EXHIBIT 10.9

                          REGISTRATION RIGHTS AGREEMENT

Registration  Rights  Agreement  (the "Agreement"), dated as of June 4, 2004, by
and  between  Payment Data Systems, Inc., a corporation organized under the laws
of  State  of  Nevada, with its principal executive office at with its principal
executive  office  at  Primary Business Systems, 12500 San Pedro, Suite 120, San
Antonio,  TX  78216 (the "Company"), and Dutchess Private Equities Fund, L.P., a
Delaware  limited  partnership  with  its principal office at 312 Stuart Street,
Boston,  MA  02116  (the  "Investor").

Whereas,  in connection with the Investment Agreement by and between the Company
and the Investor of even date herewith (the "Investment Agreement"), the Company
has  agreed  to issue and sell to the Investor an indeterminate number of shares
of the Company's Common Stock, .001 par value per share (the "Common Stock"), to
be  purchased  pursuant  to the terms and subject to the conditions set forth in
the  Investment  Agreement;  and

Whereas, to induce the Investor to execute and deliver the Investment Agreement,
the  Company  has  agreed  to  provide  certain  registration  rights  under the
Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any  similar  successor  statute  (collectively, the "1933 Act"), and applicable
state  securities  laws,  with  respect  to  the shares of Common Stock issuable
pursuant  to  the  Investment  Agreement.

Now  therefore,  in  consideration  of  the  foregoing  premises  and the mutual
covenants  contained  hereinafter and other good and valuable consideration, the
receipt  and  sufficiency  of which are hereby acknowledged, the Company and the
Investor  hereby  agree  as  follows:

SECTION  1.  DEFINITIONS.

As  used  in  this  Agreement,  the  following  terms  shall  have the following
meanings:

"Execution  Date"  means  the  date  first  written  above.

"Investor"  means  Dutchess  Private  Equities  Fund,  L.P.,  a Delaware limited
partnership.

"Person"  means  a  corporation,  a limited liability company, an association, a
partnership,  an  organization,  a  business,  an  individual, a governmental or
political  subdivision  thereof  or  a  governmental  agency.

"Potential Material Event" means any of the following: (I) the possession by the
Company  of  material  information  not  ripe  for  disclosure in a Registration
Statement, which shall be evidenced by determinations in good faith by the Board
of  Directors  of  the  Company  that  disclosure  of  such  information  in the
Registration  Statement  would be detrimental to the business and affairs of the
Company, or (II) any material engagement or activity by the Company which would,
in  the  good  faith  determination of the Board of Directors of the Company, be
adversely affected by disclosure in a Registration Statement at such time, which
determination shall be accompanied by a good faith determination by the Board of
Directors  of  the  Company  that the Registration Statement would be materially
misleading  absent  the  inclusion  of  such  information.

"Principal  Market" shall mean The American Stock Exchange, National Association
of  Securities  Dealer's,  Inc.  Over-the-Counter electronic bulletin board, the
Nasdaq  National Market or The Nasdaq SmallCap Market whichever is the principal
market  on  which  the  Common  Stock  is  listed.

"Register," "Registered," and "Registration" refer to a registration effected by
preparing  and filing one or more Registration Statements in compliance with the
1933  Act  and  pursuant  to  Rule  415 under the 1933 Act or any successor rule
providing  for  offering  securities on a continuous basis ("Rule 415"), and the
declaration  or  ordering  of effectiveness of such Registration Statement(s) by
the  United  States  Securities  and  Exchange  Commission  (the  "SEC").

"Registrable Securities" means (I) the shares of Common Stock issued or issuable
pursuant  to  the  Investment  Agreement,  and  (II) any shares of capital stock
issued  or  issuable  with  respect to such shares of Common Stock, if any, as a
result of any stock split, stock dividend, recapitalization, exchange or similar
event or otherwise, which have not been (X) included in a Registration Statement
that  has  been  declared  effective  by the SEC or (Y) sold under circumstances
meeting  all  of the applicable conditions of Rule 144 (or any similar provision
then  in  force)  under  the  1933  Act.

"Registration  Statement"  means  a  registration statement of the Company filed
under  the  1933  Act  covering  the  Registrable  Securities.

All  capitalized  terms  used in this Agreement and not otherwise defined herein
shall  have  the  same  meaning ascribed to them as in the Investment Agreement.

SECTION  2.  REGISTRATION.

(A)  On  or  before  the  execution  of  this  Agreement, the Company shall have
provided  a  draft  of  the  Registration  Statement  covering  the  Registrable
Securities  to  the Investor. The Company shall, as soon as practicable, but not
later than fifteen calendar days following the Execution Date, file with the SEC
a  Registration  Statement  or Registration Statements (as is necessary) on Form
SB-2  (or,  if  such  form is unavailable for such a registration, on such other
form as is available for such a registration), covering the resale of all of the
Registrable  Securities,  which  Registration  Statement(s) shall state that, in
accordance  with  Rule  416  promulgated  under  the 1933 Act, such Registration
Statement  also  covers such indeterminate number of additional shares of Common
Stock  as  may  become  issuable  upon  stock splits, stock dividends or similar
transactions.  The Company shall initially register for resale 40,000,000 shares
of  Common Stock which would be issuable on the date preceding the filing of the
Registration  Statement  based  on the closing bid price of the Company's Common
Stock  on  such date and the amount reasonably calculated that represents Common
Stock  issuable to other parties as set forth in the Investment Agreement except
to  the  extent  that  the  SEC  requires  the  share  amount to be reduced as a
condition  of  effectiveness.

(B)  The  Company  shall  use  commercially  reasonable  efforts  to  have  the
Registration  Statement(s) declared effective by the SEC within 90 calendar days
after  the  Execution  Date.

(C)  The  Company agrees not to include any other securities in the Registration
Statement  covering  the Registrable Securities without Investor's prior written
consent  which  Investor  may  withhold in its sole discretion. Furthermore, the
Company  agrees that it will not file any other Registration Statement for other
securities,  until thirty calendar days after the Registration Statement for the
Registrable  Securities  is  declared  effective  by  the  SEC.

SECTION  3.  RELATED  OBLIGATIONS.

At  such  time  as  the  Company is obligated to prepare and file a Registration
Statement  with  the  SEC  pursuant to Section 2(a), the Company will effect the
registration  of  the  Registrable  Securities  in  accordance with the intended
method  of disposition thereof and, with respect thereto, the Company shall have
the  following  obligations:

(A)  The  Company  shall  use  commercially  reasonable  efforts  to  cause such
Registration  Statement  relating  to  the  Registrable  Securities  to  become
effective  within  90  days  after  the  Execution  Date  and  shall  keep  such
Registration  Statement  effective until the earlier to occur of (I) the date as
of  which  the  Investor  may  sell  all  of  the Registrable Securities without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto);  or  (II)  the  date on which (A) the Investor shall have sold all the
Registrable  Securities;  and  (B)  the  Investor  has  no  right to acquire any
additional  shares  of  Common  Stock  under  the  Investment  Agreement  (the
"Registration  Period"). The Registration Statement (including any amendments or
supplements  thereto  and  prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be  stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The Company shall use its
best  efforts  to  respond  to  all SEC comments within seven business days from
receipt  of such comments by the Company. The Company shall use its best efforts
to  cause  the  Registration Statement relating to the Registrable Securities to
become  effective  no  later  than three business days after notice from the SEC
that  the  Registration Statement may be declared effective. The Investor agrees
to  provide  all  information  which  it  is  required  by law to provide to the
Company,  including  the  intended  method  of  disposition  of  the Registrable
Securities,  and  the Company's obligations set forth above shall be conditioned
on  the  receipt  of  such  information.

(B)  The  Company shall prepare and file with the SEC such amendments (including
post-effective  amendments)  and supplements to a Registration Statement and the
prospectus used in connection with such Registration Statement, which prospectus
is  to  be  filed pursuant to Rule 424 promulgated under the 1933 Act, as may be
necessary  to keep such Registration Statement effective during the Registration
Period, and, during such period, comply with the provisions of the 1933 Act with
respect  to the disposition of all Registrable Securities of the Company covered
by  such  Registration  Statement  until  such  time  as all of such Registrable
Securities  shall  have been disposed of in accordance with the intended methods
of  disposition  by  the  Investor  thereof  as  set  forth in such Registration
Statement.  In  the  event  the  number  of  shares of Common Stock covered by a
Registration  Statement  filed  pursuant  to  this  Agreement  is  at  any  time
insufficient to cover all of the Registrable Securities, the Company shall amend
such  Registration Statement, or file a new Registration Statement (on the short
form  available  therefor,  if  applicable),  or both, so as to cover all of the
Registrable  Securities,  in each case, as soon as practicable, but in any event
within  30  calendar days after the necessity therefor arises (based on the then
Purchase  Price  of  the  Common  Stock  and other relevant factors on which the
Company  reasonably  elects  to  rely),  assuming  the  Company  has  sufficient
authorized  shares  at  that  time,  and if it does not, within 30 calendar days
after  such shares are authorized. The Company shall use commercially reasonable
efforts  to  cause  such  amendment  and/or new Registration Statement to become
effective  as  soon  as  practicable  following  the  filing  thereof.

(C)  The  Company  shall  make  available  to  the  Investor  whose  Registrable
Securities  are  included  in  any  Registration Statement and its legal counsel
without charge (I) promptly after the same is prepared and filed with the SEC at
least  one  copy  of  such  Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by  reference  and  all  exhibits,  the prospectus included in such Registration
Statement  (including  each  preliminary  prospectus)  and, with regards to such
Registration  Statement(s), any correspondence by or on behalf of the Company to
the SEC or the staff of the SEC and any correspondence from the SEC or the staff
of the SEC to the Company or its representatives; (II) upon the effectiveness of
any  Registration  Statement,  the  Company  shall  make available copies of the
prospectus  included  in  such  Registration  Statement  and  all amendments and
supplements  thereto;  and  (III)  such other documents, including copies of any
preliminary  or  final  prospectus,  as the Investor may reasonably request from
time  to  time  in  order  to  facilitate  the  disposition  of  the Registrable
Securities.

(D)  The  Company  shall use commercially reasonable efforts to (I) register and
qualify  the  Registrable  Securities  covered by a Registration Statement under
such  other securities or "blue sky" laws of such states in the United States as
any  Investor reasonably requests; (II) prepare and file in those jurisdictions,
such  amendments  (including  post-effective amendments) and supplements to such
registrations  and  qualifications  as  may  be  necessary  to  maintain  the
effectiveness  thereof  during  the  Registration  Period; (III) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect  at  all  times  during  the Registration Period, and (IV) take all other
actions  reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required  in connection therewith or as a condition thereto to (X) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), or (Y) subject itself to general taxation in any such
jurisdiction.  The  Company  shall  promptly  notify  each  Investor  who  holds
Registrable  Securities  of  the receipt by the Company of any notification with
respect  to  the  suspension  of the registration or qualification of any of the
Registrable  Securities  for sale under the securities or "blue sky" laws of any
jurisdiction  in  the  United  States  or  its  receipt  of actual notice of the
initiation  or  threatening  of  any  proceeding  for  such  purpose.

(E)  As  promptly as practicable after becoming aware of such event, the Company
shall  notify each Investor in writing of the happening of any event as a result
of which the prospectus included in a Registration Statement, as then in effect,
includes  an untrue statement of a material fact or omission to state a material
fact  required to be stated therein or necessary to make the statements therein,
in  light  of  the  circumstances  under  which  they  were made, not misleading
("Registration  Default")  and  use  all  diligent efforts to promptly prepare a
supplement  or  amendment  to  such  Registration  Statement  and take any other
necessary  steps  to cure the Registration Default, (which, if such Registration
Statement  is  on Form S-3, may consist of a document to be filed by the Company
with  the  SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as
defined below) and to be incorporated by reference in the prospectus) to correct
such  untrue statement or omission, and make available copies of such supplement
or  amendment  to  each  Investor.  The  Company shall also promptly notify each
Investor  (I)  when  a prospectus or any prospectus supplement or post-effective
amendment  has  been  filed,  and  when  a  Registration  Statement  or  any
post-effective  amendment  has  become  effective  (the  Company  will  prepare
notification  of  such effectiveness which shall be delivered to the Investor on
the  same  day  of  such effectiveness and by overnight mail), additionally, the
Company  will promptly provide to the Investor a copy of the effectiveness order
prepared  by  the SEC once it is received by the Company; (II) of any request by
the  SEC  for  amendments  or supplements to a Registration Statement or related
prospectus  or  related  information,  (III)  of  the  Company's  reasonable
determination  that a post-effective amendment to a Registration Statement would
be  appropriate,  (IV)  in  the  event  the  Registration Statement is no longer
effective,  or  (V)  if  Registration  Statement  is  stale  as  a result of the
Company's  failure  to  timely  file  its  financials  or otherwise. The Company
acknowledges  that  its  failure  to  cure  the  Registration Default within ten
business  days  will cause the Investor to suffer damages in an amount that will
be difficult to ascertain. Accordingly, the parties agree that it is appropriate
to include a provision for liquidated damages, such provision being described as
"late  payments"  under  Section  2(h)  of  the Investment Agreement between the
parties. The parties acknowledge and agree that the liquidated damages provision
set  forth in this section represents the parties' good faith effort to quantify
such  damages  and,  as  such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. It is the intention of
the parties that interest payable under any of the terms of this Agreement shall
not  exceed  the  maximum  amount  permitted under any applicable law. If a law,
which  applies  to  this  Agreement  which  sets the maximum interest amount, is
finally  interpreted  so  that  the  interest  in connection with this Agreement
exceeds  the  permitted  limits, then: (1) any such interest shall be reduced by
the  amount necessary to reduce the interest to the permitted limit; and (2) any
sums  already  collected  (if  any)  from the Company which exceed the permitted
limits  will  be  refunded  to the Company. The Investor may choose to make this
refund  by  reducing the amount that the Company owes under this Agreement or by
making  a direct payment to the Company. If a refund reduces the amount that the
Company  owes  the Investor, the reduction will be treated as a partial payment.
In  case  any  provision  of  this  Agreement  is  held  by a court of competent
jurisdiction  to  be  excessive  in scope or otherwise invalid or unenforceable,
such  provision shall be adjusted rather than voided, if possible, so that it is
enforceable  to the maximum extent possible, and the validity and enforceability
of the remaining provisions of this Agreement will not in any way be affected or
impaired  thereby.

(F)  The  Company  shall  use  commercially  reasonable  efforts  to prevent the
issuance  of  any  stop  order  or  other  suspension  of  effectiveness  of  a
Registration  Statement,  or  the  suspension of the qualification of any of the
Registrable  Securities  for  sale  in any jurisdiction and, if such an order or
suspension  is  issued,  to obtain the withdrawal of such order or suspension at
the  earliest  possible  moment and to notify the Investor who holds Registrable
Securities  being  sold of the issuance of such order and the resolution thereof
or  its  receipt  of actual notice of the initiation or threat of any proceeding
for  such  purpose.

(G)  The  Company shall permit the Investor and one legal counsel, designated by
the  Investor,  to  review  and  comment  upon  a Registration Statement and all
amendments  and  supplements thereto at least three business days prior to their
filing  with  the SEC, and not file any document in a form to which such counsel
reasonably  objects.  The  Company  may request to shorten the Investor's review
period  and  the  Investor  will,  if  possible,  attempt  to  comply  with  the
accelerated review period. The Company shall not submit to the SEC a request for
acceleration  of  the effectiveness of a Registration Statement or file with the
SEC  a Registration Statement or any amendment or supplement thereto without the
prior  approval  of  such  counsel,  which  approval  shall  not be unreasonably
withheld.

(H)  Reserved

(I)  Reserved

(J)  The  Company  shall  hold  in  confidence  and  not  make any disclosure of
information  concerning a Investor provided to the Company unless (I) disclosure
of  such  information  is  necessary  to comply with federal or state securities
laws, (II) the disclosure of such information is necessary to avoid or correct a
misstatement  or  omission  in  any Registration Statement, (III) the release of
such  information  is  ordered  pursuant  to  a  subpoena  or  other  final,
non-appealable  order  from  a  court  or  governmental  body  of  competent
jurisdiction,  or (IV) such information has been made generally available to the
public  other  than  by  disclosure  in violation of this Agreement or any other
agreement.  The  Company  agrees that it shall, upon learning that disclosure of
such  information  concerning  a  Investor  is  sought  in  or  by  a  court  or
governmental  body of competent jurisdiction or through other means, give prompt
written  notice  to  such  Investor  and  allow such Investor, at the Investor's
expense,  to undertake appropriate action to prevent disclosure of, or to obtain
a  protective  order  for,  such  information.

(K)  The  Company  shall  use  commercially  reasonable  efforts  to  maintain
designation  and  quotation  of  all  the  Registrable Securities covered by any
Registration  Statement  on the Principal Market. If, despite the Company's best
efforts,  the  Company  is unsuccessful in satisfying the preceding sentence, it
shall  use  commercially  reasonable  efforts  to  cause  all  the  Registrable
Securities  covered  by  any  Registration  Statement to be listed on each other
national  securities  exchange  and automated quotation system, if any, on which
securities of the same class or series issued by the Company are then listed, if
any,  if  the listing of such Registrable Securities is then permitted under the
rules of such exchange or system. The Company shall pay all fees and expenses in
connection  with  satisfying  its  obligation  under  this  Section  3(k).

(L)  The  Company  shall  cooperate  with  the Investor to facilitate the prompt
preparation  and  delivery  of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement  and  enable such certificates to be in such denominations or amounts,
as  the  case  may  be,  as  the  Investor  may  reasonably  request.

(M)  The  Company  shall  provide  a  transfer  agent  for  all  the Registrable
Securities not later than the effective date of the first Registration Statement
filed  pursuant  hereto.

(N)  If  requested  by the Investor, the Company shall (I) as soon as reasonably
practical  incorporate  in  a  prospectus supplement or post-effective amendment
such  information  as  such  Investor  reasonably  determine  should be included
therein  relating  to  the  sale  and  distribution  of  Registrable Securities,
including,  without  limitation, information with respect to the offering of the
Registrable  Securities  to  be  sold  in  such offering; (II) make all required
filings  of  such  prospectus  supplement or post-effective amendment as soon as
reasonably  possible  after  being notified of the matters to be incorporated in
such  prospectus  supplement  or  post-effective  amendment;  and
(III)  supplement or make amendments to any Registration Statement if reasonably
requested  by  such  Investor.

(O)  The  Company  shall  use  commercially  reasonable  efforts  to  cause  the
Registrable  Securities  covered  by the applicable Registration Statement to be
registered  with  or approved by such other governmental agencies or authorities
as  may  be  necessary  to  consummate  the  disposition  of  such  Registrable
Securities.

(P)  The  Company  shall otherwise use commercially reasonable efforts to comply
with  all  applicable  rules  and  regulations of the SEC in connection with any
registration  hereunder.

(Q)  Within  one  business  day  after the Registration Statement which includes
Registrable  Securities  is  declared  effective  by  the SEC, the Company shall
deliver  to  the  transfer agent for such Registrable Securities, with copies to
the  Investor,  confirmation  that such Registration Statement has been declared
effective  by  the  SEC.

(R)  At or prior to the date of the first Put Notice (as that term is defined in
the Investment Agreement) and at such other times as the Investor may reasonably
request,  the Company shall cause to be delivered a certification from the Chief
Executive  Officer  of  the  Company  setting  forth that the Company's periodic
filings,  including  any  amendments  thereto,  with the Securities and Exchange
Commission  truthfully  and  accurately  set forth the financial position of the
Company  when  filed.

(S)  The  Company  shall take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of Registrable Securities pursuant to
a  Registration  Statement.

SECTION  4.  OBLIGATIONS  OF  THE  INVESTOR.

(A)  At least five calendar days prior to the first anticipated filing date of a
Registration  Statement  the Company shall notify the Investor in writing of the
information the Company requires from each such Investor if such Investor elects
to  have  any  of  such  Investor's  Registrable  Securities  included  in  such
Registration  Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to  the Registrable Securities of a particular Investor that such Investor shall
furnish  in  writing  to  the  Company  such  information  regarding itself, the
Registrable  Securities held by it and the intended method of disposition of the
Registrable  Securities held by it as shall reasonably be required to effect the
registration  of such Registrable Securities and shall execute such documents in
connection  with  such  registration as the Company may reasonably request. Each
Investor  covenants  and agrees that, in connection with any sale of Registrable
Securities  by it pursuant to a Registration Statement, it shall comply with the
"Plan  of  Distribution"  section  of  the  current  prospectus relating to such
Registration  Statement.

(B)  The  Investor, by such Investor's acceptance of the Registrable Securities,
agrees  to  cooperate with the Company as reasonably requested by the Company in
connection  with  the  preparation  and  filing  of  any  Registration Statement
hereunder,  unless  such  Investor  has  notified the Company in writing of such
Investor's  election  to  exclude  all of such Investor's Registrable Securities
from  such  Registration  Statement.

(C) The Investor agrees that, upon receipt of written notice from the Company of
the  happening  of  any event of the kind described in Section 3(f) or the first
sentence  of  3(e),  such  Investor  will immediately discontinue disposition of
Registrable  Securities  pursuant to any Registration Statement(s) covering such
Registrable  Securities  until  such  Investor's  receipt  of  the copies of the
supplemented  or  amended  prospectus  contemplated by Section 3(f) or the first
sentence  of  3(e).

SECTION  5.  EXPENSES  OF  REGISTRATION.

All  expenses,  other than underwriting discounts and commissions and other than
as  set  forth  in  the  Investment  Agreement,  incurred  in  connection  with
registrations including comments, filings or qualifications pursuant to Sections
2  and  3,  including,  without  limitation,  all  registration,  listing  and
qualifications fees, printing and accounting fees, and fees and disbursements of
counsel  for  the  Company  or  for  the  Investor shall be paid by the Company.

SECTION  6.  INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration Statement
under  this  Agreement:

(A)  To  the fullest extent permitted by law, the Company will, and hereby does,
indemnify,  hold  harmless  and  defend each Investor who holds such Registrable
Securities,  the  directors,  officers,  partners,  employees,  counsel, agents,
representatives  of,  and each Person, if any, who controls, any Investor within
the  meaning  of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the  "1934  Act")  (each, an "Indemnified Person"), against any losses, claims,
damages,  liabilities,  judgments,  fines, penalties, charges, costs, attorneys'
fees,  amounts  paid  in settlement or expenses, joint or several (collectively,
"Claims"),  incurred in investigating, preparing or defending any action, claim,
suit,  inquiry,  proceeding, investigation or appeal taken from the foregoing by
or  before any court or governmental, administrative or other regulatory agency,
body  or  the  SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may  become  subject  insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (I)
any  untrue  statement  or  alleged  untrue  statement  of  a material fact in a
Registration  Statement or any post-effective amendment thereto or in any filing
made  in  connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which the Investor has requested
in  writing that the Company register or qualify the Shares ("Blue Sky Filing"),
or  the  omission  or  alleged  omission to state a material fact required to be
stated  therein  or  necessary  to  make the statements therein, in light of the
circumstances under which the statements therein were made, not misleading, (II)
any untrue statement or alleged untrue statement of a material fact contained in
the  final  prospectus  (as  amended  or  supplemented, if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or alleged
omission  to  state  therein  any material fact necessary to make the statements
made  therein,  in light of the circumstances under which the statements therein
were  made,  not  misleading, or (III) any violation or alleged violation by the
Company  of  the  1933  Act,  the  1934  Act,  any other law, including, without
limitation,  any  state  securities  law,  or  any rule or regulation thereunder
relating  to  the  offer  or  sale  of  the Registrable Securities pursuant to a
Registration  Statement  (the matters in the foregoing clauses (i) through (iii)
being,  collectively,  "Violations").  Subject  to the restrictions set forth in
Section  6(c)  with  respect  to  the number of legal counsel, the Company shall
reimburse  the  Investor  and  each  such  controlling  person, promptly as such
expenses  are incurred and are due and payable, for any reasonable legal fees or
other  reasonable  expenses incurred by them in connection with investigating or
defending  any  such  Claim.  Notwithstanding anything to the contrary contained
herein,  the indemnification agreement contained in this Section 6(a): (I) shall
not  apply  to  a Claim arising out of or based upon a Violation which is due to
the  inclusion in the Registration Statement of the information furnished to the
Company  by  any  Indemnified  Person  expressly  for use in connection with the
preparation  of  the  Registration  Statement  or  any such amendment thereof or
supplement  thereto;  (II)  shall  not  be available to the extent such Claim is
based  on  (A)  a failure of the Investor to deliver or to cause to be delivered
the prospectus made available by the Company or (B) the Indemnified Person's use
of  an  incorrect  prospectus  despite  being promptly advised in advance by the
Company  in writing not to use such incorrect prospectus; (III) any claims based
on  the  manner  of sale of the Registrable Securities by the Investor or of the
Investor's  failure  to  register  as a dealer under applicable securities laws;
(IV)  any  omission  of  the Investor to notify the Company of any material fact
that  should  be  stated in the Registration Statement or prospectus relating to
the  Investor  or  the manner of sale; and (V) any amounts paid in settlement of
any  Claim  if  such settlement is effected without the prior written consent of
the  Company,  which  consent shall not be unreasonably withheld. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on  behalf  of  the  Indemnified  Person  and  shall  survive  the resale of the
Registrable  Securities  by the Investor pursuant to the Registration Statement.

(B)  In  connection  with  any  Registration  Statement  in  which a Investor is
participating,  each  such  Investor  agrees to severally and jointly indemnify,
hold  harmless  and  defend, to the same extent and in the same manner as is set
forth  in Section 6(a), the Company, each of its directors, each of its officers
who  signs  the  Registration  Statement,  each Person, if any, who controls the
Company  within  the  meaning  of the 1933 Act or the 1934 Act and the Company's
agents  (collectively  and  together with an Indemnified Person, an "Indemnified
Party"),  against  any  Claim  or  Indemnified  Damages to which any of them may
become  subject,  under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim  or  Indemnified  Damages arise out of or are based upon any Violation, in
each  case  to the extent, and only to the extent, that such Violation is due to
the inclusion in the Registration Statement of the written information furnished
to  the  Company  by  such  Investor  expressly  for use in connection with such
Registration  Statement;  and,  subject  to  Section  6(c),  such  Investor will
reimburse  any legal or other expenses reasonably incurred by them in connection
with  investigating  or  defending  any  such Claim; provided, however, that the
indemnity  agreement  contained  in  this  Section  6(b)  and the agreement with
respect  to  contribution contained in Section 7 shall not apply to amounts paid
in  settlement  of  any  Claim  if such settlement is effected without the prior
written  consent  of  such  Investor,  which  consent  shall not be unreasonably
withheld;  provided,  further,  however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim or Indemnified Damages as does
not  exceed  the  net  proceeds  to  such  Investor  as  a result of the sale of
Registrable  Securities  pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on  behalf  of  such  Indemnified  Party  and  shall  survive  the resale of the
Registrable  Securities  by the Investor pursuant to the Registration Statement.
Notwithstanding  anything  to the contrary contained herein, the indemnification
agreement  contained  in  this  Section  6(b)  with  respect  to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement  or  omission of material fact contained in the preliminary prospectus
were  corrected  on  a  timely  basis  in  the  prospectus,  as  then amended or
supplemented.  This  indemnification  provision  shall  apply separately to each
Investor  and  liability  hereunder  shall  not  be  joint  and  several.

(C)  Promptly  after receipt by an Indemnified Person or Indemnified Party under
this  Section  6  of  notice  of  the  commencement  of any action or proceeding
(including  any  governmental  action  or  proceeding)  involving  a Claim, such
Indemnified  Person or Indemnified Party shall, if a Claim in respect thereof is
to  be  made against any indemnifying party under this Section 6, deliver to the
indemnifying  party  a  written  notice  of  the  commencement  thereof, and the
indemnifying  party  shall  have the right to participate in, and, to the extent
the  indemnifying  party  so  desires, jointly with any other indemnifying party
similarly  noticed,  to  assume  control  of  the  defense  thereof with counsel
mutually  satisfactory  to  the indemnifying party and the Indemnified Person or
the  Indemnified  Party,  as  the  case  may  be;  provided,  however,  that  an
Indemnified  Person  or Indemnified Party shall have the right to retain its own
counsel  with the fees and expenses to be paid by the indemnifying party, if, in
the  reasonable  opinion  of  counsel  retained  by  the  Indemnified  Person or
Indemnified  Party,  the  representation by counsel of the Indemnified Person or
Indemnified  Party  and  the  indemnifying  party  would be inappropriate due to
actual  or  potential  differing  interests  between  such Indemnified Person or
Indemnified  Party  and  any  other  party  represented  by such counsel in such
proceeding. The indemnifying party shall pay for only one separate legal counsel
for  the Indemnified Persons or the Indemnified Parties, as applicable, and such
counsel  shall  be  selected  by  the  Investor, if the Investor are entitled to
indemnification  hereunder,  or  the  Company,  if  the  Company  is entitled to
indemnification  hereunder,  as applicable. The Indemnified Party or Indemnified
Person  shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or Claim by the indemnifying party and
shall  furnish to the indemnifying party all information reasonably available to
the  Indemnified  Party  or  Indemnified  Person which relates to such action or
Claim.  The  indemnifying  party shall keep the Indemnified Party or Indemnified
Person  fully  appraised  at  all  times  as to the status of the defense or any
settlement  negotiations  with  respect  thereto. No indemnifying party shall be
liable  for  any  settlement of any action, claim or proceeding effected without
its  written  consent,  provided, however, that the indemnifying party shall not
unreasonably  withhold,  delay  or  condition its consent. No indemnifying party
shall,  without  the  consent  of  the  Indemnified Party or Indemnified Person,
consent  to  entry  of  any  judgment  or  enter  into  any  settlement or other
compromise which does not include as an unconditional term thereof the giving by
the  claimant  or plaintiff to such Indemnified Party or Indemnified Person of a
release  from  all liability in respect to such Claim. Following indemnification
as  provided  for  hereunder,  the indemnifying party shall be surrogated to all
rights  of the Indemnified Party or Indemnified Person with respect to all third
parties,  firms or corporations relating to the matter for which indemnification
has  been  made. The failure to deliver written notice to the indemnifying party
within  a  reasonable  time  of  the  commencement  of any such action shall not
relieve  such  indemnifying  party of any liability to the Indemnified Person or
Indemnified  Party  under  this  Section  6,  except  to  the  extent  that  the
indemnifying  party  is  prejudiced  in  its  ability  to  defend  such  action.

(D)  The  indemnity  agreements contained herein shall be in addition to (I) any
cause  of action or similar right of the Indemnified Party or Indemnified Person
against  the  indemnifying  party  or  others,  and  (II)  any  liabilities  the
indemnifying  party  may  be  subject  to  pursuant  to  the  law.

SECTION  7.  CONTRIBUTION.

To  the  extent  any  indemnification  by an indemnifying party is prohibited or
limited  by  law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6  to  the  fullest  extent  permitted  by  law; provided, however, that: (I) no
contribution  shall  be  made under circumstances where the maker would not have
been  liable  for indemnification under the fault standards set forth in Section
6;  (II)  no  seller  of  Registrable  Securities  guilty  of  fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled  to  contribution from any seller of Registrable Securities who was not
guilty  of fraudulent misrepresentation; and (III) contribution by any seller of
Registrable  Securities shall be limited in amount to the net amount of proceeds
received  by  such  seller  from  the  sale  of  such  Registrable  Securities.

SECTION  8.  REPORTS  UNDER  THE  1934  ACT.

With  a  view  to  making  available  to  the  Investor the benefits of Rule 144
promulgated  under  the  1933 Act or any other similar rule or regulation of the
SEC  that  may at any time permit the Investor to sell securities of the Company
to  the  public  without  registration  ("Rule  144"),  the  Company  agrees to:

(A)  make  and  keep public information available, as those terms are understood
and  defined  in  Rule  144;

(B)  file  with  the  SEC  in  a  timely  manner all reports and other documents
required  of  the  Company  under  the  1933 Act and the 1934 Act so long as the
Company  remains  subject to such requirements (it being understood that nothing
herein  shall  limit  the  Company's  obligations  under  Section  5(c)  of  the
Investment  Agreement)  and  the  filing  of such reports and other documents is
required  for  the  applicable  provisions  of  Rule  144;  and

(C)  furnish  to the Investor, promptly upon request, (I) a written statement by
the  Company  that  it has complied with the reporting requirements of Rule 144,
the  1933  Act  and  the  1934  Act,  (II)  a  copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the  Company, and (III) such other information as may be reasonably requested to
permit  the  Investor  to  sell  such  securities  pursuant  to Rule 144 without
registration.

SECTION  9.  NO  ASSIGNMENT  OF  REGISTRATION  RIGHTS.

            THE RIGHTS UNDER THIS AGREEMENT SHALL NOT BE ASSIGNABLE.

SECTION  10.  AMENDMENT  OF  REGISTRATION  RIGHTS.

Provisions of this Agreement may be amended only with the written consent of the
Company and Investor. No such amendment shall be effective to the extent that it
applies  to  less  than  all  of  the  Investor  of  the Registrable Securities.

SECTION  11.  MISCELLANEOUS.

(A)  Any notices or other communications required or permitted to be given under
the  terms of this Agreement that must be in writing will be deemed to have been
delivered  (I)  upon receipt, when delivered personally; (II) upon receipt, when
sent  by  facsimile  (provided a confirmation of transmission is mechanically or
electronically  generated  and  kept on file by the sending party); or (III) one
day  after  deposit  with a nationally recognized overnight delivery service, in
each case properly addressed to the party to receive the same. The addresses and
facsimile  numbers  for  such  communications  shall  be:

If  to  the  Company:

Payment  Data  Systems,  Inc.
12500  San  Pedro,  Suite  120
San  Antonio,  TX  78216
Telephone:  210-249-4100
Facsimile:  210-249-4130

If  to  the  Investor:

Dutchess  Private  Equities  Fund,  LP  312  Stuart  St,  Third  Floor
Boston,  MA  02116
Telephone:  617-960-3570
Facsimile:  617-960-3772

Each  party  shall provide five business days prior notice to the other party of
any  change  in  address,  phone  number  or  facsimile  number.

(B) Failure of any party to exercise any right or remedy under this Agreement or
otherwise,  or  delay  by  a party in exercising such right or remedy, shall not
operate  as  a  waiver  thereof.

(C)  The  laws  of  the  Commonwealth  of  Massachusetts shall govern all issues
arising  from  or  related to this Agreement without regard to the principles of
conflict  of  laws.  Each  party  hereby  irrevocably  submits  to the exclusive
jurisdiction  of  the  state  and  federal courts sitting in the City of Boston,
County  of  Suffolk,  for  the  adjudication  of  any  dispute  hereunder  or in
connection  herewith  or  with  any transaction contemplated hereby or discussed
herein,  and  hereby  irrevocably  waives, and agrees not to assert in any suit,
action  or  proceeding,  any  claim  that  it  is  not personally subject to the
jurisdiction  of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Each  party hereby irrevocably waives personal service of process and
consents  to  process  being  served  in  any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service  of process and notice thereof. Nothing contained herein shall be deemed
to  limit  in any way any right to serve process in any manner permitted by law.
If  any  provision  of  this  Agreement shall be invalid or unenforceable in any
jurisdiction,  such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity  or  enforceability  of  any  provision  of this Agreement in any other
jurisdiction.

(D) This Agreement and the Transaction Documents constitute the entire agreement
among  the parties hereto with respect to the subject matter hereof and thereof.
There  are  no  restrictions,  promises,  warranties or undertakings, other than
those  set  forth  or  referred  to  herein  and  therein.

(E)  This Agreement and the Transaction Documents supersede all prior agreements
and  understandings  among the parties hereto with respect to the subject matter
hereof  and  thereof.

(F)  The  headings  in  this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof. Whenever required by the
context  of  this Agreement, the singular shall include the plural and masculine
shall  include  the feminine. This Agreement shall not be construed as if it had
been  prepared  by  one  of  the  parties,  but rather as if all the parties had
prepared  the  same.

(G)  This  Agreement may be executed in two or more identical counterparts, each
of  which  shall be deemed an original but all of which shall constitute one and
the  same  agreement. This Agreement, once executed by a party, may be delivered
to  the other party hereto by facsimile transmission of a copy of this Agreement
bearing  the  signature  of  the  party  so  delivering  this  Agreement.

(H) Each party shall do and perform, or cause to be done and performed, all such
further  acts  and  things,  and  shall  execute  and  deliver  all  such  other
agreements,  certificates,  instruments  and  documents,  as the other party may
reasonably  request in order to carry out the intent and accomplish the purposes
of  this Agreement and the consummation of the transactions contemplated hereby.

*  *  *

                 SIGNATURE PAGE OF REGISTRATION RIGHTS AGREEMENT

Agreed  as  of  the  date  first  written  above.

DUTCHESS  PRIVATE  EQUITIES  FUND,  L.P.
BY  ITS  GENERAL  PARTNER,
DUTCHESS  CAPITAL  MANAGEMENT,  LLC



     /s/  Douglas  Leighton
By:____________________________
Douglas  H.  Leighton,  Managing  Member





PAYMENT  DATA  SYSTEMS,  INC.



   /s/  Michael  Long
By__________________________________
    Michael  Long,  Chief  Executive  Officer