##### 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 September 30, 2010

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 definition 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   |  |  ̈  (Do not check if a smaller reporting company) |  | 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 November 2, 2010, there were 38,224,575 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 September 30, 2010 and December 31, 2009                                                             |  |      | 1  | 
|                                        |  | Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended
 September 30, 2010 and 2009 |  |      | 2  | 
|                                        |  | Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2010 and 2009                                  |  |      | 3  | 
|                                        |  | Consolidated Statements of Cash Flow for the nine months ended September 30, 2010 and
2009                                             |  |      | 4  | 
|                                        |  | Notes to Consolidated Financial Statements                                                                                             |  |      | 5  | 
|                                        |  |                                                                                                                                       
|Item 2.                                 |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                  |  |      | 26 | 
|                                        |  |                                                                                                                                       
|Item 3.                                 |  | Quantitative and Qualitative Disclosures about Market Risk                                                                             |  |      | 56 | 
|                                        |  |                                                                                                                                       
|Item 4.                                 |  | Controls and Procedures                                                                                                                |  |      | 57 | 
|                                        | 
|PART II. OTHER INFORMATION              |  |                                                                                                                                        |  |     
|                                        |  |                                                                                                                                       
|Item 1.                                 |  | Legal Proceedings                                                                                                                      |  |      | 57 | 
|                                        |  |                                                                                                                                       
|Item 1A.                                |  | Risk Factors                                                                                                                           |  |      | 63 | 
|                                        |  |                                                                                                                                       
|Item 2.                                 |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                            |  |      | 63 | 
|                                        |  |                                                                                                                                       
|Item 3.                                 |  | Defaults Upon Senior Securities                                                                                                        |  |      | 63 | 
|                                        |  |                                                                                                                                       
|Item 4.                                 |  | (Removed and Reserved)                                                                                                                 |  |      | 63 | 
|                                        |  |                                                                                                                                       
|Item 5.                                 |  | Other Information                                                                                                                      |  |      | 63 | 
|                                        |  |                                                                                                                                       
|Item 6.                                 |  | Exhibits                                                                                                                               |  |      | 64 | 



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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)



|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                   |  | September 30,2010 |         |   | December 31,2009 |  
|Assets                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                                                    |  |                   |         |   |                  |   |         |  
|Cash                                                                                                                                                               |  | $                 | 45,512  |   |                  | $ | 32,113  |  
|Funds held for payroll customers                                                                                                                                   |  |                   | 24,660  |   |                  |   | 29,667  |  
|Receivables, net                                                                                                                                                   |  |                   | 171,893 |   |                  |   | 149,403 |  
|Investments held to maturity                                                                                                                                       |  |                   | 1,558   |   |                  |   | 1,450   |  
|Inventory                                                                                                                                                          |  |                   | 11,350  |   |                  |   | 12,381  |  
|Prepaid expenses                                                                                                                                                   |  |                   | 5,635   |   |                  |   | 8,874   |  
|Current tax asset                                                                                                                                                  |  |                   | 23,156  |   |                  |   | 16,266  |  
|Current deferred tax assets, net                                                                                                                                   |  |                   | 7,275   |   |                  |   | 42,760  |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                                               |  |                   | 291,039 |   |                  |   | 292,914 |  
|Capitalized customer acquisition costs, net                                                                                                                        |  |                   | 60,450  |   |                  |   | 72,038  |  
|Property and equipment, net                                                                                                                                        |  |                   | 101,004 |   |                  |   | 99,989  |  
|Goodwill                                                                                                                                                           |  |                   | 62,126  |   |                  |   | 60,962  |  
|Intangible assets, net                                                                                                                                             |  |                   | 30,785  |   |                  |   | 34,637  |  
|Deposits and other assets, net                                                                                                                                     |  |                   | 523     |   |                  |   | 1,666   |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                       |  | $                 | 545,927 |   |                  | $ | 562,206 |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                   |  |                  
|Liabilities and stockholders equity                                                                                                                               |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Due to sponsor banks                                                                                                                                               |  | $                 | 81,628  |   |                  | $ | 80,007  |  
|Accounts payable                                                                                                                                                   |  |                   | 38,753  |   |                  |   | 32,305  |  
|Deposits held for payroll customers                                                                                                                                |  |                   | 24,660  |   |                  |   | 29,667  |  
|Current portion of borrowings                                                                                                                                      |  |                   | 111,469 |   |                  |   | 58,547  |  
|Current portion of accrued buyout liability                                                                                                                        |  |                   | 5,854   |   |                  |   | 9,306   |  
|Merchant deposits and loss reserves                                                                                                                                |  |                   | 37,848  |   |                  |   | 27,214  |  
|Accrued expenses and other liabilities                                                                                                                             |  |                   | 27,650  |   |                  |   | 30,456  |  
|Reserve for processing system intrusion                                                                                                                            |  |                   | 1,618   |   |                  |   | 99,911  |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                          |  |                   | 329,480 |   |                  |   | 367,413 |  
|Deferred tax liabilities, net                                                                                                                                      |  |                   | 22,162  |   |                  |   | 21,448  |  
|Reserve for unrecognized tax benefits                                                                                                                              |  |                   | 1,542   |   |                  |   | 1,391   |  
|Long-term portion of borrowings                                                                                                                                    |  |                   | 2,083   |   |                  |   | 8,419   |  
|Long-term portion of accrued buyout liability                                                                                                                      |  |                   | 23,415  |   |                  |   | 33,580  |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                  |  |                   | 378,682 |   |                  |   | 432,251 |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Commitments and contingencies (Note 12)                                                                                                                            |  |                   |        |   |                  |   |        |  
|                                                                                                                                                                   |  |                  
|Equity                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|Common Stock, $0.001 par value, 100,000,000 shares authorized, 38,213,645 and 37,524,298 shares issued and outstanding at
September 30, 2010 and December 31, 2009 |  |                   | 38      |   |                  |   | 38      |  
|Additional paid-in capital                                                                                                                                         |  |                   | 181,940 |   |                  |   | 171,736 |  
|Accumulated other comprehensive loss                                                                                                                               |  |                   | (308    | ) |                  |   | (546    | )
|Accumulated deficit                                                                                                                                                |  |                   | (14,722 | ) |                  |   | (41,487 | )
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                         |  |                   | 166,948 |   |                  |   | 129,741 |  
|Noncontrolling interests                                                                                                                                           |  |                   | 297     |   |                  |   | 214     |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total equity                                                                                                                                                       |  |                   | 167,245 |   |                  |   | 129,955 |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total liabilities and equity                                                                                                                                       |  | $                 | 545,927 |   |                  | $ | 562,206 |  
|                                                                                                                                                                   |  |                   |         |   |                  |   |         |  

See accompanying notes to condensed consolidated financial statements.



1



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Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share data)

(unaudited)



|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                            |  | 2010                            |         |   | 2009                           |   |         | 2010 |  |   | 2009      |  
|                                                                            |  |                                 |         |  
|Total Revenues                                                              |  | $                               | 499,074 |   |                                | $ | 442,568 |      |  | $ | 1,386,111 |   |  | $ | 1,232,113 |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Costs of Services:                                                          |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Interchange                                                                 |  |                                 | 350,964 |   |                                |   | 305,059 |      |  |   | 962,749   |   |  |   | 853,666   |  
|Dues, assessments and fees                                                  |  |                                 | 32,688  |   |                                |   | 27,527  |      |  |   | 88,962    |   |  |   | 63,393    |  
|Processing and servicing                                                    |  |                                 | 59,282  |   |                                |   | 50,356  |      |  |   | 175,622   |   |  |   | 148,278   |  
|Customer acquisition costs                                                  |  |                                 | 12,573  |   |                                |   | 13,147  |      |  |   | 38,758    |   |  |   | 38,479    |  
|Depreciation and amortization                                               |  |                                 | 3,890   |   |                                |   | 4,006   |      |  |   | 11,400    |   |  |   | 11,614    |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Total costs of services                                                     |  |                                 | 459,397 |   |                                |   | 400,095 |      |  |   | 1,277,491 |   |  |   | 1,115,430 |  
|General and administrative                                                  |  |                                 | 25,479  |   |                                |   | 27,784  |      |  |   | 76,673    |   |  |   | 77,247    |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Total expenses                                                              |  |                                 | 484,876 |   |                                |   | 427,879 |      |  |   | 1,354,164 |   |  |   | 1,192,677 |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|                                                                            |  |                                 |         |  
|Income from operations                                                      |  |                                 | 14,198  |   |                                |   | 14,689  |      |  |   | 31,947    |   |  |   | 39,436    |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Other income (expense):                                                     |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Interest income                                                             |  |                                 | 43      |   |                                |   | 29      |      |  |   | 111       |   |  |   | 86        |  
|Interest expense                                                            |  |                                 | (1,240  | ) |                                |   | (782    | )    |  |   | (3,511    | ) |  |   | (1,868    | )
|(Provision for) recovery of processing system intrusion costs               |  |                                 | (740    | ) |                                |   | (73,322 | )    |  |   | 14,770    |   |  |   | (105,292  | )
|Other, net                                                                  |  |                                 | 2       |   |                                |   |        |      |  |   | 2,022     |   |  |   | 4         |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Total other income (expense)                                                |  |                                 | (1,935  | ) |                                |   | (74,075 | )    |  |   | 13,392    |   |  |   | (107,070  | )
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Income (loss) before income taxes                                           |  |                                 | 12,263  |   |                                |   | (59,386 | )    |  |   | 45,339    |   |  |   | (67,634   | )
|Provision for (benefit from) income taxes                                   |  |                                 | 4,694   |   |                                |   | (22,314 | )    |  |   | 17,352    |   |  |   | (25,484   | )
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Net income (loss)                                                           |  |                                 | 7,569   |   |                                |   | (37,072 | )    |  |   | 27,987    |   |  |   | (42,150   | )
|Less: Net income attributable to noncontrolling interests                   |  |                                 | 36      |   |                                |   | 24      |      |  |   | 83        |   |  |   | 16        |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Net income (loss) attributable to Heartland                                 |  | $                               | 7,533   |   |                                | $ | (37,096 | )    |  | $ | 27,904    |   |  | $ | (42,166   | )
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|                                                                            |  |                                 |         |  
|Net income (loss)                                                           |  | $                               | 7,569   |   |                                | $ | (37,072 | )    |  | $ | 27,987    |   |  | $ | (42,150   | )
|Other comprehensive income:                                                 |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Unrealized gains on investments, net of income tax of $13, $16, $37 and $24 |  |                                 | 23      |   |                                |   | 27      |      |  |   | 60        |   |  |   | 40        |  
|Foreign currency translation adjustment                                     |  |                                 | 331     |   |                                |   | 782     |      |  |   | 178       |   |  |   | 1,251     |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Comprehensive income (loss)                                                 |  |                                 | 7,923   |   |                                |   | (36,263 | )    |  |   | 28,225    |   |  |   | (40,859   | )
|Less: Net income attributable to noncontrolling interests                   |  |                                 | 36      |   |                                |   | 24      |      |  |   | 83        |   |  |   | 16        |  
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Comprehensive income (loss) attributable to Heartland                       |  | $                               | 7,887   |   |                                | $ | (36,287 | )    |  | $ | 28,142    |   |  | $ | (40,875   | )
|                                                                            |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|                                                                            |  |                                 |         |  
|Earnings (loss) per common share:                                           |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Basic                                                                       |  | $                               | 0.20    |   |                                | $ | (0.99   | )    |  | $ | 0.74      |   |  | $ | (1.12     | )
|Diluted                                                                     |  | $                               | 0.19    |   |                                | $ | (0.99   | )    |  | $ | 0.71      |   |  | $ | (1.12     | )
|                                                                            |  |                                 |         |  
|Weighted average number of common shares outstanding:                       |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Basic                                                                       |  |                                 | 38,130  |   |                                |   | 37,461  |      |  |   | 37,899    |   |  |   | 37,484    |  
|Diluted                                                                     |  |                                 | 39,444  |   |                                |   | 38,129  |      |  |   | 39,263    |   |  |   | 37,896    |  

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                   |        |   | AdditionalPaid-InCapital |   |    | AccumulatedOtherComprehensiveLoss |  |   | (AccumulatedDeficit)RetainedEarnings |   |  | TreasuryStock |        |   | NoncontrollingMinorityInterests |   |         | TotalEquity | 
|                                                  |  | Shares                         |        |   | Amount                   |   |    |                                   |  |   |                                      |  
|Nine Months Ended September 30, 2009:             |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|Balance, January 1, 2009                          |  |                                | 37,676 |   |                          | $ | 38 |                                   |  | $ | 167,337                              |   |  | $             | (2,145 | ) |                                 | $ | 14,014  |             |  | $ |       |   |  | $ | 119 |  |  | $ | 179,363 |  
|Issuance of Common Stock options exercised       |  |                                | 137    |   |                          |   |   |                                   |  |   | 548                                  |   |  |               |       |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 548     |  
|Excess tax benefit on stock options exercised     |  |                                |       |   |                          |   |   |                                   |  |   | 325                                  |   |  |               |       |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 325     |  
|Repurchase of Common Stock                        |  |                                | (350   | ) |                          |   |   |                                   |  |   |                                     |   |  |               |       |   |                                 |   |        |             |  |   | (3,202 | ) |  |   |    |  |  |   | (3,202  | )
|Retirement of Treasury Stock                      |  |                                |       |   |                          |   |   |                                   |  |   | (1,556                               | ) |  |               |       |   |                                 |   | (1,646  | )           |  |   | 3,202  |   |  |   |    |  |  |   |        |  
|Stock-based compensation                          |  |                                |       |   |                          |   |   |                                   |  |   | 2,811                                |   |  |               |       |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 2,811   |  
|Accumulated other comprehensive income (loss):    |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|Unrealized gain on available for sale investments |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               | 40     |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 40      |  
|Foreign currency translation adjustment           |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               | 1,251  |   |                                 |   |        |             |  |   |       |   |  |   | 29  |  |  |   | 1,280   |  
|Dividends on Common Stock                         |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               |       |   |                                 |   | (1,685  | )           |  |   |       |   |  |   |    |  |  |   | (1,685  | )
|Net (loss) for the period                         |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               |       |   |                                 |   | (42,166 | )           |  |   |       |   |  |   | 16  |  |  |   | (42,150 | )
|                                                  |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|Balance September 30, 2009                        |  |                                | 37,463 |   |                          | $ | 38 |                                   |  | $ | 169,465                              |   |  | $             | (854   | ) |                                 | $ | (31,483 | )           |  | $ |       |   |  | $ | 164 |  |  | $ | 137,330 |  
|                                                  |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|                                                  |  |                                |        |   |                          |   |    |                                  
|Nine months Ended September 30, 2010:             |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|Balance, January 1, 2010                          |  |                                | 37,524 |   |                          | $ | 38 |                                   |  | $ | 171,736                              |   |  | $             | (546   | ) |                                 | $ | (41,487 | )           |  | $ |       |   |  | $ | 214 |  |  | $ | 129,955 |  
|Issuance of Common Stock  options exercised      |  |                                | 636    |   |                          |   |   |                                   |  |   | 4,713                                |   |  |               |       |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 4,713   |  
|Issuance of Common Stock  RSUs Vested           |  |                                | 53     |   |                          |   |   |                                   |  |   | (522                                 | ) |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   | (522    | )
|Excess tax benefit on stock options exercised     |  |                                |       |   |                          |   |   |                                   |  |   | 1,555                                |   |  |               |       |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 1,555   |  
|Stock-based compensation                          |  |                                |       |   |                          |   |   |                                   |  |   | 4,458                                |   |  |               |       |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 4,458   |  
|Accumulated other comprehensive income (loss):    |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|Unrealized gain on available for sale investments |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               | 60     |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 60      |  
|Foreign currency translation adjustment           |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               | 178    |   |                                 |   |        |             |  |   |       |   |  |   |    |  |  |   | 178     |  
|Dividends on Common Stock                         |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               |       |   |                                 |   | (1,139  | )           |  |   |       |   |  |   |    |  |  |   | (1,139  | )
|Net income for the period                         |  |                                |       |   |                          |   |   |                                   |  |   |                                     |   |  |               |       |   |                                 |   | 27,904  |             |  |   |       |   |  |   | 83  |  |  |   | 27,987  |  
|                                                  |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  
|Balance September 30, 2010                        |  |                                | 38,213 |   |                          | $ | 38 |                                   |  | $ | 181,940                              |   |  | $             | (308   | ) |                                 | $ | (14,722 | )           |  | $ |       |   |  | $ | 297 |  |  | $ | 167,245 |  
|                                                  |  |                                |        |   |                          |   |    |                                   |  |   |                                      |   |  |               |        |   |                                 |   |         |             |  |   |        |   |  |   |     |  |  |   |         |  

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)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months Ended September 30, |        
|                                                                                  |  | 2010                            |         |   | 2009 |  
|Cash flows from operating activities                                              |  |                                 |         |   |      |   |         |  
|Net income (loss) attributable to Heartland                                       |  | $                               | 27,904  |   |      | $ | (42,166 | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Amortization of capitalized customer acquisition costs                            |  |                                 | 40,944  |   |      |   | 42,663  |  
|Other depreciation and amortization                                               |  |                                 | 19,141  |   |      |   | 15,823  |  
|Addition to loss reserves                                                         |  |                                 | 7,880   |   |      |   | 4,375   |  
|Provision for doubtful receivables                                                |  |                                 | 773     |   |      |   | 624     |  
|Stock-based compensation                                                          |  |                                 | 4,458   |   |      |   | 2,811   |  
|Deferred taxes                                                                    |  |                                 | 36,157  |   |      |   | (18,095 | )
|Net income attributable to noncontrolling interests                               |  |                                 | 83      |   |      |   | 16      |  
|Other                                                                             |  |                                 | 194     |   |      |   | 6       |  
|Changes in operating assets and liabilities:                                      |  |                                 |         |   |      |   |         |  
|Increase in receivables                                                           |  |                                 | (23,256 | ) |      |   | (9,513  | )
|Decrease (increase) in inventory                                                  |  |                                 | 1,033   |   |      |   | (105    | )
|Payment of signing bonuses, net                                                   |  |                                 | (17,956 | ) |      |   | (25,504 | )
|Increase in capitalized customer acquisition costs                                |  |                                 | (11,400 | ) |      |   | (12,569 | )
|Decrease in prepaid expenses                                                      |  |                                 | 3,241   |   |      |   | 1,070   |  
|Increase in current tax asset                                                     |  |                                 | (5,336  | ) |      |   | (11,951 | )
|Decrease (increase) in deposits and other assets                                  |  |                                 | 1,112   |   |      |   | (1,142  | )
|Excess tax benefits on options exercised                                          |  |                                 | (1,555  | ) |      |   | (325    | )
|Increase (decrease) in reserve for unrecognized tax benefits                      |  |                                 | 151     |   |      |   | (452    | )
|Increase in due to sponsor bank                                                   |  |                                 | 1,622   |   |      |   | 13,944  |  
|Increase in accounts payable                                                      |  |                                 | 5,423   |   |      |   | 1,375   |  
|Decrease in accrued expenses and other liabilities                                |  |                                 | (3,334  | ) |      |   | (1,490  | )
|Increase in merchant deposits and loss reserves                                   |  |                                 | 2,754   |   |      |   | 13,974  |  
|(Decrease) increase in reserve for processing system intrusion                    |  |                                 | (98,293 | ) |      |   | 82,911  |  
|Payouts of accrued buyout liability                                               |  |                                 | (22,831 | ) |      |   | (6,319  | )
|Increase in accrued buyout liability                                              |  |                                 | 9,214   |   |      |   | 8,385   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                               |  |                                 | (21,877 | ) |      |   | 58,346  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Cash flows from investing activities                                              |  |                                 |         |   |      |   |         |  
|Purchase of investments held to maturity                                          |  |                                 | (1,425  | ) |      |   | (1,076  | )
|Maturities of investments held to maturity                                        |  |                                 | 1,321   |   |      |   | 1,208   |  
|Decrease in funds held for payroll customers                                      |  |                                 | 5,103   |   |      |   | 5,232   |  
|Decrease in deposits held for payroll customers                                   |  |                                 | (5,007  | ) |      |   | (5,166  | )
|Proceeds from disposal of property and equipment                                  |  |                                 |        |   |      |   | 33      |  
|Acquisition of business                                                           |  |                                 | (108    | ) |      |   | (3,193  | )
|Purchases of property and equipment                                               |  |                                 | (16,367 | ) |      |   | (33,585 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (16,483 | ) |      |   | (36,547 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Cash flows from financing activities                                              |  |                                 |         |   |      |   |         |  
|Proceeds from borrowings                                                          |  |                                 | 53,000  |   |      |   |        |  
|Principal payments on borrowings                                                  |  |                                 | (6,414  | ) |      |   | (6,403  | )
|Proceeds from exercise of stock options                                           |  |                                 | 4,713   |   |      |   | 548     |  
|Excess tax benefits on options exercised                                          |  |                                 | 1,555   |   |      |   | 325     |  
|Repurchase of common stock                                                        |  |                                 |        |   |      |   | (3,202  | )
|Dividends paid on common stock                                                    |  |                                 | (1,139  | ) |      |   | (1,685  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                                 | 51,715  |   |      |   | (10,417 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Net increase in cash                                                              |  |                                 | 13,355  |   |      |   | 11,382  |  
|Effect of exchange rates on cash                                                  |  |                                 | 44      |   |      |   | 57      |  
|Cash at beginning of year                                                         |  |                                 | 32,113  |   |      |   | 27,589  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash at end of period                                                             |  | $                               | 45,512  |   |      | $ | 39,028  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Supplemental cash flow information:                                               |  |                                 |         |   |      |   |         |  
|Cash paid (received) during the period for:                                       |  |                                 |         |   |      |   |         |  
|Interest                                                                          |  | $                               | 3,187   |   |      | $ | 1,844   |  
|Income taxes                                                                      |  |                                 | (13,620 | ) |      |   | 5,131   |  

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 consolidated financial statements include those of Heartland
Payment Systems, Inc. (the Company, we, us, or our) 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 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 September 30, 2010, its results of operations, changes in stockholders equity and cash flows for the nine months ended September 30,
2010 and 2009. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2010. 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, 2009. The December 31, 2009 condensed consolidated balance sheet was derived from the audited 2009
consolidated financial statements.

Business DescriptionThe Companys principal business is to
provide payment processing services related to bankcard transactions for merchants throughout the United States and Canada. In addition, the Company provides certain other merchant services, including check processing, the sale and rental of
terminal equipment, gift and loyalty card processing, and the sale of terminal supplies. HPC provides payroll and related tax filing services throughout the United States. Debitek provides prepaid card 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.

Over 90% of the Companys revenue is derived from processing and settling Visa and MasterCard bankcard 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 bankcard transactions for its 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 bankcard transactions under the member banks control and identification numbers to clear credit bankcard 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 certain of the bank sponsors require a certificate of deposit or a cash balance in a deposit account. If the Company breaches a sponsorship agreement, the bank sponsor 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.
As of September 30, 2010, the Company has not been notified of any such issues by its bank sponsors, Visa or MasterCard.

The Company is currently party to three bank sponsorship agreements. The Company entered into a sponsorship agreement with KeyBank,
National Association on April 1, 1999 and the agreement expires in March 2012. In 2007, the Company entered into a sponsor bank agreement with Heartland Bank (an unrelated third party), which is based in Saint Louis, Missouri. Our agreement
with Heartland Bank



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)



involves substantially the same terms as apply with KeyBank and it has been renewed through September 2013.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 contracts. In August 2008, the Company entered into a sponsorship agreement with SunTrust Bank to replace World Financial Network
National Bank as its sponsor bank for Network Services large national merchant processing portfolio and that portfolio was transferred from World Financial Network National Bank to SunTrust Bank in February 2009. In August 2009, SunTrust Bank
provided twelve months notice to the Company of its intent to withdraw its sponsorship of the Companys large national merchants processing portfolio. In November 2009, the Company entered into a sponsorship agreement with The Bancorp
Bank and transferred the sponsorship of its large national merchants from SunTrust Bank to the Bancorp Bank in February 2010. The agreement with The Bancorp Bank expires in November 2014.

Following is a breakout of the Companys total Visa and MasterCard settled bankcard processing volume for the month of September
2010 by percentage processed under its individual bank sponsorship agreements:



|                              |  |                                              |      |  
|----------------------------- |  | -------------------------------------------- | ---- | -
|Sponsor Bank                  |  | % of September 2010Bankcard ProcessingVolume |     
|KeyBank, National Association |  |                                              | 71.1 | %
|Heartland Bank                |  |                                              | 14.0 | %
|The Bancorp Bank              |  |                                              | 14.9 | %

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 trans-action authorization process. The Company believes the breach has been contained and
did not extend beyond 2008. See Note 3, Processing System Intrusion for further detail and related events.

Working
CapitalOur working capital, defined as current assets less current liabilities, was negative by $38.4 million at September 30, 2010 primarily due to the following: (i) our Revolving Credit Facility, which expires on
September 4, 2012, with $75.0 million in borrowings classified as a current liability and (ii) our $28.0 million Bridge Loan, which is due on February 17, 2011. See Note 10, Credit Facilities for discussion of Revolving Credit
Facility and the Bridge Loan. Management believes that this working capital deficiency will not cause illiquidity and that we will be able to satisfy our obligations in the normal course because: (i) we expect the $75.0 million Revolving Credit
Facility to be refinanced, and we have the flexibility to defer its repayment until 2012 and (ii) we expect the $28.0 million Bridge Loan to be refinanced. We cannot offer any assurance that we will be able to refinance the Revolving Credit
Facility or the Bridge Loan. See Note 3, Processing System Intrusion for information regarding the settlement and payments of claims during the three and nine months ended September 30, 2010.

2. Summary of Significant Accounting Policies

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, goodwill, 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.

Cash
and Cash EquivalentsAt September 30, 2010, cash included approximately $30.4 million of processing-related cash in transit and collateral, compared to approximately $25.5 million of processing-related cash in transit and
collateral at December 31, 2009.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





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 from its bankcard 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. At September 30, 2010,
the Company used $23.0 million of its available cash to fund merchant advances and at December 31, 2009, the Company used $7.0 million of its cash to fund merchant advances. The amount due to sponsor banks for funding advances was $77.6 million
at September 30, 2010 and $73.2 million at December 31, 2009. 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. Unlike the SME merchants, Network Services customers are large national accounts which are invoiced monthly, on payment terms that are typical for
large national accounts.

Receivables also include amounts resulting from the pre-funding of Discover and American Express
transactions to our merchants and are due from the related bankcard networks. These amounts are recovered over the following two business days from the date of processing the transaction.

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 bond funds, corporate debt and equity securities, and certificates of
deposit. 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 fair value based on quoted market prices. Certificates of
deposit are classified as held to maturity and recorded at cost. In the event of a sale, cost is determined on a specific identification basis. At September 30, 2010, Funds Held for Payroll Customers included cash and cash equivalents of $23.2
million and investments available for sale of $1.5 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. 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.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





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 September 30, 2010 and
December 31, 2009.

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. 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 bankcard 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. 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.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





The classification
of the accrued buyout liability between current and non-current liabilities on the Consolidated Balance Sheet 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 bankcard 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 bankcard and other processing transactions are processed or payroll services are performed.

Equipment-related income includes revenues from the sale, rental and deployment of bankcard 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.

Loss Contingencies and Legal ExpensesThe Company records a liability for loss contingencies when the liability is probable and reasonably estimable. Legal fees associated with
loss contingencies are recorded when the legal fees are incurred.

The Company records recoveries from its insurance providers
when cash is received from the provider.

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.

The provision
for/(benefit from) income taxes for the three and nine months ended September 30, 2010 and 2009 and the resulting effective tax rates were as follows:



|                                          |  |                                 |       |   |                                |   |         |      |  |   |        |   |  |   |         |  
|----------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                          |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                          |  | 2010                            |       |   | 2009                           |   |         | 2010 |  |   | 2009   |  
|                                          |  | (In thousands)                  |       |   |                                |   |         |      | 
|Provision for/(benefit from) income taxes |  | $                               | 4,694 |   |                                | $ | (22,314 | )    |  | $ | 17,352 |   |  | $ | (25,484 | )
|Effective tax rate                        |  |                                 | 38.3  | % |                                |   | 37.6    | %    |  |   | 38.3   | % |  |   | 37.7    | %

Current Deferred Tax
Assets, Net, decreased from $42.8 million at December 31, 2009 to $7.3 million at September 30, 2010. The changes in deferred tax assets primarily resulted from the payment of the settlement with the card brands and recoveries from our
insurance providers (see Note 3, Processing System Intrusion for more detail).

The Company maintains valuation allowances
when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings,
carry back and carry forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





The Company
regularly evaluates its tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax
laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions, which have been deemed reasonable by management. However, if managements estimates are not representative of actual
outcomes, the Companys results could be materially impacted. The Company does not expect any material changes to unrecognized tax benefits in the next 12 months. At September 30, 2010, the reserve for unrecognized tax benefits related to
uncertain tax positions was $1.5 million, of which $1.0 million would, if recognized, impact the effective tax rate.

StockBased Compensation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 2009, the Companys Board of Directors approved grants of 362,600 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 nine
months ended September 30, 2010 and 2009 were computed based on the weighted average outstanding common shares plus equivalent shares assuming exercise of stock options, where dilutive. Due to the net loss in 2009, calculating Diluted Earnings
Per Share using diluted weighted average shares would be anti-dilutive for 2009 periods. Therefore, weighted average common stock outstanding was used to calculate Diluted Earnings Per Share for 2009.

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 and is included in stockholders equity. At September 30, 2010 and 2009, the cumulative foreign currency translation reflected a loss of $0.4 million and $0.9 million, respectively.
The Company intends to indefinitely reinvest undistributed earnings of CPOS and has not tax affected the cumulative foreign currency translation gain or loss. Determination of the amount of unrecognized deferred tax liability related to indefinitely
reinvested profits is not material.

Noncontrolling InterestsNoncontrolling 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 attributable to noncontrolling interests in the Consolidated Statement of Operations. The minority stockholders interests included in Noncontrolling interests in the September 30, 2010 and
December 31, 2009 Consolidated Balance Sheet were $297,000 and $214,000, respectively, and reflect the original 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 nine months ended September 30, 2010.

New
Accounting PronouncementsIn October 2009, the FASB issued an accounting standard update on multiple deliverable revenue arrangements to establish the accounting for certain revenue



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)



arrangements in which the vendor or service provider will perform multiple revenue generating activities (e.g., contracts that require an up-front fee along with fees that recur over the life of
the arrangement). Specifically, the update addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. This update will be effective for revenue arrangements that are entered
into or materially altered after January 1, 2011. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.

3. 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 Industry Data Security Standard (PCI-DSS) from a third-party assessor each year since the standard was announced, including 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s published list of PCI-DSS compliant service
providers. We were similarly advised by MasterCard that, based on MasterCards investigation of the Processing System Intrusion, MasterCard believed we were in violation of the MasterCard Standards and, based on that belief, MasterCard removed
us from MasterCards published list of 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 MasterCards published list of Compliant Service Providers and 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 cards, the cardholders name). However, the cardholder information that we process does not include
addresses or Social Security numbers. Also, we believe that no unencrypted PIN data was captured and that the breach has been contained and did not extend beyond 2008.

Since its announcement of the Processing System Intrusion on January 20, 2009 and through September 30, 2010, the Company has expensed a total of $145.0 million, before reducing those charges by
$30.7 million of total insurance recoveries. The majority of the total charges, or approximately $114.7 million, related to settlements of claims. Approximately $30.3 million of the total charges were for legal fees and costs we incurred for
investigations, defending various claims and actions, remedial actions and crisis management services.

During the nine months
ended September 30, 2010, the Company recovered from its insurance providers approximately $26.8 million of the costs it incurred for the Processing System Intrusion and expensed approximately $12.0 million for accruals, legal fees and costs it
incurred for defending various claims and actions, resulting in a net recovery of $14.8 million, or $0.23 per share. For the three months ended September 30, 2010, the Company expensed a total of $0.7 million, or about $0.01 per share,
respectively, associated with the Processing System Intrusion.

For the three and nine months ended September 30, 2009,
the Company expensed a total of $73.3 million and $105.3 million, respectively, or about $1.22 and $1.74 per share, respectively, for settlement accruals, legal fees and costs it incurred for defending various claims and actions associated with the
Processing System Intrusion.

At September 30, 2010, the Company carried a $1.6 million Reserve for Processing System
Intrusion on its Consolidated Balance Sheet. The majority of this Reserve related to settlements which have been agreed upon but are unpaid as of the date of the Balance Sheet. During the three months ended September 30, 2010, the Company
settled claims and disputes with DFS Services, LLC (Discover) and MasterCard Worldwide (MasterCard) from its cash reserves as follows:



| |  |  | On August 31, 2010, the Company and Discover entered into an agreement of settlement and release (the Settlement Agreement) to resolve
potential claims and other disputes among the Company and Discover (and its affiliates and certain of its issuers) with respect to the Processing System Intrusion. On September 2, 2010, the Company paid Discover $5.0 million in full and final
satisfaction of any and all claims of Discover, its affiliates and certain of its issuers arising from or relating to the Processing System Intrusion. The Settlement Agreement contains mutual releases by and between the Company and Discover (on
behalf of itself and its affiliates) relating to the Processing System Intrusion.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





| |  |  | On May 19, 2010, the Company entered into a settlement agreement with MasterCard (the MasterCard Settlement Agreement) to resolve
potential claims and other disputes among the Company, Heartland Bank, Key Bank National Association (Key Bank and together with Heartland Bank, the Sponsor Banks) and MasterCard related to the Processing System Intrusion.
Under the MasterCard Settlement Agreement, alternative recovery offers totaling $41.4 million were made to eligible MasterCard issuers with respect to losses alleged to have been incurred by them as a result of the Processing System Intrusion. The
$41.4 million included a $6.6 million credit for fines previously collected by MasterCard during 2009, so the maximum amount payable under the settlement was $34.8 million if all MasterCard issuers had accepted the settlement. The Company paid
approximately $34.4 million because certain issuers did not accept settlement. Those issuers, who represent less than 1% of the accounts eligible for the settlement, have been preliminarily awarded $367,172 by MasterCard, and the Company is
contesting that award. On September 3, 2010 and September 14, 2010, the Company paid the remaining settlement amounts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Claims and disputes with other Card Brands, which were settled and paid prior to the three months ended September 30, 2010, were as follows:



| |  |  | On December 17, 2009, we entered into a settlement agreement and release with American Express to resolve potential claims and other disputes
among us and American Express (and its issuers) with respect to the Processing System Intrusion, and subsequently we paid approximately $3.5 million in full and final satisfaction of any and all claims of American Express and its issuers arising
from or relating to the Processing System Intrusion. Such settlement agreement and release contains mutual releases by and between us and American Express (on behalf of itself and its issuers) relating to the Processing System Intrusion.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 7, 2010, the Company, the Sponsor Banks, and Visa U.S.A. Inc., Visa International Service Association and Visa Inc. (collectively,
Visa) entered into a settlement agreement (the Settlement Agreement) to resolve potential claims and other disputes among the Company, the Sponsor Banks and Visa with respect to the potential rights and claims of Visa and
certain issuers of Visa-branded credit and debit cards related to the Processing System Intrusion. After including a $780,000 credit for fines previously collected by Visa during 2009, the amount paid by the Company under the Settlement Agreement
was $59.3 million. The costs of this settlement were included in the Companys Provision for Processing System Intrusion on its Consolidated Statement of Operations for the year ended December 31, 2009 and in its Reserve for Processing
System Intrusion on its Consolidated Balance Sheet as of December 31, 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 18, 2010,
the Company entered into a bridge loan agreement (the Bridge Loan Agreement) with KeyBank, as administrative agent, and KeyBank and Heartland Bank as bridge lenders. On that date, KeyBank made a bridge loan to the Company in the amount
of $20.0 million and Heartland Bank made a bridge loan in the amount of $8.0 million (collectively, the Bridge Loan), which are the maximum amounts that the Company may borrow under the Bridge Loan Agreement. The Company must repay the
Bridge Loan by February 17, 2011. See Note 10, Credit Facilities for additional terms of the Bridge Loan.



12



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





On
February 18, 2010, the Company also entered into a Commitment Increase Agreement (the Commitment Increase Agreement) pursuant to the Amended and Restated Credit Agreement by and between the Company and JPMorgan Chase Bank, N.A., as
administrative agent, and certain lenders who may become a party to the Amended and Restated Credit Agreement from time to time (the Amended and Restated Credit Agreement) dated as of May 30, 2008 whereby KeyBank, as one of the
lenders under the Amended and Restated Credit Agreement, agreed to increase its revolving credit commitment to the Company under the Amended and Restated Credit Agreement by $25.0 million (the Increased Credit Commitment). The terms of
the Increased Credit Commitment are similar to the terms of the Revolving Credit Facility (See Note 10, Credit Facilities).

The proceeds of the Bridge Loan and the Increased Credit Commitment, together with a portion of the Companys cash reserves, were
used to fund the settlement with Visa. The Settlement Agreement was consummated on February 18, 2010, with a payment of $58.6 million.

These settlement amounts were previously provided for in the Companys Provision for Processing System Intrusion and carried in its Reserve for Processing System Intrusion. The Company is prepared to
vigorously defend itself against any unsettled claims relating to the Processing System Intrusion that have been asserted against it and its sponsor banks to date. 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.

Additional costs the Company expects to incur
for legal fees and costs for defending various claims and actions associated with the Processing System Intrusion will be recognized as incurred. Such costs could be material and could adversely impact the Companys results of operations,
financial condition and cash flow.

4. Receivables

A summary of receivables by major class was as follows at September 30, 2010 and December 31, 2009:



|                                     |  |                   |         |   |                  |   |         |  
|------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                     |  | September 30,2010 |         |   | December 31,2009 |  
|                                     |  | (In thousands)    |        
|Accounts receivable from merchants   |  | $                 | 153,061 |   |                  | $ | 138,761 |  
|Receivables from bankcard networks   |  |                   | 15,771  |   |                  |   | 7,790   |  
|Accounts receivable from others      |  |                   | 3,700   |   |                  |   | 3,311   |  
|                                     |  |                   |         |   |                  |   |         |  
|                                     |  |                   | 172,532 |   |                  |   | 149,862 |  
|Less allowance for doubtful accounts |  |                   | (639    | ) |                  |   | (459    | )
|                                     |  |                   |         |   |                  |   |         |  
|Total receivables, net               |  | $                 | 171,893 |   |                  | $ | 149,403 |  
|                                     |  |                   |         |   |                  |   |         |  

Included in accounts receivable from others are $1.5 million and $1.8 million which are due from employees
at September 30, 2010 and December 31, 2009, respectively. Accounts receivable related to bankcard networks reflect amounts we have pre-funded to merchants for their Discover and American Express bankcard transactions.

A summary of the activity in the allowance for doubtful accounts for the three and nine months ended September 30, 2010 and 2009 was
as follows:



|                          |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  
|------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                          |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                          |  | 2010                            |      |   | 2009                           |   |     | 2010 |  |   | 2009 |  
|                          |  | (In thousands)                  |     
|Beginning balance         |  | $                               | 984  |   |                                | $ | 560 |      |  | $ | 459  |   |  | $ | 499  |  
|Additions to allowance    |  |                                 | 189  |   |                                |   | 75  |      |  |   | 773  |   |  |   | 624  |  
|Charges against allowance |  |                                 | (534 | ) |                                |   | (79 | )    |  |   | (593 | ) |  |   | (567 | )
|                          |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Ending balance            |  | $                               | 639  |   |                                | $ | 556 |      |  | $ | 639  |   |  | $ | 556  |  
|                          |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(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 September 30, 2010 and December 31, 2009:



|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|------------------------------------------------------ |  | -------------- | ------ |  | -------------------- | - | --- | --------------------- |  | - | ------------------- |  |  | - | ------ | 
|                                                       |  | Cost           |        |  | GrossUnrealizedGains |   |     | GrossUnrealizedLosses |  |   | EstimatedFair Value | 
|                                                       |  | (In thousands) |       
|September 30, 2010                                     |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Funds Held for Payroll Customers:                      |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Fixed income bond fund                                 |  | $              | 968    |  |                      | $ | 187 |                       |  | $ |                    |  |  | $ | 1,155  | 
|Corporate debt securities                              |  |                | 273    |  |                      |   | 19  |                       |  |   |                    |  |  |   | 292    | 
|Corporate equity securities                            |  |                | 29     |  |                      |   | 13  |                       |  |   |                    |  |  |   | 42     | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Total investments available-for-sale                   |  |                | 1,270  |  |                      |   | 219 |                       |  |   |                    |  |  |   | 1,489  | 
|Cash held for payroll customers                        |  |                | 23,171 |  |                      |   |    |                       |  |   |                    |  |  |   | 23,171 | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Total Funds Held for Payroll Customers                 |  | $              | 24,441 |  |                      | $ | 219 |                       |  | $ |                    |  |  | $ | 24,660 | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|                                                       |  |                |        | 
|Investments:                                           |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Investments held to maturity  Certificates of deposit |  | $              | 1,558  |  |                      | $ |    |                       |  | $ |                    |  |  | $ | 1,558  | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Total investments                                      |  | $              | 1,558  |  |                      | $ |    |                       |  | $ |                    |  |  | $ | 1,558  | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 



|(a) | Certificates of deposit have remaining terms ranging from 2 months to 23 months.
|--- | --------------------------------------------------------------------------------



|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|------------------------------------------------------ |  | -------------- | ------ |  | -------------------- | - | --- | --------------------- |  | - | ------------------- |  |  | - | ------ | 
|                                                       |  | Cost           |        |  | GrossUnrealizedGains |   |     | GrossUnrealizedLosses |  |   | EstimatedFair Value | 
|                                                       |  | (In thousands) |       
|December 31, 2009                                      |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Funds Held for Payroll Customers:                      |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Fixed income bond fund                                 |  | $              | 968    |  |                      | $ | 113 |                       |  | $ |                    |  |  | $ | 1,081  | 
|Corporate debt securities                              |  |                | 273    |  |                      |   | 10  |                       |  |   |                    |  |  |   | 283    | 
|Corporate equity securities                            |  |                | 29     |  |                      |   |    |                       |  |   |                    |  |  |   | 29     | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Total investments available-for-sale                   |  |                | 1,270  |  |                      |   | 123 |                       |  |   |                    |  |  |   | 1,393  | 
|Cash held for payroll customers                        |  |                | 28,274 |  |                      |   |    |                       |  |   |                    |  |  |   | 28,274 | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Total Funds Held for Payroll Customers                 |  | $              | 29,544 |  |                      | $ | 123 |                       |  | $ |                    |  |  | $ | 29,667 | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|                                                       |  |                |        | 
|Investments:                                           |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Investments held to maturity  Certificates of deposit |  | $              | 1,450  |  |                      | $ |    |                       |  | $ |                    |  |  | $ | 1,450  | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 
|Total investments                                      |  | $              | 1,450  |  |                      | $ |    |                       |  | $ |                    |  |  | $ | 1,450  | 
|                                                       |  |                |        |  |                      |   |     |                       |  |   |                     |  |  |   |        | 

The Companys framework for measuring fair value 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





At
September 30, 2010 and December 31, 2009, all investments in available-for-sale securities held by the Company were measured using Level 1 inputs and all held to maturity investments held by the Company were measured using Level 2 inputs.

During the nine months ended September 30, 2010, the Company did not experience any other-than-temporary losses on its
investments. During the twelve months ended December 31, 2009, the Company recognized $31,000 of other-than-temporary impairment losses on its corporate debt securities.

The maturity schedule of all available-for-sale debt securities and held to maturity investments along with amortized cost and estimated fair value as of September 30, 2010 is as follows:



|                                      |  |                |       |  |                     |   |       | 
|------------------------------------- |  | -------------- | ----- |  | ------------------- | - | ----- | 
|                                      |  | AmortizedCost  |       |  | EstimatedFair Value |  
|                                      |  | (In thousands) |      
|Due in one year or less               |  | $              | 2,610 |  |                     | $ | 2,804 | 
|Due after one year through five years |  |                | 126   |  |                     |   | 130   | 
|Due after five years                  |  |                | 63    |  |                     |   | 71    | 
|                                      |  |                |       |  |                     |   |       | 
|                                      |  | $              | 2,799 |  |                     | $ | 3,005 | 
|                                      |  |                |       |  |                     |   |       | 

6. Capitalized Customer Acquisition Costs, Net

A summary of net capitalized customer acquisition costs as of September 30, 2010 and December 31, 2009 was as follows:



|                                                |  |                   |         |   |                  |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | September 30,2010 |         |   | December 31,2009 |  
|                                                |  | (In thousands)    |        
|Capitalized signing bonuses                     |  | $                 | 103,710 |   |                  | $ | 119,560 |  
|Less accumulated amortization                   |  |                   | (58,305 | ) |                  |   | (63,299 | )
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 45,405  |   |                  |   | 56,261  |  
|                                                |  |                   |         |   |                  |   |         |  
|Capitalized customer deferred acquisition costs |  |                   | 39,056  |   |                  |   | 39,230  |  
|Less accumulated amortization                   |  |                   | (24,011 | ) |                  |   | (23,453 | )
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 15,045  |   |                  |   | 15,777  |  
|                                                |  |                   |         |   |                  |   |         |  
|Capitalized customer acquisition costs, net     |  | $                 | 60,450  |   |                  | $ | 72,038  |  
|                                                |  |                   |         |   |                  |   |         |  

A summary of the activity in capitalized customer acquisition costs, net for the three and nine month
periods ended September 30, 2010 and 2009 was as follows:



|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                |  | 2010                            |         |   | 2009                           |   |         | 2010 |  |   | 2009    |  
|                                                |  | (In thousands)                  |        
|Balance at beginning of period                  |  | $                               | 63,556  |   |                                | $ | 75,246  |      |  | $ | 72,038  |   |  | $ | 77,737  |  
|Plus additions to:                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Capitalized signing bonuses, net                |  |                                 | 6,551   |   |                                |   | 7,739   |      |  |   | 17,956  |   |  |   | 25,504  |  
|Capitalized customer deferred acquisition costs |  |                                 | 3,674   |   |                                |   | 4,374   |      |  |   | 11,400  |   |  |   | 12,569  |  
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                |  |                                 | 10,225  |   |                                |   | 12,113  |      |  |   | 29,356  |   |  |   | 38,073  |  
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Less amortization expense on:                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Capitalized signing bonuses, net                |  |                                 | (9,333  | ) |                                |   | (10,123 | )    |  |   | (28,811 | ) |  |   | (30,737 | )
|Capitalized customer deferred acquisition costs |  |                                 | (3,998  | ) |                                |   | (4,089  | )    |  |   | (12,133 | ) |  |   | (11,926 | )
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                |  |                                 | (13,331 | ) |                                |   | (14,212 | )    |  |   | (40,944 | ) |  |   | (42,663 | )
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Balance at end of period                        |  | $                               | 60,450  |   |                                | $ | 73,147  |      |  | $ | 60,450  |   |  | $ | 73,147  |  
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

Net signing bonus adjustments from estimated amounts to actual were $(0.4) million and $(0.8) million,
respectively, for the three months ended September 30, 2010 and 2009, and $(2.0) million and $(0.9) million, respectively, for the nine months ended September 30, 2010 and 2009. Net signing bonus



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)



adjustments are netted against additions in the table above. 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 result from the prior overpayment of signing bonuses and would be
recovered from the relevant salesperson.

Fully amortized signing bonuses of $11.9 million and $8.7 million respectively, were
written off during the three month periods ended September 30, 2010 and 2009, and $33.8 million and $25.0 million respectively, were written off during the nine month periods ended September 30, 2010 and 2009. In addition, fully amortized
customer deferred acquisition costs of $3.9 million and $3.2 million, respectively, were written off during the three months ended September 30, 2010 and 2009, and $11.6 million and $10.7 million, respectively, were written off during the nine
months ended September 30, 2010 and 2009.

The Company believes that no impairment of capitalized customer acquisition
costs has occurred as of September 30, 2010 and December 31, 2009.

7. Intangible Assets and Goodwill

Intangible Assets Intangible assets consisted of the following as of September 30, 2010 and December 31,
2009:



|                       |  |                    |        |  |                              |   |        |           |  |   |        |  |  |  |                                      | 
|---------------------- |  | ------------------ | ------ |  | ---------------------------- | - | ------ | --------- |  | - | ------ |  |  |  | ------------------------------------ | 
|                       |  | September 30, 2010 |        |  | Amortization Life and Method |  
|                       |  | GrossAssets        |        |  | AccumulatedAmortization      |   |        | Net Asset |  |  
|                       |  | (In thousands)     |        |  |                              |  
|Finite Lived Assets:   |  |                    |        |  |                              |   |        |           |  |   |        | 
|Customer relationships |  | $                  | 28,675 |  |                              | $ | 3,388  |           |  | $ | 25,287 |  |  |  | 3 to 18 yearsproportional cash flow | 
|Merchant Portfolio (a) |  |                    | 3,345  |  |                              |   | 993    |           |  |   | 2,352  |  |  |  | 7 yearsproportional cash flow       | 
|Software               |  |                    | 9,154  |  |                              |   | 6,450  |           |  |   | 2,704  |  |  |  | 3 to 5 yearsstraight line           | 
|Non-compete agreements |  |                    | 994    |  |                              |   | 698    |           |  |   | 296    |  |  |  | 3 to 5 yearsstraight line           | 
|Other                  |  |                    | 532    |  |                              |   | 386    |           |  |   | 146    |  |  |  | 2 to 4 yearsstraight line           | 
|                       |  |                    |        |  |                              |   |        |           |  |   |        |  |  |  |                                      | 
|                       |  | $                  | 42,700 |  |                              | $ | 11,915 |           |  | $ | 30,785 |  |  |  |                                      | 
|                       |  |                    |        |  |                              |   |        |           |  |   |        |  |  |  |                                      | 



|(a) | Includes the July 31, 2009 purchase for $3.2 million of the existing Discover merchant portfolio, which the Company was already processing. This purchase related
to the Companys 2008 agreement with DFS Services, LLC, which enables the Company to offer bankcard merchants a streamlined process that enables them to accept Discover Network cards on the Companys processing platform. This asset is
being amortized for the next 70 months in proportion to estimated future cash flows.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                       |  |                   |        |  |                              |   |       |           |  |   |        |  |  |  |                                      | 
|---------------------- |  | ----------------- | ------ |  | ---------------------------- | - | ----- | --------- |  | - | ------ |  |  |  | ------------------------------------ | 
|                       |  | December 31, 2009 |        |  | Amortization Life and Method |  
|                       |  | GrossAssets       |        |  | AccumulatedAmortization      |   |       | Net Asset |  |  
|                       |  | (In thousands)    |        |  |                              |  
|Finite Lived Assets:   |  |                   |        |  |                              |   |       |           |  |   |        | 
|Customer relationships |  | $                 | 28,663 |  |                              | $ | 2,471 |           |  | $ | 26,192 |  |  |  | 3 to 18 yearsproportional cash flow | 
|Merchant Portfolio (a) |  |                   | 3,237  |  |                              |   | 386   |           |  |   | 2,851  |  |  |  | 7 yearsproportional cash flow       | 
|Software               |  |                   | 9,154  |  |                              |   | 4,330 |           |  |   | 4,824  |  |  |  | 3 to 5 yearsstraight line           | 
|Non-compete agreements |  |                   | 994    |  |                              |   | 490   |           |  |   | 504    |  |  |  | 3 to 5 yearsstraight line           | 
|Other                  |  |                   | 512    |  |                              |   | 246   |           |  |   | 266    |  |  |  | 2 to 4 yearsstraight line           | 
|                       |  |                   |        |  |                              |   |       |           |  |   |        |  |  |  |                                      | 
|                       |  | $                 | 42,560 |  |                              | $ | 7,923 |           |  | $ | 34,637 |  |  |  |                                      | 
|                       |  |                   |        |  |                              |   |       |           |  |   |        |  |  |  |                                      | 



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





Amortization
expense related to the intangible assets was $1.3 million and $1.3 million, respectively, for the three months ended September 30, 2010 and 2009 and $4.0 million and $3.6 million, respectively, for the nine months ended September 30, 2010
and 2009. The estimated remaining amortization expense related to intangible assets is as follows:



|                                           |  |                |        | 
|------------------------------------------ |  | -------------- | ------ | 
|For the Twelve Months Ending September 30, | 
|                                           |  | (In thousands) |       
|2011                                       |  | $              | 4,091  | 
|2012                                       |  |                | 2,389  | 
|2013                                       |  |                | 2,552  | 
|2014                                       |  |                | 2,234  | 
|2015                                       |  |                | 2,208  | 
|Thereafter                                 |  |                | 17,311 | 
|                                           |  |                |        | 
|                                           |  | $              | 30,785 | 
|                                           |  |                |        | 

Goodwill The changes in the carrying amount of goodwill for the nine months ended
September 30, 2010 and 2009 were as follows:



|                                        |  |                                |        |  |      |   |        |  
|--------------------------------------- |  | ------------------------------ | ------ |  | ---- | - | ------ | -
|                                        |  | Nine Months EndedSeptember 30, |       
|                                        |  | 2010                           |        |  | 2009 |  
|                                        |  | (In thousands)                 |       
|                                        |  |                               
|Beginning balance                       |  | $                              | 60,962 |  |      | $ | 58,456 |  
|Effects of foreign currency translation |  |                                | 145    |  |      |   | 1,078  |  
|Other (a)                               |  |                                | 1,019  |  |      |   | (161   | )
|                                        |  |                                |        |  |      |   |        |  
|Ending balance                          |  | $                              | 62,126 |  |      | $ | 59,373 |  
|                                        |  |                                |        |  |      |   |        |  



|(a) | Reflects estimated earnout payments due to the former shareholders of Chockstone and adjustments to allocations of purchase price.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

8. Merchant Deposits and Loss Reserves

The majority of merchant deposits held by the Company include funds in transit associated with pin debit processing and check processing in addition to merchant funds held that are associated with
bankcard processing. As of September 30, 2010 and December 31, 2009, the Company held merchant deposits and funds in transit totaling $36.3 million and $25.9 million, respectively, of which $8.1 million and $8.8 million respectively,
related to deposits held for bankcard processing. In addition, the Company held letters of credit related to merchant bankcard processing totaling $388,000 and $463,000 at September 30, 2010 and December 31, 2009, respectively.

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 card brand networks for the reversed charges. The Company has 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.

The card brand 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 $22.8 billion and $19.6 billion for the four months ended September 30, 2010 and December 31, 2009, respectively.
However, for the four months ended September 30, 2010 and December 31, 2009, the Company was presented with $10.6 million and $11.1 million, respectively, in chargebacks by issuing banks. In the nine months ended September 30, 2010
and September 30, 2009, the Company incurred merchant credit losses of $7.3 million and $4.1 million, respectively, on total SME bankcard dollar volumes processed of $48.2 billion and $43.8 billion, respectively. These credit losses are
included in processing and servicing costs in the Companys Consolidated Statement of Operations.

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



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)



established a contingent reserve for estimated currently existing credit and fraud losses on its Consolidated Balance Sheet, amounting to $1.5 million on September 30, 2010 and $1.3 million
on December 31, 2009. This reserve is determined by performing an analysis of the Companys historical loss experience applied to current processing volume and exposures.

A summary of the activity in the loss reserve for the three and nine month periods ended September 30, 2010 and 2009 was as follows:



|                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                            |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|                            |  | (In thousands)                  |       
|Beginning balance           |  | $                               | 1,467  |   |                                | $ | 1,157  |      |  | $ | 1,336  |   |  | $ | 1,097  |  
|Additions to reserve        |  |                                 | 1,918  |   |                                |   | 1,172  |      |  |   | 7,880  |   |  |   | 4,375  |  
|Charges against reserve (a) |  |                                 | (1,838 | ) |                                |   | (1,093 | )    |  |   | (7,669 | ) |  |   | (4,236 | )
|                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Ending balance              |  | $                               | 1,547  |   |                                | $ | 1,236  |      |  | $ | 1,547  |   |  | $ | 1,236  |  
|                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



|(a) | Included in these amounts are payroll segment losses of $46,000 and $49,000, respectively, for the three months ended September 30, 2010 and 2009,
and $246,000 and $150,000, respectively, for the nine months ended September 30, 2010 and 2009.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Chargebacks originating from large national merchant bankcard processing are processed and carried by Fifth Third Processing Solutions,
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 September 30, 2010 and December 31, 2009:



|                                                  |  |                   |        |   |                  |   |        |  
|------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                  |  | September 30,2010 |        |   | December 31,2009 |  
|                                                  |  | (In thousands)    |       
|Vested Relationship Managers and sales managers   |  | $                 | 27,630 |   |                  | $ | 41,157 |  
|Unvested Relationship Managers and sales managers |  |                   | 1,639  |   |                  |   | 1,729  |  
|                                                  |  |                   |        |   |                  |   |        |  
|                                                  |  |                   | 29,269 |   |                  |   | 42,886 |  
|Less current portion                              |  |                   | (5,854 | ) |                  |   | (9,306 | )
|                                                  |  |                   |        |   |                  |   |        |  
|Long-term portion of accrued buyout liability     |  | $                 | 23,415 |   |                  | $ | 33,580 |  
|                                                  |  |                   |        |   |                  |   |        |  

In calculating the accrued buyout liability for unvested Relationship Managers and sales managers, 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 $0.3 million at September 30, 2010 and December 31, 2009.

A summary of the activity in the accrued buyout liability for the three and nine month periods ended September 30, 2010 and 2009 was as follows:



|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|-------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                       |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                       |  | 2010                            |         |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|                                       |  | (In thousands)                  |        
|Beginning balance                      |  | $                               | 45,648  |   |                                | $ | 41,212 |      |  | $ | 42,886  |   |  | $ | 41,040 |  
|Increase in settlement obligation, net |  |                                 | 2,916   |   |                                |   | 3,309  |      |  |   | 9,214   |   |  |   | 8,385  |  
|Buyouts                                |  |                                 | (19,295 | ) |                                |   | (1,415 | )    |  |   | (22,831 | ) |  |   | (6,319 | )
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Ending balance                         |  | $                               | 29,269  |   |                                | $ | 43,106 |      |  | $ | 29,269  |   |  | $ | 43,106 |  
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

During the three months ended September 30, 2010, the Company exercised its rights to buy out a
substantial portion of residual commissions owned by Relationship Managers and sales managers (also



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)



referred to as portfolio equity). As a result of these buyouts, the Company reduced the settlement obligation by the approximately $17.7 million of cash payments made. The Company
expects to realize an ongoing reduction of approximately $0.6 million in monthly residual commission expense, which is recorded in Processing and Servicing costs on the Consolidated Statement of Operations. The amount of future reductions in
residual commission expense will be impacted by merchant attrition. Partially offsetting the impact of these buyouts are increases in the settlement obligation due to new SME merchant account signings, as adjusted for changes in same-store sales
growth, changes in gross margin for existing merchant relationships, and the impact of SME merchant attrition.

10. Credit Facilities

Amended and Restated Credit Agreement. On May 30, 2008, the Company entered into 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 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 was able to increase the total commitments by
$25 million for a total commitment under the Revolving Credit Facility of $75 million. On February 18, 2010, the Company entered into the Commitment Increase Agreement to increase the total commitment under the Revolving Credit
Facility by $25 million. The terms of the Increased Credit Commitment are identical to the terms of the Revolving Credit Facility. The Revolving Credit Facility is available to the Company on a revolving basis until 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
September 30, 2010 were as follows:



|                                  |  |                |        | 
|--------------------------------- |  | -------------- | ------ | 
|Twelve Months Ended September 30, |  | (In thousands) |       
|2011                              |  | $              | 8,333  | 
|2012                              |  |                | 2,083  | 
|                                  |  |                |        | 
|                                  |  | $              | 10,416 | 
|                                  |  |                |        | 

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. The Company was in compliance with these covenants as of September 30, 2010.

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.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





At
December 31, 2009, there was $50.0 million outstanding under the Revolving Credit Facility and $16.7 million outstanding under the Term Credit Facility. At September 30, 2010, there was $75.0 million outstanding under the
Revolving Credit Facility and $10.4 million outstanding under the Term Credit Facility. The weighted average interest rate at September 30, 2010 was 3.1%. Total fees and direct costs paid for the Amended and Restated Credit Agreement through
September 30, 2010 were $514,000. These costs are being amortized to interest expense over the life of the Amended and Restated Credit Agreement.

Bridge Loan Agreement and Increased Credit Commitment.A condition of the January 7, 2010 Settlement Agreement with Visa was for the Company to obtain a loan of at least $53.0 million
from KeyBank and Heartland Bank, the proceeds of which were to be used by the Company to fund the settlement amount. See Note 3, Processing System Intrusion for more detail.

On February 18, 2010, the Company entered into the Bridge Loan Agreement with KeyBank, as administrative agent, and KeyBank and Heartland Bank as bridge lenders. On that date, KeyBank made a bridge
loan to the Company in the amount of $20.0 million and Heartland Bank made a bridge loan in the amount of $8.0 million, which represents the maximum amounts that the Company may borrow under the Bridge Loan Agreement. The Company must repay the
Bridge Loan by February 17, 2011. It may optionally prepay the Bridge Loan at any time in whole or in part. However, it must prepay the Bridge Loan with any net cash proceeds from certain asset sales, the net cash proceeds of certain equity and
debt issuances, and the net cash proceeds of certain recovery events.

The Bridge Loan bears interest at a rate of 1.0% plus
the Alternate Base Rate. The Alternate Base Rate is the greater of (i) KeyBanks prime rate, (ii) 0.5% plus the weighted average of the overnight Federal funds rate and (iii) 1.0% plus one-month LIBOR. If principal, interest or
fees on the Bridge Loan are not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest at a rate per annum equal to the Alternate Base Rate plus 3.0%.

The Bridge Loan Agreement contains covenants, which include maintenance of certain leverage and fixed charge coverage ratios, limitations
on indebtedness, 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. These covenants also apply to certain of
the Companys subsidiaries. The Bridge Loan Agreement is secured by a first priority security interest in the Companys service center located in Jeffersonville, Indiana (the Service Center) and in certain other assets relating
to the ownership and occupancy of the Service Center.

The proceeds of the Bridge Loan and the Increased Credit Commitment,
together with a portion of the Companys cash reserves, were used to fund the settlement with Visa. The Settlement Agreement was consummated on February 18, 2010, with a payment of $58.6 million.

11. Stockholders Equity

Common Stock Repurchases. No common stock was repurchased during the nine months ended September 30, 2010. During the nine months ended September 30, 2009, the Company repurchased
350,400 shares of its common stock at average per share costs of $9.14 under authorizations from its Board of Directors. Under these authorizations, the Company repurchased an aggregate of 2,924,684 shares of its common stock through
September 30, 2010 at a cost of $65.1 million, or an average cost of $22.25 per share. At September 30, 2010, the Company has remaining authorization to repurchase up to 175,316 additional shares of its common stock.

On February 28, 2008, the Companys Board of Directors resolved to retire all common shares 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. The excess of the purchase price of the treasury stock over the stated value was
allocated between additional paid-in capital and retained earnings.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





Dividends on
Common Stock.During the nine months ended September 30, 2010 and the twelve months ended December 31, 2009, the Companys Board of Directors declared the following quarterly cash dividends on common stock:



|                                       |  |                   |  |                    |  |                            |       | 
|-------------------------------------- |  | ----------------- |  | ------------------ |  | -------------------------- | ----- | 
|Date Declared                          |  | Record Date       |  | Date Paid          |  | Amount PaidPer CommonShare |      
|Nine Months Ended September 30, 2010:  |  |                   |  |                    |  |                           
|February 18, 2010                      |  | March 5, 2010     |  | March 15, 2010     |  | $                          | 0.01  | 
|May 4, 2010                            |  | May 25, 2010      |  | June 15, 2010      |  | $                          | 0.01  | 
|August 3, 2010                         |  | August 25, 2010   |  | September 15, 2010 |  | $                          | 0.01  | 
|                                      
|Twelve Months Ended December 31, 2009: | 
|February 20, 2009                      |  | March 9, 2009     |  | March 16, 2009     |  | $                          | 0.025 | 
|May 7, 2009                            |  | May 25, 2009      |  | June 15, 2009      |  | $                          | 0.01  | 
|August 3, 2009                         |  | August 25, 2009   |  | September 15, 2009 |  | $                          | 0.01  | 
|November 3, 2009                       |  | November 23, 2009 |  | December 15, 2009  |  | $                          | 0.01  | 

On November 2,
2010, the Companys Board of Directors declared a quarterly cash dividend of $0.01 per share of common stock, payable on December 15, 2010 to stockholders of record as of November 23, 2010.

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.

The Company is also subject to lawsuits, claims, and investigations which are the result of the Processing System Intrusion. See
Contingenciesbelow and Note 3 for a description of the Processing System Intrusion.

ContingenciesThe Company collects and stores sensitive data about its merchant customers and bankcard holders. 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 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. See Note 3, Processing System Intrusion for further detail and information regarding the Processing System Intrusion and the settlement and payment of a claim.

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.



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





Future minimum
lease commitments under non-cancelable leases as of September 30, 2010 were as follows:



|                                  |  |                |     |   |                 |   |        | 
|--------------------------------- |  | -------------- | --- | - | --------------- | - | ------ | 
|                                  |  | (In thousands) |    
|Twelve Months Ended September 30, |  | CapitalLeases  |     |   | OperatingLeases |  
|2011                              |  | $              | 141 |   |                 | $ | 6,472  | 
|2012                              |  |                |    |   |                 |   | 5,257  | 
|2013                              |  |                |    |   |                 |   | 3,229  | 
|2014                              |  |                |    |   |                 |   | 1,975  | 
|2015                              |  |                |    |   |                 |   | 1,629  | 
|Thereafter                        |  |                |    |   |                 |   | 4,089  | 
|                                  |  |                |     |   |                 |   |        | 
|Total Minimum Payments            |  |                | 141 |   |                 | $ | 22,651 | 
|                                  |  |                |     |   |                 |   |        | 
|Interest Amount                   |  |                | (6  | ) |                 |   |        | 
|                                  |  |                |     |   |                 |   |        | 
|Present Value of Minimum Payments |  | $              | 135 |   |                 |   |        | 
|                                  |  |                |     |   |                 |   |        | 

Rent expense for leased property was $870,000 and $760,000, respectively, for the three months
ended September 30, 2010 and 2009, and $2.6 million and $2.3 million, respectively, for the nine months ended September 30, 2010 and 2009.

CommitmentsCertain officers of the Company have entered into employee confidential information and non-competition agreements 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 2010.

The following table reflects the Companys other significant contractual obligations, including leases from above, as of
September 30, 2010:



|                             |  |                        |        |  |                 |   |        |             |  |   |             |  |  |                 |       |  |  |   |       | 
|---------------------------- |  | ---------------------- | ------ |  | --------------- | - | ------ | ----------- |  | - | ----------- |  |  | --------------- | ----- |  |  | - | ----- | 
|                             |  | Payments Due by Period |       
|Contractual Obligations      |  | Total                  |        |  | Less than1 year |   |        | 1 to 3Years |  |   | 3 to 5years |  |  | Morethan 5years |      
|                             |  | (In thousands)         |       
|Processing providers (a)     |  | $                      | 11,392 |  |                 | $ | 7,394  |             |  | $ | 3,731       |  |  | $               | 267   |  |  | $ |      | 
|Telecommunications providers |  |                        | 9,237  |  |                 |   | 4,147  |             |  |   | 5,090       |  |  |                 |      |  |  |   |      | 
|Office and equipment leases  |  |                        | 22,651 |  |                 |   | 6,472  |             |  |   | 8,486       |  |  |                 | 3,604 |  |  |   | 4,089 | 
|Term Credit Facility (b)     |  |                        | 10,416 |  |                 |   | 8,333  |             |  |   | 2,083       |  |  |                 |      |  |  |   |      | 
|Bridge Loan (c)              |  |                        | 28,000 |  |                 |   | 28,000 |             |  |   |            |  |  |                 |      |  |  |   |      | 
|Capital lease obligations    |  |                        | 141    |  |                 |   | 141    |             |  |   |            |  |  |                 |      |  |  |   |      | 
|                             |  |                        |        |  |                 |   |        |             |  |   |             |  |  |                 |       |  |  |   |       | 
|                             |  | $                      | 81,837 |  |                 | $ | 54,487 |             |  | $ | 19,390      |  |  | $               | 3,871 |  |  | $ | 4,089 | 
|                             |  |                        |        |  |                 |   |        |             |  |   |             |  |  |                 |       |  |  |   |       | 



|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Interest rates on the Term Credit Facility are variable. If interest rates were to remain at the September 30, 2010 level, the Company would make interest payments
of $226,000 in the next 1 year and $16,000 in the next 1 to 3 years, or a total of $242,000. In addition, the Company has $75 million outstanding under our Revolving Credit Facility at September 30, 2010. The Revolving Credit Facility is
available on a revolving basis until September 4, 2012.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Interest rates on the Bridge Loan are variable. If interest rates were to remain at the September 30, 2010 level, the Company would make interest payments of
$456,000 in the next year.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





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 bankcard 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 September 30, 2010, goodwill related to CPOS and Network Services was $52.7 million. The Other segment includes Payroll, which provides payroll and related tax
filing services, and PrepaidCard, which provides prepaid card, stored-value card and loyalty and gift 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 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 September 30, 2010, goodwill related to Debitek, General Meters and Chockstone was $9.4 million.

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 and corporate services. At September 30, 2010 and 2009, 44% and 38% 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. Reconciling items include eliminations of intercompany investments and receivables.

A summary
of the Companys segments for the three and six periods ended September 30, 2010 and 2009 was as follows:



|                                            |  |                |         |   |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|------------------------------------------- |  | -------------- | ------- | - | ------------ | - | ------ | ----------------------------------------- |  | - | ---------------- | - |  | ----------- | -------- | - |  | - | ------- | -
|                                            |  | CardSegment    |         |   | OtherSegment |   |        | UnallocatedCorporateAdministrationAmounts |  |   | ReconcilingItems |   |  | TotalAmount |         
|                                            |  | (In thousands) |        
|Three Months Ended September 30, 2010       |  |                |         |   |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|Total revenues                              |  | $              | 488,735 |   |              | $ | 10,393 |                                           |  | $ |                 |   |  | $           | (54      | ) |  | $ | 499,074 |  
|Depreciation and amortization               |  |                | 5,645   |   |              |   | 753    |                                           |  |   | 134              |   |  |             |         |   |  |   | 6,532   |  
|Interest income                             |  |                | 43      |   |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 43      |  
|Interest expense                            |  |                | 1,290   |   |              |   | 4      |                                           |  |   |                 |   |  |             | (54      | ) |  |   | 1,240   |  
|Net income (loss) attributable to Heartland |  |                | 12,354  |   |              |   | 22     |                                           |  |   | (4,843           | ) |  |             |         |   |  |   | 7,533   |  
|Total assets                                |  |                | 648,450 |   |              |   | 55,705 |                                           |  |   |                 |   |  |             | (158,228 | ) |  |   | 545,927 |  
|                                            |  |                |         |   |             
|Three Months Ended September 30, 2009       |  |                |         |   |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |         |  
|Total revenues                              |  | $              | 434,315 |   |              | $ | 8,296  |                                           |  | $ |                 |   |  | $           | (43      | ) |  | $ | 442,568 |  
|Depreciation and amortization               |  |                | 4,886   |   |              |   | 548    |                                           |  |   | 185              |   |  |             |         |   |  |   | 5,619   |  
|Interest income                             |  |                | 29      |   |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 29      |  
|Interest expense                            |  |                | 812     |   |              |   | 9      |                                           |  |   |                 |   |  |             | (39      | ) |  |   | 782     |  
|Net income (loss) attributable to Heartland |  |                | (29,674 | ) |              |   | 269    |                                           |  |   | (7,691           | ) |  |             |         |   |  |   | (37,096 | )
|Total assets                                |  |                | 631,563 |   |              |   | 43,970 |                                           |  |   |                 |   |  |             | (150,746 | ) |  |   | 524,787 |  



23



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





|                                            |  |             |           |   |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |           |  
|------------------------------------------- |  | ----------- | --------- | - | ------------ | - | ------ | ----------------------------------------- |  | - | ---------------- | - |  | ----------- | -------- | - |  | - | --------- | -
|                                            |  | CardSegment |           |   | OtherSegment |   |        | UnallocatedCorporateAdministrationAmounts |  |   | ReconcilingItems |   |  | TotalAmount |         
|Nine Months Ended September 30, 2010        |  |             |           |  
|Total revenues                              |  | $           | 1,356,170 |   |              | $ | 30,096 |                                           |  | $ |                 |   |  | $           | (155     | ) |  | $ | 1,386,111 |  
|Depreciation and amortization               |  |             | 16,493    |   |              |   | 2,219  |                                           |  |   | 429              |   |  |             |         |   |  |   | 19,141    |  
|Interest income                             |  |             | 111       |   |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 111       |  
|Interest expense                            |  |             | 3,646     |   |              |   | 16     |                                           |  |   |                 |   |  |             | (151     | ) |  |   | 3,511     |  
|Net income (loss) attributable to Heartland |  |             | 43,579    |   |              |   | 333    |                                           |  |   | (16,008          | ) |  |             |         |   |  |   | 27,904    |  
|Total assets                                |  |             | 648,450   |   |              |   | 55,705 |                                           |  |   |                 |   |  |             | (158,228 | ) |  |   | 545,927   |  
|                                            |  |             |           |   |             
|Nine Months Ended September 30, 2009        |  |             |           |   |              |   |        |                                           |  |   |                  |   |  |             |          |   |  |   |           |  
|Total revenues                              |  | $           | 1,208,963 |   |              | $ | 23,290 |                                           |  | $ |                 |   |  | $           | (140     | ) |  | $ | 1,232,113 |  
|Depreciation and amortization               |  |             | 13,727    |   |              |   | 1,525  |                                           |  |   | 571              |   |  |             |         |   |  |   | 15,823    |  
|Interest income                             |  |             | 86        |   |              |   |       |                                           |  |   |                 |   |  |             |         |   |  |   | 86        |  
|Interest expense                            |  |             | 1,964     |   |              |   | 32     |                                           |  |   |                 |   |  |             | (128     | ) |  |   | 1,868     |  
|Net income (loss) attributable to Heartland |  |             | (22,428   | ) |              |   | (290   | )                                         |  |   | (19,448          | ) |  |             |         |   |  |   | (42,166   | )
|Total assets                                |  |             | 631,563   |   |              |   | 43,970 |                                           |  |   |                 |   |  |             | (150,746 | ) |  |   | 524,787   |  

14. Earnings Per Share

The Company presents earnings per share data following the established standards for the computation and presentation of
basic and diluted earnings per share data. Under these standards, the dilutive effect of stock options is excluded from the calculation of basic earnings per share but included in diluted earnings per share except in periods of net loss where
inclusion would be anti-dilutive. The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share:



|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|----------------------------------------------- |  | ------------------------------------- | ------ |  | ------------------------------ | - | ------- | ---- |  | - | ------ |  |  | - | ------- | -
|                                                |  | Three Months EndedSeptember 30,       |        |  | Nine Months EndedSeptember 30, |  
|                                                |  | 2010                                  |        |  | 2009                           |   |         | 2010 |  |   | 2009   | 
|                                                |  | (In thousands, except per share data) |       
|Basic:                                          |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Net income (loss) attributable to Heartland     |  | $                                     | 7,533  |  |                                | $ | (37,096 | )    |  | $ | 27,904 |  |  | $ | (42,166 | )
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Weighted average common stock outstanding       |  |                                       | 38,130 |  |                                |   | 37,461  |      |  |   | 37,899 |  |  |   | 37,484  |  
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Earnings (loss) per share                       |  | $                                     | 0.20   |  |                                | $ | (0.99   | )    |  | $ | 0.74   |  |  | $ | (1.12   | )
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|                                                |  |                                       |        | 
|Diluted:                                        |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Net income (loss) attributable to Heartland     |  | $                                     | 7,533  |  |                                | $ | (37,096 | )    |  | $ | 27,904 |  |  | $ | (42,166 | )
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|                                                |  |                                       |        | 
|Basic weighted average common stock outstanding |  |                                       | 38,130 |  |                                |   | 37,461  |      |  |   | 37,899 |  |  |   | 37,484  |  
|Effect of dilutive instruments:                 |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Stock options and restricted share units        |  |                                       | 1,314  |  |                                |   | 668     |      |  |   | 1,364  |  |  |   | 412     |  
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Diluted weighted average shares outstanding     |  |                                       | 39,444 |  |                                |   | 38,129  |      |  |   | 39,263 |  |  |   | 37,896  |  
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  
|Earnings (loss) per share (a)                   |  | $                                     | 0.19   |  |                                | $ | (0.99   | )    |  | $ | 0.71   |  |  | $ | (1.12   | )
|                                                |  |                                       |        |  |                                |   |         |      |  |   |        |  |  |   |         |  



|(a) | Due to the net loss in the 2009 periods, calculating Diluted Earnings Per Share using diluted weighted average shares would be anti-dilutive. Therefore, weighted
average common stock outstanding was used to calculate Diluted Earnings Per Share for the three and nine months ended September 30, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Heartland Payment Systems, Inc. and Subsidiaries

Notes To Condensed Consolidated Financial Statements(Continued)

(unaudited)





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.



25



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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, 2009 (the 2009 Form 10-K).

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
criminal breach of our payment system environment (the Processing System Intrusion), 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. Some of these factors are described in Item 1A. Risk Factors of the 2009 Form 10-K and include, without limitation, the significantly
unfavorable economic conditions facing the United States, the results and effects of the Processing System Intrusion including the extent of cardholder information compromised and the consequences to our business, including the effects on sales and
costs in connection with the Processing System Intrusion, our competitive environment, the business cycles and credit risks of our merchants, chargeback liability, merchant attrition, problems with our bank sponsor, our relationships with
third-party bankcard payment processors, our inability to pass increased interchange fees along to our merchants, economic conditions, systems failures and government regulation.

Overview

General

Our primary business is to provide bankcard 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 midsized merchants (referred to as Small and Midsized Enterprises, or SME) 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, 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 occurred during some portion of 2008. See  Processing System Intrusion for more detail.



26



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##### Table of Contents



At September 30,
2010, we provided our bankcard payment processing services to approximately 174,700 active SME merchants located across the United States. This compares to 173,400 active SME merchants at December 31, 2009, and 174,560 active SME merchants at
September 30, 2009. At September 30, 2010, we provided bankcard payment processing services through Network services to 99 merchants with 53,253 locations. Additionally, at September 30, 2010, we provided bankcard payment processing
services to over 7,800 merchants in Canada.

Our total bankcard processing volume for the three months ended
September 30, 2010 was $19.7 billion, a 6.4% increase from the $18.6 billion processed during the three months ended September 30, 2009. Our total bank card processing volume for the nine months ended September 30, 2010 was $56.1
billion, an 8.1% increase from the $51.9 billion processed during the nine months ended September 30, 2009. Our SME bankcard processing volume for the three and nine months ended September 30, 2010 included increases for American Express
and Discover processing. Our Discover processing volume for the 2010 nine-month period also benefited from our purchase of an existing merchant portfolio from Discover during the third quarter of 2009. Bankcard processing volume for the three and
nine months ended September 30, 2010 and 2009 was as follows:



|                                     |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |        | 
|------------------------------------ |  | ------------------------------- | ------ |  | ------------------------------ | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                     |  | Three Months EndedSeptember 30, |        |  | Nine Months EndedSeptember 30, |  
|                                     |  | 2010                            |        |  | 2009                           |   |        | 2010 |  |   | 2009   | 
|                                     |  | (in millions)                   |       
|SME merchants                        |  | $                               | 16,646 |  |                                | $ | 15,712 |      |  | $ | 47,362 |  |  | $ | 44,259 | 
|Large national merchants             |  |                                 | 2,953  |  |                                |   | 2,726  |      |  |   | 8,325  |  |  |   | 7,306  | 
|Canada                               |  |                                 | 150    |  |                                |   | 123    |      |  |   | 411    |  |  |   | 333    | 
|                                     |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |        | 
|Total bankcard processing volume (a) |  | $                               | 19,749 |  |                                | $ | 18,561 |      |  | $ | 56,098 |  |  | $ | 51,898 | 
|                                     |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |        | 



|(a) | Bankcard processing volume includes volume for credit and signature debit transactions.
|--- | ---------------------------------------------------------------------------------------

Merchant attrition is expected in the card payment processing industry in the ordinary course of business. We experience attrition in
merchant bankcard 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 SME processing volume attrition against all SME merchants that were processing with us in the same month a year earlier. During the three months ended
September 30, 2010, we experienced an improved 14.3% average annualized attrition in our SME bankcard processing volume and for the 2010 nine-month period we experienced average attrition of 16.2%. During 2009, 2008 and 2007, we experienced
average annual attrition in our SME bankcard processing volume of 22.6%, 17.3% and 12.6%, 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 also significantly impacted by overall contraction in same stores sales.

In our SME business, we
measure same store sales growth, or contraction, as the change in bankcard processing volume for all bankcard merchants that were processing with us in the same month a year earlier. During the three months ended September 30, 2010, same store
sales grew 2.0% on average, our second consecutive quarter of same store sales growth. For the 2009 full year, we experienced 7.8% contraction. Same store sales growth or contraction results from the combination of the increasing or decreasing use
by consumers of bankcards for the purchase of goods and services at the point of sale, and sales growth or contraction experienced by our retained SME bankcard merchants. The following table compares our same store sales growth or contraction during
2010, 2009, 2008 and 2007:



|                                      |  |      |      |    |      |  |      |      |  |  |      |    |  |  |     |  
|------------------------------------- |  | ---- | ---- | -- | ---- |  | ---- | ---- |  |  | ---- | -- |  |  | --- | -
|Same Store Sales Growth (Contraction) |  | 2010 |      |    | 2009 |  |      | 2008 |  |  | 2007 |   
|                                      |  |      |      |   
|First Quarter                         |  |      | (1.5 | )% |      |  | (7.6 | )%   |  |  | 0.6  | %  |  |  | 3.4 | %
|Second Quarter                        |  |      | 1.1  | %  |      |  | (9.7 | )%   |  |  | (0.1 | )% |  |  | 3.3 | %
|Third Quarter                         |  |      | 2.0  | %  |      |  | (8.6 | )%   |  |  | (2.0 | )% |  |  | 3.6 | %
|Fourth Quarter                        |  |      |      |    |      |  | (5.2 | )%   |  |  | (6.8 | )% |  |  | 2.1 | %
|Full Year                             |  |      |      |    |      |  | (7.8 | )%   |  |  | (2.1 | )% |  |  | 3.0 | %



27



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We attribute the
deterioration in same store sales percentages that we experienced in our SME business from the third quarter of 2008 through the fourth quarter of 2009 to declining economic conditions including impacts from severely contracted credit markets, a
weak housing market, historically low consumer and investor confidence and high unemployment rates. Our same store sales contraction experience tracked the overall economic downturn. The improvement we experienced in same store sales percentages in
2010 also tracks the general economy, as well as benefitting from year-over-year comparison to weaker processing volumes. Management believes that the challenging economic conditions may continue to result in modest, if any, improvements in our
existing SME merchants businesses.

In September 2010, we refocused the efforts of our sales force by applying
historically productive sales and motivation techniques and relying less on the Industry Specialization Model (ISM) we developed and had attempted to implement earlier in the year. The ISM model had focused the sales force on specific
industry verticals, whereby Relationship Managers were assigned protected merchant verticals (e.g., restaurants, healthcare and lodging) within their territories. In order to retain their protected merchant lists, a Relationship Manager was required
to meet a minimum level of documented daily merchant visits within the protected vertical, and to report on their progress. During the summer, management determined that the daily reporting and weekly tracking processes required under the ISM model
slowed down the Relationship Managers and their sales managers, distracted them from their overall selling efforts and adversely affected sales results.

We measure the overall 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 nine months ended September 30, 2010 decreased 20.4% from the gross margin we installed during the nine months ended September 30, 2009. We attribute this decline in
newly installed gross margin to the weak economy, the disruption caused by our attempt to transition to the ISM model, and the related focus on increasing the size and training of our sales force during the first nine months of 2010.

We compensate our sales managers based on their success in growing the sales force and increasing the total SME merchant base in their
regions. Historically, increases in our direct sales force, including our Relationship Managers, had led to significant growth in the total SME merchants for which we process and the gross margin generated by those merchants. For the first half of
2010, our sales managers were focused on increasing our number of Relationship Managers. During the six months ended June 30, 2010, we grew the number of Relationship Managers by 30.0% to 1,393, from 1,069 at December 31, 2009. However,
during the third quarter of 2010, we refocused our sales efforts toward enhancing individual Relationship Manager productivity and, as a result of that new focus, our Relationship Manager count declined by 249 to 1,144 Relationship Managers at
September 30, 2010.

The bankcard revenue we earn 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 bankcard processing volume minimums. Most of our SME revenue is from 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, assessments and other network fees to Visa and MasterCard. Our SME gross bankcard processing revenue is largely driven by Visa and MasterCard volume processed by our merchants. More recently, we have experienced growth in card
processing revenues by processing transaction for SME merchants new to accepting American Express and from processing Discover transactions.



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In contrast to SME
card processing revenues, Network Services revenues from our large national merchants are largely driven by the number of transactions we process (whether settled, or only authorized), not our processing volume, as the larger merchants which
comprise Network Services customer base pay on a per transaction basis for processing services. Additionally, we acquire and settle transactions on our front and back end systems for American Express transactions for which we receive
compensation from American Express on a per transaction basis. The number of transactions we processed for large national merchants and American Express for the three and nine months ended September 30, 2010 and 2009 were as follows:



|                          |  |                                 |         |  |                                |  |         |      |  |  |           |  |  |  |           | 
|------------------------- |  | ------------------------------- | ------- |  | ------------------------------ |  | ------- | ---- |  |  | --------- |  |  |  | --------- | 
|                          |  | Three Months EndedSeptember 30, |         |  | Nine Months EndedSeptember 30, | 
|                          |  | 2010                            |         |  | 2009                           |  |         | 2010 |  |  | 2009      | 
|                          |  | (in thousands)                  |        
|Large national merchants: |  |                                 |         |  |                                |  |         |      |  |  |           |  |  |  |           | 
|Settled                   |  |                                 | 129,947 |  |                                |  | 123,014 |      |  |  | 361,871   |  |  |  | 350,059   | 
|Authorized                |  |                                 | 695,155 |  |                                |  | 634,187 |      |  |  | 1,947,889 |  |  |  | 1,776,669 | 
|American Express          |  |                                 | 8,069   |  |                                |  |        |      |  |  | 12,725    |  |  |  |          | 
|                          |  |                                 |         |  |                                |  |         |      |  |  |           |  |  |  |           | 
|Total                     |  |                                 | 833,171 |  |                                |  | 757,201 |      |  |  | 2,322,485 |  |  |  | 2,126,728 | 
|                          |  |                                 |         |  |                                |  |         |      |  |  |           |  |  |  |           | 

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. We provide authorization and data capture services to our SME merchants through our own front-end
processing system, which we call HPS Exchange. We provide 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
September 30, 2010 and 2009, we processed approximately 90% and 88%, respectively, of our SME bankcard merchant transactions through HPS Exchange. At September 30, 2010 and 2009, we were processing approximately 99% of our active SME
bankcard merchants on Passport. Our internally developed systems are providing substantially all aspects of most of our merchants bankcard processing needs, excluding Network Services. However, in the fourth quarter of 2010, the processing of
Network Services settled transactions will be fully converted to Passport. Previously, we relied on third party vendors for many of these services including bankcard authorization and data capture services, settlement and merchant accounting
services. We will continue to process a portion of our Network Services back end settlement transactions and a minority of our SME transactions through systems developed by third parties.

We also provide payroll processing services throughout the United States. At September 30, 2010, we processed payroll for 10,968
customers, an increase of 18.8% from 9,232 payroll customers at September 30, 2009. At December 31, 2009, we processed payroll for 9,382 payroll customers. During 2008 and 2009, we developed a new comprehensive payroll management system,
which we refer to as PlusOne Payroll, that streamlines all aspects of the payroll process to enable time and cost savings. PlusOne Payroll currently is being rolled out to both new and existing payroll customers. The PlusOne Payroll platform enables
us to process payroll on a large scale and provide customizable solutions for businesses of all sizes.

Processing System
Intrusion

On January 20, 2009, we 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 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 Industry Data Security Standard (PCI-DSS) from a third-party assessor each year since the
standard was announced, including 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s published list of PCI-DSS compliant service providers. We were similarly advised by MasterCard that, based on MasterCards investigation of the Processing System Intrusion,
MasterCard believed we were in violation of the MasterCard Standards and, based on that belief, MasterCard removed us from MasterCards published list of 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 MasterCards published list of Compliant Service Providers and 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 cards, the cardholders name). However, the cardholder information that we process does not include addresses or Social Security numbers. Also, we believe that no unencrypted PIN data was captured and that the breach has been
contained and did not extend beyond 2008.



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Since its announcement
of the Processing System Intrusion on January 20, 2009 and through September 30, 2010, we had expensed a total of $145.0 million, before reducing those charges by $30.7 million of total insurance recoveries. The majority of the total
charges, or approximately $114.7 million, related to settlements of claims. Approximately $30.3 million of the total charges were for legal fees and costs we incurred for investigations, defending various claims and actions, remedial actions and
crisis management services.

During the nine months ended September 30, 2010, we recovered from our insurance providers
approximately $26.8 million of the costs we incurred for the Processing System Intrusion and expensed approximately $12.0 million for accruals, legal fees and costs we incurred for defending various claims and actions, resulting in a net recovery of
$14.8 million, or $0.23 per share. For the three months ended September 30, 2010, we expensed a total of $0.7 million, or about $0.01 per share, respectively, associated with the Processing System Intrusion.

For the three and nine months ended September 30, 2009, we expensed a total of $73.3 million and $105.3 million, respectively, or
about $1.22 and $1.74 per share, respectively, for settlement accruals, legal fees and costs we incurred for defending various claims and actions associated with the Processing System Intrusion.

At September 30, 2010, the Company carried a $1.6 million Reserve for Processing System Intrusion on our Consolidated Balance Sheet.
The majority of this Reserve related to settlements which have been agreed upon but are unpaid as of the date of the Balance Sheet. During the three months ended September 30, 2010, we settled claims and disputes with DFS Services, LLC
(Discover) and MasterCard Worldwide (MasterCard) from our cash reserves as follows:



| |  |  | On August 31, 2010, we entered into an agreement of settlement and release with Discover (the Discover Settlement Agreement) to
resolve potential claims and other disputes among us and Discover (and its affiliates and certain of its issuers) with respect to the Processing System Intrusion. On September 2, 2010, we paid Discover $5.0 million in full and final
satisfaction of any and all claims of Discover, its affiliates and certain of its issuers arising from or relating to the Processing System Intrusion. The Discover Settlement Agreement contains mutual releases by and between us and Discover (on
behalf of itself and its affiliates) relating to the Processing System Intrusion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 19, 2010, we entered into a settlement agreement with MasterCard (the MasterCard Settlement Agreement) to resolve potential
claims and other disputes among us, Heartland Bank, Key Bank National Association (Key Bank, and, together with Heartland Bank, the Sponsor Banks) and MasterCard related to the Processing System Intrusion. Under the
MasterCard Settlement Agreement, alternative recovery offers totaling $41.4 million were made to eligible MasterCard issuers with respect to losses alleged to have been incurred by them as a result of the Processing System Intrusion. The $41.4
million included a $6.6 million credit for fines previously collected by MasterCard during 2009, so the maximum amount payable under the settlement was $34.8 million if all MasterCard issuers had accepted the settlement. The Company paid
approximately $34.4 million because certain issuers did not accept settlement. Those issuers, who represent less than 1% of the accounts eligible for the settlement, have been preliminarily awarded $367,172 by MasterCard, and the Company is
contesting that award. On September 3, 2010 and September 14, 2010, we paid the remaining settlement amounts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Claims and disputes with other Card Brands, which were settled and paid prior to the three months ended September 30, 2010, were as follows:



| |  |  | On December 17, 2009, we entered into a settlement agreement and release with American Express to resolve potential claims and other disputes
among us and American Express (and its issuers) with respect to the Processing System Intrusion, and subsequently we paid approximately $3.5 million in full and final satisfaction of any and all claims of American Express and its issuers arising
from or relating to the Processing System Intrusion. Such settlement agreement and release contains mutual releases by and between us and American Express (on behalf of itself and its issuers) relating to the Processing System Intrusion.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | On January 7, 2010, the Company, the Sponsor Banks, and Visa U.S.A. Inc., Visa International Service Association and Visa Inc. (collectively,
Visa) entered into a settlement agreement (the Visa Settlement Agreement) to resolve potential claims and other disputes among us, the Sponsor Banks and Visa with respect to the potential rights and claims of Visa and certain
issuers of Visa-branded credit and debit cards related to the Processing System Intrusion. After including a $780,000 credit for fines previously collected by Visa during 2009, the amount paid by us under the Visa Settlement Agreement was $59.3
million. The costs of this settlement were included in our Provision for Processing System Intrusion on our Consolidated Statement of Operations for the year ended December 31, 2009 and in our Reserve for Processing System Intrusion on our
Consolidated Balance Sheet as of December 31, 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 18, 2010, we entered into a bridge
loan agreement (the Bridge Loan Agreement) with KeyBank, as administrative agent, and KeyBank and Heartland Bank as bridge lenders. On that date, KeyBank made a bridge loan to us in the amount of $20.0 million and Heartland Bank made a
bridge loan to us in the amount of $8.0 million (collectively, the Bridge Loan), which are the maximum amounts that we may borrow under the Bridge Loan Agreement. We must repay the Bridge Loan by February 17, 2011.

On February 18, 2010, we also entered into a Commitment Increase Agreement (the Commitment Increase Agreement) pursuant
to the Amended and Restated Credit Agreement dated as of May 30, 2008 whereby KeyBank, as one of the lenders under the Amended and Restated Credit Agreement, agreed to increase its revolving credit commitment to us under the Amended and
Restated Credit Agreement by $25.0 million (the Increased Credit Commitment). The terms of the Increased Credit Commitment are similar to the terms of the Revolving Credit Facility under the Amended and Restated Credit Agreement.

The proceeds of the Bridge Loan and the Increased Credit Commitment, together with a portion of our cash reserves, were used
to fund the settlement with Visa. The Visa Settlement Agreement was consummated on February 18, 2010, with a payment of $58.6 million.

These settlement amounts were previously provided for in our Provision for Processing System Intrusion and carried in our Reserve for Processing System Intrusion. We are prepared to vigorously defend
itself against any unsettled claims relating to the Processing System Intrusion that have been asserted against it and its sponsor banks to date. 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.

Additional costs we expect to incur for legal fees and costs for defending
various claims and actions associated with the Processing System Intrusion will be recognized as incurred. Such costs could be material and could adversely impact our results of operations, financial condition and cash flow.

Third Quarter of 2010 Financial Results

Our financial results for the three months ended September 30, 2010 continue to reflect the impact of a slow economic recovery for our SME merchant base, and the costs of the Processing System
Intrusion. Both the levels of new SME merchant installs and processing volume at existing SME merchants continue to be unfavorably impacted by the uncertain economy. For the three months ended September 30, 2010, we recorded net income of $7.5
million, or $0.19 per share, compared to a net loss of $37.1 million, or $0.99 per share, in the three months ended September 30, 2009.

In the three months ended September 30, 2010, we recorded total expenses of $0.7 million, or $0.01 per share, and for the three months ended September 30, 2009, we recorded total expenses of
$73.3 million, or $1.22 per share, associated with the Processing System Intrusion (see  Processing System Intrusion for more detail). The following is a summary of our financial results for the three months ended
September 30, 2010:



| |  |  | During the three months ended September 30, 2010, our SME processing volume increased 5.9% to $16.6 billion from $15.7 billion during the three
months ended September 30, 2009. We earn percentage-based revenues on our SME processing volume. Our SME bankcard processing volume for the three months ended September 30, 2010 included increases for American Express and Discover
processing as well as increases in Visa and MasterCard processing.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | During the three months ended September 30, 2010, we generated revenues on the 130 million large national merchant transactions that we
settled and on the 695 million large national merchant transactions that we authorized. These compare to 123 million transactions settled and 634 million transactions authorized during the three months ended September 30, 2009.
We earn transaction-based revenues on our large national merchant card processing volume.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net revenue, which we define as total revenues less interchange fees and dues, assessments and fees, increased $5.4 million, or 4.9%, from $110.0
million in the three months ended September 30, 2009 to $115.4 million in the three months ended September 30, 2010. The increase in net revenue was driven by the increases in net revenue from our SME merchants and increases in
equipment-related income, primarily from prepaid card and stored-value card systems at our Debitek, Inc. subsidiary.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our processing and servicing expenses increased 17.7%, from $50.4 million in the three months ended September 30, 2009, to $59.3 million in the
three months ended September 30, 2010 due to increased costs of sales related to higher equipment-related revenues, costs associated with higher SME bankcard processing volume, an increase in the costs of support personnel and costs of
investments we have made in enhancing our processing systems.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our general and administrative expenses decreased 8.3% from $27.8 million in the three months ended September 30, 2009 to $25.5 million in the
three months ended September 30, 2010 primarily due to a decrease in staff expense, including bonus and fringe benefits, as well as an increase in the amount of personnel expense capitalized for work on system development. General and
administrative expenses as a percentage of total revenue for the three months ended September 30, 2010 was 5.1%, a decrease from 6.3% for the three months ended September 30, 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our income from operations, which we also refer to as operating income, declined 3.3% to $14.2 million for the three months ended September 30,
2010, from $14.7 million for the three months ended September 30, 2009. This decline was primarily due to the continuing limiting effect which economic conditions had on growth of our net revenues, and to increases in processing and servicing
expense. Our operating margin, which we measure as operating income divided by net revenue, was 12.3% for the three months ended September 30, 2010, compared to 13.4% for the three months ended September 30, 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See  Results of Operations  Three Months Ended September 30, 2010 Compared to Three
Months Ended September 30, 2009 for a more detailed discussion of our third quarter financial results.

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 September 30, 2010, our results of operations, our changes in stockholders equity and our cash flows for the nine months ended September 30, 2010 and 2009. Results of operations reported
for interim periods are not necessarily indicative of the results to be expected for the year ended December 31, 2010. 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, 2009. 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 bankcard processing revenue is derived from processing and settling Visa and MasterCard bankcard 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 bankcard processing,
we do not offset bankcard 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 Statements of Operations. 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. 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 bankcard, payroll and check processing accounts is based on the estimated gross margin for the first year of the merchant contract. The gross
signing bonuses paid during the nine months ended September 30, 2010 and 2009 were $19.9 million and $26.4 million respectively and for the full year ended December 31, 2009 were $34.7 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 nine months ended September 30, 2010
and 2009 were $(2.0) million and $(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 sales person. Negative signing bonus adjustments 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 September 30, 2010 was $26.2 million.

The
deferred acquisition cost component is accrued for vested salespersons over the first year of SME bankcard 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 nine months ended September 30, 2010 or
the year ended December 31, 2009.

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



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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 they have 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 $0.3 million at
September 30, 2010 and December 31, 2009.

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 21/2years 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 nine months ended September 30, 2010 and 2009 we made buyout payments of approximately $22.8
million and $6.3 million, respectively, and during the 2009 full year, we made buyout payments of approximately $8.1 million.

Buyout payments we made during the nine months ended September 30, 2010 included approximately $17.7 million of cash payments made in the third quarter to buy out a substantial portion of residual
commissions owned by our Relationship Managers and sales managers. We expect to realize a reduction of approximately $0.6 million in monthly residual commission expense beginning in the fourth quarter of 2010, and lesser reductions in ensuing years.
The amount of future reductions in residual commission expense will be impacted by merchant attrition. Management believes that these buyouts will generate an attractive return for the Company in the years ahead.

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. See  Overview  Processing System
Intrusion for a discussion of the Processing System Intrusion.

Since our announcement of the Processing System
Intrusion on January 20, 2009 and through September 30, 2010, we have expensed a total of $145.0 million, before reducing those charges by $30.7 million of total insurance recoveries. The majority of the total charges, or approximately
$114.7 million, related to settlements of claims. Approximately $30.3 million of the total charges were for legal fees and costs we incurred for investigations, defending various claims and actions, remedial actions and crisis management services.



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During the nine months
ended September 30, 2010, we recovered from our insurance providers approximately $26.8 million of the costs it incurred for the Processing System Intrusion and expensed approximately $12.0 million for accruals, legal fees and costs it incurred
for defending various claims and actions, resulting in a net recovery of $14.8 million, or $0.23 per share. For the three months ended September 30, 2010, we expensed a total of $0.7 million, or about $0.01 per share, respectively, associated
with the Processing System Intrusion.

For the three and nine months ended September 30, 2009, we expensed a total of
$73.3 million and $105.3 million, respectively, or about $1.22 and $1.74 per share, respectively, for settlement accruals, legal fees and costs we incurred for defending various claims and actions associated with the Processing System Intrusion.

At September 30, 2010, we carried a $1.6 million Reserve for Processing System Intrusion on its Consolidated Balance
Sheet. The majority of this Reserve related to settlements which have been agreed upon but are unpaid as of the date of the Balance Sheet. We are prepared to vigorously defend ourselves against any unsettled claims relating to the Processing System
Intrusion that have been asserted against us and our sponsor banks to date. 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.

Additional costs we expect to incur for legal fees and settlements related to the Processing System Intrusion will be recognized as
incurred. Such costs 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. The majority of
merchant deposits held by the Company include funds in transit associated with debit processing and check processing in addition to merchant funds held that are associated with bankcard processing. At September 30, 2010 and December 31,
2009, we held SME bankcard processing merchant deposits totaling $8.1 million and $8.8 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 bankcard processing volume. At September 30, 2010 and
December 31, 2009, our loss reserve totaled $1.5 million and $1.3 million, respectively. Aggregate bankcard merchant losses, including losses charged to operations and the loss reserve, were $7.3 million and $4.1 million for the nine months
ended September 30, 2010 and 2009, respectively, and were $5.9 million for the year ended December 31, 2009.

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

Stock Options

We expense employee share-based payments under the fair value method. 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. Under the modified-prospective-transition method, we are required to record compensation expense for all awards granted after the date of adoption using
grant-date fair value estimate and for the unvested portion of previously granted awards using the grant-date fair value estimate.



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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 had sufficient historical volatility data related to market trading of our own Common Stock, we determined 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. 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 2010, 2009 and 2008 were $6.12, $3.12 and $6.11, respectively. The fair value of options granted during 2010, 2009 and 2008 was estimated at the grant date using the following weighted average
assumptions:



|                        |  |                         |            |   |      |  |                   |      |  |  |                  |  
|----------------------- |  | ----------------------- | ---------- | - | ---- |  | ----------------- | ---- |  |  | ---------------- | -
|                        |  | Year Ended December 31, |           
|                        |  | 2010                    |            |   | 2009 |  |                   | 2008 | 
|Expected volatility     |  |                         | 54         | % |      |  | 48                | %    |  |  | 35               | %
|Expected life           |  |                         | 3.75 years |   |      |  | 3.75 to 4.0 years |      |  |  | 2.5 to 4.0 years |  
|Expected Dividends      |  |                         | 0.40       | % |      |  | 0.47              | %    |  |  | 1.36             | %
|Risk-free interest rate |  |                         | 1.21       | % |      |  | 1.76              | %    |  |  | 2.98             | %

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.

Also in 2009, our Board of Directors approved grants of 362,600 Restricted Share Units. These Restricted Share Units are nonvested share
awards which vest over a four-year service period. The closing price of our 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.

Goodwill

Goodwill represents the excess of acquisition costs over the fair values of net assets acquired in business combinations. We recorded goodwill in connection with our acquisitions of Debitek, Inc.,
E-Secure Peripherals, Inc., General Meters Corp., Collective Point of Sales Solutions Ltd., Network Services and Chockstone, Inc. Goodwill is tested for impairment at least annually and between annual tests if an event occurs or changes in
circumstances suggest a potential decline in the fair value of the reporting unit. A significant amount of judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may
include, among others: a significant decline in expected future cash flows; a sustained decline in market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth
rates. We perform annual goodwill impairment testing in the fourth quarter. Our evaluation indicated that no impairment existed as of December 31, 2009 or 2008. At September 30, 2010 and December 31, 2009, goodwill of $62.1
million and $61.0 million, respectively, was recorded on our Consolidated Balance Sheet. We may be required to record goodwill impairment losses in future periods, whether in connection with our next annual impairment testing in the fourth quarter
of 2010 or subsequent to that, if any such indicators constitute a triggering event in other than the quarter in which the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment
loss would result or, if it does, whether such charge would be material.



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Income Taxes

We account for income taxes by recognizing deferred tax assets and liabilities, which 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 is appropriate.

We also account for the recognition and measurement of tax benefits associated with uncertain tax positions. This requires evaluations of individual tax positions to determine whether any part of that
position can be recognized or continues 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 September 30, 2010, our reserve for unrecognized tax
benefits related to uncertain tax positions was $1.5 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 September 30, 2010, a total of $1.0 million unrecognized tax benefit would, if recognized, impact the effective tax rate.

Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

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



|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---------- |  | ----- | ------------------------------- |  | - | ---------- | - |  | ------ | ----- | -- | - | - | ------ | - |  |  | ----- | --
|                                                              |  | Three MonthsEnded
September 30, |         |   | % of Total |  |       | Three MonthsEnded
September 30, |  |   | % of Total |   |  | Change |      
|                                                              |  | 2010                            |         |   | Revenue    |  |       | 2009                            |  |   | Revenue    |   |  | Amount |       |    | % |  
|                                                              |  |                                 |         |   |            | 
|Total Revenues                                                |  | $                               | 499,074 |   |            |  | 100.0 | %                               |  | $ | 442,568    |   |  |        | 100.0 | %  |   | $ | 56,506 |   |  |  | 12.8  | % 
|Costs of Services:                                            |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Interchange                                                   |  |                                 | 350,964 |   |            |  | 70.3  | %                               |  |   | 305,059    |   |  |        | 68.9  | %  |   |   | 45,905 |   |  |  | 15.0  | % 
|Dues, assessments and fees                                    |  |                                 | 32,688  |   |            |  | 6.5   | %                               |  |   | 27,527     |   |  |        | 6.2   | %  |   |   | 5,161  |   |  |  | 18.7  | % 
|Processing and servicing                                      |  |                                 | 59,282  |   |            |  | 11.9  | %                               |  |   | 50,356     |   |  |        | 11.4  | %  |   |   | 8,926  |   |  |  | 17.7  | % 
|Customer acquisition costs                                    |  |                                 | 12,573  |   |            |  | 2.5   | %                               |  |   | 13,147     |   |  |        | 3.0   | %  |   |   | (574   | ) |  |  | (4.4  | )%
|Depreciation and amortization                                 |  |                                 | 3,890   |   |            |  | 0.8   | %                               |  |   | 4,006      |   |  |        | 0.9   | %  |   |   | (116   | ) |  |  | (2.9  | )%
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Total costs of services                                       |  |                                 | 459,397 |   |            |  | 92.0  | %                               |  |   | 400,095    |   |  |        | 90.4  | %  |   |   | 59,302 |   |  |  | 14.8  | % 
|General and administrative                                    |  |                                 | 25,479  |   |            |  | 5.1   | %                               |  |   | 27,784     |   |  |        | 6.3   | %  |   |   | (2,305 | ) |  |  | (8.3  | )%
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Total expenses                                                |  |                                 | 484,876 |   |            |  | 97.2  | %                               |  |   | 427,879    |   |  |        | 96.7  | %  |   |   | 56,997 |   |  |  | 13.3  | % 
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Income from operations                                        |  |                                 | 14,198  |   |            |  | 2.8   | %                               |  |   | 14,689     |   |  |        | 3.3   | %  |   |   | (491   | ) |  |  | (3.3  | )%
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Other income (expense):                                       |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Interest income                                               |  |                                 | 43      |   |            |  |      |                                 |  |   | 29         |   |  |        |      |    |   |   | 14     |   |  |  | 48.3  | % 
|Interest expense                                              |  |                                 | (1,240  | ) |            |  | (0.2  | )%                              |  |   | (782       | ) |  |        | (0.2  | )% |   |   | (458   | ) |  |  | 58.6  | % 
|(Provision for) recovery of processing system intrusion costs |  |                                 | (740    | ) |            |  | (0.1  | )%                              |  |   | (73,322    | ) |  |        | (16.6 | )% |   |   | 72,582 |   |  |  | (99.0 | )%
|Other, net                                                    |  |                                 | 2       |   |            |  |       |                                 |  |   |           |   |  |        |      |    |   |   | 2      |   |  |  |       |   
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Total other income (expense)                                  |  |                                 | (1,935  | ) |            |  | (0.4  | )%                              |  |   | (74,075    | ) |  |        | (16.7 | )% |   |   | 72,140 |   |  |  | (97.4 | )%
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Income (loss) before income taxes                             |  |                                 | 12,263  |   |            |  | 2.5   | %                               |  |   | (59,386    | ) |  |        | (13.4 | )% |   |   | 71,649 |   |  |  | 120.6 | % 
|Provision for (benefit from) income taxes                     |  |                                 | 4,694   |   |            |  | 0.9   | %                               |  |   | (22,314    | ) |  |        | (5.0  | )% |   |   | 27,008 |   |  |  | 121.0 | % 
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Net income (loss)                                             |  |                                 | 7,569   |   |            |  | 1.5   | %                               |  |   | (37,072    | ) |  |        | (8.4  | )% |   |   | 44,641 |   |  |  | 120.4 | % 
|Less: Net income attributable to noncontrolling interests     |  |                                 | 36      |   |            |  |       |                                 |  |   | 24         |   |  |        |       |    |   |   | 12     |   |  |  |       |   
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   
|Net income (loss) attributable to Heartland                   |  | $                               | 7,533   |   |            |  | 1.5   | %                               |  | $ | (37,096    | ) |  |        | (8.4  | )% |   | $ | 44,629 |   |  |  | 120.3 | % 
|                                                              |  |                                 |         |   |            |  |       |                                 |  |   |            |   |  |        |       |    |   |   |        |   |  |  |       |   



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Total
Revenues. Total revenues increased by 12.8% from $442.6 million in the three months ended September 30, 2009 to $499.1 million in the three months ended September 30, 2010, primarily as a result of a $54.7 million, or 12.7%
increase in processing revenues. The breakout of our total revenues for the three months ended September 30, 2010 and 2009 was as follows (in thousands of dollars):



|                               |  |                                 |         |  |                       |   |         |        |  |   |        |  |  |  |      |  
|------------------------------ |  | ------------------------------- | ------- |  | --------------------- | - | ------- | ------ |  | - | ------ |  |  |  | ---- | -
|                               |  | Three Months
EndedSeptember 30, |         |  | Change fromPrior Year |  
|                               |  | 2010                            |         |  | 2009                  |   |         | Amount |  |   | %      | 
|Processing revenues, gross (a) |  | $                               | 486,274 |  |                       | $ | 431,549 |        |  | $ | 54,725 |  |  |  | 12.7 | %
|Payroll processing revenues    |  |                                 | 4,096   |  |                       |   | 3,516   |        |  |   | 580    |  |  |  | 16.5 | %
|Equipment-related income       |  |                                 | 8,704   |  |                       |   | 7,503   |        |  |   | 1,201  |  |  |  | 16.0 | %
|                               |  |                                 |         |  |                       |   |         |        |  |   |        |  |  |  |      |  
|Total Revenues                 |  | $                               | 499,074 |  |                       | $ | 442,568 |        |  | $ | 56,506 |  |  |  | 12.8 | %
|                               |  |                                 |         |  |                       |   |         |        |  |   |        |  |  |  |      |  



|(a) | Includes Visa, MasterCard, AMEX and Discover bankcard processing revenues, AMEX fees, Discover fees, check processing fees, customer service fees, gift card, loyalty
and other miscellaneous revenue.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The $54.7 million increase in processing revenues from $431.5 million in the
three months ended September 30, 2009 to $486.3 million in the three months ended September 30, 2010 was primarily due to higher SME merchant card processing revenues. Revenues from our SME bankcard processing increased due to higher SME
bankcard processing volume. For the three months ended September 30, 2010, our SME bankcard processing volume increased 5.9% to $16.6 billion, compared to $15.7 billion for the three months ended September 30, 2009. American Express and
Discover processing volume contributed over 37% of this increase. Network Services increased its bankcard processing revenues on the 130 million transactions it settled, representing $3.0 billion in processing volume, and the 695 million
transactions it authorized through its front-end card processing systems during the three months ended September 30, 2010, compared to 123 million transactions it settled, representing $2.7 billion in processing volume, and the
634 million transactions it authorized through its front-end card processing systems during the three months ended September 30, 2009. The increase in Network Services bankcard processing revenues was primarily due to increases in
Visa and MasterCard bankcard transaction authorization fees, which we pass through to our merchants, partially offset by reductions in gross processing revenues due to renegotiations of customer contracts. We report Network Services settled
bankcard processing revenues net of credit 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 16.5%, from $3.5 million in the three months
ended September 30, 2009 to $4.1 million in the three months ended September 30, 2010, primarily due to the 18.8% increase in the number of payroll processing customers from 9,232 at September 30, 2009 to 10,968 at September 30,
2010, partially offset by the impact of a reduction in the average number of employees at our customers.

Equipment-related
income increased by 16.0% from $7.5 million in the three months ended September 30, 2009 to $8.7 million in the three months ended September 30, 2010, primarily due to increases in revenues from the laundry vertical in our prepaid and
stored-value card business as well as an increase in revenue from our campus solutions business, both at our Debitek subsidiary. We also experienced an increase in equipment-related revenues from the sale of SME card terminals, including our
proprietary terminals, referred to as E3 Terminals, which encrypt cardholder data as the card is being swiped.

Costs of
services. Costs of services increased 14.8% from $400.1 million in the three months ended September 30, 2009 to $459.4 million in the three months ended September 30, 2010, due primarily to increases in interchange fees, dues,
assessments and fees, and processing and servicing expense. Costs of services represented 92.0% of total revenues in the three months ended September 30, 2010, up from 90.4% in the three months ended September 30, 2009.

Interchange fees increased 15.0% from $305.1 million in the three months ended September 30, 2009 to $351.0 million in the
three months ended September 30, 2010, and represented 70.3% of total revenues in the three months ended September 30, 2010 compared to 68.9% in the three months ended September 30, 2009. The increase in interchange fees was primarily
due to higher SME bankcard processing volume in the three months ended September 30, 2010, especially for American Express and Discover which generally have higher interchange rates than Visa and MasterCard.

Dues, assessments and fees increased 18.7% from $27.5 million in the three months ended September 30, 2009 to $32.7 million in
the three months ended September 30, 2010, primarily as a result of increases in Visa and MasterCard assessments which we pass through to our merchants, and also due to higher SME bankcard processing volume. Dues, assessments and fees were 6.5%
of total revenues in the three months ended September 30, 2010, compared to 6.2% in the three months ended September 30, 2009.



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Net revenue, which we
define as total revenues less interchange fees and dues, assessments and fees, increased 4.9% from $110.0 million in the three months ended September 30, 2009, to $115.4 million in the three months ended September 30, 2010. The increase in
net revenue was driven primarily by increases in SME bankcard processing volume and equipment-related revenues. Net revenue for Network Services merchants declined in the three months ended September 30, 2010 primarily due to
renegotiations of customer contracts.

Processing and servicing expense for the three months ended September 30, 2010
increased by $8.9 million, or 17.7%, compared with the three months ended September 30, 2009. The increase in processing and servicing expense was due to costs associated with processing the higher SME bankcard processing volume, including
increased commission expense, increased costs of sales related to the higher equipment-related revenues, costs of investments we have made in enhancing our processing systems, and an increase in the cost of support personnel, particularly account
managers. As a percentage of total revenue, processing and servicing expense increased to 11.9% for the three months ended September 30, 2010 compared with 11.4% for the three months ended September 30, 2009. Transactions processed on HPS
Exchange represented approximately 90% of our total SME processing transactions during the three months ended September 30, 2010, compared to 88% during the three months ended September 30, 2009.

Customer acquisition costs for the three months ended September 30, 2010 decreased by $0.6 million, or 4.4% compared with the three
months ended September 30, 2009. This decline reflects the impacts of the lower levels of new gross margin installed by our sales force. Customer acquisition costs for the three months ended September 30, 2010 and 2009 included the
following components (in thousands of dollars):



|                                                                |  |                                 |        |   |      |   |        |  
|--------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                |  | Three Months
EndedSeptember 30, |       
|                                                                |  | 2010                            |        |   | 2009 |  
|Amortization of signing bonuses, net                            |  | $                               | 9,333  |   |      | $ | 10,123 |  
|Amortization of capitalized customer deferred acquisition costs |  |                                 | 3,998  |   |      |   | 4,089  |  
|Increase in accrued buyout liability                            |  |                                 | 2,916  |   |      |   | 3,309  |  
|Capitalized customer deferred acquisition costs                 |  |                                 | (3,674 | ) |      |   | (4,374 | )
|                                                                |  |                                 |        |   |      |   |        |  
|Total Customer Acquisition Costs                                |  | $                               | 12,573 |   |      | $ | 13,147 |  
|                                                                |  |                                 |        |   |      |   |        |  

Depreciation and amortization expenses decreased 2.9% from $4.0 million in the three months ended
September 30, 2009 to $3.9 million in the three months ended September 30, 2010. Most of our investments in information technology have been for security-related enhancements and in support of the continuing development of HPS Exchange,
Passport and other processing-related initiatives. Depreciation and amortization expense recorded on these investments is included in processing and servicing expense. Additionally, we capitalized salaries, fringe benefits and other expenses
incurred by our employees that worked on internally developed software projects and outsourced programming. 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 $3.4 million in the three months ended September 30, 2009 to $4.6 million in the three months ended September 30, 2010. The total
amount of capitalized costs for projects placed in service in the three months ended September 30, 2010 and 2009 was $0.8 million and $1.0 million, respectively.

General and administrative. General and administrative expenses decreased $2.3 million, or 8.3%, from $27.8 million in the three months ended September 30, 2009 to $25.5 million in the three
months ended September 30, 2010, primarily due to a decrease in staff expense including bonus and fringe benefits, as well as an increase in the amount of personnel expense capitalized for work on system development. General and administrative
expenses as a percentage of total revenue for the three months ended September 30, 2010 was 5.1%, a decrease from 6.3% for the three months ended September 30, 2009.

Income from operations. Our income from operations, which we also refer to as operating income, declined to $14.2 million for the three months ended September 30, 2010, from $14.7 million for
the three



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months ended September 30, 2009. This decline was primarily due to the continuing limiting effect which economic conditions had on growth in our net revenues, and to increases in processing
and servicing expense. Our operating margin, which we measure as operating income divided by net revenue, was 12.3% for the three months ended September 30, 2010, compared to 13.4% for the three months ended September 30, 2009.

Interest expense. Interest expense for the three months ended September 30, 2010 of $1.2 million increased from $0.8 million
for the three months ended September 30, 2009. The increase in interest expense for the three months ended September 30, 2010 was due to higher interest rates incurred on our borrowings under our Amended and Restated Credit Agreement and
increased borrowings under our Amended and Restated Credit Agreement and Bridge Loan. This was offset slightly by decreased interest expense on lower average payables to our sponsor banks. Interest expense for the three months ended
September 30, 2010 included approximately $0.5 million related to borrowings we incurred to fund the settlement with Visa in February 2010 (see OverviewProcessing System Intrusion for more detail). See
Liquidity and Capital ResourcesCredit Facility for more detail on our borrowings. Interest expense which we recorded as payables to our sponsor banks resulted from our practice of having our sponsor banks advance interchange
fees to most of our SME merchants. Generally, when we have cash available for investment we fund these advances to our SME 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.

(Provision for) recovery of processing system intrusion costs.See
OverviewProcessing System Intrusion and Critical Accounting EstimatesReserve for Processing System Intrusion for more details on the Processing System Intrusion.

During the three months ended September 30, 2010, we recorded total expenses of $0.7 million, or $0.01 per share associated with the
Processing System Intrusion for accruals, legal fees and costs we incurred for remediation and defending various claims and actions. For the three months ended September 30, 2009, we recorded total expenses of $73.3 million, or $1.22 per share,
associated with the Processing System Intrusion.

Income taxes. Income taxes for the three months ended
September 30, 2010 were an expense of $4.7 million, reflecting an effective tax rate of 38.3%. This compares to an income tax benefit of $22.3 million for the nine months ended September 30, 2009, at an effective tax rate of 37.6%. The
increase in the effective tax rate for 2010 reflects the impacts of minimum income tax obligations in certain states.

Net
income (loss) attributable to Heartland. As a result of the above factors, we recorded net income of $7.5 million for the three months ended September 30, 2010. This compares to a net loss of $37.1 million for the three months ended
September 30, 2009.



40



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Nine Months Ended
September 30, 2010 Compared to Nine Months Ended September 30, 2009

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



|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|------------------------------------------------------------- |  | ----------------------------- | --------- | - | ---------- |  | ----- | ----------------------------- |  | - | ---------- | - |  | ------ | ----- | -- | - | - | ------- | - |  |  | ------ | --
|                                                              |  | Nine MonthsEndedSeptember 30, |           |   | % of Total |  |       | Nine MonthsEndedSeptember 30, |  |   | % of Total |   |  | Change |      
|                                                              |  | 2010                          |           |   | Revenue    |  |       | 2009                          |  |   | Revenue    |   |  | Amount |       |    | % |  
|                                                              |  |                               |           |   |            | 
|Total Revenues                                                |  | $                             | 1,386,111 |   |            |  | 100.0 | %                             |  | $ | 1,232,113  |   |  |        | 100.0 | %  |   | $ | 153,998 |   |  |  | 12.5   | % 
|Costs of Services:                                            |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Interchange                                                   |  |                               | 962,749   |   |            |  | 69.5  | %                             |  |   | 853,666    |   |  |        | 69.3  | %  |   |   | 109,083 |   |  |  | 12.8   | % 
|Dues, assessments and fees                                    |  |                               | 88,962    |   |            |  | 6.4   | %                             |  |   | 63,393     |   |  |        | 5.1   | %  |   |   | 25,569  |   |  |  | 40.3   | % 
|Processing and servicing                                      |  |                               | 175,622   |   |            |  | 12.7  | %                             |  |   | 148,278    |   |  |        | 12.0  | %  |   |   | 27,344  |   |  |  | 18.4   | % 
|Customer acquisition costs                                    |  |                               | 38,758    |   |            |  | 2.8   | %                             |  |   | 38,479     |   |  |        | 3.1   | %  |   |   | 279     |   |  |  | 0.7    | % 
|Depreciation and amortization                                 |  |                               | 11,400    |   |            |  | 0.8   | %                             |  |   | 11,614     |   |  |        | 0.9   | %  |   |   | (214    | ) |  |  | (1.8   | )%
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Total costs of services                                       |  |                               | 1,277,491 |   |            |  | 92.2  | %                             |  |   | 1,115,430  |   |  |        | 90.5  | %  |   |   | 162,061 |   |  |  | 14.5   | % 
|General and administrative                                    |  |                               | 76,673    |   |            |  | 5.5   | %                             |  |   | 77,247     |   |  |        | 6.3   | %  |   |   | (574    | ) |  |  | (0.7   | )%
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Total expenses                                                |  |                               | 1,354,164 |   |            |  | 97.7  | %                             |  |   | 1,192,677  |   |  |        | 96.8  | %  |   |   | 161,487 |   |  |  | 13.5   | % 
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Income from operations                                        |  |                               | 31,947    |   |            |  | 2.3   | %                             |  |   | 39,436     |   |  |        | 3.2   | %  |   |   | (7,489  | ) |  |  | (19.0  | )%
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Other income (expense):                                       |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Interest income                                               |  |                               | 111       |   |            |  |      |                               |  |   | 86         |   |  |        |      |    |   |   | 25      |   |  |  | 29.1   | % 
|Interest expense                                              |  |                               | (3,511    | ) |            |  | (0.3  | )%                            |  |   | (1,868     | ) |  |        | (0.2  | )% |   |   | (1,643  | ) |  |  | 88.0   | % 
|(Provision for) recovery of processing system intrusion costs |  |                               | 14,770    |   |            |  | 1.1   | %                             |  |   | (105,292   | ) |  |        | (8.5  | )% |   |   | 120,062 |   |  |  | (114.0 | )%
|Other, net                                                    |  |                               | 2,022     |   |            |  | 0.1   | %                             |  |   | 4          |   |  |        |      |    |   |   | 2,018   |   |  |  |        |   
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Total other income (expense)                                  |  |                               | 13,392    |   |            |  | 1.0   | %                             |  |   | (107,070   | ) |  |        | (8.7  | )% |   |   | 120,462 |   |  |  | (112.5 | )%
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Income (loss) before income taxes                             |  |                               | 45,339    |   |            |  | 3.3   | %                             |  |   | (67,634    | ) |  |        | (5.5  | )% |   |   | 112,973 |   |  |  | 167.0  | % 
|Provision for (benefit from) income taxes                     |  |                               | 17,352    |   |            |  | 1.3   | %                             |  |   | (25,484    | ) |  |        | (2.1  | )% |   |   | 42,836  |   |  |  | 168.1  | % 
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Net income (loss)                                             |  |                               | 27,987    |   |            |  | 2.0   | %                             |  |   | (42,150    | ) |  |        | (3.4  | )% |   |   | 70,137  |   |  |  | 166.4  | % 
|Less: Net income attributable to noncontrolling interests     |  |                               | 83        |   |            |  |       |                               |  |   | 16         |   |  |        |       |    |   |   | 67      |   |  |  |        |   
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   
|Net income (loss) attributable to Heartland                   |  | $                             | 27,904    |   |            |  | 2.0   | %                             |  | $ | (42,166    | ) |  |        | (3.4  | )% |   | $ | 70,070  |   |  |  | 166.2  | % 
|                                                              |  |                               |           |   |            |  |       |                               |  |   |            |   |  |        |       |    |   |   |         |   |  |  |        |   

Total Revenues. Total revenues increased by 12.5% from $1,232.1 million in the nine
months ended September 30, 2009 to $1,386.1 million in the nine months ended September 30, 2010, primarily as a result of a $147.9 million, or 12.3%, increase in processing revenues. The breakout of our total revenues for the nine months
ended September 30, 2010 and 2009 was as follows (in thousands of dollars):



|                               |  |                                |           |  |                       |   |           |        |  |   |         |  |  |  |      |  
|------------------------------ |  | ------------------------------ | --------- |  | --------------------- | - | --------- | ------ |  | - | ------- |  |  |  | ---- | -
|                               |  | Nine Months EndedSeptember 30, |           |  | Change fromPrior Year |  
|                               |  | 2010                           |           |  | 2009                  |   |           | Amount |  |   | %       | 
|Processing revenues, gross (a) |  | $                              | 1,348,559 |  |                       | $ | 1,200,662 |        |  | $ | 147,897 |  |  |  | 12.3 | %
|Payroll processing revenues    |  |                                | 12,931    |  |                       |   | 11,415    |        |  |   | 1,516   |  |  |  | 13.3 | %
|Equipment-related income       |  |                                | 24,621    |  |                       |   | 20,036    |        |  |   | 4,585   |  |  |  | 22.9 | %
|                               |  |                                |           |  |                       |   |           |        |  |   |         |  |  |  |      |  
|Total Revenues                 |  | $                              | 1,386,111 |  |                       | $ | 1,232,113 |        |  | $ | 153,998 |  |  |  | 12.5 | %
|                               |  |                                |           |  |                       |   |           |        |  |   |         |  |  |  |      |  



|(a) | Includes Visa, MasterCard, AMEX and Discover bankcard processing revenues, AMEX fees, Discover fees, check processing fees, customer service fees, gift card, loyalty
and other miscellaneous revenue.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The $147.9 million increase in processing revenues from $1,200.7 million in
the nine months ended September 30, 2009 to $1,348.6 million in the nine months ended September 30, 2010 was primarily due to higher SME merchant card processing revenues. Revenues from our SME bankcard processing increased due to
higher SME bankcard processing volume. For the nine months ended September 30, 2010, our SME bankcard processing volume increased 7.0% to $47.4 billion, compared to $44.3 billion for the nine months ended September 30, 2009. American
Express and Discover processing volume contributed half of this year-over-year increase. Network Services increased its bankcard processing revenues on the 362 million transactions it settled, representing $8.3 billion in processing volume, and
the 1,948 million transactions it authorized through its front-end card processing systems during the nine months ended September 30, 2010, compared to 350 million transactions it settled, representing $7.3 billion in processing
volume, and the 1,777 million transactions it authorized through its front-end card processing systems during the nine months ended



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September 30, 2009. The increase in Network Services bankcard processing revenues was primarily due to increases in Visa and MasterCard bankcard transaction authorization fees, which
we pass through to our merchants, partially offset by reductions in gross processing revenues due to renegotiations of customer contracts. We report Network Services settled bankcard processing revenues net of credit 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 13.3%, from $11.4 million in the nine months ended September 30, 2009 to $12.9 million in the nine months
ended September 30, 2010, primarily due to the 18.8% increase in the number of payroll processing customers from 9,232 at September 30, 2009 to 10,968 at September 30, 2010, partially offset by the impact of a reduction in the average
number of employees at our customers.

Equipment-related income increased by 22.9% from $20.0 million in the nine months ended
September 30, 2009 to $24.6 million in the nine months ended September 30, 2010, primarily due to increases in revenues from the laundry vertical in our prepaid and stored-value card business as well as increases in revenues from our
campus solutions business, both at our Debitek subsidiary. We also experienced an increase in equipment-related revenues from the sale of SME card terminals, including our proprietary terminals, referred to as E3 Terminals, which encrypt cardholder
data as the card is being swiped.

Costs of services. Costs of services increased 14.5% from $1,115.4 million in
the nine months ended September 30, 2009 to $1,277.5 million in the nine months ended September 30, 2010, due primarily to increases in interchange fees, dues, assessments and fees, and processing and servicing expense. Costs of services
represented 92.2% of total revenues in the nine months ended September 30, 2010, up from 90.5% in the nine months ended September 30, 2009.

Interchange fees increased 12.8% from $853.7 million in the nine months ended September 30, 2009 to $962.7 million in the nine months ended September 30, 2010, and represented 69.5% of
total revenues in the nine months ended September 30, 2010 compared to 69.3% in the nine months ended September 30, 2009. The increase in interchange fees was primarily due to higher SME bankcard processing volume in the nine months ended
September 30, 2010, especially for American Express and Discover which generally have higher interchange rates than Visa and MasterCard.

Dues, assessments and fees increased 40.3% from $63.4 million in the nine months ended September 30, 2009 to $89.0 million in the nine months ended September 30, 2010, primarily as a result of
increases in MasterCard and Visa bankcard transaction authorization fees during 2009, as well as increases in MasterCard and Visa assessments during 2010, and also due to higher SME bankcard processing volume. Dues, assessments and fees were 6.4% of
total revenues in the nine months ended September 30, 2010, compared to 5.1% in the nine months ended September 30, 2009.

Net revenue, which we define as total revenues less interchange fees and dues, assessments and fees, increased 6.1% from $315.1 million in the nine months ended September 30, 2009, to $334.4 million
in the nine months ended September 30, 2010. The increase in net revenue was driven primarily by increases in SME bankcard processing volume and equipment-related revenues. Net revenue for Network Services merchants declined in the nine
months ended September 30, 2010 primarily due to renegotiations of customer contracts.

Processing and servicing expense
for the nine months ended September 30, 2010 increased by $27.3 million, or 18.4%, compared with the nine months ended September 30, 2009. The increase in processing and servicing expense was due to costs associated with processing the
higher SME bankcard processing volume, increased costs of sales related to the higher payroll and equipment-related revenues as well as phone card and loyalty and gift related revenues, costs of investments we have made in enhancing our processing
systems, an increase in the amount of merchant losses and increases in the costs of operating our service centers, particularly the costs of support personnel, including account managers and depreciation and amortization. As a percentage of total
revenue, processing and servicing expense increased to 12.7% for the nine months ended September 30, 2010 compared with 12.0% for the nine months ended September 30, 2009. Transactions processed on HPS Exchange represented approximately
90% of our total SME processing transactions during the nine months ended September 30, 2010, compared to 87% during the nine months ended September 30, 2009.



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Customer acquisition
costs increased 0.7% from $38.5 million in the nine months ended September 30, 2009 to $38.8 million in the nine months ended September 30, 2010. The increase in customer acquisition costs was primarily due to a higher rate of increase in
the accrued buyout liability in the nine months ended September 30, 2010. This increase is attributable to new merchants added since September 30, 2009 and lower same store sales contraction in the nine months ended September 30,
2010. Customer acquisition costs for the nine months ended September 30, 2010 and 2009 included the following components (in thousands of dollars):



|                                                                |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                |  | Nine Months EndedSeptember 30, |        
|                                                                |  | 2010                           |         |   | 2009 |  
|Amortization of signing bonuses, net                            |  | $                              | 28,811  |   |      | $ | 30,737  |  
|Amortization of capitalized customer deferred acquisition costs |  |                                | 12,133  |   |      |   | 11,926  |  
|Increase in accrued buyout liability                            |  |                                | 9,214   |   |      |   | 8,385   |  
|Capitalized customer deferred acquisition costs                 |  |                                | (11,400 | ) |      |   | (12,569 | )
|                                                                |  |                                |         |   |      |   |         |  
|Total Customer Acquisition Costs                                |  | $                              | 38,758  |   |      | $ | 38,479  |  
|                                                                |  |                                |         |   |      |   |         |  

Depreciation and amortization expenses decreased 1.8% from $11.6 million in the nine months ended
September 30, 2009 to $11.4 million in the nine months ended September 30, 2010. Most of our investments in information technology have been for security-related enhancements and in support of the continuing development of HPS Exchange,
Passport and other processing-related initiatives. Depreciation and amortization expense recorded on these investments is included in processing and servicing expense. Additionally, we capitalized salaries, fringe benefits and other expenses
incurred by our employees that worked on internally developed software projects and outsourced programming. 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 $9.5 million in the nine months ended September 30, 2009 to $11.1 million in the nine months ended September 30, 2010. The total amount
of capitalized costs for projects placed in service in the nine months ended September 30, 2010 and 2009 was $7.0 million and $4.6 million, respectively.

General and administrative. General and administrative expenses decreased 0.7%, from $77.2 million in the nine months ended September 30, 2009 to $76.7 million in the nine months ended
September 30, 2010. This decrease was primarily due to a decrease in administrative personnel costs including bonus and fringe expense as well as an increase in the amount of capitalized salaries. General and administrative expenses as a
percentage of total revenue for the nine months ended September 30, 2010 was 5.5%, a decrease from 6.3% for the nine months ended September 30, 2009.

Income from operations. Our income from operations, which we also refer to as operating income, declined to $31.9 million for the nine months ended September 30, 2010, from $39.4 million for
the nine months ended September 30, 2009. This decline was primarily due to the continuing limiting effect which economic conditions had on growth in our net revenues, and to increases in processing and servicing expenses. Our operating margin,
which we measure as operating income divided by net revenue, was 9.6% for the nine months ended September 30, 2010, compared to 12.5% for the nine months ended September 30, 2009.

Interest expense. Interest expense for the nine months ended September 30, 2010 of $3.5 million increased from $1.9 million
for the nine months ended September 30, 2009. The increase in interest expense for the nine months ended September 30, 2010 was due to higher interest rates incurred on our borrowings under our Amended and Restated Credit Agreement,
increased borrowings under our Amended and Restated Credit Agreement and Bridge Loan, and higher average payables to our sponsor banks. Interest expense for the nine months ended September 30, 2010 included approximately $1.2 million related to
borrowings we incurred to fund the settlement with Visa in February 2010 (see OverviewProcessing System Intrusion for more detail). See Liquidity and Capital ResourcesCredit Facility for more detail on
our borrowings. Interest expense which we recorded as payables to our sponsor banks resulted from our practice



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of having our sponsor banks advance interchange fees to most of our SME merchants. Generally, when we have cash available for investment we fund these advances to our SME 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.

(Provision for) recovery of processing system intrusion costs.See OverviewProcessing System Intrusion and Critical Accounting EstimatesReserve for Processing System
Intrusion for more details on the Processing System Intrusion.

During the nine months ended September 30, 2010, we
recovered from our insurance providers approximately $26.8 million of the costs we incurred for the Processing System Intrusion and expensed approximately $12.0 million for accruals, legal fees and costs we incurred for remediation and defending
various claims and actions, for a net recovery of $14.8 million, or $0.23 per share. For the nine months ended September 30, 2009, we recorded total expenses of $105.3 million, or $1.74 per share, associated with the Processing System
Intrusion.

Other income (expense), net. Other, net for the nine months ended September 30, 2010 reflected a net
legal settlement received during the period.

Income taxes. Income taxes for the nine months ended September 30,
2010 were an expense of $17.4 million, reflecting an effective tax rate of 38.3%. This compares to income tax benefit of $25.5 million for the nine months ended September 30, 2009, reflecting an effective tax rate of 37.7%. The increase in the
effective tax rate for 2010 primarily reflects the impacts of minimum income tax obligations in certain states.

Net income
(loss) attributable to Heartland. As a result of the above factors, we recorded net income of $27.9 million for the nine months ended September 30, 2010. This compares to a net loss of $42.2 million for the nine months ended
September 30, 2009.

Balance Sheet Information



|                                            |  |                   |         |  |                  |   |         | 
|------------------------------------------- |  | ----------------- | ------- |  | ---------------- | - | ------- | 
|                                            |  | September 30,2010 |         |  | December 31,2009 |  
|                                            |  | (in thousands)    |        
|Selected Balance Sheet Data                 |  |                   |         | 
|                                            |  |                  
|Cash                                        |  | $                 | 45,512  |  |                  | $ | 32,113  | 
|Funds held for payroll customers            |  |                   | 24,660  |  |                  |   | 29,667  | 
|Receivables, net                            |  |                   | 171,893 |  |                  |   | 149,403 | 
|Current tax asset                           |  |                   | 23,156  |  |                  |   | 16,266  | 
|Current deferred tax asset                  |  |                   | 7,275   |  |                  |   | 42,760  | 
|Capitalized customer acquisition costs, net |  |                   | 60,450  |  |                  |   | 72,038  | 
|Property and equipment, net                 |  |                   | 101,004 |  |                  |   | 99,989  | 
|Goodwill                                    |  |                   | 62,126  |  |                  |   | 60,962  | 
|Intangible assets                           |  |                   | 30,785  |  |                  |   | 34,637  | 
|Total assets                                |  |                   | 545,927 |  |                  |   | 562,206 | 
|                                            |  |                  
|Due to sponsor banks                        |  |                   | 81,628  |  |                  |   | 80,007  | 
|Accounts payable                            |  |                   | 38,753  |  |                  |   | 32,305  | 
|Deposits held for payroll customers         |  |                   | 24,660  |  |                  |   | 29,667  | 
|Borrowings:                                 |  |                   |         |  |                  |   |         | 
|Current portion                             |  |                   | 111,469 |  |                  |   | 58,547  | 
|Long term portion                           |  |                   | 2,083   |  |                  |   | 8,419   | 
|Accrued buyout liability:                   |  |                   |         |  |                  |   |         | 
|Current portion                             |  |                   | 5,854   |  |                  |   | 9,306   | 
|Long term portion                           |  |                   | 23,415  |  |                  |   | 33,580  | 
|Reserve for Processing System Intrusion     |  |                   | 1,618   |  |                  |   | 99,911  | 
|Total liabilities                           |  |                   | 378,682 |  |                  |   | 432,251 | 
|Total stockholders equity                  |  |                   | 166,948 |  |                  |   | 129,741 | 



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September 30,
2010 Compared to December 31, 2009

Total assets decreased $16.3 million, or 2.9%, to $545.9 million at
September 30, 2010 from $562.2 million at December 31, 2009, primarily due to decreases in current deferred tax assets, capitalized customer acquisition costs, and funds held for payroll customers. Current deferred tax assets decreased
$35.5 million to $7.3 million at September 30, 2010. The reduction in current deferred tax assets primarily resulted from the payment of the settlements with Visa, MasterCard and Discover during the nine months ended September 30, 2010
(see  Overview Processing System Intrusion for more detail). The payments of these settlements was also the primary reason for the $98.3 million decrease in our Reserve for Processing System Intrusion. Capitalized customer
acquisition costs decreased by $11.6 million, or 16.1%, primarily reflecting a decline in the amount of signing bonuses paid due to the decrease in gross margin installed. A $5.0 million decrease in funds held for payroll customers was offset by an
equal decrease in deposits held for payroll customers.

Our receivables, which increased $22.5 million or 15.1% from
December 31, 2009, are primarily due from our bankcard processing merchants and result from our practice of advancing interchange fees to most of our SME merchants during the 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 September 30, 2010, we used $23.0 million of available cash to fund merchant advances and at December 31, 2009, we used $7.0 million of cash to fund merchant advances. The amount due to
sponsor banks for funding advances was $77.6 million at September 30, 2010 and $73.2 million at December 31, 2009. 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.

Current borrowings increased $52.9 million, or 90.4%, to $111.5 million at September 30, 2010 from
$58.5 million at December 31, 2009, due to our January 7, 2010 Settlement Agreement with Visa and that Settlement Agreements condition that we obtain a loan of at least $53.0 million from our Sponsor Banks, the proceeds of which were
to be used to fund the settlement amount. See  Overview  Provision for Processing System Intrusion and Liquidity and Capital Resources for discussion of the Settlement Agreement, the Bridge Loan and the
Increased Credit Commitment.

During the three months ended September 30, 2010, we exercised our rights to buy out a
substantial portion of residual commissions owned by our Relationship Managers and sales managers (also referred to as portfolio equity). As a result of these buyouts, we reduced our Accrued Buyout Liability recorded on the Consolidated
Balance Sheet by the approximately $17.7 million of cash payments we made. We expect to realize a reduction of approximately $0.6 million in monthly residual commission expense beginning in the fourth quarter of 2010, and a lesser reducing in
ensuing years. The amount of future annual reductions in residual commission expense will be impacted by merchant attrition. See  Critical Accounting Estimates  Accrued Buyout liability for the accounting treatment of our
Accrued Buyout Liability.

Total stockholders equity increased $37.2 million from December 31, 2009 primarily due
to recording net income of $27.9 million for the nine months ended September 30, 2010, including net pre-tax insurance recoveries of $14.8 million related to the Processing System Intrusion. Other increases in total stockholders equity
for the nine months ended September 30, 2010 included proceeds received from the exercise of stock options and tax benefits related to those stock option exercises.

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



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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 primary service center and investing in building our technology infrastructure. We
expect that our future cash requirements will continue to include amounts required to defend against claims arising from the Processing System Intrusion and such costs could be material. At times, we have used cash to repurchase our common stock. We
could in the future use cash for other unspecified acquisitions of businesses or assets.

Other than borrowings we used to
fund our May 2008 acquisition of Network Services and our settlement with Visa, 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 if we are unable to replace our current Credit Facility with a new arrangement, refinance the Bridge Loan, or meet future cash requirements arising from the Processing System
Intrusion from our operating cash flow. See  Overview  Processing System Intrusion for more detail. We cannot provide assurance that we will be able to replace our current Credit Facility with a new arrangement or refinance
the Bridge Loan in order to meet any liquidity challenges we may face.

Working Capital.Our working capital,
defined as current assets less current liabilities, was negative by $38.4 million at September 30, 2010 primarily due to the following: (i) our Revolving Credit Facility, which expires on September 4, 2012, with $75.0 million in
borrowings classified as a current liability, and (ii) our $28.0 million Bridge Loan, which is due on February 17, 2011. See  Credit Facilities for discussion of Revolving Credit Facility and the Bridge Loan. Management
believes that this working capital deficiency will not cause illiquidity and that we will be able to satisfy our obligations in the normal course because: (i) we expect the $75.0 million Revolving Credit Facility to be refinanced, and we have
the flexibility to defer its repayment until 2012 and (ii) we expect the $28.0 million Bridge Loan to be refinanced. We cannot offer any assurance that we will be able to refinance the Revolving Credit Facility or the Bridge Loan.

At September 30, 2010, we had cash on our Balance Sheet totaling $45.5 million compared to cash of $32.1 million at
December 31, 2009 and $27.6 million at December 31, 2008. Our September 30, 2010 cash balance included approximately $30.4 million of processing-related cash in transit and collateral, compared to approximately $25.5 million of cash
in transit and collateral at December 31, 2009. As of September 30, 2010, the Company had used $23.0 million of its available cash to fund merchant advances and at December 31, 2009, the Company had used $7.0 million of its cash to
fund merchant advances.

On September 30, 2010, we were fully borrowed on our existing credit facilities. See
 Credit Facilities for more details.

Settlements of Claims Related to the Processing System
Intrusion.On December 17, 2009, we entered into a settlement agreement and release with American Express to resolve potential claims and other disputes among us and American Express (and its issuers) with respect to the Processing
System Intrusion, and subsequently paid approximately $3.5 million in full and final satisfaction of any and all claims of American Express and its issuers arising from or relating to the Processing System Intrusion. Such settlement agreement and
release contains mutual releases by and between us and American Express (on behalf of itself and its issuers) relating to the Processing System Intrusion.

On January 7, 2010, we, the Sponsor Banks, and Visa entered into the Visa Settlement Agreement to resolve potential claims and other disputes among us, the Sponsor Banks and Visa with respect to the
potential rights and claims of Visa and certain issuers of Visa-branded credit and debit cards related to the Processing System Intrusion. After credit for fines previously collected by Visa during 2009, the settlement amount paid under the Visa
Settlement Agreement was $59.3 million. We had included costs of this



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settlement in our Provision for Processing System Intrusion on our Consolidated Statement of Operations for the year ended December 31, 2009 and in our Reserve for Processing System
Intrusion on the Consolidated Balance Sheet as of December 31, 2009.

A condition of the Visa Settlement Agreement was
that we obtain a loan of at least $53.0 million from the Sponsor Banks, the proceeds of which were to be used to partially fund the settlement amount. See  Credit Facilities for a discussion of our $28.0 million Bridge Loan and our
$25.0 million Increased Credit Commitment, both entered into on February 18, 2010. We used the proceeds of the Bridge Loan and the Increased Credit Commitment, together with a portion of our cash reserves, to fund the settlement with Visa. The
Visa Settlement Agreement was consummated on February 18, 2010.

On May 19, 2010, we entered into the MasterCard
Settlement Agreement with MasterCard to resolve potential claims and other disputes among us, the Sponsor Banks and MasterCard related to the Processing System Intrusion. Under the MasterCard Settlement Agreement, alternative recovery offers
totaling $41.4 million were made to eligible MasterCard issuers with respect to losses alleged to have been incurred by them as a result of the Processing System Intrusion. The $41.4 million included a $6.6 million credit for fines previously
collected by MasterCard during 2009, so the maximum amount payable under the settlement was $34.8 million if all MasterCard issuers had accepted the settlement. The Company paid approximately $34.4 million because certain issuers did not accept
settlement. Those issuers, who represent less than 1% of the accounts eligible for the settlement, have been preliminarily awarded $367,172 by MasterCard, and the Company is contesting that award. On September 3, 2010 and September 14,
2010, we paid the remaining settlement amounts.

On August 31, 2010, we entered into the Discover Settlement Agreement to
resolve potential claims and other disputes among us and Discover (and its affiliates and certain of its issuers) with respect to the Processing System Intrusion. On September 2, 2010, we paid Discover $5.0 million in full and final
satisfaction of any and all claims of Discover, its affiliates and certain of its issuers arising from or relating to the Processing System Intrusion. The Settlement Agreement contains mutual releases by and between us and Discover (on behalf of
itself and its affiliates) relating to the Processing System Intrusion.

2009 Acquisition.On July 31,
2009, we purchased for $3.2 million the existing Discover merchant portfolio, which we were already processing. This purchase related to our 2008 agreement with DFS Services, LLC, which enables us to offer bankcard merchants a streamlined process
that enables them to accept Discover Network cards on our processing platforms. This asset is being amortized over the next 73 months in proportion to estimated future cash flows.

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

Cash Flow (Used In) Provided By Operating Activities. We reported net cash used in operating activities of $21.9 million in the nine months ended September 30, 2010, compared to net
cash provided by operating activities of $58.3 million in the nine months ended September 30, 2009.

The primary reason
for the negative operating cash flow for the nine months ended September 30, 2010 was the payment of $98.5 million, which is reflected in the reduction of our Reserve for Processing System Intrusion, for the settlements with Visa, MasterCard
and Discover. The Visa Settlement Agreement required us to obtain a loan of at least $53.0 million from our Sponsor Banks, the proceeds of which were to be used to fund the settlement amount (see  Overview  Processing System
Intrusion for more detail). The $53.0 million of proceeds from the loans we obtained from our Sponsor Banks are included in Cash Flow Provided by Financing Activities (See  Cash Flow Provided By (Used In) Financing Activities). The
settlements with MasterCard and Discover were funded from our cash reserves. Partially offsetting the impact of the Visa settlement on our operating cash flow for the nine months ended September 30, 2010 was approximately $26.8 million of cash
we recovered from our insurance providers against certain costs we incurred for the Processing System Intrusion. Other settlements we paid in the nine months ended September 30, 2010 totaled $2.5 million. For the nine months ended
September 30, 2010 and 2009, we paid $9.8 million and $20.4 million, respectively, for costs we incurred for legal fees and costs incurred for investigations, defending various claims and actions, and crisis management services.



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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 $18.0
million and $25.5 million, respectively, were paid in the nine months ended September 30, 2010 and 2009. The reduction in net signing bonuses paid during the nine months ended September 30, 2010 reflects a year-over-year decline in newly
installed gross margin. In the nine months ended September 30, 2010 and 2009, we reduced our accrued buyout liability by making buyout payments of $22.8 million and $6.3 million, respectively. See  Balance Sheet Information
for a discussion of buyouts initiated in the three months ended September 30, 2010.

Cash Flow Used In Investing
Activities. Net cash used in investing activities was $16.5 million for the nine months ended September 30, 2010, compared to $36.5 million for the nine months ended September 30, 2009. The amount of cash used in investing
activities was lower during the nine months ended September 30, 2010 as we made capital expenditures of $16.4 million, compared to $33.6 million invested in the nine months ended September 30, 2009. Capital expenditures include costs of
$1.3 million and $15.0 million in the nine months ended September 30, 2010 and 2009, respectively, related to the construction of our primary service center facility in Jeffersonville, Indiana. See Contractual Obligations for
more detail regarding cumulative cash outlays and expected future funding requirements related to our primary service center. We also continued building our technology infrastructure, primarily for hardware and software needed for the 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 in 2009 were increased by measures we implemented after the Processing
System Intrusion to further enhance the security of our computer system.

Cash Flow Provided By (Used In) Financing
Activities. Net cash provided by financing activities was $51.7 million for the nine months ended September 30, 2010, compared to net cash used in financing activities of $10.4 million for the nine months ended September 30, 2009.
Cash flow from financing activities in the nine months ended September 30, 2010 included the $53.0 million of proceeds from the loans we obtained from our Sponsor Banks to use in funding the February 18, 2010 settlement with Visa (see
 Overview  Processing System Intrusion for more detail).

During the nine months ended
September 30, 2010 and 2009, we made term loan amortization payments of $6.2 million due under our Term Credit facility. See  Credit Facilities for more details.

Cash dividends paid in the nine months ended September 30, 2010 were $1.1 million, compared to dividends paid of $1.7 million in the
nine months ended September 30, 2009. See  Dividends on Common Stock for more information on our common stock dividends. During the nine months ended September 30, 2010 and 2009, employees exercised stock options
generating cash proceeds in the aggregate of $4.7 million and $0.5 million, respectively.

Cash used in financing activities
in the nine month period ended September 30, 2009 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 nine months ended September 30, 2009. No common stock was repurchased during the nine months ended September 30, 2010.

Credit Facilities. On May 30, 2008, we entered into 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 Amended and Restated Credit Agreement from time to time. The 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 our
assets, and increase the interest margin charged on borrowings.



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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 were able to increase the total commitments by $25 million for a total commitment under the Revolving Credit Facility of
$75 million. On February 18, 2010, we entered into the Commitment Increase Agreement with KeyBank as one of the lenders under the Revolving Credit Facility to increase the total commitment under the Revolving Credit Facility by $25
million. The terms of the Increased Credit Commitment are identical to the terms of the Revolving Credit Facility. The Revolving Credit Facility is available to us on a revolving basis until 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 certain of our subsidiaries.
We were in compliance with these covenants as of September 30, 2010. 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.

On February 18, 2010, we entered into the Bridge Loan Agreement with KeyBank, as administrative agent, and KeyBank and Heartland Bank as bridge lenders. On that date, KeyBank made a bridge loan to us
in the amount of $20.0 million and Heartland Bank made a bridge loan to us in the amount of $8.0 million, which are the maximum amounts that we may borrow under the Bridge Loan Agreement. We must repay the Bridge Loan by February 17, 2011. We
may optionally prepay the Bridge Loan at any time in whole or in part. However, we must prepay the Bridge Loan with any net cash proceeds from certain asset sales, the net cash proceeds of certain equity and debt issuances, and the net cash proceeds
of certain recovery events.

The proceeds of the Bridge Loan and the Increased Credit Commitment, together with a portion of
our cash reserves, were used to fund the settlement with Visa. The Visa Settlement Agreement was consummated on February 18, 2010, with a payment of $58.6 million.

At December 31, 2009, there was $50.0 million outstanding under the Revolving Credit Facility and $16.7 million outstanding under the Term Credit Facility. At September 30, 2010, there was
$75.0 million outstanding under the Revolving Credit Facility, $10.4 million outstanding under the Term Credit Facility, and $28.0 million outstanding under the Bridge Loan.

Common Stock Repurchases.No common stock was repurchased during the nine months ended September 30, 2010. During the
nine months ended September 30, 2009, we repurchased 350,400 shares of our common stock at average per share costs of $9.14 under authorizations from our Board of Directors. Under these authorizations, we repurchased an aggregate of 2,924,684
shares of common stock through September 30, 2010 at a cost of $65.1 million, or an average cost of $22.25 per share. At September 30, 2010, the Company has remaining authorization to repurchase up to 175,316 additional shares of its
common stock.



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Dividends on
Common Stock.The following table summarizes quarterly cash dividends declared and paid on our common stock during 2010 and 2009:



|                                       |  |                   |  |                    |  |                            |       | 
|-------------------------------------- |  | ----------------- |  | ------------------ |  | -------------------------- | ----- | 
|Date Declared                          |  | Record Date       |  | Date Paid          |  | Amount PaidPer
CommonShare |      
|Nine Months Ended September 30, 2010:  |  |                   |  |                    |  |                           
|February 18, 2010                      |  | March 5, 2010     |  | March 15, 2010     |  | $                          | 0.01  | 
|May 4, 2010                            |  | May 25, 2010      |  | June 15, 2010      |  | $                          | 0.01  | 
|August 3, 2010                         |  | August 25, 2010   |  | September 15, 2010 |  | $                          | 0.01  | 
|                                      
|Twelve Months Ended December 31, 2009: | 
|February 20, 2009                      |  | March 9, 2009     |  | March 16, 2009     |  | $                          | 0.025 | 
|May 7, 2009                            |  | May 25, 2009      |  | June 15, 2009      |  | $                          | 0.01  | 
|August 3, 2009                         |  | August 25, 2009   |  | September 15, 2009 |  | $                          | 0.01  | 
|November 3, 2009                       |  | November 23, 2009 |  | December 15, 2009  |  | $                          | 0.01  | 

On November 2,
2010, the Companys Board of Directors declared a quarterly cash dividend of $0.01 per share of common stock, payable on December 15, 2010 to stockholders of record as of November 23, 2010.

Contractual Obligations.The card brand 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. If the merchant incurring the chargeback is unable to fund the refund to the card issuing bank, we must do so. As the majority of our SME transactions involve
the delivery of the product or service at the time of the transaction, a good basis to estimate our exposure to chargebacks is the last four months bankcard processing volume on our SME portfolio, which was $22.8 billion for the four months
ended September 30, 2010 and $19.6 billion for the four months ended December 31, 2009. However, during the four months ended September 30, 2010 and December 31, 2009, we were presented with $10.6 million and $11.1 million,
respectively, of chargebacks by issuing banks. In the nine months ended September 30, 2010 and the 2009 full year, we incurred merchant credit losses of $7.3 million and $4.1 million, respectively, on total SME bankcard dollar volumes processed
of $48.2 billion and $43.8 billion, respectively. These credit losses are included in processing and servicing expense in our Consolidated Statement of Operations.

Chargebacks originating from large national merchant bankcard processing are mostly processed and carried by Fifth Third Processing Solutions, which is our third-party outsourced processor for settling
large national merchant accounts.

The following table reflects our significant contractual obligations as of
September 30, 2010:



|                             |  |                        |        |  |                 |   |        |             |  |   |             |  |  |                  |       |  |  |   |       | 
|---------------------------- |  | ---------------------- | ------ |  | --------------- | - | ------ | ----------- |  | - | ----------- |  |  | ---------------- | ----- |  |  | - | ----- | 
|                             |  | Payments Due by Period |       
|Contractual Obligations      |  | Total                  |        |  | Less than1 year |   |        | 1 to 3years |  |   | 3 to 5years |  |  | More than5 years |      
|                             |  | (in thousands)         |       
|Processing providers (a)     |  | $                      | 11,392 |  |                 | $ | 7,394  |             |  | $ | 3,731       |  |  | $                | 267   |  |  | $ |      | 
|Telecommunications providers |  |                        | 9,237  |  |                 |   | 4,147  |             |  |   | 5,090       |  |  |                  |      |  |  |   |      | 
|Office and equipment leases  |  |                        | 22,651 |  |                 |   | 6,472  |             |  |   | 8,486       |  |  |                  | 3,604 |  |  |   | 4,089 | 
|Term Loan Facility (b)       |  |                        | 10,416 |  |                 |   | 8,333  |             |  |   | 2,083       |  |  |                  |      |  |  |   |      | 
|Bridge Loan (c)              |  |                        | 28,000 |  |                 |   | 28,000 |             |  |   |            |  |  |                  |      |  |  |   |      | 
|Capital lease obligations    |  |                        | 141    |  |                 |   | 141    |             |  |   |             |  |  |                  |      |  |  |   |      | 
|                             |  |                        |        |  |                 |   |        |             |  |   |             |  |  |                  |       |  |  |   |       | 
|                             |  | $                      | 81,837 |  |                 | $ | 54,487 |             |  | $ | 19,390      |  |  | $                | 3,871 |  |  | $ | 4,089 | 
|                             |  |                        |        |  |                 |   |        |             |  |   |             |  |  |                  |       |  |  |   |       | 



|(a) | We have agreements with several third-party processors to provide 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 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 the third party processors the fees that they would have received if we had submitted the required minimum number or volume of transactions.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Interest rates on the Term Credit Facility are variable. If interest rates were to remain at the September 30, 2010 level, the Company would make interest payments
of $226,000 in the next 1 year and $16,000 in the next 1 to 3 years, or a total of $242,000. In addition, the Company has $75 million outstanding under our Revolving Credit Facility at September 30, 2010. The Revolving Credit Facility is
available on a revolving basis until September 4, 2012.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Interest rates on the Bridge Loan are variable. If interest rates were to remain at the September 30, 2010 level, the Company would make interest payments of
$456,000 in the next year.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In addition, we record
a payable to sponsor banks each month in conjunction with our monthly processing activities. This amount was $81.6 million as of September 30, 2010. 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 September 30, 2010, we had gross tax-effected
unrecognized tax benefits of approximately $1.5 million. See  Critical Accounting Estimates  Income Taxes. As of September 30, 2010 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 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, attorneys 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, attorneys fees and costs.

On June 10, 2009, the Judicial Panel on Multidistrict Litigation (the
JPML) entered an order centralizing the class action 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. On August 24, 2009, the court appointed interim co-lead and liaison counsel for the financial institution and consumer plaintiffs. On September 23, 2009, the financial
institution plaintiffs filed a Master Complaint in the MDL proceedings, which we moved to dismiss on October 23, 2009. Briefing on that motion to dismiss concluded on February 1, 2010 and the motion remains pending. On December 18,
2009, we and interim counsel for the consumer plaintiffs filed with the Court a proposed settlement agreement, subject to court approval, of the consumer class action claims. On May 3, 2010, the Court entered an order preliminarily certifying
the settlement class, authorizing notice to the class to proceed, and scheduling a fairness hearing for December 10, 2010. The putative consumer class actions and putative financial institution class actions filed against us and pending through
September 30, 2010 are described in Legal Proceedings - Processing System Intrusion Legal Proceedings.

Other
actions have been filed against us seeking damages allegedly arising out of the Processing System Intrusion and other related relief on an individual basis. On October 14, 2009, the Clark County Indiana Teachers Federal Credit Union filed a
complaint in the Clark Circuit Superior Court of the State of Indiana. This action is captioned Clark County Indiana Teachers Federal Credit Union v. Heartland Payment Systems, Inc., Civ. No. 10D02-0910-LL-1209, and asserts claims for
negligence and breach of contract. On April 12, 2010, we filed an answer to the complaint. On July 30, 2010, the court entered an order staying the action until the MDL court rules on our motion to dismiss or until September 30,
2010, whichever occurs first. On October 25, 2010, the court granted our motion to extend the stay until the MDL court rules on our motion to dismiss or until December 31, 2010, whichever occurs first. On December 28, 2009, Putnam
Bank of Putnam, Connecticut filed a complaint in Connecticut Superior Court, Putnam Bank v. Heartland Payment Systems, Inc., case no. WWM-CV-10-6001208-S. On January 20, 2010, we removed the action to the United States District Court for
the District of Connecticut, case no. 3:10-cv-0061 (JBA), and,



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on January 27, 2010, filed a Notice of Potential Tag-Along Action, requesting centralization of the action with the MDL proceedings. On March 17, 2010, the action was centralized with
the MDL proceedings. On February 9, 2010, OmniAmerican Bank filed a complaint in the District Court for Collin County, Texas, Civ. No. 380-00563-2012. The complaint identifies as a party in interest the Federal Insurance Company, which is
alleged to have insured plaintiff and reimbursed it for $1,005,077.50, less a $100,000 deductible. On March 15, 2010, we filed an answer to the complaint and removed the action to the United States District Court for the Eastern District of
Texas, case no. 4:10-cv-114, and, on March 16, 2010, filed a Notice of Potential Tag-Along Action, requesting centralization of the action with the MDL proceedings. On April 29, 2010, the action was centralized with the MDL proceedings. On
February 18, 2010, Quad City Bank and Trust filed a complaint in the District Court for Collin County, Texas, Civ. No. 380-00721-2010. The complaint identifies as a party in interest the Federal Insurance Company, which is alleged to have
insured plaintiff and reimbursed it for $432,420.32, less a $100,000 deductible. On March 15, 2010, we filed an answer to the complaint and removed the action to the United States District Court for the Eastern District of Texas, case no.
4:10-cv-115 and, on March 16, 2010, filed a Notice of Potential Tag-Along Action, requesting centralization of the action with the MDL proceedings. On April 29, 2010, the action was centralized with the MDL proceedings. On May 5,
2010, Napus Federal Credit Union filed a complaint in the United States District Court for the Southern District of Texas, case no. 4:10-cv-1616, and the action was consolidated with the MDL proceedings on June 9, 2010.

On January 19, 2010, financial institution plaintiffs, including certain of the named plaintiffs in the MDL
proceedings, commenced an action against our sponsor banks in the United States District Court for the Southern District of Texas, captioned Lonestar National Bank, N.A. et al. v. KeyBank NA, et al., Civ. No. 4:10-cv-00171. This
action against our sponsor banks asserts common-law claims similar to those asserted against us, and likewise seeks 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. On March 4, 2010, this action was transferred to the judge overseeing the MDL proceedings. On April 9, 2010, our sponsor banks moved to dismiss the
complaint. Briefing on that motion to dismiss concluded on June 7, 2010 and the motion remains pending. The sponsor banks could seek indemnification from us in regard to the claims asserted in this action.

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
letters dated February 19, 2009, August 4, 2009, and March 10, 2010, has requested that we provide information about our payment processing services and 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. 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.

Since our announcement of the Processing System Intrusion on January 20, 2009
and through September 30, 2010, we had expensed a total of $145.0 million, before reducing those charges by $30.7 million of total insurance recoveries. The majority of the total charges, or approximately $114.7 million,



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related to settlements of claims. Approximately $30.3 million of the total charges were for legal fees and costs we incurred for investigations, defending various claims and actions, remedial
actions and crisis management services.

During the nine months ended September 30, 2010, we recovered from our insurance
providers approximately $26.8 million of the costs we incurred for the Processing System Intrusion and expensed approximately $12.0 million for accruals, legal fees and costs we incurred for defending various claims and actions, resulting in a net
recovery of $14.8 million, or $0.23 per share. For the three months ended September 30, 2010, we expensed a total of $0.7 million, or about $0.01 per share, respectively, associated with the Processing System Intrusion.

For the three and nine months ended September 30, 2009, we expensed a total of $73.3 million and $105.3 million, respectively, or
about $1.22 and $1.74 per share, respectively, for settlement accruals, legal fees and costs we incurred for defending various claims and actions associated with the Processing System Intrusion.

At September 30, 2010, we carried a $1.6 million Reserve for Processing System Intrusion on our Consolidated Balance Sheet. The
majority of this Reserve related to settlements which have been agreed upon but are unpaid as of the date of the Balance Sheet. During the three months ended September 30, 2010, we settled claims and disputes with Discover and MasterCard from
our cash reserves as follows:



| |  |  | On August 31, 2010, we entered into the Discover Settlement Agreement to resolve potential claims and other disputes among us and Discover (and
its affiliates and certain of its issuers) with respect to the Processing System Intrusion. On September 2, 2010, we paid Discover $5.0 million in full and final satisfaction of any and all claims of Discover, its affiliates and certain of its
issuers arising from or relating to the Processing System Intrusion. The Settlement Agreement contains mutual releases by and between us and Discover (on behalf of itself and its affiliates) relating to the Processing System Intrusion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 19, 2010, we entered into the MasterCard Settlement Agreement with MasterCard to resolve potential claims and other disputes among us, the
Sponsor Banks and MasterCard related to the Processing System Intrusion. Under the MasterCard Settlement Agreement, alternative recovery offers totaling $41.4 million were made to eligible MasterCard issuers with respect to losses alleged to have
been incurred by them as a result of the Processing System Intrusion. The $41.4 million included a $6.6 million credit for fines previously collected by MasterCard during 2009, so the maximum amount payable under the settlement was $34.8 million if
all MasterCard issuers had accepted the settlement. The Company paid approximately $34.4 million because certain issuers did not accept settlement. Those issuers, who represent less than 1% of the accounts eligible for the settlement, have been
preliminarily awarded $367,172 by MasterCard, and the Company is contesting that award. On September 3, 2010 and September 14, 2010, we paid the remaining settlement amounts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Claims and disputes with other Card Brands, which were settled and paid prior to the three months ended September 30, 2010, were as
follows:



| |  |  | On December 17, 2009, we entered into a settlement agreement and release with American Express to resolve potential claims and other disputes
among us and American Express (and its issuers) with respect to the Processing System Intrusion, and subsequently we paid approximately $3.5 million in full and final satisfaction of any and all claims of American Express and its issuers arising
from or relating to the Processing System Intrusion. Such settlement agreement and release contains mutual releases by and between us and American Express (on behalf of itself and its issuers) relating to the Processing System Intrusion.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 7, 2010, we, the Sponsor Banks, and Visa entered into the Visa Settlement Agreement to resolve potential claims and other disputes
among us, the Sponsor Banks and Visa with respect to the potential rights and claims of Visa and certain issuers of Visa-branded credit and debit cards
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | related to the Processing System Intrusion. After including a $780,000 credit for fines previously collected by Visa during 2009, the amount paid by us under the Visa Settlement Agreement was
$59.3 million. The costs of this settlement were included in our Provision for Processing System Intrusion on our Consolidated Statement of Operations for the year ended December 31, 2009 and in our Reserve for Processing System Intrusion on
its Consolidated Balance Sheet as of December 31, 2009.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 18, 2010, we entered into the
Bridge Loan Agreement with KeyBank, as administrative agent, and KeyBank and Heartland Bank as bridge lenders. On that date, KeyBank made a bridge loan to us in the amount of $20.0 million and Heartland Bank made a bridge loan to us in the amount of
$8.0 million, which are the maximum amounts that we may borrow under the Bridge Loan Agreement. We must repay the Bridge Loan by February 17, 2011. See Note 10, Credit Facilities for additional terms of the Bridge Loan.

On February 18, 2010, we also entered into the Commitment Increase Agreement whereby KeyBank, as one of the lenders under the Amended
and Restated Credit Agreement, agreed to increase its revolving credit commitment to us under the Amended and Restated Credit Agreement by $25.0 million. The terms of the Increased Credit Commitment are similar to the terms of the Revolving Credit
Facility.

The proceeds of the Bridge Loan and the Increased Credit Commitment, together with a portion of our cash reserves,
were used to fund the settlement with Visa. The Visa Settlement Agreement was consummated on February 18, 2010, with a payment of $58.6 million.

These settlement amounts were previously provided for in our Provision for Processing System Intrusion and carried in our Reserve for Processing System Intrusion. We are prepared to vigorously defend
ourself against any unsettled claims relating to the Processing System Intrusion that have been asserted against it and its sponsor banks to date. 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.

Additional costs we expect to incur for legal fees and costs for defending
various claims and actions associated with the Processing System Intrusion will be recognized as incurred. Such costs could be material and could adversely impact our results of operations, financial condition and cash flow.

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 attorneys fees and costs.

On
September 9, 2009, VeriFone Israel Ltd. filed a lawsuit in the Northern District of California alleging patent infringement of U.S. Patent No. 6,853,093 (the  093 patent) by the Companys NP3000 payment
terminals. VeriFone Israel seeks injunctive relief against the alleged infringement and damages, including enhanced damages for willfulness and reasonable attorneys fees. On October 13, 2009, VeriFone Israel Ltd. amended its complaint
to add an additional plaintiff, VeriFone Holdings, Inc., and seeking Declaratory Judgment that VeriFone Holdings was not involved in certain unfair business activity including Tortious Interference with Contract
and Prospective Economic Advantage, Tortious Refusal to Deal, Breach of Contract, Breach of Implied Duty of Good Faith and Fair Dealing, Unfair Competition and Defamation. These declaratory judgment counts regarding
VeriFones unfair business activities correspond to affirmative claims the Company brought against VeriFone Holdings in New Jersey State Court, previously. The Company has not yet answered the complaint. This case has was
assigned to Hon. Charles R. Breyer. VeriFone Israel filed a notice of voluntary dismissal on February 15, 2010. On February 16, 2010, the Company filed a Declaratory Judgment action in the Northern District of California seeking a
judgment that it has not infringed the 093 patent and that the 093 patent is not valid. On February 16, 2010, VeriFone Israel filed counterclaims in the Companys New Jersey Lanham Act case mirroring those it



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voluntarily dismissed in the Northern District of California. On April 22, 2010, the Companys Declaratory Judgment action was transferred to the District of New Jersey, where it has
been assigned to Judge Mary L. Cooper. On June 8, 2010, Magistrate Judge Douglas E. Arpert entered an Order staying all discovery in the case until September 7, 2010. The Order staying all discovery was extended until December 6,
2010.

On November 6, 2009, VeriFone Holdings, Inc. filed a lawsuit in the Northern District of California alleging
violations of the Lanham Act (False Advertising) and California Laws (Unfair Business Practices). VeriFone Holdings sought a preliminary and permanent injunction against Heartland and unspecified damages. The case was assigned to Hon. Phyllis
Hamilton. VeriFone Holdings filed a notice of voluntary dismissal on February 15, 2010. On February 16, 2010, VeriFone Holdings filed counterclaims in the Companys New Jersey Lanham Act case mirroring those it voluntarily dismissed
in the Northern District of California.

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.

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 September 30, 2010, our payable to
our sponsor banks was $81.6 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 September 30, 2010 the average daily interest-bearing balance of
that payable was approximately $22.2 million. The outstanding balance of our payable to our sponsor banks is directly related to our bankcard 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 $222,000 in annual pre-tax income.

We also incur interest rate risk on borrowings under our Amended and Restated Credit Agreement and our Bridge Loan. The Amended and Restated Credit Agreement provides for a Revolving Credit Facility in an
aggregate amount of $75 million and a Term Credit Facility with $10.4 million outstanding at September 30, 2010. 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. At September 30, 2010, we had $28.0
million outstanding under our Bridge Loan. The Bridge Loan bears interest at a rate of 1.0% plus the Alternate Base Rate. The Alternate Base Rate is the greater of (i) KeyBanks prime rate, (ii) 0.5% plus the weighted average of the
overnight Federal funds rate and (iii) 1.0% plus one-month LIBOR. During the quarter ended September 30, 2010, the average daily interest-bearing balances outstanding were $87.5 million under the Amended and Restated Credit Agreement and
$28.0 million under the Bridge Loan. A hypothetical 100 basis point increase in short-term interest rates applied to our average outstanding balance under the Amended and Restated Credit Agreement and our Bridge Loan would result in a decline of
approximately $875,000 and $280,000, respectively, in annual pre-tax income.

While the bulk of our cash and cash-equivalents
are held in checking accounts or money market funds, we do hold certain fixed-income investments with maturities within three years. At September 30, 2010, a hypothetical 100 basis point increase in short-term interest rates would result in an
increase of approximately $49,000 in annual pre-tax income from money market fund holdings, but a decrease in the value of fixed-rate investments of approximately $34,000. A hypothetical 100 basis point decrease in short-term interest rates would
result in a decrease of approximately $49,000 in annual pre-tax income from money market funds, but an increase in the value of fixed-rate instruments of approximately $34,000.



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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 nine
months ended September 30, 2010, foreign currency exposures had an immaterial impact on our revenues and our net income. At September 30, 2010, fluctuations in exchange rates on CPOS assets and liabilities increased our Other
Comprehensive Income by $0.2 million.

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

Office Facilities

At September 30, 2010, 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 have completed constructing our credit card operations and service center. The state-of-the-art facility is comprised of 238,000 square feet of space supporting customer service, operations, deployment, day care, fitness,
cafeteria, and large company meetings.

We also leased the following facilities as of September 30, 2010:



|                                  |  |             |        |  |            |                                                                             
|--------------------------------- |  | ----------- | ------ |  | ---------- | ----------------------------------------------------------------------------
|Location                          |  | Square Feet |        |  | Expiration
|Alpharetta, Georgia               |  |             | 3,008  |  |            | November 30, 2010                                                           
|Chattanooga, Tennessee            |  |             | 9,461  |  |            | September 30, 2014                                                          
|Cleveland, Ohio                   |  |             | 24,229 |  |            | June 30, 2012                                                               
|Colorado Springs, Colorado        |  |             | 9,920  |  |            | March 1, 2014                                                               
|Johnson City, Tennessee           |  |             | 45,000 |  |            | May 1, 2011                                                                 
|Phoenix, Arizona                  |  |             | 1,284  |  |            | March 31, 2011                                                              
|Plano, Texas                      |  |             | 53,976 |  |            | May 31, 2015 for 26,988 square feet.January 14, 2019 for 26,988 square feet.
|Portland, Oregon                  |  |             | 11,564 |  |            | September 30, 2013                                                          
|Toronto, Ontario, Canada          |  |             | 14,094 |  |            | July 31, 2020                                                               
|West Windsor Township, New Jersey |  |             | 5,288  |  |            | May 31, 2013                                                                

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 September 30, 2010. 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 September 30, 2010, there was no change in the Companys internal controls over financial reporting (as defined in Rule 13 a-15(f) and 15d-15(e) under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.

PART II. OTHER INFORMATION



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

Processing System Intrusion Legal Proceedings

To date, we have had several lawsuits filed against us and 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, attorneys 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, attorneys fees and costs.

On June 10, 2009, the Judicial Panel on Multidistrict Litigation (the JPML) entered an order centralizing the class
action 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. On August 24, 2009, the court appointed interim co-lead and liaison counsel for the financial institution and consumer plaintiffs. On September 23, 2009, the financial institution plaintiffs filed a Master Complaint in the
MDL proceedings, which we moved to dismiss on October 23, 2009. Briefing on that motion to dismiss concluded on February 1, 2010 and the motion remains



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pending. On December 18, 2009, the Company and interim counsel for the consumer plaintiffs filed with the Court a proposed settlement agreement, subject to court approval, of the consumer
class action claims. On May 3, 2010, the Court entered an order preliminarily certifying the settlement class, authorizing notice to the class to proceed, and scheduling a fairness hearing for December 10, 2010.

Other actions have been filed against us seeking damages allegedly arising out of the Processing System Intrusion and other related
relief on an individual basis. On October 14, 2009, the Clark County Indiana Teachers Federal Credit Union filed a complaint in the Clark Circuit Superior Court of the State of Indiana. This action is captioned Clark County Indiana Teachers
Federal Credit Union v. Heartland Payment Systems, Inc., Civ. No. 10D02-0910-LL-1209, and asserts claims for negligence and breach of contract. On April 12, 2010, we filed an answer to the complaint. On July 30, 2010, the
court entered an order staying the action until the MDL court rules on our motion to dismiss or until September 30, 2010, whichever occurs first. On October 25, 2010, the court granted our motion to extend the stay until the MDL court
rules on our motion to dismiss or until December 31, 2010, whichever occurs first. On December 28, 2009, Putnam Bank of Putnam, Connecticut filed a complaint in Connecticut Superior Court, Putnam Bank v. Heartland Payment Systems,
Inc., case no. WWM-CV-10-6001208-S. On January 20, 2010, we removed the action to the United States District Court for the District of Connecticut, case no. 3:10-cv-0061 (JBA), and, on January 27, 2010, filed a Notice of Potential
Tag-Along Action, requesting centralization of the action with the MDL proceedings. On March 17, 2010, the action was centralized with the MDL proceedings. On February 9, 2010, OmniAmerican Bank filed a complaint in the District Court for
Collin County, Texas, Civ. No. 380-00563-2012. The complaint identifies as a party in interest the Federal Insurance Company, which is alleged to have insured plaintiff and reimbursed it for $1,005,077.50, less a $100,000 deductible. On
March 15, 2010, we filed an answer to the complaint and removed the action to the United States District Court for the Eastern District of Texas, case no. 4:10-cv-114, and, on March 16, 2010, filed a Notice of Potential Tag-Along Action,
requesting centralization of the action with the MDL proceedings. On April 29, 2010, the action was centralized with the MDL proceedings. On February 18, 2010, Quad City Bank and Trust filed a complaint in the District Court for Collin
County, Texas, Civ. No. 380-00721-2010. The complaint identifies as a party in interest the Federal Insurance Company, which is alleged to have insured plaintiff and reimbursed it for $432,420.32, less a $100,000 deductible. On March 15,
2010, we filed an answer to the complaint and removed the action to the United States District Court for the Eastern District of Texas, case no. 4:10-cv-115 and, on March 16, 2010, filed a Notice of Potential Tag-Along Action, requesting
centralization of the action with the MDL proceedings. On April 29, 2010, the action was centralized with the MDL proceedings. On May 5, 2010, Napus Federal Credit Union filed a complaint in the United States District Court for the
Southern District of Texas, case no. 4:10-cv-1616, and the action was consolidated with the MDL proceedings on June 9, 2010.

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



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|                                                                     |  |                   |  |                                                                            
|-------------------------------------------------------------------- |  | ----------------- |  | ---------------------------------------------------------------------------
|Name of the Court                                                    |  | Date Filed        |  | Principal Parties                                                          
|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          
|                                                                     |  |                  
|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      



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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 |  | Community West Credit Union, et al. v. Heartland Payment Systems, Inc. et al., 4:09-cv-01201      
|                                                                |  |               
|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

On January 19, 2010, financial institution plaintiffs, including certain of the named plaintiffs in the MDL
proceedings, commenced an action against our sponsor banks in the United States District Court for the Southern District of Texas, captioned Lonestar National Bank, N.A. et al. v. KeyBank NA, et al., Civ.
No. 4:10-cv-00171. This action against our sponsor banks asserts common-law claims similar to those asserted against us, and likewise seeks 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. On March 4, 2010, this action was transferred to the judge overseeing the MDL proceedings. On April 9, 2010,
our sponsor banks moved to dismiss the complaint. Briefing on that motion to dismiss concluded on June 7, 2010 and the motion remains pending. The sponsor banks could seek indemnification from us in regard to the claims asserted in this
action.

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
letters dated February 19, 2009, August 4, 2009, and March 10, 2010, has requested that we provide information about our payment processing services and 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. 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.

Since its announcement of the Processing System Intrusion on January 20, 2009
and through September 30, 2010, the Company has expensed a total of $145.0 million, before reducing those charges by $30.7 million of total insurance recoveries. The majority of the total charges, or approximately $114.7 million, related to
settlements of claims. Approximately $30.3 million of the total charges were for legal fees and costs we incurred for investigations, defending various claims and actions, remedial actions and crisis management services.



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During the nine months
ended September 30, 2010, the Company recovered from its insurance providers approximately $26.8 million of the costs it incurred for the Processing System Intrusion and expensed approximately $12.0 million for accruals, legal fees and costs it
incurred for defending various claims and actions, resulting in a net recovery of $14.8 million, or $0.23 per share. For the three months ended September 30, 2010, the Company expensed a total of $0.7 million, or about $0.01 per share,
respectively, associated with the Processing System Intrusion.

For the three and nine months ended September 30, 2009,
the Company expensed a total of $73.3 million and $105.3 million, respectively, or about $1.22 and $1.74 per share, respectively, for settlement accruals, legal fees and costs it incurred for defending various claims and actions associated with the
Processing System Intrusion.

At September 30, 2010, the Company carried a $1.6 million Reserve for Processing System
Intrusion on its Consolidated Balance Sheet. The majority of this Reserve related to settlements which have been agreed upon but are unpaid as of the date of the Balance Sheet. During the three months ended September 30, 2010, the Company
settled claims and disputes with DFS Services, LLC (Discover) and MasterCard Worldwide (MasterCard) from its cash reserves as follows:



| |  |  | On August 31, 2010, the Company and Discover entered into an agreement of settlement and release (the Settlement Agreement) to resolve
potential claims and other disputes among the Company and Discover (and its affiliates and certain of its issuers) with respect to the Processing System Intrusion. On September 2, 2010, the Company paid Discover $5.0 million in full and final
satisfaction of any and all claims of Discover, its affiliates and certain of its issuers arising from or relating to the Processing System Intrusion. The Settlement Agreement contains mutual releases by and between the Company and Discover (on
behalf of itself and its affiliates) relating to the Processing System Intrusion.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 19, 2010, the Company entered into a settlement agreement with MasterCard (the MasterCard Settlement Agreement) to resolve
potential claims and other disputes among the Company, the Sponsor Banks and MasterCard related to the Processing System Intrusion. Under the MasterCard Settlement Agreement, alternative recovery offers totaling $41.4 million were made to eligible
MasterCard issuers with respect to losses alleged to have been incurred by them as a result of the Processing System Intrusion. The $41.4 million included a $6.6 million credit for fines previously collected by MasterCard during 2009, so the maximum
amount payable under the settlement was $34.8 million if all MasterCard issuers had accepted the settlement. The Company paid approximately $34.4 million because certain issuers did not accept settlement. Those issuers, who represent less than 1% of
the accounts eligible for the settlement, have been preliminarily awarded $367,172 by MasterCard, and the Company is contesting that award. On September 3, 2010 and September 14, 2010, the Company paid the remaining settlement amounts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Claims and disputes with other Card Brands, which were settled and paid prior to the three months ended
September 30, 2010, were as follows:



| |  |  | On December 17, 2009, we entered into a settlement agreement and release with American Express to resolve potential claims and other disputes
among us and American Express (and its issuers) with respect to the Processing System Intrusion, and subsequently we paid approximately $3.5 million in full and final satisfaction of any and all claims of American Express and its issuers arising
from or relating to the Processing System Intrusion. Such settlement agreement and release contains mutual releases by and between us and American Express (on behalf of itself and its issuers) relating to the Processing System Intrusion.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 7, 2010, the Company, Heartland Bank, KeyBank National Association (KeyBank, and, together with Heartland Bank, the
Sponsor Banks), and Visa U.S.A. Inc., Visa International Service Association and Visa Inc. (collectively, Visa) entered into a settlement agreement (the Settlement Agreement) to resolve potential claims and other
disputes among the Company, the
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Sponsor Banks and Visa with respect to the potential rights and claims of Visa and certain issuers of Visa-branded credit and debit cards related to the Processing System Intrusion. After
including a $780,000 credit for fines previously collected by Visa during 2009, the amount paid by the Company under the Settlement Agreement was $59.3 million. The costs of this settlement were included in the Companys Provision for
Processing System Intrusion on its Consolidated Statement of Operations for the year ended December 31, 2009 and in its Reserve for Processing System Intrusion on its Consolidated Balance Sheet as of December 31, 2009.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 18, 2010, the Company entered into a bridge loan agreement (the Bridge Loan
Agreement) with KeyBank, as administrative agent, and KeyBank and Heartland Bank as bridge lenders. On that date, KeyBank made a bridge loan to the Company in the amount of $20.0 million and Heartland Bank made a bridge loan in the amount of
$8.0 million (collectively, the Bridge Loan), which are the maximum amounts that the Company may borrow under the Bridge Loan Agreement. The Company must repay the Bridge Loan by February 17, 2011. See Note 10, Credit Facilities for
additional terms of the Bridge Loan.

On February 18, 2010, the Company also entered into a Commitment Increase Agreement
pursuant to the Amended and Restated Credit Agreement dated as of May 30, 2008 (the Commitment Increase Agreement) whereby KeyBank, as one of the lenders under the Amended and Restated Credit Agreement, agreed to increase its
revolving credit commitment to the company under the Amended and Restated Credit Agreement by $25.0 million (the Increased Credit Commitment). The terms of the Increased Credit Commitment are similar to the terms of the Revolving Credit
Facility (See Note 10, Credit Facilities).

The proceeds of the Bridge Loan and the Increased Credit Commitment, together with
a portion of the Companys cash reserves, were used to fund the settlement with Visa. The Settlement Agreement was consummated on February 18, 2010, with a payment of $58.6 million.

These settlement amounts were previously provided for in the Companys Provision for Processing System Intrusion and carried in its
Reserve for Processing System Intrusion. The Company is prepared to vigorously defend itself against any unsettled claims relating to the Processing System Intrusion that have been asserted against it and its sponsor banks to date. 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.

Additional costs the Company expects to incur for legal fees and costs for defending various claims and actions associated with the Processing System Intrusion will be recognized as incurred. Such costs
could be material and could adversely impact the Companys results of operations, financial condition and cash flow.

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 attorneys fees and costs.

On
September 9, 2009, VeriFone Israel Ltd. filed a lawsuit in the Northern District of California alleging patent infringement of U.S. Patent No. 6,853,093 (the  093 patent) by the Companys NP3000 payment
terminals. VeriFone Israel seeks injunctive relief against the alleged infringement and damages, including enhanced damages for willfulness and reasonable attorneys fees. On October 13, 2009, VeriFone Israel Ltd. amended its complaint
to add an additional plaintiff, VeriFone Holdings, Inc., and seeking Declaratory Judgment that VeriFone Holdings was not involved in certain unfair business activity including Tortious Interference with Contract
and Prospective Economic Advantage, Tortious Refusal to Deal, Breach of Contract, Breach of Implied Duty of Good Faith and Fair Dealing, Unfair Competition and Defamation. These declaratory judgment counts regarding
VeriFones unfair business activities correspond



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to affirmative claims the Company brought against VeriFone Holdings in New Jersey State Court, previously. The Company has not yet answered the complaint. This case has was assigned to
Hon. Charles R. Breyer. VeriFone Israel filed a notice of voluntary dismissal on February 15, 2010. On February 16, 2010, the Company filed a Declaratory Judgment action in the Northern District of California seeking a judgment that
it has not infringed the 093 patent and that the 093 patent is not valid. On February 16, 2010, VeriFone Israel filed counterclaims in the Companys New Jersey Lanham Act case mirroring those it voluntarily dismissed in the
Northern District of California. On April 22, 2010, the Companys Declaratory Judgment action was transferred to the District of New Jersey, where it has been assigned to Judge Mary L. Cooper. On June 8, 2010, Magistrate Judge Douglas
E. Arpert entered an Order staying all discovery in the case until September 7, 2010. The Order staying all discovery was extended until December 6, 2010.

On November 6, 2009, VeriFone Holdings, Inc. filed a lawsuit in the Northern District of California alleging violations of the Lanham Act (False Advertising) and California Laws (Unfair Business
Practices). VeriFone Holdings sought a preliminary and permanent injunction against Heartland and unspecified damages. The case was assigned to Hon. Phyllis Hamilton. VeriFone Holdings filed a notice of voluntary dismissal on February 15, 2010.
On February 16, 2010, VeriFone Holdings filed counterclaims in the Companys New Jersey Lanham Act case mirroring those it voluntarily dismissed in the Northern District of California.

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.



|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, 2009.



|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

Under authorizations from its Board of Directors, we repurchased an aggregate of 2,924,684 shares of our common stock as part of publicly
announced plans through September 30, 2010 at a cost of $65.1 million, or an average cost of $22.25 per share. No common stock was repurchased during the nine months ended September 30, 2010. During the years ended December 31, 2009,
2008 and 2007, we repurchased 350,400 shares, 781,584 shares and 731,500, respectively, of our common stock at average per share costs of $9.14, $23.02 and $25.78. At September 30, 2010, the Company has remaining authorization to repurchase up
to 175,316 additional shares of its common stock.



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

Not applicable.



|Item 4. | (Removed And Reserved)
|------- | ----------------------



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

None



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



|              |  |                                                                                                                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                             
|              | 
|10.1*         |  | Amendment No.1 dated as of July 2, 2010 to the Settlement Agreement dated as of May 19, 2010 by and between Mastercard International Incorporated, a Delaware corporation
and Heartland Payment Systems, Inc., a Delaware corporation.                                                                  
|              | 
|10.2*         |  | Amendment No.2 dated as of July 13, 2010 to the Settlement Agreement dated as of May 19, 2010, as amended by amendment dated July 2, 2010, by and between Mastercard
International Incorporated, a Delaware corporation and Heartland Payment Systems, Inc., a Delaware corporation.                    
|              | 
|10.3*         |  | Amendment No.3 dated as of August 6, 2010 to the Settlement Agreement dated as of May 19, 2010, as amended by amendments dated July 2, 2010 and July 13, 2010, by
and between Mastercard International Incorporated, a Delaware corporation and Heartland Payment Systems, Inc., a Delaware corporation.
|              | 
|10.4*         |  | Waiver Agreement dated as of August 27, 2010, by and among Mastercard International Incorporated, a Delaware corporation and Heartland Payment Systems, Inc., a Delaware
corporation.                                                                                                                   
|              | 
|10.5*         |  | Agreement of Settlement and Release, effective as of August 31, 2010, is entered into by and between Heartland Payment Systems, Inc., a Delaware corporation, and DFS Services
LLC, a Delaware corporation.                                                                                             
|              | 
|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
|- | --------------



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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: November 8, 2010



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                                                                                                                                                                                                                                                                                             
|              | 
|10.1*         |  | Amendment No.1 dated as of July 2, 2010 to the Settlement Agreement dated as of May 19, 2010 by and between Mastercard International Incorporated, a Delaware corporation
and Heartland Payment Systems, Inc., a Delaware corporation.                                                                  
|              | 
|10.2*         |  | Amendment No.2 dated as of July 13, 2010 to the Settlement Agreement dated as of May 19, 2010, as amended by amendment dated July 2, 2010, by and between Mastercard
International Incorporated, a Delaware corporation and Heartland Payment Systems, Inc., a Delaware corporation.                    
|              | 
|10.3*         |  | Amendment No.3 dated as of August 6, 2010 to the Settlement Agreement dated as of May 19, 2010, as amended by amendments dated July 2, 2010 and July 13, 2010, by
and between Mastercard International Incorporated, a Delaware corporation and Heartland Payment Systems, Inc., a Delaware corporation.
|              | 
|10.4*         |  | Waiver Agreement dated as of August 27, 2010, by and among Mastercard International Incorporated, a Delaware corporation and Heartland Payment Systems, Inc., a Delaware
corporation.                                                                                                                   
|              | 
|10.5*         |  | Agreement of Settlement and Release, effective as of August 31, 2010, is entered into by and between Heartland Payment Systems, Inc., a Delaware corporation, and DFS Services
LLC, a Delaware corporation.                                                                                             
|              | 
|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
|- | --------------