquisition Costs, Net

A summary of the capitalized customer acquisition costs, net, as of June 30, 2009 and December 31, 2008 was as follows:



|                                                |  |                |         |   |                  |   |         |  
|----------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | June 30,2009   |         |   | December 31,2008 |  
|                                                |  | (In thousands) |        
|Capitalized signing bonuses                     |  | $              | 119,296 |   |                  | $ | 117,776 |  
|Less accumulated amortization                   |  |                | (59,676 | ) |                  |   | (55,307 | )
|                                                |  |                |         |   |                  |   |         |  
|                                                |  |                | 59,620  |   |                  |   | 62,469  |  
|                                                |  |                |         |   |                  |   |         |  
|                                                |  |               
|Capitalized customer deferred acquisition costs |  |                | 37,787  |   |                  |   | 37,010  |  
|Less accumulated amortization                   |  |                | (22,161 | ) |                  |   | (21,742 | )
|                                                |  |                |         |   |                  |   |         |  
|                                                |  |                | 15,626  |   |                  |   | 15,268  |  
|                                                |  |                |         |   |                  |   |         |  
|Capitalized Customer Acquisition Costs, Net     |  | $              | 75,246  |   |                  | $ | 77,737  |  
|                                                |  |                |         |   |                  |   |         |  

A summary of the activity in capitalized customer acquisition costs, net for the three and six
month periods ended June 30, 2009 and 2008 was as follows:



|                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|                                                |  | (In thousands)             |        
|Balance at beginning of period                  |  | $                          | 76,551  |   |                          | $ | 73,143  |      |  | $ | 77,737  |   |  | $ | 70,498  |  
|Plus additions to:                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Capitalized signing bonuses, net                |  |                            | 8,758   |   |                          |   | 12,671  |      |  |   | 17,765  |   |  |   | 24,104  |  
|Capitalized customer deferred acquisition costs |  |                            | 4,259   |   |                          |   | 3,913   |      |  |   | 8,195   |   |  |   | 7,647   |  
|                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                |  |                            | 13,017  |   |                          |   | 16,584  |      |  |   | 25,960  |   |  |   | 31,751  |  
|                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Less amortization expense on:                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Capitalized signing bonuses, net                |  |                            | (10,335 | ) |                          |   | (9,622  | )    |  |   | (20,614 | ) |  |   | (18,535 | )
|Capitalized customer deferred acquisition costs |  |                            | (3,987  | ) |                          |   | (3,729  | )    |  |   | (7,837  | ) |  |   | (7,338  | )
|                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                |  |                            | (14,322 | ) |                          |   | (13,351 | )    |  |   | (28,451 | ) |  |   | (25,873 | )
|                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Balance at end of period                        |  | $                          | 75,246  |   |                          | $ | 76,376  |      |  | $ | 75,246  |   |  | $ | 76,376  |  
|                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

Net signing bonus adjustments from estimated amounts to actual were $(0.2) million and $0.9
million, respectively, for the three months ended June 30, 2009 and 2008, and $(0.2) million and $0.9 million, respectively, for the six months ended June 30, 2009 and 2008. Net signing bonus adjustments are netted against additions in the
table above. Positive signing bonus adjustments occur when the actual gross



17



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



margin generated by the merchant contract during the first year exceeds the estimated gross margin for that year, resulting in the underpayment of the
up-front signing bonus and would be paid to the relevant salesperson. Negative signing bonus adjustments could result from the prior overpayment of signing bonuses and would be recovered from the relevant salesperson.

Fully amortized signing bonuses of $9.1 million and $6.9 million respectively, were written off during the three month periods ended June 30, 2009
and 2008, and $16.2 million and $13.5 million respectively, were written off during the six month periods ended June 30, 2009 and 2008. In addition, fully amortized customer deferred acquisition costs of $3.8 million and $3.6 million,
respectively, were written off during the three month ended June 30, 2009 and 2008, and $7.4 million and $6.6 million, respectively, were written off during the six month ended June 30, 2009 and 2008.

The Company believes that no impairment of capitalized customer acquisition costs has occurred as of June 30, 2009 and December 31, 2008.

7. Intangible Assets and Goodwill

Intangible AssetsIntangible assets consisted of the following as of June 30, 2009 and December 31, 2008:



|                       |  |                   |        |                              |   |           |  |   |        |  |                                       
|---------------------- |  | ----------------- | ------ | ---------------------------- | - | --------- |  | - | ------ |  | --------------------------------------
|                       |  | June 30, 2009     |        | Amortization Life and Method
|                       |  | Gross Assets      |        | AccumulatedAmortization      |   | Net Asset | 
|                       |  | (In thousands)    |        |                             
|Finite Lived Assets:   |  |                   |        |                              |   |           |  |   |        |  |                                       
|Customer relationships |  | $                 | 28,590 |                              | $ | 1,734     |  | $ | 26,856 |  | 2 to 18 years  proportional cash flow
|Software               |  |                   | 9,154  |                              |   | 2,916     |  |   | 6,238  |  | 2 to 5 years  straight line          
|Non-compete agreements |  |                   | 994    |                              |   | 350       |  |   | 644    |  | 2 to 5 years  straight line          
|Other                  |  |                   | 384    |                              |   | 110       |  |   | 274    |  | 2 to 5 years  straight line          
|                       |  |                   |        |                              |   |           |  |   |        |  |                                       
|                       |  | $                 | 39,122 |                              | $ | 5,110     |  | $ | 34,012 |  |                                       
|                       |  |                   |        |                              |   |           |  |   |        |  |                                       
|                       |  |                  
|                       |  | December 31, 2008 |        | Amortization Life and Method
|                       |  | Gross Assets      |        | AccumulatedAmortization      |   | Net Asset | 
|                       |  | (In thousands)    |        |                             
|Finite Lived Assets:   |  |                   |        |                              |   |           |  |   |        |  |                                       
|Customer relationships |  | $                 | 28,749 |                              | $ | 1,024     |  | $ | 27,725 |  | 3 to 18 years  proportional cash flow
|Software               |  |                   | 9,154  |                              |   | 1,503     |  |   | 7,651  |  | 3 to 5 years  straight line          
|Non-compete agreements |  |                   | 994    |                              |   | 211       |  |   | 783    |  | 3 to 5 years  straight line          
|Other                  |  |                   | 326    |                              |   | 32        |  |   | 294    |  | 3 to 5 years  straight line          
|                       |  |                   |        |                              |   |           |  |   |        |  |                                       
|                       |  | $                 | 39,223 |                              | $ | 2,770     |  | $ | 36,453 |  |                                       
|                       |  |                   |        |                              |   |           |  |   |        |  |                                       

Amortization expense related to the intangible assets was $1,161,000 and $597,000, respectively,
for the three months ended June 30, 2009 and 2008 and $2,299,000 and $647,000, respectively, for the six months ended June 30, 2009 and 2008.



18



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



The estimated amortization expense related to intangible assets for the next five years is as
follows:



|                                      |  |                |       
|------------------------------------- |  | -------------- | ------
|For the Twelve Months Ending June 30, |  |               
|                                      | 
|                                      |  | (In thousands)
|2010                                  |  | $              | 4,624 
|2011                                  |  |                | 4,081 
|2012                                  |  |                | 2,008 
|2013                                  |  |                | 1,842 
|2014                                  |  |                | 1,947 
|Thereafter                            |  |                | 19,510
|                                      |  |                |       
|                                      |  | $              | 34,012
|                                      |  |                |       

GoodwillThe changes in the carrying amount of goodwill for the six months ended June 30,
2009 and 2008 were as follows:



|                                                              |  |                          |        |      |   |        |  
|------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                                                              |  | Six Months EndedJune 30, |       
|                                                              |  | 2009                     |        | 2008 |  
|                                                              |  | (In thousands)           |       
|Beginning balance                                             |  | $                        | 58,456 |      | $ | 5,489  |  
|Goodwill acquired during the period                           |  |                          |       |      |   | 53,345 |  
|Effects of foreign currency translation                       |  |                          | 401    |      |   | (163   | )
|Other, primarily adjustments to allocations of purchase price |  |                          | 193    |      |   | 103    |  
|                                                              |  |                          |        |      |   |        |  
|Ending balance                                                |  | $                        | 59,050 |      | $ | 58,774 |  
|                                                              |  |                          |        |      |   |        |  

8. Merchant Deposits and Loss Reserves

The Companys merchants have the liability for any charges properly reversed by the cardholder through a mechanism known as a chargeback. If the
merchant is unable to pay this amount, the Company will be liable to the Visa and MasterCard networks for the reversed charges. Under FIN 45, the Company determined that the fair value of its obligation to stand ready to perform is minimal. The
Company requires personal guarantees, merchant deposits and letters of credit from certain merchants to minimize its obligation. Merchants deposits also include deposits representing debit processing and check processing funds in transit.
Previously, the debit processing funds in transit were netted against receivables. As of June 30, 2009 and December 31, 2008, the Company held merchant deposits totaling $32.7 million and $15.8 million, respectively, and letters of credit
totaling $438,000 and $513,000, respectively.

The Visa and MasterCard networks generally allow chargebacks up to four months after the
later of the date the transaction is processed or the delivery of the product or service to the cardholder. As the majority of the Companys SME merchant transactions involve the delivery of the product or service at the time of the
transaction, a reasonable basis for determining an estimate of the Companys exposure to chargebacks is the last four months processing volume on the SME portfolio, which was $19.8 billion and $18.7 billion for the four months ended
June 30, 2009 and December 31, 2008, respectively. However, for the four months ended June 30, 2009 and December 31, 2008, the Company was presented with $11.2 million and $10.2 million, respectively, in chargebacks by issuing
banks. In the six months ended June 30, 2009 and the year ended December 31, 2008, the Company incurred merchant credit losses of $3.0 million and $5.1 million, respectively, on total SME dollar volume processed of $28.5 billion and $57.9
billion, respectively. These credit losses are included in processing and servicing costs in the Companys consolidated statements of income.

The loss recorded by the Company for chargebacks associated with any individual merchant is typically small, due both to the relatively small size and the processing profile of the Companys SME merchants. However, from time to time
the Company will encounter instances of merchant fraud, and the resulting chargeback losses may be considerably more significant to the Company. The Company has established a contingent reserve for estimated currently existing credit and fraud
losses on its consolidated balance sheets, amounting to $1,157,000 on June 30, 2009 and $1,097,000 on December 31, 2008. This reserve is determined by performing an analysis of the Companys historical loss experience applied to
current processing volume and exposures.



19



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



A summary of the activity in the loss reserve for the three and six month periods ended June 30,
2009 and 2008 was as follows:



|                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                            |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                            |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|                            |  | (In thousands)             |       
|Beginning balance           |  | $                          | 1,122  |   |                          | $ | 737    |      |  | $ | 1,097  |   |  | $ | 663    |  
|Additions to reserve        |  |                            | 1,674  |   |                          |   | 1,288  |      |  |   | 3,203  |   |  |   | 2,767  |  
|Charges against reserve (a) |  |                            | (1,639 | ) |                          |   | (1,284 | )    |  |   | (3,143 | ) |  |   | (2,689 | )
|                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Ending balance              |  | $                          | 1,157  |   |                          | $ | 741    |      |  | $ | 1,157  |   |  | $ | 741    |  
|                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



|(a) | Included in these amounts are payroll segment losses of $23,000 and $19,000, respectively, for the three months ended June 30, 2009 and 2008, and $101,000 and $39,000,
respectively, for the six months ended June 30, 2009 and 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Chargebacks originating from large national merchant
bank card processing are processed and carried by Fifth Third Bank, which is the Companys third-party outsourced processor for settling large national merchant accounts.

9. Accrued Buyout Liability

A summary of the accrued buyout liability was as follows as of
June 30, 2009 and December 31, 2008:



|                                                  |  |                |        |   |                  |   |         |  
|------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------- | -
|                                                  |  | June 30,2009   |        |   | December 31,2008 |  
|                                                  |  | (In thousands) |       
|Vested Relationship Managers and sales managers   |  | $              | 39,605 |   |                  | $ | 39,879  |  
|Unvested Relationship Managers and sales managers |  |                | 1,607  |   |                  |   | 1,161   |  
|                                                  |  |                | 41,212 |   |                  |   | 41,040  |  
|Less current portion                              |  |                | (9,726 | ) |                  |   | (10,547 | )
|                                                  |  |                |        |   |                  |   |         |  
|Long-term portion of accrued buyout liability     |  | $              | 31,486 |   |                  | $ | 30,493  |  
|                                                  |  |                |        |   |                  |   |         |  

In calculating the accrued buyout liability for unvested Relationship Managers and sales managers
at June 30, 2009 and December 31, 2008, the Company has assumed that 31% of the unvested Relationship Managers and sales managers will vest in the future, which represents the Companys historical vesting rate. A 5% increase to 36% in
the expected vesting rate would have increased the accrued buyout liability for unvested Relationship Managers and sales managers by $0.2 million at June 30, 2009 and December 31, 2008.

A summary of the activity in the accrued buyout liability for the three and six month periods ended June 30, 2009 and 2008 was as follows:



|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                       |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|                                       |  | (In thousands)             |       
|Beginning balance                      |  | $                          | 40,709 |   |                          | $ | 39,226 |      |  | $ | 41,040 |   |  | $ | 37,773 |  
|Increase in settlement obligation, net |  |                            | 2,694  |   |                          |   | 2,835  |      |  |   | 5,076  |   |  |   | 5,498  |  
|Buyouts                                |  |                            | (2,191 | ) |                          |   | (2,040 | )    |  |   | (4,904 | ) |  |   | (3,250 | )
|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Ending balance                         |  | $                          | 41,212 |   |                          | $ | 40,021 |      |  | $ | 41,212 |   |  | $ | 40,021 |  
|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

The increase in the settlement obligation is due to new SME merchant account signings, as well as
same-store sales growth, if any, and changes in gross margin, partially offset by the impact of SME merchant attrition.



20



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



10. Credit Facility

On May 30, 2008, the Company entered into an amended and restated credit agreement (the Amended and Restated Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and certain
lenders who may become a party to the Credit Agreement from time to time. The May 30, 2008 Amended and Restated Credit Agreement amended and restated in its entirety the previous credit agreement entered into on September 5, 2007 between
the same parties that are parties to the Amended and Restated Credit Agreement. On August 3, 2009, the Company and JPMorgan Chase Bank, N.A. amended the Amended and Restated Credit Agreement to exclude a certain amount of charges related to the
Processing System Intrusion that may be incurred or accrued by the Company in determining the Companys compliance with the financial covenants in the Amended and Restated Credit Agreement, provide the lenders with a security interest in the
assets of the Company, and increase the interest margin charged on borrowings.

The Amended and Restated Credit Agreement provides for a
revolving credit facility in the aggregate amount of up to $50 million (the Revolving Credit Facility), of which up to $5 million may be used for the issuance of letters of credit and up to $5 million is available for
swing line loans. Upon the prior approval of the administrative agent, the Company may increase the total commitments by $25 million for a total commitment under the Revolving Credit Facility of $75 million. The Revolving Credit Facility
is available to the Company on a revolving basis commencing on May 30, 2008 and ending on September 4, 2012.

The Amended and
Restated Credit Agreement also provides for a term credit facility in the aggregate amount of up to $25 million (the Term Credit Facility). The Term Credit Facility requires amortizing payments in the amount of $2,083,333 on the
last business day of each fiscal quarter commencing March 31, 2009. All principal and interest not previously paid on the Term Credit Facility will mature and be due and payable on December 31, 2011. Amounts borrowed and repaid under the
Term Credit Facility may not be re-borrowed. Principal payments due under the Term Credit Facility as of June 30, 2009 were as follows:



|                             |  |                |       
|---------------------------- |  | -------------- | ------
|Twelve Months Ended June 30, |  |               
|                             |  | (In thousands)
|2010                         |  | $              | 8,333 
|2011                         |  |                | 8,333 
|2012                         |  |                | 4,167 
|                             |  |                |       
|                             |  | $              | 20,833
|                             |  |                |       

The Amended and Restated Credit Agreement contains covenants, which include the maintenance of
certain leverage and fixed charge coverage ratios, limitations on the Companys indebtedness, liens on its properties and assets, investments in, and loans to, other business units, the Companys ability to enter into business combinations
and asset sales, and certain other financial and non-financial covenants. In accordance with the August 3, 2009 amendment to the Amended and Restated Credit Agreement, the Company was in compliance with these covenants as of June 30, 2009.

Under the terms of the Amended and Restated Credit Agreement, the Company may borrow, at its option, at interest rates equal to one, two,
three or nine month adjusted LIBOR rates or equal to the greater of prime and the federal funds rate plus 0.50%, in each case plus a margin determined by the Companys current leverage ratio.

The Revolving Credit Facility may be used to finance future construction projects and acquisitions in accordance with the terms of the Credit Agreement
and for other working capital needs and general corporate purposes. On May 30, 2008, the Company borrowed $50 million under the Revolving Credit Facility and $25 million under the Term Credit Facility. All of the proceeds of both such
borrowings were applied to finance and pay expenses related to the acquisition of certain assets from ADS Alliance Data Systems, Inc., as described in more detail in Note 3. At June 30, 2009, there was $50.0 million outstanding under the
Revolving Credit Facility and $20.8 million outstanding under the Term Credit Facility. The weighted average interest rate at June 30, 2009 was 0.93%. Total fees and direct costs paid for the Amended and Restated Credit Agreement through
June 30, 2009 were $306,000. These costs are being amortized to interest expense over the life of the Amended and Restated Credit Agreement.



21



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



11. Stockholders Equity

Common Stock Repurchases. On January 13, 2006, the Companys Board of Directors authorized management to repurchase up to the lesser of (a) 1,000,000 shares of the Companys common
stock or (b) $25,000,000 worth of its common stock in the open market. On August 1, 2006, the Companys Board of Directors authorized management to repurchase up to an additional 1,000,000 shares of its common stock in the open market
using the proceeds from the exercise of stock options.

On May 3, 2007, the Companys Board of Directors eliminated the
restriction in the August 1, 2006 repurchase authorization which required the Company to use only proceeds from the issuance of stock options for repurchases, and increased the total authorized number of shares to be repurchased to
2,000,000. Management intends to use these authorizations to repurchase shares opportunistically as a means of offsetting dilution from shares issued upon the exercise of options under employee benefit plans, and to use cash to take advantage of
declines in the Companys stock price. Management has no obligation to repurchase shares under the authorization, and the specific timing and amount of the stock repurchase will vary based on market conditions, securities law limitations
and other factors.

Under these authorizations, the Company repurchased an aggregate of 2,924,684 shares of its common stock at a cost of
$65.1 million, or an average cost of $22.25 per share. This includes 350,400 shares repurchased at a cost of $3.2 million, or $9.14 per share during the six months ended June 30, 2009 and 781,584 shares repurchased at a cost of $18.0 million,
or $23.02 per share during the six months ended June 30, 2008.

On February 28, 2008, the Companys Board of Directors
resolved to retire all common shares as repurchased and include the retired shares in the authorized and unissued shares of the Company. Until February 28, 2008, the final disposition of the repurchased shares had not been decided. At
retirement, the excess of the purchase price of the treasury stock over the stated value is allocated between additional paid-in capital and retained earnings.

Dividends on Common Stock.During the six months ended June 30, 2009 and the twelve months ended December 31, 2008, the Companys Board of Directors declared the following quarterly cash
dividends on common stock:



|                                       |  |                   |  |                    |  |                             |      
|-------------------------------------- |  | ----------------- |  | ------------------ |  | --------------------------- | -----
|Date Declared                          |  | Record Date       |  | Date Paid          |  | Amount PaidPer Common Share
|Six Months Ended June 30, 2009:        |  |                   |  |                    | 
|February 20, 2009                      |  | March 9, 2009     |  | March 16, 2009     |  | $                           | 0.025
|May 7, 2009                            |  | May 25, 2009      |  | June 15, 2009      |  | $                           | 0.01 
|                                       | 
|Twelve Months Ended December 31, 2008: |  |                   | 
|February 13, 2008                      |  | February 28, 2008 |  | March 15, 2008     |  | $                           | 0.09 
|April 30, 2008                         |  | May 23, 2008      |  | June 15, 2008      |  | $                           | 0.09 
|August 5, 2008                         |  | August 22, 2008   |  | September 15, 2008 |  | $                           | 0.09 
|November 4, 2008                       |  | November 24, 2008 |  | December 15, 2008  |  | $                           | 0.09 

On August 3, 2009, the Companys Board of Directors declared a quarterly cash dividend
of $0.01 per share of common stock, payable on September 15, 2009 to stockholders of record as of August 25, 2009.

12. Commitments and
Contingencies

LitigationThe Company is involved in certain legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of the Company, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on its
results of operations, financial condition or cash flows.



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Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



The Company is also subject to lawsuits, claims, and investigations which are the result of the
Processing System Intrusion. See Contingenciesbelow for a description of the Processing System Intrusion.

LeasesThe Company leases various office spaces and certain equipment under operating leases with remaining terms ranging up to eight years. The majority of the office space lease agreements contain renewal options and
generally require the Company to pay certain operating expenses.

Future minimum lease commitments under non-cancelable leases as of
June 30, 2009 were as follows:



|                                  |  |                |     |   |                 |   |       
|--------------------------------- |  | -------------- | --- | - | --------------- | - | ------
|                                  |  | (In thousands)
|Twelve Months Ended June 30,      |  | CapitalLeases  |     |   | OperatingLeases
|2010                              |  | $              | 243 |   |                 | $ | 4,514 
|2011                              |  |                | 194 |   |                 |   | 3,417 
|2012                              |  |                | 9   |   |                 |   | 2,149 
|2013                              |  |                |    |   |                 |   | 1,769 
|2014                              |  |                |    |   |                 |   | 1,307 
|Thereafter                        |  |                |    |   |                 |   | 2,584 
|                                  |  |                |     |   |                 |   |       
|Total Minimum Payments            |  |                | 446 |   |                 | $ | 15,740
|                                  |  |                |     |   |                 |   |       
|Interest Amount                   |  |                | (40 | ) |                 |   |       
|                                  |  |                |     |   |                 |   |       
|Present Value of Minimum Payments |  | $              | 406 |   |                 |   |       
|                                  |  |                |     |   |                 |   |       

Rent expense for leased property was $760,000 and $796,000, respectively, for the three months
ended June 30, 2009 and 2008, and $1.6 million and $1.2 million, respectively, for the six months ended June 30, 2009 and 2008.

CommitmentsRobert O. Carr, the Companys Chairman and Chief Executive Officer, has entered into an amendment to his employee confidential information and non-competition agreement under which he is entitled to
severance pay equal to his base salary and medical benefits for 24 months (or 12 months if upon a change in control of the Company) and a pro-rated bonus in the event he is terminated by the Company other than for cause. Certain other officers of
the Company have entered into an employee confidential information and non-competition agreement under which they are entitled to severance pay equal to their base salary and medical benefits for 12 months and a pro-rated bonus in the event they are
terminated by the Company other than for cause. There were no payouts under these agreements in 2008 or 2009.

The following table reflects
the Companys other significant contractual obligations, including leases from above, as of June 30, 2009:



|                               |  |                        |        |                 |   |             |  |             |        |                  |   |       |  |   |      
|------------------------------ |  | ---------------------- | ------ | --------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | ----- |  | - | -----
|                               |  | Payments Due by Period
|Contractual Obligations        |  | Total                  |        | Less than1 year |   | 1 to 3Years |  | 3 to 5years |        | More than5 years
|                               |  | (In thousands)        
|Processing providers (a)       |  | $                      | 18,977 |                 | $ | 11,642      |  | $           | 7,335  |                  | $ |      |  | $ |     
|Telecommunications providers   |  |                        | 6,666  |                 |   | 4,704       |  |             | 1,962  |                  |   |      |  |   |     
|Office and equipment leases    |  |                        | 15,740 |                 |   | 4,515       |  |             | 5,565  |                  |   | 3,076 |  |   | 2,584
|Term Credit Facility (b)       |  |                        | 20,833 |                 |   | 8,333       |  |             | 12,500 |                  |   |      |  |   |     
|Construction and equipment (c) |  |                        | 6,771  |                 |   | 6,771       |  |             |       |                  |   |      |  |   |     
|Capital lease obligations      |  |                        | 446    |                 |   | 243         |  |             | 203    |                  |   |      |  |   |     
|                               |  |                        |        |                 |   |             |  |             |        |                  |   |       |  |   |      
|                               |  | $                      | 69,433 |                 | $ | 36,208      |  | $           | 27,565 |                  | $ | 3,076 |  | $ | 2,584
|                               |  |                        |        |                 |   |             |  |             |        |                  |   |       |  |   |      



|(a) | The Company has agreements with several third-party processors to provide to us on a non-exclusive basis payment processing and transmittal, transaction authorization and data
capture services, and access to various reporting tools. Our agreements with third-party processors require the Company to submit a minimum monthly number of transactions or volume for processing. If the Company submits a number of transactions or
volume that is lower than the minimum, it is required to pay the third party processors the fees that they would have received if the Company had submitted the required minimum number or volume of transactions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



|(b) | In addition, the Company has $50 million outstanding under its Revolving Credit Facility at June 30, 2009. The Revolving Credit Facility is available to the Company on a
revolving basis commencing on May 30, 2008 and ending on September 4, 2012.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | These amounts relate to contractual commitments we have for constructing our new service center in Jeffersonville, Indiana. Additional contractual commitments will be entered into
as we progress with the development of this site. Through June 30, 2009, we have spent approximately $59.8 million of our cash on our new service center, including $1.7 million to acquire land.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ContingenciesThe Company collects and stores sensitive data about its merchant customers and bank cardholders. If the Companys
network security is breached or sensitive merchant or cardholder data is misappropriated, the Company could be exposed to assessments, fines or litigation costs.

On January 20, 2009, the Company publicly announced the discovery of the Processing System Intrusion. The Processing System Intrusion involved malicious software that appears to have been used to collect
in-transit, unencrypted payment card data while it was being processed by the Company during the transaction authorization process. Such data is not required to be encrypted while in transit under current payment card industry guidelines. The
Company had received confirmation of its compliance with the Payment Card Initiative Data Security Standard (PCI-DSS) from a third-party assessor each year since the standard was announced, including most recently in April 2008, before
the discovery of the Processing System Intrusion. Subsequent to the discovery of the Processing System Intrusion, we were advised by Visa that based on Visas investigation of the Processing System Intrusion, Visa had removed us from Visa
published list of PCI-DSS compliant service providers. In April 2009, we were re-certified as PCI- DSS compliant and the assessors report attesting to such re-certification has been reviewed and approved by Visa. As such, the Company was
returned to Visas Global List of PCI DSS Validated Service Providers. Card data that could have been exposed by the Processing System Intrusion included card numbers, expiration dates, and certain other information from the magnetic stripe on
the back of the payment card (including, for a small percentage of transactions, the cardholders name). However, the cardholder information that the Company processes does not include addresses or Social Security numbers. Also, the Company
believes that no unencrypted PIN data was captured. The Company believes the breach has been contained and did not extend beyond 2008.

For
the three and six months ended June 30, 2009, the Company expensed a total of $19.4 million and $32.0 million, respectively, or about $0.32 and $0.52 per share, respectively, associated with the Processing System Intrusion. Over the six months ended
June 30, 2009, the majority of these charges, or $22.1 million, related to fines imposed by certain card brands in April 2009 against the Company and its sponsor banks and a settlement offer made by the Company in an attempt to resolve certain of
the claims asserted against its sponsor banks (who have asserted rights to indemnification from the Company pursuant to the Companys agreements with them) relating to the Processing System Intrusion. Notwithstanding its belief that the Company
and its sponsor banks have strong defenses against the claims that are the subject of the settlement offer, the Company decided to make the settlement offer in an attempt to avoid the costs and uncertainty of litigation. The Company is prepared to
vigorously defend itself against all the claims relating to the Processing System Intrusion that have been asserted against it and its sponsor banks to date. In particular, the Company is prepared to vigorously contest (and it has recommended to its
sponsor banks that they vigorously contest) through all available means, including litigation if necessary, any liability that may be asserted or assessments that may be imposed against the Company or its sponsor banks by certain card brands.

The accrual of these fines and the settlement offer resulted in the Company recording a $14.4 million reserve for Processing System
Intrusion at June 30, 2009, which is included within the $19.4 million expensed for the three months ended June 30, 2009. To date the Company has not received any response to the settlement offer and it should not be assumed that the Company will
resolve the claims that are the subject of the settlement offer for the amount of the settlement offer. The Company understands that the portion of this reserve related to the settlement offer is required by SFAS No. 5 based solely on the fact the
Company tendered an offer of settlement in the amount it has accrued. The ultimate cost of resolving the claims that are the subject of the settlement offer may substantially exceed the amount the Company has accrued. Moreover, even if the claims
that are the subject of the settlement offer were resolved for the amount the Company has accrued, that would still leave unresolved most of the claims that have been asserted against the Company or its sponsor banks relating to the Processing
System Intrusion. The Company feels it has strong defenses to all the claims that have been asserted against it and its sponsor banks relating to the Processing System Intrusion, including those claims that are not the subject of the settlement
offer. However, it is possible the Company will end up resolving the claims that are not the subject of the settlement offer, either through settlements or pursuant to litigation, for amounts that are significantly greater than the amount it has
reserved to date in respect of those claims. The Company may also be required to reserve significant additional amounts in the future, either in respect of the claims that are the subject of the settlement offer or in respect of the other claims
that have been asserted against the Company and its sponsor banks relating to the Processing System Intrusion (or in respect of both categories of claims).



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



The remainder of the expenses and accruals related to the Processing System Intrusion recorded in
the three and six months ended June 30, 2009 were primarily for legal fees and costs the Company incurred for investigations, remedial actions and crisis management services.

While the Company has determined that the Processing System Intrusion has triggered other loss contingencies, to date an unfavorable outcome is not
believed by it to be probable on those claims that are pending or have been threatened against it, or that the Company considers to be probable of assertion against it, and the Company does not have sufficient information to reasonably estimate the
loss it would incur in the event of an unfavorable outcome on any such claim. Therefore, in accordance with SFAS No. 5, no reserve/liability has been recorded as of June 30, 2009 with respect to any such claim, except for the fines
actually assessed by MasterCard and Visa and the amount of the settlement offer by the Company. As more information becomes available, if the Company should determine that an unfavorable outcome is probable on such a claim and that the amount of
such probable loss that it will incur on that claim is reasonably estimable, it will record a reserve for the claim in question. If and when, the Company records such a reserve, it could be material and could adversely impact its results of
operations, financial condition and cash flow.

Additional costs the Company expects to incur for investigations, remedial actions, legal
fees, and crisis management services related to the Processing System Intrusion will be recognized as incurred. Such costs are expected to be material and could adversely impact the Companys results of operations, financial condition and cash
flow.

13. Segments

The determination
of the Companys business segments is based on how the Company monitors and manages the performance of its operations. The Companys operating segments are strategic business units that offer different products and services. They are
managed separately because each business requires different marketing strategies, personnel skill sets and technology.

The Company has two
reportable segments, as follows: (1) Card, which provides payment processing and related services for bank card transactions; and (2) Other. The Card segment includes CPOS, our Canadian payments processing subsidiary, since March 2008, and
Network Services since May 2008. Goodwill and intangible assets resulting from the acquisitions of CPOS and Network Services are reported in the Card segment. At June 30, 2009, goodwill related to CPOS and Network Services was $51.6 million.
The Other segment includes Payroll, which provides payroll and related tax filing services, and PrepaidCard, which provides prepaid cards, stored-value card solutions and loyalty card solutions. The PrepaidCard operating segment includes Debitek,
General Meters and Chockstone since its November 2008 acquisition. Neither the Payroll operating segment nor the PrepaidCard operating segment meet the SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information defined thresholds for determining individually reportable segments. Goodwill and intangible assets resulting from the acquisition of Debitek, General Meters and Chockstone are reported in the Other segment. At June 30,
2009, goodwill related to Debitek, General Meters and Chockstone was $7.4 million.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



The Company allocates revenues, expenses, assets and liabilities to segments only where directly
attributable. The unallocated corporate administration amounts are costs attributed to finance, corporate administration, human resources, legal and corporate services. Reconciling items represent elimination of inter-segment income and expense
items, and are included to reconcile segment data to the consolidated financial statements. At June 30, 2009 and 2008, 49% and 48% respectively, of the Other segments total assets were funds that the Company holds as a fiduciary in its
Payroll services activities for payment to taxing authorities. The Company does not have any major individual customers.

A summary of the
Companys segments for the three and six month periods ended June 30, 2009 and 2008 was as follows:



|                                            |  |                |         |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|------------------------------------------- |  | -------------- | ------- | ------------ | - | ------ | ----------------------------------------- |  | - | ---------------- | - |  | ----------- | -------- | - |  | - | ------- | -
|                                            |  | CardSegment    |         | OtherSegment |   |        | UnallocatedCorporateAdministrationAmounts |  |   | ReconcilingItems |   |  | TotalAmount |         
|                                            |  | (In thousands) |        
|Three Months Ended June 30, 2009            |  |                |         |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|Total revenues                              |  | $              | 410,036 |              | $ | 7,378  |                                           |  | $ |                 |   |  | $           | (41      | ) |  | $ | 417,373 |  
|Depreciation and amortization               |  |                | 4,589   |              |   | 519    |                                           |  |   | 193              |   |  |             |         |   |  |   | 5,301   |  
|Interest income                             |  |                | 28      |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 28      |  
|Interest expense                            |  |                | 571     |              |   | 11     |                                           |  |   |                 |   |  |             | (37      | ) |  |   | 545     |  
|Net income (loss) attributable to Heartland |  |                | 3,716   |              |   | (262   | )                                         |  |   | (6,069           | ) |  |             |         |   |  |   | (2,615  | )
|Total assets                                |  |                | 585,582 |              |   | 52,247 |                                           |  |   |                 |   |  |             | (135,921 | ) |  |   | 501,908 |  
|                                            |  |                |         |              |  
|Three Months Ended June 30, 2008            |  |                |         |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|Total revenues                              |  | $              | 388,974 |              | $ | 5,584  |                                           |  | $ |                 |   |  | $           | (4       | ) |  | $ | 394,554 |  
|Depreciation and amortization               |  |                | 2,804   |              |   | 242    |                                           |  |   | 126              |   |  |             |         |   |  |   | 3,172   |  
|Interest income                             |  |                | 169     |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 169     |  
|Interest expense                            |  |                | 751     |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 751     |  
|Net income (loss) attributable to Heartland |  |                | 16,277  |              |   | 33     |                                           |  |   | (4,841           | ) |  |             |         |   |  |   | 11,469  |  
|Total assets                                |  |                | 547,386 |              |   | 47,351 |                                           |  |   |                 |   |  |             | (125,955 | ) |  |   | 468,782 |  
|                                            |  |                |         |              |  
|Six Months Ended June 30, 2009              |  |                |         |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|Total revenues                              |  | $              | 774,648 |              | $ | 14,994 |                                           |  | $ |                 |   |  | $           | (97      | ) |  | $ | 789,545 |  
|Depreciation and amortization               |  |                | 8,841   |              |   | 977    |                                           |  |   | 386              |   |  |             |         |   |  |   | 10,204  |  
|Interest income                             |  |                | 57      |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 57      |  
|Interest expense                            |  |                | 1,153   |              |   | 22     |                                           |  |   |                 |   |  |             | (89      | ) |  |   | 1,086   |  
|Net income (loss) attributable to Heartland |  |                | 7,248   |              |   | (560   | )                                         |  |   | (11,758          | ) |  |             |         |   |  |   | (5,070  | )
|Total assets                                |  |                | 585,582 |              |   | 52,247 |                                           |  |   |                 |   |  |             | (135,921 | ) |  |   | 501,908 |  
|                                            |  |                |         |              |  
|Six Months Ended June 30, 2008              |  |                |         |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|Total revenues                              |  | $              | 722,257 |              | $ | 11,925 |                                           |  | $ |                 |   |  | $           | (9       | ) |  | $ | 734,173 |  
|Depreciation and amortization               |  |                | 5,097   |              |   | 499    |                                           |  |   | 250              |   |  |             |         |   |  |   | 5,846   |  
|Interest income                             |  |                | 469     |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 469     |  
|Interest expense                            |  |                | 1,097   |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 1,097   |  
|Net income (loss) attributable to Heartland |  |                | 28,681  |              |   | 489    |                                           |  |   | (8,724           | ) |  |             |         |   |  |   | 20,446  |  
|Total assets                                |  |                | 547,386 |              |   | 47,351 |                                           |  |   |                 |   |  |             | (125,955 | ) |  |   | 468,782 |  



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements

(unaudited)



14. Earnings Per Share

The Company presents earnings per share data in accordance with SFAS No. 128, Earnings Per Share, as amended, (SFAS No. 128), which establishes the standards for the
computation and presentation of basic and diluted earnings per share data. Under SFAS No. 128, the dilutive effect of stock options is excluded from the calculation of basic earnings per share but included in diluted earnings per share. The
following is a reconciliation of the amounts used to calculate basic and diluted earnings per share (In thousands, except per share data):



|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|----------------------------------------------- |  | ------------------------------------- | ------ | ------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | ------
|                                                |  | Three Months EndedJune 30,            |        | Six Months EndedJune 30,
|                                                |  | 2009                                  |        |                          | 2008 |   | 2009   |  |   | 2008  
|                                                |  | (In thousands, except per share data)
|Basic:                                          |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss) attributable to Heartland     |  | $                                     | (2,615 | )                        |      | $ | 11,469 |  | $ | (5,070 | ) |  | $ | 20,446
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Weighted average common stock outstanding       |  |                                       | 37,458 |                          |      |   | 37,387 |  |   | 37,496 |   |  |   | 37,464
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Earnings (loss) per share                       |  | $                                     | (0.07  | )                        |      | $ | 0.31   |  | $ | (0.14  | ) |  | $ | 0.55  
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|                                                |  |                                       |        |                         
|Diluted:                                        |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss) attributable to Heartland     |  | $                                     | (2,615 | )                        |      | $ | 11,469 |  | $ | (5,070 | ) |  | $ | 20,446
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|                                                |  |                                       |        |                         
|Basic weighted average common stock outstanding |  |                                       | 37,458 |                          |      |   | 37,387 |  |   | 37,496 |   |  |   | 37,464
|Effect of dilutive instruments:                 |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Stock options                                   |  |                                       | 290    |                          |      |   | 1,301  |  |   | 299    |   |  |   | 1,291 
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Diluted weighted average shares outstanding     |  |                                       | 37,748 |                          |      |   | 38,688 |  |   | 37,795 |   |  |   | 38,755
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       
|Earnings (loss) per share                       |  | $                                     | (0.07  | )                        |      | $ | 0.30   |  | $ | (0.14  | ) |  | $ | 0.53  
|                                                |  |                                       |        |                          |      |   |        |  |   |        |   |  |   |       

15. Fair Value of Financial Instruments

Management uses methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair
value. Fair value equals quoted market price for securities held as available-for-sale investments. Other financial instruments include cash and cash equivalents, certificates of deposit, receivables, various accounts payable and accrued expenses.
The fair value of such financial instruments approximates their carrying value due to their short maturity and pricing terms.

16. Subsequent Events

See Note 1, Organization and Operations, for a discussion of the Processing System Intrusion.

See Note 10, Credit Facility for a discussion of the August 3, 2009 amendment to the Amended and Restated Credit Agreement.



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##### Table of Contents

PART I FINANCIAL INFORMATION (continued)



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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated
financial statements and the accompanying notes to condensed consolidated financial statements included elsewhere in this report, and the consolidated financial statements, notes to consolidated financial statements and Managements Discussion
and Analysis of Financial Condition and Results of Operations and the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended.

Forward Looking Statements

Unless the context requires otherwise, references in this report to
the Company, we, us, and our refer to Heartland Payment Systems, Inc. and our subsidiaries.

Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements that are based on our managements beliefs and assumptions and on information currently available to our management. Forward-looking
statements include the information concerning our possible or assumed future results of operations, the impact of the systems breach of our processing system, business strategies, financing plans, competitive position, industry environment,
potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as
the words believe, expect, anticipate, intend, plan, estimate or similar expressions.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in the forward-looking statements. You should understand that many important factors,
in addition to those discussed elsewhere in this report, could cause our results to differ materially from those expressed in the forward-looking statements. Certain of these factors are described in Item 1A. Risk Factors contained in our
Annual Report on Form 10K for the year ended December 31, 2008, as amended, and include, without limitation, the significantly unfavorable economic conditions facing the United States, the results and effects of the Processing System Intrusion
including the outcome of investigations, litigation and claims, the extent of cardholder information compromised and the consequences to our business, including the effects on sales and costs in connection with the system breach, our competitive
environment, the business cycles and credit risks of our merchants, chargeback liability, merchant attrition, problems with our bank sponsors, our reliance on other bank card payment processors, our inability to pass increased interchange fees along
to our merchants, system failures and government regulation.

Overview

General

Our primary business is to provide bank card payment processing services to merchants
in the United States and Canada. This involves facilitating the exchange of information and funds between merchants and cardholders financial institutions, providing end-to-end electronic payment processing services to merchants, including
merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support and risk management. Our merchant customers primarily fall into two categories; our
core small and mid-sized merchants (referred to as Small and Midsized Enterprises, or SME merchants) and large national merchants, primarily in the petroleum industry. We also provide additional services to our merchants, such as payroll
processing, gift and loyalty programs, and paper check processing, and we sell and rent point-of-sale devices and supplies.

On
January 20, 2009, we publicly announced the Processing System Intrusion, which apparently had occurred during some portion of 2008. See Processing System Intrusion for more detail.



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##### Table of Contents

At June 30, 2009, we provided our bank card payment processing services to approximately 172,850
active SME merchants located across the United States. This represents a 2.4% increase over the 168,850 active SME merchants at December 31, 2008 and a 4.9% increase over the 164,750 active SME merchants at June 30, 2008. At June 30,
2009, we provided bank card payment processing services to approximately 78 large national merchants with approximately 54,153 locations. Our total bank card processing volume for the three months ended June 30, 2009 was $17.8 billion, a 3.8%
increase from the $17.1 billion processed during the three months ended June 30, 2008. Our total bank card processing volume for the six months ended June 30, 2009 was $33.3 billion, a 9.7% increase from the $30.4 billion processed during
the six months ended June 30, 2008. Bank card processing volume for the three and six months ended June 30, 2009 includes $2.6 billion and $4.6 billion, respectively, for large national merchants acquired with Network Services, compared to
$1.9 billion for both the three and six months ended June 30, 2008. Additionally, we provided bank card processing services to approximately 6,000 merchants in Canada.

Merchant attrition is expected in the payment processing industry in the ordinary course of business. We experience attrition in merchant bank card
processing volume resulting from several factors, including business closures, transfers of merchants accounts to our competitors and account closures that we initiate due to heightened credit risks relating to, or contract breaches by,
merchants, and when applicable same store sales contraction. We measure total processing volume attrition against all SME merchants that were processing with us in the same month a year earlier. During the six months ended June 30, 2009, we
experienced 23.2% average annualized attrition of our SME bank card processing volume. During 2008, 2007 and 2006, we experienced average annual attrition in our SME bank card processing volume of 17.3%, 12.6% and 11.1%, respectively. Much of our
attrition is related to business closures, which accelerated in 2009 and 2008 due to weak economic conditions, and in 2009 and 2008 our volume attrition was significantly impacted by overall contraction in same stores sales. In 2009, attrition was
also likely increased modestly due to merchant concern regarding the Processing System Intrusion.

In our SME business, same store sales
growth or contraction, which represents the change in bank card processing volume for all bank card merchants that were processing with us in the same month a year earlier, contracted 9.7% on average in the three months ended June 30, 2009,
compared to contraction of 0.1% on average in the three months ended June 30, 2008. Same store sales growth or contraction results from the combination of the increasing use by consumers of bank cards for the purchase of goods and services at
the point of sale, and sales growth or contraction experienced by our retained SME merchants. The following table compares our same store sales growth or contraction for the 2008, 2007, 2006 and 2005 full years, and by quarter during 2009 and 2008:



|                    |  |                                     |   
|------------------- |  | ----------------------------------- | --
|                    |  | Same StoreSales Growth(Contraction) |   
|2005 full year      |  | 7.5                                 | % 
|2006 full year      |  | 4.2                                 | % 
|2007 full year      |  | 3.0                                 | % 
|2008 full year      |  | (2.1                                | )%
|                    | 
|2008 first quarter  |  | 0.6                                 | % 
|2008 second quarter |  | (0.1                                | )%
|2008 third quarter  |  | (2.0                                | )%
|2008 fourth quarter |  | (6.8                                | )%
|                    | 
|2009 first quarter  |  | (7.6                                | )%
|2009 second quarter |  | (9.7                                | )%

The increasing contraction rates we experienced in our SME business during the second, third and
fourth quarters of 2008, and the first and second quarters of 2009, are attributable to economic conditions including impacts from severely contracted credit markets, a weak housing market, historically low consumer and investor confidence and
increasing unemployment rates. Management believes that all of



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these factors have negatively impacted consumer confidence, disposable income, spending and behavior, which has impacted the businesses of our SME merchants.
In addition, Management believes that the current challenging economic conditions and depressed consumer confidence, as well as the general contraction in credit availability, and a decrease in usage of credit cards by consumers, may continue to
negatively impact our business.

Increases in our direct sales force, including our Relationship Managers, historically have led to
significant growth in the total SME merchants for whom we process and the gross margin generated by those merchants. Our sales managers are compensated based on their success in growing the sales force and increasing the total SME merchant base in
their regions. Our sales force grew from 1,117 Relationship Managers at December 31, 2007 and 1,166 at December 31, 2008, to 1,210 at June 30, 2009. We measure the production of our sales force by gross margin installed, which
reflects the expected annual gross profit from a merchant contract after deducting processing and servicing costs associated with that revenue. Our newly installed gross margin for the six months ended June 30, 2009 decreased 12.5% from the
gross margin we installed during the six months ended June 30, 2008. We attribute this decline in newly installed gross margin to the weak economy and negative publicity related to the Processing System Intrusion, which required our sales force
to focus on merchant retention instead of new gross margin installs.

As a result of our commission-only compensation system for our sales
force, we are able to increase the size of our sales force with minimal upfront costs. However, since we pay signing bonuses and commissions approximating 92% of the gross margin generated by a SME merchant in its first year, growth in SME merchant
base consumes significant capital, as it typically takes approximately one years processing to cover the outlays for signing bonuses, commissions and payroll taxes.

We have developed a number of proprietary payment processing systems to increase our operating efficiencies and distribute our processing and merchant data to our three main constituencies: our merchant base, our
sales force and our customer service staff. In 2001, we began providing authorization and data capture services to our merchants through our own front-end processing system, which we call HPS Exchange. In 2005, we began providing clearing,
settlement and merchant accounting services through our own internally developed back-end processing system, which we call Passport. Passport enables us to more effectively customize these services to the needs of our Relationship Managers and
merchants.

During the three months ended June, 2009 and 2008, we processed approximately 87% and 82%, respectively, of our SME merchant
transactions through HPS Exchange. At June 30, 2009 and 2008, we were processing approximately 99% and 98%, respectively, of our active SME merchants on Passport. We completed converting substantially all of our SME merchants to Passport during
the second quarter of 2006. This conversion has decreased our operating costs per transaction. With our conversion to Passport, our internally developed systems are providing substantially all aspects of most of our merchants processing needs,
excluding Network Services. Previously, we relied on third party vendors for many of these services including bank card authorization and data capture services, settlement and merchant accounting services. We will continue to process a minority of
our transactions through third party systems.

Our bankcard revenue earned in our SME business is recurring in nature, as we typically
enter into three-year service contracts with our card processing merchants that, in order to qualify for the agreed-upon pricing, require the merchant to achieve bank card processing volume minimums. Most of our SME revenue is payment processing
fees, which are a combination of a fee equal to a percentage of the dollar amount of each Visa or MasterCard transaction we process plus a flat fee per transaction. We make mandatory payments of interchange fees to card-issuing banks through Visa
and MasterCard and dues and assessment fees to Visa and MasterCard. Our SME gross bankcard processing revenue is largely driven by Visa and MasterCard volume processed by merchants with whom we have processing contracts; as such, we also generally
benefit from consumers increasing use of bank cards in place of cash and checks, and sales growth experienced by our retained bank card merchants. In contrast, Network Services revenues are largely driven by the number of transactions it
processes (whether settled, or only authorized), not its processing volume, as the larger merchants which comprise Network Services customer base pay on a per transaction basis for processing services.



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We also provide payroll processing services throughout the United States. At June 30, 2009, we
processed payroll for 8,887 customers, an increase of 22.6% from 7,249 payroll customers at June 30, 2008. At December 31, 2008, we processed payroll for 7,738 payroll customers.

Processing System Intrusion

On
January 20, 2009, we publicly announced the discovery of a criminal breach of our payment systems environment (the Processing System Intrusion). The Processing System Intrusion involved malicious software that appears to have been
used to collect in-transit, unencrypted payment card data while it was being processed by us during the transaction authorization process. Such data is not required to be encrypted while in transit under current payment card industry guidelines. We
had received confirmation of our compliance with the Payment Card Initiative Data Security Standard (PCI-DSS) from a third-party assessor each year since the standard was announced, including most recently in April 2008, before the
discovery of the Processing System Intrusion. Subsequent to the discovery of the Processing System Intrusion, we were advised by Visa that based on Visas investigation of the Processing System Intrusion, Visa had removed us from Visa
published list of PCI-DSS compliant service providers. In April 2009, we were re-certified as PCI- DSS compliant and the assessors report attesting to such re-certification has been reviewed and approved by Visa. As such, we were returned to
Visas Global List of PCI DSS Validated Service Providers. Card data that could have been exposed by the Processing System Intrusion included card numbers, expiration dates, and certain other information from the magnetic stripe on the back of
the payment card (including, for a small percentage of transactions, the cardholders name). However, the cardholder information that we processes does not include addresses or Social Security numbers. Also, we believe that no unencrypted PIN
data was captured. We believe the breach has been contained and did not extend beyond 2008.

For the three and six months ended June 30,
2009, we expensed a total of $19.4 million and $32.0 million, respectively, or about $0.32 and $0.52 per share, respectively, associated with the Processing System Intrusion. Over the six months ended June 30, 2009, the majority of these charges, or
$22.1 million, related to fines imposed by certain card brands in April 2009 against us and our sponsor banks and a settlement offer we made in an attempt to resolve certain of the claims asserted against our sponsor banks (who have asserted rights
to indemnification from us pursuant to our agreements with them) relating to the Processing System Intrusion. Notwithstanding our belief that we and our sponsor banks have strong defenses against the claims that are the subject of the settlement
offer, we decided to make the settlement offer in an attempt to avoid the costs and uncertainty of litigation. We are prepared to vigorously defend ourselves against all the claims relating to the Processing System Intrusion that have been asserted
against us and our sponsor banks to date. In particular, we are prepared to vigorously contest (and we have recommended to our sponsor banks that they vigorously contest) through all available means, including litigation if necessary, any liability
that may be asserted or assessments that may be imposed against us or our sponsor banks by certain card brands.

The accrual of these fines
and the settlement offer resulted in a $14.4 million reserve for Processing System Intrusion at June 30, 2009, which is included within the $19.4 million expensed for the three months ended June 30, 2009. To date, we have not received any response
to our settlement offer and it should not be assumed that we will resolve the claims that are the subject of the settlement offer for the amount of the settlement offer. We understand that the portion of this reserve related to the settlement offer
is required by SFAS No. 5, Accounting for Contingencies (SFAS No. 5), based solely on the fact we tendered an offer of settlement in the amount we have accrued. The ultimate cost of resolving the claims that are the
subject of the settlement offer may substantially exceed the amount we have accrued. Moreover, even if the claims that are the subject of the settlement offer were resolved for the amount we have accrued, that would still leave unresolved most of
the claims that have been asserted against us or our sponsor banks relating to the Processing System Intrusion. We feel we have strong defenses to all the claims that have been asserted against us and our sponsor banks relating to the Processing
System Intrusion, including those claims that are not the subject of the settlement offer. However, it is possible we will end up resolving the claims that are not the subject of the settlement offer, either through settlements or pursuant to
litigation, for amounts that are significantly greater than the amount we have reserved to date in respect of those claims. We may also be required to reserve significant additional amounts in the future, either in respect of the claims that are the
subject of the settlement offer or in respect of the other claims that have been asserted against us and our sponsor banks relating to the Processing System Intrusion (or in respect of both categories of claims).



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The remainder of the expenses and accruals related to the Processing System Intrusion recorded in the
three and six months ended June 30, 2009 were primarily for legal fees and costs we incurred for investigations, remedial actions and crisis management services.

While we have determined that the Processing System Intrusion has triggered other loss contingencies, to date an unfavorable outcome is not believed to be probable on those claims that are pending or have been
threatened against us, or that we consider to be probable of assertion against us, and we do not have sufficient information to reasonably estimate the loss we would incur in the event of an unfavorable outcome on any such claim. Therefore, in
accordance with SFAS No. 5, no reserve/liability has been recorded as of June 30, 2009 with respect to any such claim, except for the fines actually assessed by MasterCard and Visa and the amount of the settlement offer by the Company. As
more information becomes available, if we should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that we will incur on that claim is reasonably estimable, we will record a reserve for the
claim in question. If and when we record such a reserve, it could be material and could adversely impact our results of operations, financial condition and cash flow.

Additional costs we expect to incur for investigations, remedial actions, legal fees, and crisis management services related to the Processing System Intrusion will be recognized as incurred. Such costs are expected
to be material and could adversely impact our results of operations, financial condition and cash flow.

Acquisitions in 2008

In May 2008, we acquired the net assets of the Network Services business unit (Network Services) of Alliance Data Network Services LLC
(Alliance), for a cash payment of $92.5 million. The acquisition was financed through a combination of cash on hand and our credit facilities. Network Services provides processing of credit and debit cards to large national merchants,
primarily in the petroleum industry. From the date we acquired Network Services through December 31, 2008, it settled $8.7 billion of bank card processing volume on 317 million transactions and during the six months ended June 30,
2009 it settled $4.6 billion of bank card processing volume on 227 million transactions. Additionally, Network Services generated revenues on 1.6 billion and 1.1 billion transactions it authorized through its front-end card processing systems
during the period from the date we acquired it through December 31, 2008 and in the six months ended June 30, 2009, respectively.

In March 2008, the Company acquired a majority interest in Collective Point of Sale Solutions Ltd. (CPOS) for a net cash payment of $10.1 million. CPOS is a Canadian provider of payment processing services and secure
point-of-sale solutions. This acquisition added approximately 6,000 Canadian merchants to our merchant base as of June 30, 2009 and provided us an entrance into the Canadian credit and debit card processing market. We are now able to service
merchants that have locations in both the United States and Canada.

In November 2008, we acquired the net assets of Chockstone, Inc.
(Chockstone) for a net cash payment of $4.0 million. The Chockstone acquisition expands our ability to equip merchants nationwide with enhanced gift card and loyalty programs. Chockstones loyalty platform helps businesses of all
sizes identify their most profitable customers and market to their unique needsthereby increasing the frequency of their visits and the size of their average purchases. Chockstones loyalty marketing and gift card solutions are used by
leading brands in more than 65,000 restaurants, convenience stores, and other retail locations in North America.

Second Quarter of 2009 Financial
Results

Our financial results for the three months ended June 30, 2009 reflect the challenging economic conditions and
resulting soft consumer spending, and the costs we incurred related to the Processing



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System Intrusion. Poor economic conditions unfavorably impacted both new merchant installs and processing volume at existing merchants. For the three months
ended June 30, 2009, we recorded a net loss of $2.6 million, or $0.07 per share, compared to net income of $11.5 million, or $0.30 per share, in the three months ended June 30, 2008. During the three months ended June 30, 2009, we
recorded pretax charges of $19.4 million, or about $0.32 per share, for costs we incurred for investigations, remedial actions, legal fees, crisis management services and a settlement offer. The following is a summary of our financial results for
the three months ended June 30, 2009:



| |  |  | Bank card processing volume during the three months ended June 30, 2009 increased 3.8% to $17.8 billion from $17.1 billion during the three months ended
June 30, 2008; however the 2009 period included $2.6 billion of processing volume from Network Services, compared with $1.9 billion for the three months ended June 30, 2008, accounting for most of the increase. Excluding Network Services
processing volume, we received percentage-based revenues on processing volume of $15.2 billion, a decrease of 0.2% from the $15.3 billion processed in the three months ended June 30, 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net revenue, which we define as total revenues less interchange fees and dues, assessments and fees, increased 14.1% from $93.4 million in the three months ended
June 30, 2008 to $106.6 million in the three months ended June 30, 2009. The increase in net revenue was driven by the addition of revenues from Network Services and the year-over-year increase in SME merchant processing revenue. Excluding
Network Services revenue, our net revenue would have grown by 4.9% in the three months ended June 30, 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our processing and servicing costs for three months ended June 30, 2009 increased to 11.9% of our total revenues, up from 10.9% of total revenues for the three
months ended June 30, 2008. The increase reflects Network Services processing and servicing costs of $9.3 million, or 40.5% of its total revenues, for the three months ended June 30, 2009. The increase was also due to costs
associated with the increased bank card processing volume, increases in merchant losses due to weak economic conditions and increases in the costs of operating our Jeffersonville, Indiana service center, particularly the costs of support personnel,
including field servicing managers, and depreciation and amortization as we place into service a greater portion of the new service center.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our income from operations, which we also refer to as operating income, declined to $15.6 million for the three months ended June 30, 2009 from $19.1 million
for the three months ended June 30, 2008. This decline was primarily due to the unfavorable impact which challenging economic conditions had on our revenues. Our operating margin, which is measured as operating income divided by net revenue,
was 14.7% for the three months ended June 30, 2009, compared to 20.4% for the three months ended June 30, 2008. In addition to the impact of the economy, the year-over-year decline in our operating margin was also due to the addition of
Network Services, whose operating margin is significantly lower than that of our historic business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. These condensed consolidated financial statements are unaudited. In our opinion, the unaudited condensed consolidated financial
statements include all normal recurring adjustments necessary for a fair presentation of our financial position at June 30, 2009, our results of operations, our changes in stockholders equity and our cash flows for the six months ended
June 30, 2009 and 2008. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ended December 31, 2009. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Our significant accounting policies are more fully described in note 2 to our consolidated
financial statements included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended. The critical accounting estimates described here are those that are most important to the depiction
of our financial condition and results of operations, including those whose application requires managements most subjective judgment in making estimates about the effect of matters that are inherently uncertain. The line items on our income
statement and balance sheet which are impacted by managements estimates are described below.



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Revenue

Our bank card processing revenue is derived from processing and settling Visa and MasterCard bank card transactions for our merchant customers. Our most significant expense related to the generation of those revenues
is interchange fees, which are set by the Visa and MasterCard card networks, and paid to the card issuing banks. For our SME merchants bank card processing, we do not offset bank card processing revenues and interchange fees because our business
practice is to advance the interchange fees to most of our merchants when settling their daily transactions (thus paying the full amount of the transaction to the merchant), and then to collect our full discount fees from our merchants on the first
business day of the next month. We believe this policy aids in new business generation, as our merchants benefit from bookkeeping simplicity. However, this results in our carrying a large receivable from our merchants at each period-end, and a
corresponding but smaller payable to our sponsor banks, which are settled on the first business day after the period-end. As we are at risk for the receivables, we record the associated revenues on a gross processing revenue basis in our
consolidated income statements. Certain of our competitors report their processing revenue net of interchange fees. This is because the card issuing banks make their payments to these competitors net of those interchange fees, and these acquirers
pay this reduced amount to their merchants. Since the acquisition of Network Services, we also record a portion of our processing revenues net of interchange fees because the daily cash settlement with Network Services merchants is net of
interchange fees.

Capitalized Customer Acquisition Costs

Capitalized customer acquisition costs consist of (1) up-front signing bonuses paid to Relationship Managers and sales managers, referred to as the salesperson or salespersons, for the establishment of new
merchant relationships, and (2) deferred acquisition cost representing the estimated cost of buying out the commissions of vested salespersons at some point in the future. Pursuant to Staff Accounting Bulletin Topic 13, Revenue
Recognition, and the Financial Accounting Standards Board (FASB) Technical Bulletin No. 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, capitalized customer acquisition costs
represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with SME merchant contracts. The capitalized customer acquisition costs are amortized using a method which approximates a proportional
revenue approach over the initial three-year term of the merchant contract.

The amount of the up-front signing bonus paid for new SME bank
card, payroll and check processing accounts is based on the estimated gross margin for the first year of the merchant contract. Estimated gross margin is calculated by deducting interchange fees, dues, assessments and fees and costs incurred in
underwriting, processing, servicing and managing the risk of the account from gross processing revenue. The gross signing bonuses paid during the six months ended June 30, 2009 and 2008 were $17.9 million and $23.1 million, respectively, and
for the full year ended December 31, 2008 were $43.8 million. The signing bonus paid, amount capitalized, and related amortization are adjusted at the end of the first year to reflect the actual gross margin generated by the merchant contract
during that year. The net signing bonus adjustments made during the six months ended June 30, 2009 and 2008 were negative $(0.2) million and positive $0.9 million, respectively. Positive signing bonus adjustments occur when the actual gross
margin generated by the merchant contract during the first year exceeds the estimated gross margin for that year, resulting in the underpayment of the up-front signing bonus and would be paid to the relevant salesperson. Negative signing bonus
adjustments could result from prior overpayments of up-front signing bonuses, and would be recovered from the relevant salesperson. The amount of signing bonuses paid which remained subject to adjustment at June 30, 2009 was $38.6 million.

The deferred acquisition cost is accrued over the first year of merchant processing, consistent with the build-up in the accrued buyout
liability, which is described below.

Management evaluates the capitalized customer acquisition costs for impairment at each balance sheet
date by comparing, on a pooled basis by vintage month of origination, the expected future net cash flows from underlying merchant relationships to the carrying amount of the capitalized customer acquisition costs. If the estimated future net cash
flows are lower than the recorded carrying amount, indicating an impairment of the value of the capitalized customer acquisition costs, the impairment loss will be charged to operations. We have not recognized an impairment loss for the six months
ended June 30, 2009 or the year ended December 31, 2008.



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Accrued Buyout Liability

We pay our salespersons residual commissions based on the gross margin generated from the monthly processing activity of SME merchants signed by them. We refer to these residual commissions as the owned
portion of such commissions, or portfolio equity. The salesperson has no obligation to perform additional services for the merchant for so long as the merchant continues processing with us. We accrue the buyout liability, which
represents the estimated current settlement cost of buying out all vested and expected-to-vest salespersons for the owned portion of such commissions. We also record a deferred acquisition cost asset related to those buyouts, and amortize that asset
as an expense over the initial 3-year contract term.

We consider a salesperson to be vested once he or she has established merchant
relationships that generate the equivalent of $10,000 of monthly gross margin. Vested status entitles the salesperson to his or her residual commissions for as long as the merchant processes with us, even if the salesperson is no longer employed by
us.

The accrued buyout liability is based on the SME merchants we have under contract at the balance sheet date, the gross margin we
generated from those accounts in the prior twelve months, the owned commission rate, and the fixed buyout multiple of 2.5 times the commissions. The liability related to a new merchant is therefore zero when the merchant is installed,
and increases over the twelve months following the installation date.

For unvested salespersons, the accrued buyout liability is accrued
over the expected vesting period; however, no deferred acquisition cost is capitalized as future services are required in order to vest. In calculating the accrued buyout liability for unvested salespersons, we have assumed that 31% of unvested
salespersons will vest in the future, which represents our historical vesting rate. A 5% increase to 36% in the expected vesting rate would have increased the accrued buyout liability for unvested salespersons by $0.2 million at June 30, 2009
and December 31, 2008.

Buyout payments made to salespersons reduce the outstanding accrued buyout liability.
Given our view of the duration of the cash flows associated with a pool of merchant contracts, we believe that the benefits of such buyouts significantly exceed the cost, which typically represents 2 to 2 1/2years of commissions. If the cash flows associated with a pool of bought out
contracts does not exceed this cost, we will incur an economic loss on our decision to buyout the contracts. During the six months ended June 30, 2009 and 2008 we made buyout payments of approximately $4.9 million and $3.2 million,
respectively, and during the 2008 full year, we made buyout payments of approximately $7.0 million. We expect to make buyout payments in the future, subject to available cash, as such buyouts reduce the monthly payments we will have to make to our
salespersons for such merchants in the future.

Reserve for Processing System Intrusion

The Processing System Intrusion requires us to make assumptions and estimates concerning the outcomes and related costs and losses in connection with
various lawsuits, claims, and investigations. We make our estimates of costs based on our best judgments and anticipated outcomes of these lawsuits, claims, and investigations.

For the three and six months ended June 30, 2009, we expensed a total of $19.4 million and $32.0 million, respectively, or about $0.32 and $0.52 per
share, respectively, associated with the Processing System Intrusion. Over the six months ended June 30, 2009, the majority of these charges, or $22.1 million, related to fines imposed by certain card brands in April 2009 against us and our sponsor
banks and a settlement offer we made in an attempt to resolve certain of the claims asserted against our sponsor banks (who have asserted rights to indemnification from us pursuant to our agreements with them) relating to the Processing System
Intrusion (see Processing System Intrusion for further discussion). The accrual of these fines and the settlement offer resulted in a $14.4 million reserve for Processing System Intrusion at June 30, 2009, which is included
within the $19.4 million expensed for the three months ended June 30, 2009. To date we have not received any response to our settlement offer and you should not assume that we will resolve the claims that are the subject of the settlement offer for
the amount of the settlement offer. We understand that the portion of this reserve related to the settlement offer is required by SFAS No. 5 based solely on the fact we tendered an offer of settlement in the amount we have accrued. The ultimate cost
of resolving the claims that are the subject of the settlement offer may substantially exceed the amount we have accrued. Moreover, even if the claims that are the subject of the settlement offer were resolved for the amount we have accrued, that
would still leave unresolved most of the claims that have been asserted against us or our sponsor banks relating to the Processing System Intrusion. We feel we have strong defenses to all the claims that have been asserted against us and our sponsor
banks relating to the Processing System Intrusion, including those claims that are not the subject of the settlement offer. However, it is possible we will end up resolving the claims that are not the subject of the settlement offer, either through
settlements or pursuant to litigation, for amounts that are significantly greater than the amount we have reserved to date in respect of those claims. We may also be required to reserve significant additional amounts in the future, either in respect
of the claims that are the subject of the settlement offer or in respect of the other claims that have been asserted against us and our sponsor banks relating to the Processing System Intrusion (or in respect of both categories of claims).



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The remainder of the expenses and accruals related to the Processing System Intrusion recorded in the
three and six months ended June 30, 2009 were primarily for legal fees and costs we incurred for investigations, remedial actions and crisis management services.

While we have determined that the Processing System Intrusion has triggered other loss contingencies, to date an unfavorable outcome is not believed to be probable on those claims that are pending or have been
threatened against us, or that we consider to be probable of assertion against us, and we do not have sufficient information to reasonably estimate the loss we would incur in the event of an unfavorable outcome on any such claim. Therefore, in
accordance with SFAS No. 5, no reserve/liability has been recorded as of June 30, 2009 with respect to any such claim, except for the fines actually assessed by MasterCard and Visa and the amount of the settlement offer by the Company. As
more information becomes available, if we should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that we will incur on that claim is reasonably estimable, we will record a reserve for the
claim in question. If and when we record such a reserve, it could be material and could adversely impact our results of operations, financial condition and cash flow.

Merchant Deposits and Loss Reserves

Disputes between a cardholder and a merchant periodically
arise as a result of, among other things, the cardholders 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 by the card-issuing bank and charged to the merchant. If the merchant is unable to fund the refund, we must do so. We also bear the risk of reject losses arising
from the fact that we collect our fees from our merchants on the first day after the monthly billing period. If the merchant has gone out of business during such period, we may be unable to collect such fees. We maintain cash deposits or require the
pledge of a letter of credit from certain merchants, generally those with higher average transaction size where the card is not present when the charge is made or the product or service is delivered after the charge is made, in order to offset
potential contingent liabilities such as chargebacks and reject losses that would arise if the merchant went out of business. At June 30, 2009 and December 31, 2008, we held merchant deposits totaling $32.7 million and $15.8 million,
respectively. Most chargeback and reject losses are charged to processing and servicing as they are incurred. However, we also maintain a loss reserve against losses including major fraud losses, which are both less predictable and involve larger
amounts. The loss reserve was established using historical loss rates, applied to recent processing volume. At June 30, 2009 and December 31, 2008, our loss reserve totaled $1,157,000 and $1,097,000 respectively. Aggregate bank card
merchant losses, including losses charged to operations and the loss reserve, were $3.0 million and $2.6 million for the six months ended June 30, 2009 and 2008, respectively, and were $5.1 million for the year ended December 31, 2008.

Chargebacks originating from large national merchant bank card processing are processed and carried by Fifth Third Bank, which is our
third-party outsourced processor for settling large national merchant accounts.

Stock Options

We adopted SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123R) on January 1, 2006. This statement requires
companies to expense employee share-based payments under the fair value method. Pursuant to SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the
requisite service period. We elected to adopt the modified-prospective-transition method, as provided by SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this transitional method, we are required to record
compensation expense for all awards granted after the date of adoption using grant-date fair value estimated in accordance with the provisions of SFAS No. 123R and for the unvested portion of previously granted awards using the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123.



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In the third quarter of 2008, our Board of Directors approved a performance-based stock option program.
Under this program, we granted 2.5 million performance-based stock options to our employees. These stock options were granted to those employees who the Board of Directors determined could have significant impact on successfully integrating the
recently acquired Network Services business and effectively executing our growth plan. These stock options have a five-year term and will vest in equal amounts in 2011, 2012 and 2013 only if over the term of the stock options, both of the following
performance conditions are achieved:



| |  |  | Consolidated net revenue grows at a compound annual rate of at least 15%; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | Fully diluted EPS grows at a compound annual rate of at least 25%.
| | - |  | ------------------------------------------------------------------

Management believes that achieving these performance conditions is not more likely than not to occur, therefore no share-based compensation expense has been recorded for these stock options. The evaluation
of the likelihood of achieving these performance conditions will be repeated regularly, and at such point that vesting of some or all of the options becomes more likely than not, share-based compensation expense will be recorded.

In the second quarter of 2009, our Board of Directors approved grants of 930,000 stock options subject to multiple vesting conditions. Under these stock
options, the employee must provide continuous service over four years and a market price condition must be satisfied within those four years. These stock options have a five-year term and could vest in equal amounts in 2010, 2011, 2012 and 2013 only
if during the four-year service period, the price of our common stock as reported by the New York Stock Exchange exceeds two or three times the exercise price for 30 consecutive trading days. The grant date fair values of these multiple vesting
condition options are recognized as compensation expense over their four-year service periods.

We estimate the grant date fair value of
the stock options we issue using a Black-Scholes valuation model for plain-vanilla stock options and performance-based stock options, and we use a lattice valuation model to measure grant date fair value for stock options containing
market vesting conditions. Our assumption for expected volatility is based on our historical volatility for those option grants whose expected life fall within a period we have sufficient historical volatility data related to market trading of our
own Common Stock. For those option grants whose expected life is longer than we have sufficient historical volatility data related to market trading of our own Common Stock, we determine an expected volatility assumption by referencing the average
volatility experienced by a group of our public company peers. For plain-vanilla stock options, we estimate the expected life of a stock option based on the simplified method as provided by the staff of the SEC in Staff Accounting Bulletins 107 and
110. The simplified method is used because, at this point, we do not have sufficient historical information to develop reasonable expectations about future exercise patterns. For the performance-based options, the expected life is estimated based on
the average of three possible performance condition outcomes. Our dividend yield assumption is based on dividends expected to be paid over the expected life of the stock option. Our risk-free interest rate assumption for stock options granted is
determined by using U.S. treasury rates of the same period as the expected option term of each stock option.

The weighted-average fair
value of options we granted during 2009, 2008 and 2007 were $2.40, $6.11 and $7.64, respectively. We did not grant any stock options during the three months ended March 31, 2009. The fair value of options granted during 2009, 2008 and 2007 was
estimated at the grant date using the following weighted average assumptions:



|                        |  |                   |   |  |                  |   |  |                   |  
|----------------------- |  | ----------------- | - |  | ---------------- | - |  | ----------------- | -
|                        |  | 2009              |   |  | 2008             |   |  | 2007              |  
|Expected volatility     |  | 39                | % |  | 35               | % |  | 31                | %
|Expected life           |  | 3.75 to 4.0 years |   |  | 2.5 to 4.0 years |   |  | 2.5 to 3.75 years |  
|Dividends               |  | 0.48              | % |  | 1.36             | % |  | 0.90              | %
|Risk-free interest rate |  | 1.81              | % |  | 2.98             | % |  | 4.29              | %



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Also in the second quarter of 2009, our Board of Directors approved grants of 336,000 Restricted Share
Units. These Restricted Share Units are nonvested share awards which will vest over a four-year service period. The closing price of the Companys common stock on the grant date equals the grant date fair value of these nonvested share awards
and will be recognized as compensation expense over their four-year service periods.

Income Taxes

We account for income taxes pursuant to the provisions of Statement of Financial Accounting Standards 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. Judgments are required in determining the amount and probability of future taxable income, which in turn is critical to a determination of whether a valuation reserve against the deferred tax asset or liability is appropriate.

The FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109(FIN No. 48), in September 2006. FIN No. 48 clarifies the accounting for the recognition and measurement of tax benefits associated with uncertain tax positions and defines criterion that an individual tax
position must meet for any part of that position to be recognized or continue to be recognized in the financial statements. An uncertain tax position exists if it is unclear how a transaction will be treated under tax law. At June 30, 2009, our
reserve for unrecognized tax benefits related to uncertain tax positions was $1.7 million.

We have not recorded any unrecognized tax
benefits that would be reasonably possible to significantly increase or decrease within 12 months of the reporting date. As of June 30, 2009, a total of $1.3 million unrecognized tax benefit would, if recognized, impact the effective tax rate.



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Results of Operations

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The following table shows
certain income statement data as a percentage of revenue for the periods indicated (in thousands of dollars):



|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------------- | ----- | -- | ------------------------------ | - | ------- | ----------------- |  | ----- | ------ |  | - | ------- | - |  | ------ | --
|                                                                          |  | Three Months EndedJune
30,2009 |         |   | % of TotalRevenue |       |    | Three Months EndedJune
30,2008 |   |         | % of TotalRevenue |  |       | Change | 
|                                                                          |  |                                |         |   | Amount            |       |    | %                              |  
|                                                                          |  |                                |         |   |                   |      
|Total Revenues                                                            |  | $                              | 417,373 |   |                   | 100.0 | %  |                                | $ | 394,554 |                   |  | 100.0 | %      |  | $ | 22,819  |   |  | 5.8    | % 
|Costs of Services:                                                        |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Interchange                                                               |  |                                | 291,235 |   |                   | 69.8  | %  |                                |   | 283,830 |                   |  | 71.9  | %      |  |   | 7,405   |   |  | 2.6    | % 
|Dues, assessments and fees                                                |  |                                | 19,586  |   |                   | 4.7   | %  |                                |   | 17,340  |                   |  | 4.4   | %      |  |   | 2,246   |   |  | 13.0   | % 
|Processing and servicing                                                  |  |                                | 49,866  |   |                   | 11.9  | %  |                                |   | 42,827  |                   |  | 10.9  | %      |  |   | 7,039   |   |  | 16.4   | % 
|Customer acquisition costs                                                |  |                                | 12,757  |   |                   | 3.1   | %  |                                |   | 12,274  |                   |  | 3.1   | %      |  |   | 483     |   |  | 3.9    | % 
|Depreciation and amortization                                             |  |                                | 3,874   |   |                   | 0.9   | %  |                                |   | 2,465   |                   |  | 0.6   | %      |  |   | 1,409   |   |  | 57.2   | % 
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Total costs of services                                                   |  |                                | 377,318 |   |                   | 90.4  | %  |                                |   | 358,736 |                   |  | 90.9  | %      |  |   | 18,582  |   |  | 5.2    | % 
|General and administrative                                                |  |                                | 24,430  |   |                   | 5.9   | %  |                                |   | 16,747  |                   |  | 4.2   | %      |  |   | 7,683   |   |  | 45.9   | % 
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Total expenses                                                            |  |                                | 401,748 |   |                   | 96.3  | %  |                                |   | 375,483 |                   |  | 95.2  | %      |  |   | 26,265  |   |  | 7.0    | % 
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Income from operations                                                    |  |                                | 15,625  |   |                   | 3.7   | %  |                                |   | 19,071  |                   |  | 4.8   | %      |  |   | (3,446  | ) |  | (18.1  | )%
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Other income (expense):                                                   |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Interest income                                                           |  |                                | 28      |   |                   |      |    |                                |   | 169     |                   |  |      |        |  |   | (141    | ) |  | (83.4  | )%
|Interest expense                                                          |  |                                | (545    | ) |                   | (0.1  | )% |                                |   | (751    | )                 |  | (0.2  | )%     |  |   | 206     |   |  | 27.4   | % 
|Provision for processing system intrusion                                 |  |                                | (19,380 | ) |                   | (4.6  | )% |                                |   |        |                   |  |      |        |  |   | (19,380 | ) |  |        |   
|Other, net                                                                |  |                                | 2       |   |                   |      |    |                                |   | 1       |                   |  |      |        |  |   | 1       |   |  |        |   
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Total other income (expense)                                              |  |                                | (19,895 | ) |                   | (4.8  | )% |                                |   | (581    | )                 |  | (0.1  | )      |  |   | (19,314 | ) |  |        |   
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Income (loss) before income taxes                                         |  |                                | (4,270  | ) |                   | (1.0  | )% |                                |   | 18,490  |                   |  | 4.7   | %      |  |   | (22,760 | ) |  | (123.1 | )%
|Provision for income taxes                                                |  |                                | (1,669  | ) |                   | (0.4  | )% |                                |   | 6,994   |                   |  | 1.8   | %      |  |   | (8,663  | ) |  | (123.9 | )%
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Net income (loss)                                                         |  |                                | (2,601  | ) |                   | (0.6  | )% |                                |   | 11,496  |                   |  | 2.9   | %      |  |   | (14,097 | ) |  | (122.6 | )%
|Less: Net income (loss) attributable to noncontrolling minority interests |  |                                | 14      |   |                   |       |    |                                |   | 27      |                   |  |       |        |  |   | (13     | ) |  | (48.1  | )%
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Net income (loss) attributable to Heartland                               |  | $                              | (2,615  | ) |                   | (0.6  | )% |                                | $ | 11,469  |                   |  | 2.9   | %      |  | $ | (14,084 | ) |  | (122.8 | )%
|                                                                          |  |                                |         |   |                   |       |    |                                |   |         |                   |  |       |        |  |   |         |   |  |        |   

Total Revenues. Total revenues increased by 5.8% from $394.6 million in the
three months ended June 30, 2008 to $417.4 million in the three months ended June 30, 2009, primarily as a result of a $22.2 million, or 5.8%, increase in processing revenues. The breakout of our total revenues for the three months ended
June 30, 2009 and 2008 was as follows (in thousands of dollars):



|                                                                                                                                                                                              |  |                            |         |                       |   |         |  |   |        |  |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | --------------------- | - | ------- |  | - | ------ |  | ---- | -
|                                                                                                                                                                                              |  | Three Months EndedJune 30, |         | Change fromPrior Year |  
|                                                                                                                                                                                              |  | 2009                       |         | 2008                  |   | Amount  |  | % |       
|Processing revenues, gross (a)                                                                                                                                                                |  | $                          | 406,861 |                       | $ | 384,687 |  | $ | 22,174 |  | 5.8  | %
|Payroll processing revenues                                                                                                                                                                   |  |                            | 3,471   |                       |   | 3,015   |  |   | 456    |  | 15.1 | %
|Equipment-related income                                                                                                                                                                      |  |                            | 7,041   |                       |   | 6,852   |  |   | 189    |  | 2.8  | %
|                                                                                                                                                                                              |  |                            |         |                       |   |         |  |   |        |  |      |  
|Total Revenues                                                                                                                                                                                |  | $                          | 417,373 |                       | $ | 394,554 |  | $ | 22,819 |  | 5.8  | %
|                                                                                                                                                                                              |  |                            |         |                       |   |         |  |   |        |  |      |  
|(a)    Includes Visa and MasterCard bankcard processing revenues, AMEX fees, Discover fees, check processing fees, customer service fees, gift card, loyalty and other miscellaneous
revenue. | 

The $22.2 million increase in processing revenues from $384.7 million in the three months ended
June 30, 2008 to $406.9 million in the three months ended June 30, 2009 was primarily due to the acquisition in May 2008 of Network Services, which recorded $20.2 million of transaction-based processing revenues in the current year,
compared to $7.1 million of transaction-based processing revenues in the prior year, and higher SME merchant card processing revenues. Revenues from our SME bank card processing increased on a higher net revenue margin even though SME bank card
processing volume declined. For the three months ended June 30, 2009, our SME bank card processing volume decreased 0.2% to $15.2 billion, compared to $15.3 billion for the three months ended June 30, 2008. This decrease in SME bank card
processing volume was primarily attributable to volume attrition and slower new merchant



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installs as a result of economic conditions. Network Services generated its revenues on the 122 million transactions it settled, representing $2.6
billion in processing volume, and the 606 million transactions it authorized through its front-end card processing systems during the three months ended June 30, 2009, compared to 61 million transactions it settled, representing $1.9
billion in processing volume, and the 195 million transactions it authorized through its front-end card processing systems during the three months ended June 30, 2008. We report Network Services settled bank card processing revenues
net of interchange and dues and assessments because the daily cash settlement with Network Services merchants is on a net basis.

Payroll processing revenues, which include fees earned on payroll processing services and interest income earned on funds held for customers, increased by 15.1%, from $3.0 million in the three months ended June 30, 2008 to $3.5 million
in the three months ended June 30, 2009, primarily due to the 22.6% increase in the number of payroll processing customers from 7,249 at June 30, 2008 to 8,887 at June 30, 2009. Payroll processing revenues include processing fees and
the interest income we earn on funds held for customers. Payroll processing fees increased by 18.5% from $2.9 million in the three months ended June 30, 2008 to $3.5 million in the three months ended June 30, 2009, while interest income
earned on funds held for customers decreased from $101,000 in the three months ended June 30, 2008 to $17,000 in the three months ended June 30, 2009 primarily due to lower interest rates in the current period and the application of
available interest earning balances to offset bank fees and payables to sponsor banks.

Equipment-related income decreased by 2.8%, from
$6.9 million in the three months ended June 30, 2008 to $7.0 million in the three months ended June 30, 2009, primarily due to declines in revenues from prepaid card and stored-value card systems at our Debitek, Inc. subsidiary and in the
number of new bank card merchants installed during the three months ended June 30, 2009. Both of these declines were attributable to the weak economy in the current year. The addition of revenues from our May 2008 acquisition of Network
Services partially offset these declines.

Costs of services. Costs of services increased 5.2% from $358.7 million in
the three months ended June 30, 2008 to $377.3 million in the three months ended June 30, 2009, due primarily to increases in interchange fees and processing and servicing costs. Costs of services represented 90.4% of total revenues in the
three months ended June 30, 2009, down from 90.9% in the three months ended June 30, 2008.

Interchange fees increased 2.6% from
$283.8 million in the three months ended June 30, 2008 to $291.2 million in the three months ended June 30, 2009, and represented 69.8% of total revenues in the three months ended June 30, 2009 compared to 71.9% in the three
months ended June 30, 2008. The increase in interchange fees was primarily due to the result of including NWS debit interchange for the full 2009 quarter and only one month in the 2008 quarter. Interchange fees as a percentage of total revenues
declined due to the nature of Network Services bank card processing settlement practices. We report Network Services bank card processing revenues net of interchange fees because our daily cash settlement with Network Services
merchants is on a net basis.

Dues, assessments and fees increased 13.0% from $17.3 million in the three months ended June 30,
2008 to $19.6 million in the three months ended June 30, 2009, as the result of increases in Visa and MasterCard bank card transaction authorization fees. Dues, assessments and fees were 4.7% of total revenues in the three months ended
June 30, 2009, compared to 4.4% in the three months ended June 30, 2008. This decline also reflects our reporting of Network Services bank card processing revenues net of dues and assessments because the daily cash settlement with Network
Services merchants is on a net basis.

Net revenue, which we define as total revenues less interchange fees and dues, assessments and
fees, increased 14.1% from $93.4 million in the three months ended June 30, 2008 to $106.6 million in the three months ended June 30, 2009. The increase in net revenue was driven by the addition of revenues from Network Services and the
year-over-year increase in SME merchant processing revenues. Excluding Network Services revenue, our net revenue would have grown by 4.9% in the three months ended June 30, 2009.

Processing and servicing expense for the three months ended June 30, 2009 increased by $7.0 million, or 16.4%, compared with the three months ended
June 30, 2008. The increase in processing and



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servicing expense included $9.3 million for Network Services processing and servicing and costs related to our emphasis on merchant retention after our
announcement of the Processing System Intrusion. The increase in processing and servicing expense was also due to costs associated with the increased bank card processing volume, increases in merchant losses due to weak economic conditions and
increases in the costs of operating our Jeffersonville, Indiana service center, particularly the costs of support personnel, including account managers, and depreciation and amortization.

Included in processing and servicing expense was $1.0 million of payroll processing costs in the three months ended June 30, 2009, an increase of
10.9% from $0.9 million recorded in the three months ended June 30, 2008. This increase was primarily due to the 22.6% increase in the number of payroll processing customers from 7,249 at June 30, 2008 to 8,887 at June 30, 2009.

As a percentage of total revenue, processing and servicing expense increased to 11.9% for the three months ended June 30, 2009
compared with 10.9% for the three months ended June 30, 2008. The increase in processing and servicing as a percentage of total revenue for the three months ended June 30, 2009 reflects the addition of Network Services processing and
servicing costs, partially offset by continued leveraging of our lower cost internally developed front-end processing system, HPS Exchange, and cost savings associated with our back-end processing system, Passport. Transactions processed on HPS
Exchange represented approximately 87% of our total SME processing transactions during the three months ended June 30, 2009, compared to 82% during the three months ended June 30, 2008. We expect the increasing share of HPS Exchange in our
SME merchant base to continue in the future, and over time the Network Services transactions will be converted over to our internally developed platforms.

Customer acquisition costs increased 3.9% from $12.3 million in the three months ended June 30, 2008 to $12.8 million in the three months ended June 30, 2009. An increase in amortization of signing bonuses
was primarily responsible for the increase in the customer acquisition costs. The increase in the accrued buyout liability for the three months ended June 30, 2009 was lower than the prior year three-month period due to a contraction in same
store sales and higher merchant attrition, including merchants who have gone out of business. Customer acquisition costs for the three months ended June 30, 2009 and 2008 included the following components (in thousands of dollars):



|                                                                |  |                            |        |   |      |   |        |  
|--------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                                |  | Three Months EndedJune 30, |       
|                                                                |  | 2009                       |        |   | 2008 |  
|Amortization of signing bonuses, net                            |  | $                          | 10,335 |   |      | $ | 9,622  |  
|Amortization of capitalized customer deferred acquisition costs |  |                            | 3,987  |   |      |   | 3,729  |  
|Increase in accrued buyout liability                            |  |                            | 2,694  |   |      |   | 2,835  |  
|Capitalized customer deferred acquisition costs                 |  |                            | (4,259 | ) |      |   | (3,912 | )
|                                                                |  |                            |        |   |      |   |        |  
|Total Customer Acquisition Costs                                |  | $                          | 12,757 |   |      | $ | 12,274 |  
|                                                                |  |                            |        |   |      |   |        |  

Depreciation and amortization expenses increased $1.4 million, or 57.2%, to $3.9 million in the
three months ended June 30, 2009. The increase was primarily due to an increase of $1.2 million in amortization recorded on the intangible assets acquired in the acquisitions of Network Services, CPOS and Chockstone and depreciation expense
recorded on information technology equipment to support the network and the continuing development of HPS Exchange and Passport. Additionally, we capitalized salaries and fringe benefits and other expenses incurred by employees that worked on
internally developed software projects. Amortization does not begin on the internally developed software until the project is complete and placed in service, at which time we begin to amortize the asset over expected lives of three to five years.
The amount capitalized increased from $1.4 million in the three months ended June 30, 2008 to $3.3 million in the three months ended June 30, 2009. The total amount of capitalized costs for projects placed in service in the three months
ended June 30, 2009 and 2008 was $2.1 million and $0.9 million, respectively.

General and administrative. General and
administrative expenses increased 45.9%, from $16.7 million in the three months ended June 30, 2008 to $24.4 million in the three months ended June 30, 2009. The increase was primarily due to the addition of Network Services general
and administrative expenses, adding personnel and marketing initiatives to continue building our corporate, information technology and



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marketing infrastructure, which are necessary to support our growth and our product development initiatives, and legal, consulting and other expenses which
are related to the Processing System Intrusion, but that cannot be separated from ongoing expenses. Additionally, the three months ended June 30, 2009 included $0.9 million for costs of our periodic sales and servicing organization summit,
which focuses on the training and development of our organization.

General and administrative expenses as a percentage of total revenue
for the three months ended June 30, 2009 was 5.9%, an increase from 4.2% for the three months ended June 30, 2008. Our payroll operations general and administrative expenses increased by 23.1%, from $1.2 million in the three months
ended June 30, 2008 to $1.5 million in the three months ended June 30, 2009.

Income from operations. Primarily due to the
unfavorable impact which challenging economic conditions had on our revenues, our income from operations, which we also refer to as operating income, decreased 18.1%, from $19.1 million for the three months ended June 30, 2008 to $15.6 million
for the three months ended June 30, 2009. Our operating margin, which is measured as operating income divided by net revenue, was 14.7% for the three months ended June 30, 2009, compared to 20.4% for the three months ended June 30,
2008. In addition to the impact of the economy, the year-over-year decline in our operating margin was also due to the addition of Network Services whose operating margin is significantly lower than that of our historic business.

Interest income. Interest income decreased from $169,000 in the three months ended June 30, 2008 to $28,000 in the three months ended
June 30, 2009, primarily due to reduced cash balance available to invest, as well as lower interest rates. (see Liquidity and Capital Resources for more detail).

Interest expense. Interest expense for the three months ended June 30, 2009 of $545,000 decreased from $751,000 for the three months ended
June 30, 2008. The decrease in interest expense for the three months ended June 30, 2009 was due to lower interest rates incurred on our borrowings under our Credit Facility and payables to our sponsor banks. Interest expense which we
recorded on payables to our sponsor banks resulted from our practice of having our sponsor banks advance interchange fees to most of our merchants. Generally, when we have cash available for investment we fund these advances to our merchants first
with our cash, then by incurring a payable to our sponsor banks when that cash has been expended. We pay our sponsor banks the prime rate on these payables. See Liquidity and Capital ResourcesCredit Facility for more detail
on the borrowings.

Provision for processing system intrusion.During the three months ended June 30, 2009, we recorded a
pretax charge of $19.4 million, or about $0.32 per share, for costs we incurred for investigations, remedial actions, legal fees, crisis management services, certain card brand assessments, and a settlement offer we made regarding certain claims
against our sponsor banks related to the Processing System Intrusion. See OverviewProcessing System Intrusion andCritical Accounting EstimatesReserve for Processing System Intrusion for more details on the
Processing System Intrusion.

Income taxes. Income taxes for the three months ended June 30, 2009 were a benefit of $1.7
million, reflecting an effective tax rate of 39.1%. This compares to income tax expense of $7.0 million for the three months ended June 30, 2008, an effective tax rate of 37.8%.

Net income (loss) attributable to Heartland. As a result of the above factors, we recorded a net loss of $2.6 million for the three months ended
June 30, 2009. This compares to net income of $11.5 million for the three months ended June 30, 2008.



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Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

The following table shows certain income statement data as a percentage of revenue for the periods indicated (in thousands of dollars):



|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ----------------- | ----- | -- | ---------------------------- | - | ------- | ----------------- |  | ----- | ------ |  | - | ------- | - |  | ------ | --
|                                                                          |  | Six Months EndedJune
30,2009 |         |   | % of TotalRevenue |       |    | Six Months EndedJune
30,2008 |   |         | % of TotalRevenue |  |       | Change | 
|                                                                          |  |                              |         |   | Amount            |       |    | %                            |  
|                                                                          |  |                              |         |   |                   |      
|Total Revenues                                                            |  | $                            | 789,545 |   |                   | 100.0 | %  |                              | $ | 734,173 |                   |  | 100.0 | %      |  | $ | 55,372  |   |  | 7.5    | % 
|Costs of Services:                                                        |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Interchange                                                               |  |                              | 548,607 |   |                   | 69.5  | %  |                              |   | 529,107 |                   |  | 72.1  | %      |  |   | 19,500  |   |  | 3.7    | % 
|Dues, assessments and fees                                                |  |                              | 35,866  |   |                   | 4.5   | %  |                              |   | 31,843  |                   |  | 4.3   | %      |  |   | 4,023   |   |  | 12.6   | % 
|Processing and servicing                                                  |  |                              | 97,922  |   |                   | 12.4  | %  |                              |   | 79,283  |                   |  | 10.8  | %      |  |   | 18,639  |   |  | 23.5   | % 
|Customer acquisition costs                                                |  |                              | 25,332  |   |                   | 3.2   | %  |                              |   | 23,724  |                   |  | 3.2   | %      |  |   | 1,608   |   |  | 6.8    | % 
|Depreciation and amortization                                             |  |                              | 7,608   |   |                   | 1.0   | %  |                              |   | 4,375   |                   |  | 0.6   | %      |  |   | 3,233   |   |  | 73.9   | % 
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Total costs of services                                                   |  |                              | 715,335 |   |                   | 90.6  | %  |                              |   | 668,332 |                   |  | 91.0  | %      |  |   | 47,003  |   |  | 7.0    | % 
|General and administrative                                                |  |                              | 49,463  |   |                   | 6.3   | %  |                              |   | 32,228  |                   |  | 4.4   | %      |  |   | 17,235  |   |  | 53.5   | % 
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Total expenses                                                            |  |                              | 764,798 |   |                   | 96.9  | %  |                              |   | 700,560 |                   |  | 95.4  | %      |  |   | 64,238  |   |  | 9.2    | % 
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Income from operations                                                    |  |                              | 24,747  |   |                   | 3.1   | %  |                              |   | 33,613  |                   |  | 4.6   | %      |  |   | (8,866  | ) |  | (26.4  | )%
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Other income (expense):                                                   |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Interest income                                                           |  |                              | 57      |   |                   |      |    |                              |   | 469     |                   |  | 0.1   | %      |  |   | (412    | ) |  | (87.8  | )%
|Interest expense                                                          |  |                              | (1,086  | ) |                   | (0.1  | )% |                              |   | (1,097  | )                 |  | (0.1  | )%     |  |   | 11      |   |  | (1.0   | )%
|Provision for processing system intrusion                                 |  |                              | (31,970 | ) |                   | (4.0  | )% |                              |   |        |                   |  |      |        |  |   | (31,970 | ) |  |        |   
|Other, net                                                                |  |                              | 4       |   |                   |      |    |                              |   | (79     | )                 |  |      |        |  |   | 83      |   |  |        |   
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Total other income (expense)                                              |  |                              | (32,995 | ) |                   | (4.2  | )% |                              |   | (707    | )                 |  |      |        |  |   | (32,288 | ) |  |        |   
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Income (loss) before income taxes                                         |  |                              | (8,248  | ) |                   | (1.0  | )% |                              |   | 32,906  |                   |  | 4.5   | %      |  |   | (41,154 | ) |  | (125.1 | )%
|Provision for income taxes                                                |  |                              | (3,170  | ) |                   | (0.4  | )% |                              |   | 12,428  |                   |  | 1.7   | %      |  |   | (15,598 | ) |  | (125.5 | )%
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Net income (loss)                                                         |  |                              | (5,078  | ) |                   | (0.6  | )% |                              |   | 20,478  |                   |  | 2.8   | %      |  |   | (25,556 | ) |  | (124.8 | )%
|Less: Net income (loss) attributable to noncontrolling minority interests |  |                              | (8      | ) |                   |       |    |                              |   | 32      |                   |  |       |        |  |   | (40     | ) |  |        |   
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   
|Net income (loss) attributable to Heartland                               |  | $                            | (5,070  | ) |                   | (0.6  | )% |                              | $ | 20,446  |                   |  | 2.8   | %      |  | $ | (25,516 | ) |  | (124.8 | )%
|                                                                          |  |                              |         |   |                   |       |    |                              |   |         |                   |  |       |        |  |   |         |   |  |        |   

Total Revenues. Total revenues increased by 7.5%, from $734.2 million in the
six months ended June 30, 2008 to $789.5 million in the six months ended June 30, 2009, primarily as a result of a $54.6 million, or 7.6%, increase in processing revenues. The breakout of our total revenues for the six months ended
June 30, 2009 and 2008 was as follows (in thousands of dollars):



|                                                                                                                                                                                              |  |                          |         |                       |   |         |  |   |        |   |  |      |   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | --------------------- | - | ------- |  | - | ------ | - |  | ---- | --
|                                                                                                                                                                                              |  | Six Months EndedJune 30, |         | Change fromPrior Year |  
|                                                                                                                                                                                              |  | 2009                     |         | 2008                  |   | Amount  |  |   | %      |  
|Processing revenues, gross (a)                                                                                                                                                                |  | $                        | 769,113 |                       | $ | 714,475 |  | $ | 54,638 |   |  | 7.6  | % 
|Payroll processing revenues                                                                                                                                                                   |  |                          | 7,899   |                       |   | 6,846   |  |   | 1,053  |   |  | 15.4 | % 
|Equipment-related income                                                                                                                                                                      |  |                          | 12,533  |                       |   | 12,852  |  |   | (319   | ) |  | (2.5 | )%
|                                                                                                                                                                                              |  |                          |         |                       |   |         |  |   |        |   |  |      |   
|Total Revenues                                                                                                                                                                                |  | $                        | 789,545 |                       | $ | 734,173 |  | $ | 55,372 |   |  | 7.5  | % 
|                                                                                                                                                                                              |  |                          |         |                       |   |         |  |   |        |   |  |      |   
|(b)    Includes Visa and MasterCard bankcard processing revenues, AMEX fees, Discover fees, check processing fees, customer service fees, gift card, loyalty and other miscellaneous
revenue. | 

The $54.6 million increase in processing revenues from $714.5 million in the six months ended
June 30, 2008 to $769.1 million in the six months ended June 30, 2009 was primarily due to the acquisition in May 2008 of Network Services, which recorded $38.2 million of transaction-based processing revenues in the current year, higher
net revenue margin earned on SME bank card processing and higher SME bank card processing volume. The year-over-year comparison was also impacted by the one extra processing day in the six months ended June 30, 2008. Revenues from our SME bank
card processing are earned as a percentage of processing volume. For the six months ended June 30, 2009, our SME bank card processing volume increased 0.9% to $28.8 billion, compared to $28.5 billion for the six months ended June 30, 2008.
This increase in SME bank card processing volume was attributable to a net increase in bank card merchant accounts primarily as the result of the continued growth in our sales force, combined with improved production from our existing sales force as
previous additions to the sales force gain experience and



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seasoning. Network Services generated its revenues on the 227 million transactions it settled, representing $4.6 billion in processing volume, and the
1,142 million transactions it authorized through its front-end card processing systems during the six months ended June 30, 2009. We report Network Services settled bank card processing revenues net of interchange and dues and
assessments because the daily cash settlement with Network Services merchants is on a net basis.

Payroll processing revenues, which
include fees earned on payroll processing services and interest income earned on funds held for customers, increased by 15.4%, from $6.8 million in the six months ended June 30, 2008 to $7.9 million in the six months ended June 30, 2009,
primarily due to the 22.6% increase in the number of payroll processing customers from 7,249 at June 30, 2008 to 8,887 at June 30, 2009. Payroll processing revenues include processing fees and the interest income we earn on funds held for
customers. Payroll processing fees increased by 19.5% from $6.6 million in the six months ended June 30, 2008 to $7.9 million in the six months ended June 30, 2009, while interest income earned on funds held for customers decreased from
$267,000 in the six months ended June 30, 2008 to $34,000 in the six months ended June 30, 2009 primarily due to lower interest rates in the current period and the application of available interest earning balances to offset bank fees and
payables to sponsor banks.

Equipment-related income decreased by 2.5%, from $12.9 million in the six months ended June 30, 2008 to
$12.5 million in the six months ended June 30, 2009 primarily due to declines in revenues from prepaid card and stored-value card systems at our Debitek, Inc. subsidiary and in the number of new bank card merchants installed during the six
months ended June 30, 2009. Both of these declines were attributable to the weak economy in the current year. The addition of revenues from our May 2008 acquisition of Network Services partially offset these declines.

Costs of services. Costs of services increased 7.0% from $668.3 million in the six months ended June 30, 2008 to $715.3
million in the six months ended June 30, 2009, primarily due to increases in interchange fees and processing and servicing costs. Costs of services represented 90.6% of total revenues in the six months ended June 30, 2009, down from 91.0%
in the six months ended June 30, 2008.

Interchange fees increased 3.7% from $529.1 million in the six months ended June 30,
2008 to $548.6 million in the six months ended June 30, 2009, and represented 69.5% of total revenues in the six months ended June 30, 2009 compared to 72.1% in the six months ended June 30, 2008. The increase in interchange fees was
primarily due to the result of including NWS debit interchange for the full 2009 period and only one month in the 2008 period and higher SME bank card processing volume in the six months ended June 30, 2009. However, interchange fees as a
percentage of total revenues declined due to the nature of Network Services bank card processing settlement practices. We report Network Services bank card processing revenues net of interchange fees because our daily cash settlement
with Network Services merchants is on a net basis.

Dues, assessments and fees increased 12.6% from $31.8 million in the six
months ended June 30, 2008 to $35.9 million in the six months ended June 30, 2009, as the result of increases in Visa and MasterCard bank card transaction authorization fees. Dues, assessments and fees were 4.5% of total revenues in the
six months ended June 30, 2009, compared to 4.3% in the six months ended June 30, 2008. This decline also reflects our reporting of Network Services bank card processing revenues net of dues and assessments because the daily cash
settlement with Network Services merchants is on a net basis.

Net revenue, which we define as total revenues less interchange fees
and dues, assessments and fees, increased 18.4% from $173.2 million in the six months ended June 30, 2008 to $205.1 million in the six months ended June 30, 2009. The increase in net revenue was driven by the addition of revenues from
Network Services and the year-over-year increase in SME processing revenues. Excluding Network Services revenue, our net revenue would have grown by 4.7% in the six months ended June 30, 2009.

Processing and servicing expense for the six months ended June 30, 2009 increased by $18.6 million, or 23.5%, compared with the six months ended
June 30, 2008. The increase in processing and servicing expense included $18.3 million for Network Services processing and servicing and costs related to our emphasis on merchant retention after our announcement of the Processing System
Intrusion. The



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increase in processing and servicing expense was also due to costs associated with the increased bank card processing volume, increases in merchant losses
due to weak economic conditions and increases in the costs of operating our Jeffersonville, Indiana service center, particularly the costs of support personnel, including account managers, and depreciation and amortization.

Included in processing and servicing expense was $2.2 million of payroll processing costs in the six months ended June 30, 2009, an increase of
10.8% from $2.0 million recorded in the six months ended June 30, 2008. This increase was primarily due to the 22.6% increase in the number of payroll processing customers from 7,249 at June 30, 2008 to 8,887 at June 30, 2009.

As a percentage of total revenue, processing and servicing expense increased to 12.4% for the six months ended June 30, 2009 compared
with 10.8% for the six months ended June 30, 2008. The increase in processing and servicing as a percentage of total revenue for the six months ended June 30, 2009 reflects the addition of Network Services processing and servicing
costs, partially offset by continued leveraging of our lower cost internally developed front-end processing system, HPS Exchange, and cost savings associated with our back-end processing system, Passport. Transactions processed on HPS Exchange
represented approximately 87% of our total SME processing transactions during the six months ended June 30, 2009, compared to 81% during the six months ended June 30, 2008. We expect the increasing share of HPS Exchange in our SME merchant
base to continue in the future, and over time the Network Services transactions will be converted over to our platforms.

Customer
acquisition costs increased 6.8% from $23.7 million in the six months ended June 30, 2008 to $25.3 million in the six months ended June 30, 2009. An increase in amortization of signing bonuses was primarily responsible for the increase in
the customer acquisition costs. The increase in the accrued buyout liability for the six months ended June 30, 2009 was lower than the prior year six month period due to a contraction in same store sales and higher merchant attrition, including
merchants who have gone out of business. Customer acquisition costs for the six months ended June 30, 2009 and 2008 included the following components (in thousands of dollars):



|                                                                |  |                          |        |   |      |   |        |  
|--------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                |  | Six Months EndedJune 30, |       
|                                                                |  | 2009                     |        |   | 2008 |  
|Amortization of signing bonuses, net                            |  | $                        | 20,614 |   |      | $ | 18,535 |  
|Amortization of capitalized customer deferred acquisition costs |  |                          | 7,837  |   |      |   | 7,338  |  
|Increase in accrued buyout liability                            |  |                          | 5,076  |   |      |   | 5,498  |  
|Capitalized customer deferred acquisition costs                 |  |                          | (8,195 | ) |      |   | (7,647 | )
|                                                                |  |                          |        |   |      |   |        |  
|Total Customer Acquisition Costs                                |  | $                        | 25,332 |   |      | $ | 23,724 |  
|                                                                |  |                          |        |   |      |   |        |  

Depreciation and amortization expenses increased $3.2 million, or 73.9%, to $7.6 million in the
six months ended June 30, 2009. The increase was primarily due to recording amortization of $2.3 million on the intangible assets acquired in the acquisitions of Network Services, CPOS and Chockstone and depreciation expense recorded on
information technology equipment to support the network and the continuing development of HPS Exchange and Passport. Additionally, we capitalized salaries and fringe benefits and other expenses incurred by employees that worked on internally
developed software projects. Amortization does not begin on the internally developed software until the project is complete and placed in service, at which time we begin to amortize the asset over expected lives of three to five years. The amount
capitalized increased from $2.8 million in the six months ended June 30, 2008 to $6.2 million in the six months ended June 30, 2009. The total amount of capitalized costs for projects placed in service in the six months ended June 30,
2009 and 2008 was $3.6 million and $0.9 million, respectively.

General and administrative. General and administrative expenses
increased 53.5%, from $32.2 million in the six months ended June 30, 2008 to $49.5 million in the six months ended June 30, 2009. The increase was primarily due to the addition of Network Services general and administrative expenses,
adding personnel and marketing initiatives to continue building our corporate, information technology and marketing infrastructure, which are necessary to support our growth and our product development initiatives, and legal, consulting and other
expenses which are related to the Processing System Intrusion, but that cannot be separated from ongoing expenses. Additionally, the six months ended June 30, 2009 included $2.6 million for costs of our periodic sales and servicing organization
summit, which focuses on the training and development of our organization.



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General and administrative expenses as a percentage of total revenue for the six months ended
June 30, 2009 was 6.3%, an increase from 4.4% for the six months ended June 30, 2008. Our payroll operations general and administrative expenses increased by 27.8%, from $2.4 million in the six months ended June 30, 2008 to $3.1
million in the six months ended June 30, 2009.

Income from operations. Primarily due to the unfavorable impact which
challenging economic conditions had on our revenues, our income from operations, which we also refer to as operating income, decreased 26.4%, from $33.6 million for the six months ended June 30, 2008 to $24.7 million for the six months ended
June 30, 2009. Our operating margin, which is measured as operating income divided by net revenue, was 12.1% for the six months ended June 30, 2009, compared to 19.4% for the six months ended June 30, 2008. In addition to the impact
of the economy, the year-over-year decline in our operating margin was also due to the addition of Network Services whose operating margin is significantly lower than that of our historic business.

Interest income. Interest income decreased from $469,000 in the six months ended June 30, 2008 to $57,000 in the six months ended
June 30, 2009, primarily due to our use of cash to acquire Network Services and CPOS, as well as lower interest rates. (see Liquidity and Capital Resources for more detail).

Interest expense. Interest expense for the six months ended June 30, 2009 of $1,086,000 decreased from $1,097,000 for the six months ended
June 30, 2008. The year-to-year comparability of interest expense for the six-month periods was impacted by lower interest rates incurred on our borrowings under our Credit Facility and payables to our sponsor banks during the six months ended
June 30, 2009, and the higher average balance of amounts outstanding under our Credit Facility. Interest expense which we recorded on payables to our sponsor banks resulted from our practice of having our sponsor banks advance interchange fees
to most of our merchants. Generally, when we have cash available for investment we fund these advances to our merchants first with our cash, then by incurring a payable to our sponsor banks when that cash has been expended. We pay our sponsor banks
the prime rate on these payables. See Liquidity and Capital ResourcesCredit Facility for more detail on the borrowings.

Provision for processing system intrusion.During the six months ended June 30, 2009, we recorded a pretax charge of $32.0 million, or about $0.52 per share, for costs we incurred for investigations, remedial actions, legal
fees, crisis management services, certain card brand assessments, and a settlement offer we made regarding certain claims asserted against our sponsor banks related to the Processing System Intrusion. See OverviewProcessing System
Intrusion andCritical Accounting EstimatesReserve for Processing System Intrusion for more details on the Processing System Intrusion.

Income taxes. Income taxes for the six months ended June 30, 2009 were a benefit of $3.2 million, reflecting an effective tax rate of 38.4%. This compares to income tax expense of $12.4 million for the six
months ended June 30, 2008, an effective tax rate of 37.8%.

Net income(loss) attributable to Heartland. As a result of the
above factors, we recorded a net loss of $5.1 million for the six months ended June 30, 2009. This compares to net income of $20.4 million for the six months ended June 30, 2008.



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Balance Sheet Information



|                                            |  |                |         |                  |   |        
|------------------------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                                            |  | June 30,2009   |         | December 31,2008
|                                            |  | (in thousands)
|Selected Balance Sheet Data                 |  |                |        
|                                            |  |               
|Cash                                        |  | $              | 31,473  |                  | $ | 27,589 
|Funds held for payroll customers            |  |                | 25,164  |                  |   | 22,002 
|Receivables, net                            |  |                | 151,536 |                  |   | 140,145
|Current tax asset                           |  |                | 5,046   |                  |   | 2,440  
|Capitalized customer acquisition costs, net |  |                | 75,246  |                  |   | 77,737 
|Property and equipment, net                 |  |                | 92,778  |                  |   | 75,443 
|Goodwill                                    |  |                | 59,050  |                  |   | 58,456 
|Intangible assets                           |  |                | 34,012  |                  |   | 36,453 
|Total assets                                |  |                | 501,908 |                  |   | 463,619
|                                            |  |               
|Due to sponsor banks                        |  |                | 84,535  |                  |   | 68,212 
|Accounts payable                            |  |                | 29,158  |                  |   | 25,864 
|Deposits held for payroll customers         |  |                | 25,164  |                  |   | 22,002 
|Borrowings:                                 |  |                |         |                  |   |        
|Current portion                             |  |                | 58,540  |                  |   | 58,522 
|Long term portion                           |  |                | 12,698  |                  |   | 16,984 
|Accrued buyout liability:                   |  |                |         |                  |   |        
|Current portion                             |  |                | 9,726   |                  |   | 10,547 
|Long term portion                           |  |                | 31,486  |                  |   | 30,493 
|Total liabilities                           |  |                | 329,702 |                  |   | 284,256
|Total stockholders equity                  |  |                | 172,091 |                  |   | 179,244

June 30, 2009 Compared to December 31, 2008

Total assets increased $38.3 million, or 8.3%, to $501.9 million at June 30, 2009 from $463.6 million at December 31, 2008, primarily due to
increases in receivables, current and deferred tax assets and property and equipment. Funds held for payroll customers increased $3.2 million to $25.2 million at June 30, 2009, with an equivalent increase in the liability for deposits held for
payroll customers. Cash increased by $3.9 million, or 14.1% (see Liquidity and Capital Resources for more detail).

Our
receivables primarily are due from our bank card processing merchants and result from our practice of advancing interchange fees to most of our SME merchants during the processing month and collecting those fees from our merchants at the beginning
of the following month, as well as from transaction fees we charge merchants for processing transactions. Generally, these advances to our SME merchants are funded first with our cash available for investment, then by incurring a payable to our
sponsor banks when that cash has been expended. At June 30, 2009, we used $10.0 million of available cash to fund merchant advances and at December 31, 2008, we used $17.5 million of cash to fund merchant advances. The amount due to
sponsor banks for funding advances was $84.5 million at June 30, 2009 and $68.2 million at December 31, 2008. The payable to sponsor banks is repaid at the beginning of the following month out of the fees we collect from our merchants.
Receivables from merchants also include receivables from the sale of point of sale terminal equipment and check processing terminals.

Receivables also include amounts resulting from the sale, installation, training and repair of payment system hardware and software for prepaid card and stored-value card payment systems and campus payment solutions.

Total stockholders equity decreased $7.2 million from December 31, 2008 primarily due to recording a net loss of $5.1 million for the six
months ended June 30, 2009, repurchasing $3.2 million of treasury shares and declaring $1.3 million in dividends on our common stock. Offsetting increases in total stockholders equity resulted from proceeds received from the exercise of
stock options and tax benefits related to those stock option exercises.



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Liquidity and Capital Resources

General. Liquidity and capital resource management is a process focused on providing the funding we need to meet our short and long-term cash and working capital needs. We have used our funding sources
to build our merchant portfolio, our servicing technology platforms, and our Jeffersonville, Indiana service center with the expectation that these investments will generate cash flows sufficient to cover our working capital needs and other
anticipated needs for capital.

Our cash requirements include funding payments to salespersons for signing bonuses, residual commissions
and residual buyouts, paying interest expense and other operating expenses, including taxes, constructing our new service center and investing in building our technology infrastructure. We expect that our future cash requirements will include
material amounts required to defend against claims arising from the Processing System Intrusion and could include material amounts required to resolve such claims. At times, we have used cash to repurchase our common stock. We could in the future
use cash for other unspecified acquisitions of related businesses or assets.

Other than borrowings we used to fund our May 2008
acquisition of Network Services, we fund our cash needs primarily with cash flow from our operating activities and through our agreements with our sponsor banks to fund SME merchant advances. We believe that our current cash and investment balances,
cash generated from operations and our agreements with our sponsor banks to fund SME merchant advances will provide sufficient liquidity to meet our anticipated needs for operating capital for at least the next twelve months. However, we may face a
liquidity challenge, particularly in light of current conditions in the financial markets, if we are unable to meet cash requirements arising from the Processing System Intrusion from our operating cash flow. See OverviewProcessing
System Intrusion for more detail. As potential sources of liquidity to address this challenge, we have insurance coverage to cover certain claims and expenses, we could seek to raise cash by financing our owned service center in
Jeffersonville, Indiana, and we could replace our current Credit facility with a new arrangement.

On June 30, 2009, we were fully
borrowed on our credit facilities, which total $70.8 million. However, the revolving credit facility provides for an increase of $25 million upon the prior approval of the administrative agent. See Credit Facility for more details.

Our working capital, defined as current assets less current liabilities, was negative at June 30, 2009 and December 31, 2008
primarily due to financing the Network Services acquisition with cash and predominately current borrowings.

At June 30, 2009, we had
cash totaling $31.5 million compared to cash of $27.6 million at December 31, 2008.

2008 Acquisitions. As of
May 31, 2008, we acquired the net assets of the Network Services business unit of Alliance Data Network Services LLC, for a cash payment of $77.5 million plus the net working capital of Network Services on the closing date, for a total purchase
price of $92.5 million. The acquisition was financed through a combination of cash on hand and our credit facilities. Network Services provides processing of credit and debit cards to large national merchants, primarily in the petroleum industry. On
March 3, 2008, we acquired a majority interest in Collective Point of Sale Solutions Ltd. (CPOS) for a net cash payment of $10.1 million. CPOS is a Canadian provider of payment processing services and secure point-of-sale solutions.
On November 14, 2008, we acquired Chockstone, Inc. (Chockstone) for a net cash payment of $4.0 million. Chockstone provides loyalty marketing and gift card solutions to restaurant, convenience store, and other retail locations in
North America. The acquisitions of CPOS and Chockstone are not expected to have a material impact on earnings in the near term.

Each
funding source and use is described in more detail below.

Cash Flow Provided by Operating Activities. We reported net cash
provided by operating activities of $37.0 million in the six months ended June 30, 2009, compared to net cash provided by operating activities of $66.8 million in the six months ended June 30, 2008.



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The most significant contributor to the decline in the amount of cash provided by operating activities
for the six months ended June 30, 2009 was the cash payments we made related to the Processing System Intrusion. For the six months ended June 30, 2009, we paid $16.1 million for costs we incurred for investigations, remedial actions,
legal fees, crisis management services and assessments imposed on our sponsor banks (who have asserted rights to indemnification from us pursuant to our agreements with them) by card brands.

Also contributing to the lower amount of cash provided by operating activities for the six months ended June 30, 2009 was a smaller increase in
payables due to sponsor banks. Contained within other changes in operating assets and liabilities are the changes in our receivables and due to sponsor banks. Advances of interchange fees, which generate a receivable from our merchants, are funded
first from our available cash, then by incurring a payable to our sponsor banks when that cash has been expended. The payable to the sponsor banks is repaid at the beginning of the following month out of the fees we collect from our merchants. At
June 30, 2009, we had used $10.0 million of cash to fund merchant advances. At December 31, 2008, we used $17.5 million of available cash to fund merchant advances. The amount due to sponsor banks for funding advances was $84.5 million at
June 30, 2009 and $68.2 million at December 31, 2008. During the six months ended June 30, 2009, our receivables from SME merchants increased $6.6 million, while we increased our payable to sponsor banks by $16.3 million. During the
six months ended June 30, 2008, our receivables from SME merchants increased $8.3 million, while we increased our payable to sponsor banks by $48.4 million.

Other major determinants of operating cash flow are net signing bonus payments, which consume operating cash as we install new merchants, and payouts on the accrued buyout liability, which represent the costs of
buying out residual commissions owned by our salespersons. See Critical Accounting EstimatesCapitalized Customer Acquisition Costs and Critical Accounting EstimatesAccrued Buyout liability for more
information. Net signing bonuses of $17.8 million and $24.1 million, respectively, were paid in the six months ended June 30, 2009 and 2008. The reduction in net signing bonuses paid during the six months ended June 30, 2009 reflects a
year-over-year decline in newly installed margin. In the six months ended June 30, 2009 and 2008, we reduced the accrued buyout liability by making buyout payments of $4.9 million and $3.3 million, respectively.

Cash Flow Used in Investing Activities. Net cash used in investing activities was $25.2 million for the six months ended June 30,
2009, compared to $115.0 million for the six months ended June 30, 2008. The amount of cash used in financing activities was substantially higher in the prior year six-month period due to acquisitions. During the year ended December 31,
2008, we invested in the following acquisitions: March 2008, we acquired CPOS for a net cash payment of $10.1 million; May 2008, we acquired Network Services for a cash payment of $92.5 million; and November 2008, we acquired Chockstone, Inc. for a
net cash payment of $4.0 million.

During each six-month period, we used cash to fund capital expenditures. Total capital expenditures for
the six months ended June 30, 2009 were $25.2 million, compared to $12.4 million invested in the six months ended June 30, 2008. Capital expenditures include costs of $11.6 million and $4.2 million in the six months ended June 30,
2009 and 2008, respectively, related to construction of our new Service Center facility. Construction commenced in 2006 and we completed 96,000 square feet of office space for Phase 1 of the new service center and opened it for operation in December
2007. In December 2008 our processing equipment deployment group moved into a portion of an additional 125,000 square feet of multi-use space constructed on the site. See Contractual Obligations for more detail regarding cumulative
cash outlays and expected future funding requirements related to our new service center. We also continued building our technology infrastructure, primarily for hardware and software needed for the security and expansion of HPS Exchange and
Passport. To further develop our technology, we anticipate that these expenditures will continue near current levels. Additionally, our technology expenditures could be increased by measures we implement after the Processing System Intrusion to
further enhance the security of our computer system.

Cash Flow Used In Financing Activities. Net cash used in financing
activities was $7.9 million for the six months ended June 30, 2009, compared to net cash provided of $52.9 million for the six months ended June 30, 2008. Cash flow from financing activities in the six months ended June 30, 2008 was
positive due to proceeds from borrowing under our Credit Facility to fund an acquisition. See Credit Facility for more details on these borrowings and the application of funds borrowed.



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Cash used in financing activities in each six-month period included cash for common stock repurchases.
See Common Stock Repurchases for more information on our common stock repurchases authorization. We used $3.2 million of cash to repurchase 350,400 shares of our common stock during the six months ended June 30, 2009, compared
to $18.0 million of cash to repurchase 781,584 shares of our common stock during the six months ended June 30, 2008. During the six months ended June 30, 2009 and 2008, employees exercised stock options generating cash proceeds in the
aggregate of $0.5 million and $1.8 million, respectively.

During the six months ended June 30, 2009, we made term loan amortization
payments of $4.2 million due under our Term Credit facility. See Credit Facility for more details.

Cash dividends paid
in the six months ended June 30, 2009 were $1.3 million, compared to dividends paid of $6.7 million in the six months ended June 30, 2008. See Dividends on Common Stock for more information on our common stock dividends.

Credit Facility. On May 30, 2008, we entered into an amended and restated credit agreement (the Amended and
Restated Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and certain lenders who may become a party to the Credit Agreement from time to time. The May 30, 2008 Amended and Restated Credit Agreement amended and
restated in its entirety the previous credit agreement entered into on September 5, 2007 between the same parties that are parties to the Amended and Restated Credit Agreement. On August 3, 2009, we amended the Amended and Restated Credit
Agreement to exclude a certain amount of charges related to the Processing System Intrusion that may be incurred or accrued by us in determining our compliance with the financial covenants of the Amended and Restated Credit Agreement, provide the
lenders with a security interest in the assets of the Company, and increase the interest margin charged on borrowings.

The Amended and
Restated Credit Agreement provides for a revolving credit facility in the aggregate amount of up to $50 million (the Revolving Credit Facility), of which up to $5 million may be used for the issuance of letters of credit and up
to $5 million is available for swing line loans. Upon the prior approval of the administrative agent, we may increase the total commitments by $25 million for a total commitment under the Revolving Credit Facility of $75 million. The
Revolving Credit Facility is available to us on a revolving basis commencing on May 30, 2008 and ending on September 4, 2012.

The Amended and Restated Credit Agreement also provides for a term credit facility in the aggregate amount of up to $25 million (the Term Credit Facility). The Term Credit Facility requires amortizing payments in the amount
of $2,083,333 on the last business day of each fiscal quarter commencing March 31, 2009. All principal and interest not previously paid on the Term Credit Facility will mature and be due and payable on December 31, 2011. Amounts borrowed
and repaid under the Term Credit Facility may not be re-borrowed.

The Amended and Restated Credit Agreement contains covenants, which
include our maintenance of certain leverage and fixed charge coverage ratios, limitations on our indebtedness, liens on our properties and assets, our investments in, and loans to, other business units, our ability to enter into business
combinations and asset sales, and certain other financial and non-financial covenants. These covenants also apply to our subsidiaries. In accordance with the August 3, 2009 amendment to the Amended and Restated Credit Agreement, we were in
compliance with these covenants as of June 30, 2009.

Under the terms of the Amended and Restated Credit Agreement, we may borrow, at
our option, at interest rates equal to one, two, three or nine month adjusted LIBOR rates or equal to the greater of prime and the federal funds rate plus 0.50%, in each case plus a margin determined by our current leverage ratio.

The Revolving Credit Facility may be used to finance future construction projects and acquisitions in accordance with the terms of the Credit Agreement
and for our other working capital needs and general corporate purposes. On May 30, 2008, the Company borrowed $50 million under the Revolving Credit Facility and $25 million under the Term Credit Facility. All of the proceeds of both such
borrowings were applied to finance and pay expenses related to the acquisition of Network Services. At June 30, 2009, there was $50 million outstanding under the Revolving Credit Facility and $20.8 million outstanding under the Term Credit
Facility.



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Common Stock Repurchases.On January 13, 2006, our Board of Directors authorized
management to repurchase up to the lesser of (a) 1,000,000 shares of our common stock or (b) $25,000,000 worth of our common stock in the open market. On August 1, 2006, our Board of Directors authorized management to repurchase up to
an additional 1,000,000 shares of our common stock in the open market using proceeds from the issuance of stock options. On May 3, 2007, the Board of Directors eliminated the restriction in the August 1, 2006
repurchase authorization which required management to use only proceeds from the issuance of stock options for repurchases, and increased the total remaining authorized number of shares to be repurchased to 2,000,000. The Board of Directors
authorized management to purchase up to 1,000,000 shares at purchase prices within managements discretion. We intend to use these authorizations to repurchase shares opportunistically as a means of offsetting dilution from shares issued upon
the exercise of options under employee benefit plans, and to use cash to take advantage of declines in the Companys stock price. We have no obligation to repurchase shares under the authorization, and the specific timing and amount of the
stock repurchase will vary based on market conditions, securities law limitations and other factors. The stock repurchase will be executed utilizing general corporate funds.

Under these authorizations, we repurchased an aggregate of 2,924,684 shares of our common stock during the years ended December 31, 2007 and 2008
and the six months ended June 30, 2009 at a cost of $65.1 million, or average cost of $22.25 per share.

During the six months ended
June 30, 2009 and 2008, we repurchased 350,400 shares and 781,584 shares, respectively, of our common stock at average per share costs of $9.14 and $23.02. At June 30, 2009, we have remaining authorization to repurchase up to 175,316
additional shares of our common stock.

Dividends on Common Stock.The following table summarizes quarterly cash dividends
declared and paid on our common stock during 2009 and 2008:



|                                       |  |                   |  |                    |  |                             |      
|-------------------------------------- |  | ----------------- |  | ------------------ |  | --------------------------- | -----
|Date Declared                          |  | Record Date       |  | Date Paid          |  | Amount PaidPer Common Share
|                                      
|Six Months Ended June 30, 2009:       
|February 24, 2009                      |  | March 9, 2009     |  | March 16, 2009     |  | $                           | 0.025
|May 7, 2009                            |  | May 25, 2009      |  | June 15, 2009      |  | $                           | 0.01 
|                                      
|Twelve Months Ended December 31, 2008:
|February 13, 2008                      |  | February 28, 2008 |  | March 15, 2008     |  | $                           | 0.09 
|April 30, 2008                         |  | May 23, 2008      |  | June 15, 2008      |  | $                           | 0.09 
|August 5, 2008                         |  | August 22, 2008   |  | September 15, 2008 |  | $                           | 0.09 
|November 4, 2008                       |  | November 24, 2008 |  | December 15, 2008  |  | $                           | 0.09 

On August 3, 2009, our Board of Directors declared a quarterly cash dividend of $0.01 per
share of common stock, payable on September 15, 2009 to stockholders of record as of August 25, 2009. During 2009, after considering economic conditions and our financial obligations related to the Processing System Intrusion, our Board of
Directors reduced our quarterly dividend rate. The payment of dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend on, among other factors, our earnings, stockholders equity, cash
position and financial condition.

Contractual Obligations.The Visa and MasterCard networks generally allow chargebacks up
to four months after the later of the date the transaction is processed or the delivery of the product or service to the cardholder. As the majority of our SME transactions involve the delivery of the product or service at the time of the
transaction, a good estimate of our exposure to chargebacks is the last four months processing volume on SME portfolio, which was $19.8 billion for the four months ended June 30, 2009 and $18.7 billion for the four months ended
December 31, 2008. However, for the four months ended June 30, 2009 and December 31, 2008, we were presented with $11.2 million and $10.2 million, respectively, of chargebacks by issuing banks. In the six months ended June 30,
2009 and the 2008 full year, we incurred



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bankcard merchant credit losses of $3.0 million and $5.1 million, respectively, on total SME dollar volume processed of $28.5 billion and $57.9 billion,
respectively. These credit losses are included in processing and servicing expense in our consolidated statements of income.

Chargebacks
originating from large national merchant bank card processing are processed and carried by Fifth Third Bank, which is our third-party outsourced processor for settling large national merchant accounts.

The following table reflects our significant contractual obligations as of June 30, 2009:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                        |        |                 |   |             |  |             |        |                 |   |       |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | --------------- | - | ----------- |  | ----------- | ------ | --------------- | - | ----- |  | - | -----
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Payments Due by Period
|Contractual Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Total                  |        | Less than1 year |   | 1 to 3years |  | 3 to 5years |        | Morethan5 years
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | (in thousands)        
|Processing providers (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $                      | 18,977 |                 | $ | 11,642      |  | $           | 7,335  |                 | $ |      |  | $ |     
|Telecommunications providers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                        | 6,666  |                 |   | 4,704       |  |             | 1,962  |                 |   |      |  |   |     
|Office and equipment leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                        | 15,740 |                 |   | 4,515       |  |             | 5,565  |                 |   | 3,076 |  |   | 2,584
|Term Credit Facility (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                        | 20,833 |                 |   | 8,333       |  |             | 12,500 |                 |   |      |  |   |     
|Construction and equipment (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                        | 6,771  |                 |   | 6,771       |  |             |       |                 |   |      |  |   |     
|Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                        | 446    |                 |   | 243         |  |             | 203    |                 |   |      |  |   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                        |        |                 |   |             |  |             |        |                 |   |       |  |   |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | $                      | 69,433 |                 | $ | 36,208      |  | $           | 27,565 |                 | $ | 3,076 |  | $ | 2,584
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                        |        |                 |   |             |  |             |        |                 |   |       |  |   |      
|(a)    We have agreements with several third-party processors to provide to us on a non-exclusive basis payment processing and transmittal, transaction authorization and data capture services, and
access to various reporting tools. Our agreements with third-party processors may require us to submit a minimum monthly number of transactions or volume for processing. If we submit a number of transactions or volume that is lower than the minimum,
we are required to pay them the fees that they would have received if we had submitted the required minimum number or volume of transactions. (b)    In addition, we have $50 million outstanding under our Revolving Credit Facility at June 30, 2009. The Revolving Credit Facility is available to us on a revolving basis commencing on
May 30, 2008 and ending on September 4, 2012. (c)    These amounts relate to
contractual commitments we have for developing land and constructing our new Service Center in Jeffersonville, Indiana. Additional contractual commitments will be entered into as we progress with the development of this site. Through June 30,
2009, we have spent approximately $59.8 million of our cash on our new Service Center, including $1.7 million to acquire land.

In addition, we record a payable to sponsor banks each month in conjunction with our monthly
processing activities. This amount was $84.5 million as of June 30, 2009. This amount is repaid on the first business day of the following month out of the fees collected from our merchants.

Unrecognized Tax Benefits.At June 30, 2009, we had gross tax effected unrecognized tax benefits of approximately $1.7 million. See
Critical Accounting EstimatesIncome Taxes. As of June 30, 2009, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority, hence the unrecognized tax
benefits have been excluded from the above commitment and contractual obligations table.

Legal and Regulatory Considerations

Processing System Intrusion Legal Proceedings

To date, we have had several lawsuits filed against us and we expect additional lawsuits may be filed. These include lawsuits which assert claims against us by cardholders (including various
putative class actions seeking in the aggregate to represent all cardholders in the United States whose transaction information is alleged to have been placed at risk in the course of the Processing System Intrusion), and banks that issued payment
cards to cardholders whose transaction information is alleged to have been placed at risk in the course of the Processing System Intrusion (including various putative class actions seeking to represent all financial institutions that issued payment
cards to cardholders whose transaction information is alleged to have been placed at risk in the course of the Processing System Intrusion), seeking damages allegedly arising out of the Processing System Intrusion and other related relief. The
actions generally assert various common-law claims such as claims for negligence and breach of contract, as well as, in some cases, statutory claims such as violation of the Fair Credit Reporting Act, state data breach notification statutes, and
state unfair and deceptive practices statutes. The putative cardholder class actions seek various forms of relief including damages, injunctive relief, multiple or punitive damages, attorneys fees and costs. The putative financial institution
class actions seek compensatory damages, including recovery of the cost of issuance of replacement cards and losses by reason of unauthorized transactions, as well as injunctive relief, attorneys fees and costs. On June 10, 2009, the Judicial
Panel on Multidistrict Litigation (the JPML) entered an order centralizing these cases for pre-trial proceedings before the United States District Court for the Southern District of Texas, under the caption In re Heartland Payment
Systems, Inc. Customer Data Security Breach Litigation, MDL No. 2046, 4:09-md-2046. The putative consumer class actions and putative financial institution class actions filed against us and pending through August 6, 2009 are described in
Legal Proceedings - Processing System Intrusion Legal Proceedings.



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Four securities class action complaints have been filed in the United States District Court for the
District of New Jersey: Davis v. Heartland Payment Systems, Inc., Robert O. Carr and Robert H. B. Baldwin, Jr.,3:09-cv-01043-AET-TJB (March 6, 2009); Ivy v. Heartland Payment Systems, Inc., Robert O. Carr and Robert H. B. Baldwin,
Jr., 3:09-cv-01264-AET-JJH (March 19, 2009); Ladensack v. Heartland Payment Systems, Inc., Robert O. Carr and Robert H. B. Baldwin, Jr., 3:09-cv-01632-FLW-TJB (April 3, 2009); and Morr v. Heartland Payment Systems, Inc., Robert O. Carr
and Robert H. B. Baldwin, Jr., 3:09-cv-01818-JAP-LHG (April 16, 2009). All four complaints contain similar allegations. In Ladensack, the plaintiff purports to represent all individuals who bought our securities between February 13, 2008,
and February 23, 2009. In Davis, Ivy and Morr, the plaintiffs initially purported to represent all individuals who bought our securities between August 5, 2008, and February 23, 2009 (the Class Period). However, on April 7,
2009, counsel for the Davis and Ivy plaintiffs issued a press release announcing the purported expansion of the alleged Class Period to February 13, 2008 to February 23, 2009. On April 16, 2009, counsel for the Morr plaintiff
issued a similar press release. In each case, the plaintiff alleges that Heartland and two of our officers made material misrepresentations and/or omissions to security holders concerning the Processing System Intrusion in violation of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) and that four Heartland insiders engaged in insider trading in our securities. The plaintiffs seek various forms of relief, including damages,
attorneys fees, and costs and expenses. On May 6, 2009, plaintiff J.P. Ladensack filed a Notice of Voluntary Dismissal to dismiss the Ladensack action, which was granted by the Court on May 7, 2009. On May 27, 2009, the three remaining
securities class actions were consolidated into In re Heartland Payment Systems, Inc. Securities Litigation, 3:09-cv-01043-AET-TJB (the Consolidated Securities Class Action). The Teamsters Local Union No. 727 Pension Fund and
Genesee County Employees Retirement System were appointed Co-Lead Plaintiffs for the purported class pursuant to 15 U.S.C. § 78u-4(a)(3)(B). It is anticipated that Lead Plaintiffs will file an amended consolidated complaint in August
2009.

The original four securities class actions were identified as potential tag-along actions to In re: Heartland Payment
Systems, Inc. Computer System Intrusion Litigation, MDL No. 2046, discussed above. On June 12, 2009, the Clerk of the JPML issued a Conditional Transfer Order for tag-along actions to be similarly transferred to the Southern District
of Texas. The Conditional Transfer Order did not include the Consolidated Securities Class Action. On June 19, 2009, we filed a Motion for Transfer of Tag-Along Action Pursuant to 28 U.S.C. § 1407 seeking to have the Consolidated Securities
Class Action transferred as a tag-along action to In re: Heartland Payment Systems, Inc. Computer System Intrusion Litigation, MDL No. 2046. The JPML is expected to hear that motion in its next hearing session in September 2009.

On May 20, 2009, we received a letter from counsel purporting to represent Heartland shareholders Charles Lee and Paul Miele demanding
that we initiate suit against certain members of the Board of Directors and executive officers to recover damages for alleged breaches of fiduciary duty and to correct supposed deficiencies in our internal controls. The Board has formed an
independent Special Committee, represented by independent counsel (Ballard Spahr Andrews & Ingersoll, LLP), that is investigating the allegations in the demand letter in order to recommend to the Board whether suit should be filed or what other
action, if any, should be taken in response to the demand.

On July 14, 2009, Eric Kirkham filed a Verified Shareholder Derivative
Complaint in the United States District Court, District of New Jersey, Erik Kirkham , derivatively on behalf of Heartland Payment Systems, Inc. v. Robert O. Carr, Mitchell L. Hollin, Robert H. Niehaus, Marc J. Ostro, Jonathan J. Palmer, George F.
Raymond, Richard W. Vague and Robert H.B. Baldwin, Jr. (Defendants) and Heartland Payment Systems, Inc. (Nominal Defendant),(Derivative Complaint) purportedly for the benefit of nominal defendant Heartland Payment Systems, Inc.,
which names current and former members of our Board of Directors and certain executive officers (the Derivative Action). The Derivative Complaint asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross
mismanagement, and waste of corporate assets, alleging that the Board members and certain executive officers caused Heartland to disseminate to our shareholders materially misleading and inaccurate information, ignored supposed inadequacies within
our internal controls practices and procedures, and failed to make a good faith effort to correct the problems or prevent their recurrence from February 13, 2008 to July 14, 2009. The plaintiff seeks various forms of relief, including damages,
injunctive relief, restitution, and attorneys fees and costs. An independent Special Committee of the Board of Directors, represented by independent counsel (Ballard Spahr Andrews & Ingersoll, LLP), is investigating the allegations in the
Complaint in order to recommend to the Board what actions should be taken.

In addition, a putative merchant class action has been
commenced that seeks to represent all merchants against whom Heartland asserts or has asserted a claim for chargebacks or fines related to compromised credit card data since 2006. Filed on March 9, 2009 in the Circuit Court of the City of Saint
Louis, Missouri, the action is captioned S.M. Corporation, d/b/a Mike Shannons Steak & Seafood v. Orbit POS Systems, Inc. and Heartland Payment Systems, Inc., Case No. 0822-CC07833. The action asserts various
common-law claims, including for breach of contract, unjust enrichment, fraudulent misrepresentation, and breach of the duty of good faith and fair dealing, and seeks various forms of relief including damages, injunctive relief, and attorneys
fees.



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We have been advised by the SEC that it has commenced an informal inquiry and we have been advised by the
United States Attorney for the District of New Jersey that it has commenced an investigation, in each case to determine whether there have been any violations of the federal securities laws in connection with our disclosure of the Processing Systems
Intrusion and the alleged trading in our securities by certain of our employees, including certain executive officers. We are cooperating with these inquiries.

We have been contacted by the Federal Financial Institutions Examination Council and informed that it will be making inquiries into the Processing System Intrusion, and the Federal Trade Commission, by letter dated
February 19, 2009, has requested that we provide information about our information security practices. Additionally, we have received written or telephonic inquiries relating to the Processing System Intrusion from a number of state Attorneys
Generals offices, including a Civil Investigative Demand from the Louisiana Department of Justice Office of the Attorney General, the Canadian Privacy Commission, and other government officials. We are cooperating with the government officials
in response to each of these inquiries. We expect that additional lawsuits may be filed against us relating to the Processing System Intrusion and that additional inquiries from governmental agencies may be received or investigations may be
commenced.

Although we intend to defend the lawsuits, investigations and inquiries described above vigorously, we cannot predict the
outcome of such lawsuits, investigations and inquiries. Apart from damages claimed in such lawsuits and in other lawsuits relating to the Processing System Intrusion that may be filed, we may be subject to fines or other obligations as a result of
the government inquiries and investigations described above and additional governmental inquiries or investigations relating to the Processing System Intrusion that may be commenced. The card brands also have asserted and may assert claims seeking
to impose fines, penalties, and/or other assessments against us or our sponsor banks (who would seek indemnification from us pursuant to our agreements with them) based upon the Processing System Intrusion. By these claims, we expect the card brands
to seek to recover from us, or from our sponsor banks (who would in turn seek to recover from us), assessments in respect of fraud losses and operating expenses (including card reissuance costs and non-ordinary-course account monitoring expenses)
that the card brands believe either themselves or their issuers to have incurred by reason of the Processing System Intrusion, as well as fines and/or penalties by reason of our alleged failure to comply with the card brands operating
regulations. The amounts of the card brand claims described above are expected to be material, and the amounts we are required to pay to defend against and/or resolve those claims could have a material adverse effect on our results of operations and
financial condition.

Costs we expect to incur for investigations, remedial actions, legal fees, and crisis management services related to
the Processing System Intrusion will be recognized as incurred. Such costs are expected to be material and could adversely impact our results of operations, financial condition and cash flow.

For the three and six months ended June 30, 2009, we expensed a total of $19.4 million and $32.0 million, respectively, or about $0.32 and $0.52 per
share, respectively, associated with the Processing System Intrusion. Over the six months ended June 30, 2009, the majority of these charges, or $22.1 million, related to fines imposed by certain card brands in April 2009 against us and our sponsor
banks and a settlement offer we made in an attempt to resolve certain of the claims asserted against our sponsor banks (who have asserted rights to indemnification from us pursuant to our agreements with them) relating to the Processing System
Intrusion. Notwithstanding our belief that we and our sponsor banks have strong defenses against the claims that are the subject of the settlement offer, we decided to make the settlement offer in an attempt to avoid the costs and uncertainty of
litigation. We are prepared to vigorously defend ourselves against all the claims relating to the Processing System Intrusion that have been asserted against us and our sponsor banks to date. In particular, we are prepared to vigorously contest (and
we have recommended to our sponsor banks that they vigorously contest) through all available means, including litigation if necessary, any liability that may be asserted or assessments that may be imposed against us or our sponsor banks by certain
card brands.

The accrual of these fines and the settlement offer resulted in a $14.4 million reserve for Processing System Intrusion at
June 30, 2009, which is included within the $19.4 million expensed for the three months ended June 30, 2009. To date, we have not received any response to our settlement offer and it should not be assumed that we will resolve the claims that are the
subject of the settlement



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offer for the amount of the settlement offer. We understand that the portion of this reserve related to the settlement offer is required by SFAS No. 5 based
solely on the fact we tendered an offer of settlement in the amount we have accrued. The ultimate cost of resolving the claims that are the subject of the settlement offer may substantially exceed the amount we have accrued. Moreover, even if the
claims that are the subject of the settlement offer were resolved for the amount we have accrued, that would still leave unresolved most of the claims that have been asserted against us or our sponsor banks relating to the Processing System
Intrusion. We feel we have strong defenses to all the claims that have been asserted against us and our sponsor banks relating to the Processing System Intrusion, including those claims that are not the subject of the settlement offer. However, it
is possible we will end up resolving the claims that are not the subject of the settlement offer, either through settlements or pursuant to litigation, for amounts that are significantly greater than the amount we have reserved to date in respect of
those claims. We may also be required to reserve significant additional amounts in the future, either in respect of the claims that are the subject of the settlement offer or in respect of the other claims that have been asserted against us and our
sponsor banks relating to the Processing System Intrusion (or in respect of both categories of claims).

The remainder of the expenses and
accruals related to the Processing System Intrusion recorded in the three and six months ended June 30, 2009 were primarily for legal fees and costs we incurred for investigations, remedial actions and crisis management services.

While we have determined that the Processing System Intrusion has triggered other loss contingencies, to date an unfavorable outcome is not believed to
be probable on those claims that are pending or have been threatened against us, or that we consider to be probable of assertion against us, and we do not have sufficient information to reasonably estimate the loss we would incur in the event of an
unfavorable outcome on any such claim. Therefore, in accordance with SFAS No. 5, no reserve/liability has been recorded as of June 30, 2009 with respect to any such claim, except for the fines actually assessed by MasterCard and Visa and the amount
of the settlement offer by the Company. As more information becomes available, if we should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that we will incur on that claim is reasonably
estimable, we will record a reserve for the claim in question. If and when we record such a reserve, it could be material and could adversely impact our results of operations, financial condition and cash flow.

As previously disclosed, we were advised by Visa that, based on Visas investigation of the Processing System Intrusion Visa believes we are in
violation of the Visa Operating Regulations and that, based on that belief, Visa removed us from Visas published Global List of PCI DSS Validated Service Providers. On April 30, 2009, following the completion of our annual PCI DSS assessment,
we successfully validated our compliance with PCI DSS. As such, we were returned to MasterCards and Visas Lists of PCI DSS Validated Service Providers.

Although we have insurance that we believe may cover some of the costs and losses that we may incur in connection with the above-described pending and potential lawsuits, inquiries, investigations and claims, we
cannot now confirm that such coverage will, in fact, be provided or the extent of such coverage, if it is provided.

Other Legal Proceedings

On December 16, 2008, a putative class action was filed against us in the Superior Court of California, County of San Diego, Ryan
McInerney, Hossein Vazir Zand v. Heartland Payment Systems, Inc. The plaintiffs purport to represent a putative class of individuals who allegedly were not reimbursed by us for business expenses and whose compensation was allegedly reduced for
their costs of doing business. The plaintiffs seek unspecified monetary damages, penalties, injunctive and declaratory relief, and attorneys fees and costs.

In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. We believe that the outcome of the proceedings to which we are currently
a party will not have a material adverse effect on our financial position, results of operations or cash flows.



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Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk.Our primary market risk exposure is to changes in interest rates.

We have interest rate risk related to our payable to our sponsor banks. During each month, KeyBank and Heartland Bank advance interchange fees to most of
our merchants. We fund these advances first by applying a portion of our available cash and then by incurring a significant payable to our sponsor banks, bearing interest at the prime rate. At June 30, 2009, our payable to our sponsor banks was
$84.5 million. This payable is repaid on the first business day of the following month out of fees collected from our merchants. During the quarter ended June 30, 2009, the average daily interest-bearing balance of that payable to sponsor banks
was approximately $32 million. The outstanding balance of our payable to our sponsor banks is directly related to our bank card processing volume and also will fluctuate depending on the amount of our available cash. A hypothetical 100 basis point
change in short-term interest rates applied to our average payable to sponsor banks would result in a change of approximately $320,000 in annual pre-tax income.

We also incur interest rate risk on borrowings under our Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement provides for a Revolving Credit Facility in an aggregate amount of up to
$50 million and a Term Credit Facility with an outstanding balance of $20.8 million at June 30, 2009. The Term Credit Facility requires amortizing payments in the amount of $2,083,333 on the last business day of each fiscal quarter
commencing March 31, 2009. Under the terms of the Amended and Restated Credit Agreement, the Company may borrow, at its option, at interest rates equal to one, two, three or nine month adjusted LIBOR rates or equal to the greatest of prime, the
secondary market rate for three month certificates of deposits plus 1% and the federal funds rate plus 0.50%, in each case plus a margin determined by the Companys current leverage ratio. During the quarter ended June 30, 2009, the
average daily interest-bearing balance outstanding under the Amended and Restated Credit Agreement was $72.9 million. A hypothetical 100 basis point increase in short-term interest rates applied to our average outstanding balance under the Amended
and Restated Credit Agreement would result in a decline of approximately $729,000 in annual pre-tax income.

While the bulk of our cash is
held in checking accounts or money market funds, we do hold certain fixed-income investments with maturities of up to three years. At June 30, 2009, a hypothetical 100 basis point increase in short-term interest rates would result in an
increase of approximately $48,000 in annual pre-tax income from money market fund holdings, but a decrease in the value of fixed-rate investments of approximately $35,000. A hypothetical 100 basis point decrease in short-term interest rates would
result in a decrease of approximately $48,000 in annual pre-tax income from money market funds, but an increase in the value of fixed-rate instruments of approximately $35,000.

Foreign Currency Risk. While substantially all of our business is conducted in U.S. dollars, our Canadian processing subsidiary, CPOS,
conducts its operations in Canadian dollars. Consequently, a portion of CPOS revenues and expenses may be affected by fluctuations in foreign currency exchange rates. We are also affected by fluctuations in exchange rates on assets and
liabilities related to our CPOS subsidiary. We have not hedged our translation risk on foreign currency exposure. For the six months ended June 30, 2009, foreign currency exposures had an immaterial impact on our revenues and our net income. At
June 30, 2009, cumulative fluctuations in exchange rates on CPOS assets and liabilities reduced our Other Comprehensive Income by $0.5 million.

We do not hold or engage in the trading of derivative financial, commodity or foreign exchange instruments.



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Office Facilities

At June 30, 2009, we owned one facility and leased eleven facilities, which we use for operational, sales and administrative purposes.

Our principal executive offices are located in approximately 9,300 square feet of leased office space on Nassau Street in Princeton, New Jersey. The
Nassau Street lease expires in May 2013.

We own 35 acres of land in Jeffersonville, Indiana, on which we completed constructing 96,000
square feet of office space for the first phase of our new service center, which opened for operation in December 2007, and 30,000 square feet of space for our equipment deployment area, which opened in December 2008. We are currently building an
additional 95,000 square feet of multi-use space on the site of our Jeffersonville service center.

We also lease the following facilities
as of June 30, 2009:



|                                  |  |            |  |                                                                                                         
|--------------------------------- |  | ---------- |  | --------------------------------------------------------------------------------------------------------
|Location                          |  | SquareFeet |  | Expiration                                                                                              
|Alpharetta, Georgia               |  | 3,008      |  | November 30, 2010                                                                                       
|                                  |  |           
|Chattanooga, Tennessee            |  | 9,461      |  | June 30, 2014                                                                                           
|                                  |  |           
|Cleveland, Ohio                   |  | 17,696     |  | June 30, 2012 for 15,940 square feet. 1,756 square feet of the total are on a month-to-month commitment.
|                                  |  |           
|Colorado Springs, Colorado        |  | 10,431     |  | December 31, 2009                                                                                       
|                                  |  |           
|Johnson City, Tennessee           |  | 45,000     |  | October 22, 2010                                                                                        
|                                  |  |           
|Phoenix, Arizona                  |  | 1,284      |  | March 31, 2010                                                                                          
|                                  |  |           
|Plano, Texas                      |  | 49,015     |  | May 31, 2015 for 26,988 square feet. January 14, 2019 for 22,027 square feet.                           
|                                  |  |           
|Portland, Oregon                  |  | 14,203     |  | September 30, 2010                                                                                      
|                                  |  |           
|West Windsor Township, New Jersey |  | 5,288      |  | May 31, 2013                                                                                            
|                                  |  |           
|Woodbridge, Ontario, Canada       |  | 2,205      |  | February 28, 2010                                                                                       

We believe that our facilities are suitable and adequate for our current business operations and,
if necessary, could be replaced with little disruption to our company. We periodically review our space requirements and may acquire new space to meet our business needs or consolidate and dispose of or sublet facilities which are no longer
required.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

See Managements Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk.



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|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Under the supervision and with the participation of the Companys management, including its Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), the Company evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
2009. Based upon that evaluation, the CEO and CFO concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective and provided reasonable assurance that the information
required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and are designed to ensure that information required
to be disclosed in those reports is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system
will be met. In addition, the design of any control system is based, in part, upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that
the Companys controls will succeed in achieving their goals under all potential future conditions.

Changes in Internal Controls

During the quarter ended June 30, 2009, there was no change in the Companys internal controls over financial reporting (as defined in Rules 13
a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Processing System Intrusion Legal
Proceedings

To date, we have had several lawsuits filed against us and we expect additional lawsuits may be filed. These include
lawsuits which assert claims against us by cardholders (including various putative class actions seeking in the aggregate to represent all cardholders in the United States whose transaction information is alleged to have been placed at risk in the
course of the Processing System Intrusion) and banks that issued payment cards to cardholders whose transaction information is alleged to have been placed at risk in the course of the Processing System Intrusion (including various putative class
actions seeking to represent all financial institutions that issued payment cards to cardholders whose transaction information is alleged to have been placed at risk in the course of the Processing System Intrusion), seeking damages allegedly
arising out of the Processing System Intrusion and other related relief. The actions generally assert various common-law claims such as claims for negligence and breach of contract, as well as, in some cases, statutory claims such as violation of
the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices statutes. The putative cardholder class actions seek various forms of relief including damages, injunctive relief, multiple or punitive
damages, attorneys fees and costs. The putative financial institution class actions seek compensatory damages, including recovery of the cost of issuance of replacement cards and losses by reason of unauthorized transactions, as well as
injunctive relief, attorneys fees and costs. On June 10, 2009, the Judicial Panel on Multidistrict Litigation (the JPML) entered an order centralizing these cases for pre-trial proceedings before the United States District Court
for the Southern District of Texas, under the caption In re Heartland Payment Systems, Inc. Customer Data Security Breach Litigation, MDL No. 2046, 4:09-md-2046. The putative consumer class actions and putative financial institution class
actions filed against us and pending through August 6, 2009 are described below.

Putative Consumer Class Actions



|                                                                    |  |                  |  |                                                                                   
|------------------------------------------------------------------- |  | ---------------- |  | ----------------------------------------------------------------------------------
|Name of the Court                                                   |  | Date Filed       |  | Principal Parties                                                                 
|United States District Court for the District of New Jersey         |  | January 23, 2009 |  | Sansom and Engel v. Heartland Payment Systems, Inc. et al., 3:09-cv-00335         
|                                                                    |  |                 
|United States District Court for the Northern District of Florida   |  | January 26, 2009 |  | Read v. Heartland Payment Systems, Inc. et al., 3:09-cv-00035                     
|                                                                    |  |                 
|United States District Court for the District of Arizona            |  | January 29, 2009 |  | Swenka v. Heartland Payment Systems, Inc. et al., 2:09-cv-00179                   
|                                                                    |  |                 
|United States District Court for the District of Kansas             |  | January 29, 2009 |  | Barrett v. Heartland Payment Systems, Inc. et al., 09-cv-2053                     
|                                                                    |  |                 
|United States District Court for the District of New Jersey         |  | January 29, 2009 |  | Merino v. Heartland Payment Systems, Inc. et al., 3:09-cv-00439                   
|                                                                    |  |                 
|United States District Court for the Middle District of Alabama     |  | February 2, 2009 |  | Brown, Latham and Spencer v. Heartland Payment Systems, Inc. et al., 2:09-cv-00086
|                                                                    |  |                 
|United States District Court for the Eastern District of California |  | February 2, 2009 |  | Hilliard v. Heartland Payment Systems, Inc. et al., 1:09-cv-00179                 



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|                                                                     |  |                   |  |                                                                            
|-------------------------------------------------------------------- |  | ----------------- |  | ---------------------------------------------------------------------------
|Name of the Court                                                    |  | Date Filed        |  | Principal Parties                                                          
|United States District Court for the District of New Jersey          |  | February 2, 2009  |  | Kaissi v. Heartland Payment Systems, Inc. et al., 3:09-cv-00540            
|                                                                     |  |                  
|United States District Court for the Northern District of Ohio       |  | February 3, 2009  |  | McGinty and Carr v. Heartland Payment Systems, Inc. et al., 1:09-cv-00244  
|                                                                     |  |                  
|United States District Court for the Southern District of Texas      |  | February 4, 2009  |  | Watson v. Heartland Payment Systems, Inc. et al., 4:09-cv-00325            
|                                                                     |  |                  
|United States District Court for the Eastern District of Wisconsin   |  | February 4, 2009  |  | Anderson and Hoven v. Heartland Payment Systems, Inc. et al., 2:09-cv-00113
|                                                                     |  |                  
|United States District Court for the Southern District of Florida    |  | February 6, 2009  |  | Balloveras v. Heartland Payment Systems, Inc. et al., 1:09-cv-20326        
|                                                                     |  |                  
|United States District Court for the Southern District of California |  | February 25, 2009 |  | Mata v. Heartland Payment Systems, Inc. et al., 3:09-cv-00376              
|                                                                     |  |                  
|United States District Court for the Western District of Missouri    |  | February 26, 2009 |  | McLaughlin v. Heartland Payment Systems, Inc. et al., 6:09-cv-3069         
|                                                                     |  |                  
|United States District Court for the District of New Jersey          |  | February 27, 2009 |  | Rose v. Heartland Payment Systems, Inc. et al., 3:09-cv-00917              
|                                                                     |  |                  
|United States District Court for the Southern District of Illinois   |  | April 21, 2009    |  | Leavell v. Heartland Payment Systems, Inc. et al., 3:09-cv-00270           
|                                                                     |  |                  
|United States District Court for the Eastern District of Arkansas    |  | April 30, 2009    |  | Brown v. Heartland Payment Systems, Inc. et al.,4:09-cv-00384              

Putative Financial Institution Class Actions



|                                                                  |  |                   |  |                                                                                             
|----------------------------------------------------------------- |  | ----------------- |  | --------------------------------------------------------------------------------------------
|Name of the Court                                                 |  | Date Filed        |  | Principal Parties                                                                           
|United States District Court for the District of New Jersey       |  | February 6, 2009  |  | Lone Summit Bank v. Heartland Payment Systems, Inc. et al., 3:09-cv-00581                   
|                                                                  |  |                  
|United States District Court for the District of New Jersey       |  | February 13, 2009 |  | TriCentury Bank et al. v. Heartland Payment Systems, Inc. et al., 3:09-cv-00697             
|                                                                  |  |                  
|United States District Court for the Southern District of Texas   |  | February 16, 2009 |  | Lone Star National Bank v. Heartland Payment Systems, Inc. et al., 7:09-cv-00064            
|                                                                  |  |                  
|United States District Court for the District of New Jersey       |  | February 20, 2009 |  | Amalgamated Bank et al. v. Heartland Payment Systems, Inc. et al., 3:09-cv-00776            
|                                                                  |  |                  
|United States District Court for the Southern District of Florida |  | March 19, 2009    |  | First Bankers Trust Co., N.A. v. Heartland Payment Systems, Inc. et al., 4:09-cv-00825      
|                                                                  |  |                  
|United States District Court for the Southern District of Florida |  | March 31, 2009    |  | PBC Credit Union et al. v. Heartland Payment Systems, Inc. et al., 9:09-cv-80481            
|                                                                  |  |                  
|United States District Court for the Southern District of Texas   |  | April 22, 2009    |  | Community West Credit Union, et al. v. Heartland Payment Systems, Inc. et al., 4:09-cv-01201



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|                                                                |  |                |  |                                                                                                   
|--------------------------------------------------------------- |  | -------------- |  | --------------------------------------------------------------------------------------------------
|Name of the Court                                               |  | Date Filed     |  | Principal Parties                                                                                 
|United States District Court for the Southern District of Texas |  | April 22, 2009 |  | Eden Financial Corp. v. Heartland Payment Systems, Inc. et al., 4:09-cv-01203                     
|                                                                |  |               
|United States District Court for the Southern District of Texas |  | April 28, 2009 |  | Heritage Trust Federal Credit Union v. Heartland Payment Systems, Inc. et al., 4:09-cv-01284      
|                                                                |  |               
|United States District Court for the Southern District of Texas |  | May 1, 2009    |  | Pennsylvania State Employees Credit Union v. Heartland Payment Systems, Inc. et al., 4:09-cv-01330

Four securities class action complaints have been filed in the United States District Court for
the District of New Jersey: Davis v. Heartland Payment Systems, Inc., Robert O. Carr and Robert H. B. Baldwin, Jr., 3:09-cv-01043-AET-TJB (March 6, 2009); Ivy v. Heartland Payment Systems, Inc., Robert O. Carr and Robert H. B. Baldwin,
Jr., 3:09-cv-01264-AET-JJH (March 19, 2009); Ladensack v. Heartland Payment Systems, Inc., Robert O. Carr and Robert H. B. Baldwin, Jr., 3:09-cv-01632-FLW-TJB (April 3, 2009); and Morr v. Heartland Payment Systems, Inc., Robert O. Carr
and Robert H. B. Baldwin, Jr., 3:09-cv-01818-JAP-LHG (April 16, 2009). All four complaints contain similar allegations. In Ladensack, the plaintiff purports to represent all individuals who bought our securities between February 13, 2008,
and February 23, 2009. In Davis, IvyandMorr, the plaintiffs initially purported to represent all individuals who bought our securities between August 5, 2008, and February 23, 2009 (the Class Period). However, on April 7,
2009, counsel for the Davis and Ivy plaintiffs issued a press release announcing the purported expansion of the alleged Class Period to February 13, 2008 to February 23, 2009. On April 16, 2009, counsel for the Morr plaintiff
issued a similar press release. In each case, the plaintiff alleges that Heartland and two of our officers made material misrepresentations and/or omissions to security holders concerning the Processing System Intrusion in violation of Sections
10(b) and 20(a) of the Exchange Act and that four Heartland insiders engaged in insider trading in our securities. The plaintiffs seek various forms of relief, including damages, attorneys fees, and costs and expenses. On May 7, 2009,
Ladensack was voluntarily dismissed without prejudice. On May 27, 2009, the three remaining securities class actions were consolidated into In re Heartland Payment Systems, Inc. Securities Litigation, 3:09-cv-01043-AET-TJB (the
Consolidated Securities Class Action). The Teamsters Local Union No. 727 Pension Fund and Genesee County Employees Retirement System were appointed Co-Lead Plaintiffs for the purported class pursuant to 15 U.S.C. §
78u-4(a)(3)(B). It is anticipated that Lead Plaintiffs will file an amended consolidated complaint in August 2009.

The original four
securities class actions were identified as potential tag-along actions to In re: Heartland Payment Systems, Inc. Computer System Intrusion Litigation, MDL No. 2046, discussed above. On June 12, 2009, the Clerk of the JPML issued
a Conditional Transfer Order for tag-along actions to be similarly transferred to the Southern District of Texas. The Conditional Transfer Order did not include the Consolidated Securities Class Action. On June 19, 2009, we filed a
Motion for Transfer of Tag-Along Action Pursuant to 28 U.S.C. § 1407 seeking to have the Consolidated Securities Class Action transferred as a tag-along action to In re: Heartland Payment Systems, Inc. Computer System Intrusion
Litigation, MDL No. 2046. The JPML is expected to hear that motion in its next hearing session in September 2009.

On May 20, 2009, we
received a letter from counsel purporting to represent Heartland shareholders Charles Lee and Paul Miele demanding that we initiate suit against certain members of the Board of Directors and executive officers to recover damages for alleged breaches
of fiduciary duty and to correct supposed deficiencies in our internal controls. The Board has formed an independent Special Committee, represented by independent counsel (Ballard Spahr Andrews & Ingersoll, LLP), that is investigating the
allegations in the demand letter in order to recommend to the Board whether suit should be filed or what other action, if any, should be taken in response to the demand.

On July 14, 2009, Eric Kirkham filed a Verified Shareholder Derivative Complaint in the United States District Court, District of New Jersey, Erik Kirkham , derivatively on behalf of Heartland Payment Systems, Inc.
v. Robert O. Carr, Mitchell L. Hollin, Robert H. Niehaus, Marc J. Ostro, Jonathan J. Palmer, George F. Raymond, Richard W. Vague and Robert H.B. Baldwin, Jr. (Defendants) and Heartland Payment Systems, Inc. (Nominal Defendant),(Derivative
Complaint) purportedly for the benefit of nominal defendant Heartland Payment Systems, Inc., which names current and former members of our Board of Directors and certain executive officers (the Derivative Action). The Derivative
Complaint asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets, alleging that the Board members and certain executive officers caused Heartland to disseminate to our
shareholders materially misleading and inaccurate information, ignored supposed inadequacies within our internal controls practices and procedures, and failed to make a good faith effort to correct the problems or prevent their recurrence from
February 13, 2008 to July 14, 2009. The plaintiff seeks various forms of relief, including damages, injunctive relief, restitution, and attorneys fees and costs. An independent Special Committee of the Board of Directors, represented by
independent counsel (Ballard Spahr Andrews & Ingersoll, LLP), is investigating the allegations in the Complaint in order to recommend to the Board what actions should be taken.

In addition, a putative merchant class action has been commenced that seeks to represent all merchants against whom Heartland asserts or has asserted a
claim for chargebacks or fines related to compromised credit card data since 2006. Filed on March 9, 2009 in the Circuit Court of the City of Saint Louis, Missouri, the action is captioned S.M. Corporation, d/b/a Mike Shannons Steak &
Seafood v. Orbit POS Systems, Inc. and Heartland Payment Systems, Inc., Case No. 0822-CC07833. The action asserts various common-law claims, including for breach of contract, unjust enrichment, fraudulent misrepresentation, and breach of the
duty of good faith and fair dealing, and seeks various forms of relief including damages, injunctive relief, and attorneys fees.



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We have been advised by the SEC that it has commenced an informal inquiry and we have been advised by the
United States Attorney for the District of New Jersey that it has commenced an investigation, in each case to determine whether there have been any violations of the federal securities laws in connection with our disclosure of the Processing Systems
Intrusion and the alleged trading in our securities by certain of our employees, including certain executive officers. We are cooperating with these inquiries.

We have been contacted by the Federal Financial Institutions Examination Council and informed that it will be making inquiries into the Processing System Intrusion, and the Federal Trade Commission, by letter dated
February 19, 2009, has requested that we provide information about our information security practices. Additionally, we have received written or telephonic inquiries relating to the Processing System Intrusion from a number of state Attorneys
Generals offices, including a Civil Investigative Demand from the Louisiana Department of Justice Office of the Attorney General, the Canadian Privacy Commission, and other government officials. We are cooperating with the government officials
in response to each of these inquiries. We expect that additional lawsuits may be filed against us relating to the Processing System Intrusion and that additional inquiries from governmental agencies may be received or investigations may be
commenced.

Although we intend to defend the lawsuits, investigations and inquiries described above vigorously, we cannot predict the
outcome of such lawsuits, investigations and inquiries. Apart from damages claimed in such lawsuits and in other lawsuits relating to the Processing System Intrusion that may be filed, we may be subject to fines or other obligations as a result of
the government inquiries and investigations described above and additional governmental inquiries or investigations relating to the Processing System Intrusion that may be commenced. The card brands may also assert additional claims seeking to
impose fines, penalties, and/or other assessments against us or our sponsor banks (who would seek indemnification from us pursuant to our agreements with them) based upon the Processing System Intrusion. By these claims, we expect the card brands to
seek to recover from us, or from our sponsor banks (who would in turn seek to recover from us) assessments in respect of fraud losses and operating expenses (including card reissuance costs and non-ordinary-course account monitoring expenses) that
the card brands believe either themselves or their issuers to have incurred by reason of the Processing System Intrusion, as well as fines and/or penalties by reason of our alleged failure to comply with the card brands operating regulations.
The amounts of the card brand claims described above are expected to be material, and the amounts we are required to pay to defend against and/or resolve those claims could have a material adverse effect on our results of operations and financial
condition.

Costs we expect to incur for investigations, remedial actions, legal fees, and crisis management services related to the
Processing System Intrusion will be recognized as incurred. Such costs are expected to be material and could adversely impact our results of operations, financial condition and cash flow.

For the three and six months ended June 30, 2009, we expensed a total of $19.4 million and $32.0 million, respectively, or about $0.32 and $0.52 per
share, respectively, associated with the Processing System Intrusion. Over the six months ended June 30, 2009, the majority of these charges, or $22.1 million, related to fines imposed by certain card brands in April 2009 against us and our sponsor
banks and a settlement offer we made in an attempt to resolve certain of the claims asserted against our sponsor banks (who have asserted rights to indemnification from us pursuant to our agreements with them) relating to the Processing System
Intrusion. Notwithstanding our belief that we have strong defenses against the claims that are the subject of the settlement offer, we decided to make the settlement offer in an attempt to avoid the costs and uncertainty of litigation. We are
prepared to vigorously defend ourselves against all the claims relating to the Processing System Intrusion that have been asserted against us and our sponsor banks to date. In particular, we are prepared to vigorously contest (and we have
recommended to our sponsor banks that they vigorously contest) through all available means, including litigation if necessary, any liability that may be asserted or assessments that may be imposed against us or our sponsor banks by certain card
brands.

The accrual of these fines and the settlement offer resulted in a $14.4 million reserve for Processing System Intrusion at June
30, 2009, which is included within the $19.4 million expensed for the three months ended June 30, 2009. To date, we have not received a response to our settlement offer and it should not be assumed that we will resolve the claims that are the
subject of the settlement offer for the amount of the settlement offer. We understand that the portion of this reserve related to the settlement offer is required by SFAS No. 5 based solely on the fact we tendered an offer of settlement in the
amount we have accrued. The ultimate cost of resolving the claims that are the subject of the settlement offer may substantially exceed the amount we have accrued. Moreover, even if the claims that are the subject of the settlement offer were
resolved for the amount we have accrued, that would still leave unresolved most of the claims that have been asserted against us or our sponsor banks relating to the Processing System Intrusion. We feel we have strong defenses to all the claims that
have been asserted against us and our sponsor banks relating to the Processing System Intrusion, including those claims that are not the subject of the settlement offer. However, it is possible we will end up resolving the claims that are not the
subject of the settlement offer, either through settlements or pursuant to litigation, for amounts that are significantly greater than the amount we have reserved to date in respect of those claims. We may also be required to reserve significant
additional amounts in the future, either in respect of the claims that are the subject of the settlement offer or in respect of the other claims that have been asserted against us and our sponsor banks relating to the Processing System Intrusion (or
in respect of both categories of claims).



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The remainder of the expenses and accruals related to the Processing System Intrusion recorded in the
three and six months ended June 30, 2009 were primarily for legal fees and costs we incurred for investigations, remedial actions and crisis management services.

While we have determined that the Processing System Intrusion has triggered other loss contingencies, to date an unfavorable outcome is not believed to be probable on those claims that are pending or have been
threatened against us, or that we consider to be probable of assertion against us, and we do not have sufficient information to reasonably estimate the loss we would incur in the event of an unfavorable outcome on any such claim. Therefore, in
accordance with SFAS No. 5, no reserve/liability has been recorded as of June 30, 2009 with respect to any such claim, except for the fines actually assessed by MasterCard and Visa and the amount of the settlement offer by the Company. As more
information becomes available, if we should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that we will incur on that claim is reasonably estimable, we will record a reserve for the claim
in question. If and when we record such a reserve, it could be material and could adversely impact our results of operations, financial condition and cash flow.

As previously disclosed, we were advised by Visa that, based on Visas investigation of the Processing System Intrusion Visa believes we are in violation of the Visa Operating Regulations and that, based on that
belief, Visa removed us from Visas published Global List of PCI DSS Validated Service Providers. On April 30, 2009, following the completion of our annual PCI DSS assessment, we successfully validated our compliance with PCI DSS. As such,
we were returned to MasterCards and Visas Lists of PCI DSS Validated Service Providers.

Although we have insurance that we
believe may cover some of the costs and losses that we may incur in connection with the above-described pending and potential lawsuits, inquiries, investigations and claims, we cannot now confirm that such coverage will, in fact, be provided or the
extent of such coverage, if it is provided.

Other Legal Proceedings

On December 16, 2008, a putative class action was filed against us in the Superior Court of California, County of San Diego, Ryan
McInerney, Hossein Vazir Zand v. Heartland Payment Systems, Inc. The plaintiffs purport to represent a putative class of individuals who allegedly were not reimbursed by us for business expenses and whose compensation was allegedly reduced for
their costs of doing business. The plaintiffs seek unspecified monetary damages, penalties, injunctive and declaratory relief, and attorneys fees and costs.

In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. We believe that the outcome of the proceedings to which we are currently
a party will not have a material adverse effect on our financial position, results of operations or cash flows.



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|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
in our Risk Factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

(a) None

(b) Not applicable

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On January 13, 2006, our Board of Directors
authorized management to repurchase up to the lesser of (a) 1,000,000 shares of our common stock or (b) $25,000,000 worth of our common stock in the open market. On August 1, 2006, our Board of Directors authorized management to
repurchase up to 1,000,000 shares of our common stock in the open market using the proceeds from the exercise of stock options.

On
May 3, 2007, the Board of Directors eliminated the restriction in the August 1, 2006 repurchase authorization which required management to use only proceeds from the issuance of stock options for repurchases, and increased the total
remaining authorized number of shares to be repurchased to 2,000,000. We intend to use these authorizations to repurchase shares opportunistically as a means of offsetting dilution from shares issued upon the exercise of options under employee
benefit plans, and to use cash to take advantage of declines in the Companys stock price. We have no obligation to repurchase shares under the authorization, and the specific timing and amount of the stock repurchase will vary based on
market conditions, securities law limitations and other factors. The stock repurchase will be executed utilizing the Companys cash resources including the proceeds of stock option exercises.

At June 30, 2009, we have remaining authorization to repurchase up to 175,316 additional shares of our common stock.

We did not make any purchases of our common stock during the three months ended June 30, 2009. The cumulative number of shares purchased as part of
publicly announced plans was 2,924,684 shares at an average price of $22.25 per share.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None



|Item 5. | Other Information
|------- | -----------------

On August 3, 2009, we entered
into an amendment (the Amendment) to our amended and restated credit agreement dated May 30, 2008 (the Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party to the Credit Agreement.
The lenders are currently JPMorgan Chase Bank, N.A., KeyBank National Association and SunTrust Bank. Credit extended under the Credit Agreement is guaranteed by our subsidiaries, Heartland Acquisition, LLC, a Delaware limited liability company,
Heartland Payroll Company, L.L.C., an Ohio limited liability company, and Debitek, Inc., a Delaware corporation. In connection with the Amendment, on August 3, 2009, we also entered into a Pledge and Security Agreement with JPMorgan Chase Bank,
N.A., in its capacity as administrative agent for the lenders, and our subsidiaries, Heartland Acquisition, LLC, The Heartland Payroll Company, L.L.C. and Debitek, Inc., and (the Security Agreement). The Security Agreement provides the
lenders with a security interest in all of our and our subsidiaries assets.

The Amendment excludes a certain amount of charges
related to the Processing System Intrusion that may be incurred or accrued by us in determining our compliance with certain of the financial covenants in the Credit Agreement and increases the interest margin charged on borrowings.

The description of the Amendment and the Security Agreement set forth above does not purport to be complete and is qualified in its entirety by reference
to the Amendment and the Security Agreement, which are filed hereto as Exhibits 10.50 and 10.51, respectively, and are incorporated herein by reference.



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                    
|              | 
|*10.46**      |  | Form of Employee Restricted Stock Unit Agreement Under 2008 Equity Incentive Plan.                                                                                                                                                                                                             
|              | 
|*10.47**      |  | Amendment No. 1 to Amended and Restated Employee Confidential Information and Noncompetition Agreement effective May 11, 2009 entered into by Robert O. Carr with Heartland Payment Systems,
Inc.                                                                                              
|              | 
|*10.48**      |  | Performance-Based Stock Option Agreement dated May 11, 2009 entered into by Robert O. Carr with Heartland Payment Systems, Inc. ($17.76 vesting requirement).                                                                                                                                  
|              | 
|*10.49**      |  | Performance-Based Stock Option Agreement dated May 11, 2009 entered into by Robert O. Carr with Heartland Payment Systems, Inc. ($26.64 vesting requirement).                                                                                                                                  
|              | 
|*10.50        |  | Amendment No. 1 and Limited Waiver dated as of August 3, 2009 to the Amended and Restated Credit Agreement dated as of May 30, 2008 among Heartland Payment Systems, Inc., the Lenders party
thereto and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender and issuing bank.
|              | 
|*10.51        |  | Pledge and Security Agreement dated as of August 3, 2009 by and among Heartland Payment Systems, Inc., The Heartland Payroll Company, L.L.C., Debitek, Inc., Heartland Acquisition, LLC, and
JPMorgan Chase Bank, N.A., in its capacity as administrative agent for the lenders.               
|              | 
|31.1          |  | Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                       
|              | 
|31.2          |  | Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                       
|              | 
|32.1          |  | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                         
|              | 
|32.2          |  | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                         



|* | Filed herewith.
|- | ---------------

|** | Management contract or compensatory plan or arrangement.
|-- | --------------------------------------------------------



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SIGNATURES

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

Date: August 7, 2009



HEARTLAND PAYMENT SYSTEMS, INC.(Registrant)By:

/s/ Robert O. CarrRobert O. CarrChief Executive Officer(Principal Executive Officer)By:

/s/ Robert H.B. Baldwin, Jr.Robert H.B. Baldwin, Jr.President and Chief Financial Officer(Principal Financial Officer)




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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                    
|              | 
|*10.46**      |  | Form of Employee Restricted Stock Unit Agreement Under 2008 Equity Incentive Plan.                                                                                                                                                                                                             
|              | 
|*10.47**      |  | Amendment No. 1 to Amended and Restated Employee Confidential Information and Noncompetition Agreement effective May 11, 2009 entered into by Robert O. Carr with Heartland Payment Systems,
Inc.                                                                                              
|              | 
|*10.48**      |  | Performance-Based Stock Option Agreement dated May 11, 2009 entered into by Robert O. Carr with Heartland Payment Systems, Inc. ($17.76 vesting requirement).                                                                                                                                  
|              | 
|*10.49**      |  | Performance-Based Stock Option Agreement dated May 11, 2009 entered into by Robert O. Carr with Heartland Payment Systems, Inc. ($26.64 vesting requirement).                                                                                                                                  
|              | 
|*10.50        |  | Amendment No. 1 and Limited Waiver dated as of August 3, 2009 to the Amended and Restated Credit Agreement dated as of May 30, 2008 among Heartland Payment Systems, Inc., the Lenders party
thereto and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender and issuing bank.
|              | 
|*10.51        |  | Pledge and Security Agreement dated as of August 3, 2009 by and among Heartland Payment Systems, Inc., The Heartland Payroll Company, L.L.C., Debitek, Inc., Heartland Acquisition, LLC, and
JPMorgan Chase Bank, N.A., in its capacity as administrative agent for the lenders.               
|              | 
|31.1          |  | Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                       
|              | 
|31.2          |  | Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                       
|              | 
|32.1          |  | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                         
|              | 
|32.2          |  | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                         



|* | Filed herewith.
|- | ---------------

|** | Management contract or compensatory plan or arrangement.
|-- | --------------------------------------------------------