UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               PIPELINE DATA INC.
                                   Form 10-KSB


X    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934 For the fiscal year ended December 31, 2004

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

     For the transition period from ---------------- to -------------------

                 Delaware                                 13-3953764
              ------------                            ----------------
          (State or other jurisdiction of              (I.R.S. Employer
           incorporation or organization)             Identification No.)

                 1515 Hancock Street, Suite 301, Hancock Plaza,
                        Quincy, Massachusetts 02169-5243
         ---------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (781)843-3812
         Securities registered under Section 12(g) of the Exchange Act:
                          Common Stock $0.001 par value

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X

     State issuer's revenues for its most recent fiscal year. $15,565,134.



<PAGE>



     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days.  (See  definition of affiliate in Rule
12b-2 of the  Exchange  Act.) As of December  31,  2004,  there were  26,102,022
shares  of  the   registrant's   common  stock,  par  value  $0.001  issued  and
outstanding.  As of March 10,  2005,  the  market  value of  securities  held by
non-affiliates is $8,261,581 based on the average of the high and low bid prices
as reported by Yahoo.com.  on March 10, 2005,  $1.19.  These quotations  reflect
inter-dealer prices, without retail mark-up,  mark-down or commissions,  and may
not reflect actual transactions.

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest  practicable  date.  26,373,928 shares of common
stock, par value $0.001, as of March 28, 2005.


                       DOCUMENTS INCORPORATED BY REFERENCE

     If the following documents are incorporated by reference,  briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated:  (1) any annual report to security  holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities  Act"). The listed
documents should be clearly described for identification  purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).


     Transitional Small Business Disclosure Format (Check one): Yes _ ; No X



<PAGE>

                                TABLE OF CONTENTS


Item Number and Caption

PART I

ITEM 1. Business.............................................................. 2

ITEM 2. Properties............................................................30

ITEM 3. Legal Proceedings.....................................................30

ITEM 4. Submission of Matters to a Vote of Security Holders...................30

PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters..............31

ITEM 6. Management's Discussion and Analysis of Financial Condition and
               Results of Operations..........................................35

ITEM 7. Financial Statements................................................. 45

ITEM 8. Changes in and Disagreements with Accountants on
               Accounting and Financial Matters.............................. 68

PART III

ITEM 9. Directors and Executive Officers..................................... 69

ITEM 10. Executive Compensation.............................................. 71

ITEM 11. Security Ownership of Certain Beneficial Owners and
            Management....................................................... 75

ITEM 12. Certain Relationships and Related Transactions...................... 78

ITEM 13. Exhibits ........................................................... 81

Item 14.Principal Accountant Fees and Services............................... 83

<PAGE>



               ANNUAL REPORT ON FORM 10KSB FOR PIPELINE DATA INC.

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     To the extent that the information  presented in this Annual Report on Form
10-KSB for the year ended  December 31, 2004  discusses  financial  projections,
information  or  expectations  about the products or markets of our company,  or
otherwise   makes   statements   about  future  events,   such   statements  are
forward-looking.  We are making these forward-looking  statements in reliance on
the safe harbor  provisions of the Private  Securities  Litigation Reform Act of
1995.   Although  we  believe   that  the   expectations   reflected   in  these
forward-looking  statements  are based on  reasonable  assumptions,  there are a
number of risks and  uncertainties  that could  cause  actual  results to differ
materially from such forward-looking  statements.  These risks and uncertainties
are  described,  among other  places in this  Annual  Report,  in  "Management's
Discussion and  Analysis".  Readers are cautioned not to place undue reliance on
these  forward-looking  statements,  which speak only as of the date hereof.  In
addition,  we disclaim any obligations to update any forward-looking  statements
to reflect events or  circumstances  after the date of this Annual Report.  When
considering  such  forward-looking  statements,  readers should keep in mind the
risks  referenced  above  and the other  cautionary  statements  in this  Annual
Report.

<PAGE>
                                     PART I

Item 1. Business.


Overview of our Business and our Development

     We are an integrated  provider of merchant payment processing  services and
related  software  products.  We  deliver  credit and debit  card-based  payment
processing  solutions  primarily to small to medium-sized  merchants who operate
either in a physical "brick and mortar" business environment, over the Internet,
or in mobile or wireless settings via cellular-based  wireless devices.  We also
target  new  customers  for  our  mobile  wireless  transaction  processing  and
municipal payment processing services.  As of December 31, 2004, we provided our
services to approximately  15,000 active merchants located throughout the United
States. We were formed as a Delaware corporation in June 1997.

     We believe our  experience  and knowledge in providing  payment  processing
services to small and medium-sized merchants gives us the ability to effectively
evaluate  and manage the payment  processing  needs and risks that are unique to
small businesses.  The small and medium-sized  merchants  generally have a lower
volume  of  credit  card  transactions,  are  difficult  to  identify  and  have
traditionally  been underserved by credit card  processors.  We expect the small
merchants we target to increasingly  accept and benefit from the increased usage
of card-based  payment  systems.  We estimate that there are  approximately  3.2
million  merchant  locations in the United States  currently  accepting Visa and
MasterCard  credit  cards  in  the  small  merchant  market  segment;  and  that
approximately  2 million of such small  merchant  locations  utilize  electronic
processing  for  credit  card  transactions.  In 1997,  the U.S.  Census  Bureau
estimated that approximately 20 million businesses, which average less than $1.0
million in annual sales in the United States or which had no payroll,  generated
an aggregate of $1.7 trillion in annual sales. As a result,  many of these small
businesses  are seeking,  and we expect many new small  businesses  to seek,  to
provide  customers  with the ability to pay for  merchandise  and services using
credit or debit cards,  including  those in  industries  that have  historically
accepted cash and checks as the only forms of payment for their  merchandise and
services.

     We have decided to build our company by aggressively  growing the number of
merchant accounts serviced and by creating a processing and servicing  operation
that is efficient and scalable, meaning that we can easily expand our operations
without  significantly  increasing our fixed costs. We intend to grow the number
of accounts  we service  through a  combination  of  external  acquisitions  and
internal sales efforts. We have created an efficient and scalable processing and
servicing operation by employing talented team members, utilizing state -of- the
-art  technology  and  discriminating  between  that which should be serviced in
house and that which should be  outsourced,  in order to maximize  resources and
provide  better  service  to  our  clients.   The  development  of  our  company
demonstrates how we have put our strategy into operation.

     In  March  2002,  we  acquired  all of the  stock  of  SecurePay.com,  Inc.
("SecurePay")  in exchange for seven  million six hundred  thousand  (7,600,000)
shares of our common  stock at  closing  and an  additional  seven  million  six
hundred  thousand  (7,600,000)  shares of our common  stock  based upon  revenue
milestones  achieved within a specified  period of time. To date,  three million
eight hundred  thousand  (3,800,000)  shares have been issued  pursuant to these
milestones.  We have extended the time period for review of  achievement  of the
milestones  required to issue the second 3.8 million  shares.  We then appointed
SecurePay's  president,  MacAllister  Smith,  as our President,  Chief Executive
Officer and Director.

                                       2
<PAGE>

     Our wholly owned  subsidiary  SecurePay is a custom credit card transaction
processor  serving  as a  gateway  intermediary  between  the  customer  and the
financial  networks for the acceptance of card payments by merchants.  Most card
transactions  worldwide are processed by a  third-party  working in  conjunction
with the financial networks.  SecurePay processes all major card types including
Visa,  MasterCard,  Amex,  Discover and JCB.  Presently,  SecurePay's  solutions
include: payment gateway solutions,  virtual credit card terminals,  proprietary
shopping  carts and wireless  applications  operating on cell phone  networks to
support mobile merchant card acceptance.

     On  August  26,  2002,  we  acquired  all the  stock of  Northern  Merchant
Services, Inc. ("NMSI") in exchange for five thousand shares (5,000) of series A
preferred convertible stock (the "Preferred Shares") and one million (1,000,000)
shares  of our  common  stock  at  closing,  with an  additional  three  million
(3,000,000)  shares of our common  stock  based upon  milestones  involving  the
acquisition  of additional  new merchant  account  within a specified  period of
time. Each Preferred Share was convertible  into one thousand  (1,000) shares of
our common stock at the  conversion  price of $0.50 per common  share.  To date,
three  million  eight  hundred  thousand  (3,800,000)  shares  have been  issued
pursuant to these milestones.  Pursuant to our acquisition agreement,  we agreed
that during the 36-month period from the date of acquisition,  we would offer to
repurchase  the Preferred  Shares from the former NMSI  shareholders,  Kevin and
Nancy Weller,  for  $2,500,000.  In the event we failed to do this, the merchant
portfolio  would  revert back to the  Wellers.  On February 27, 2004 we complied
with this provision and repurchased  2,000  Preferred  Shares for $1,000,000 and
the  Wellers  exercised  their  option to convert  3,000  Preferred  Shares into
3,000,000 shares of our common stock. As a result of this transaction,  the NMSI
merchant  portfolio  cannot  revert back to the  Wellers.  We  appointed  NMSI's
president, Kevin Weller, as our director.

     Our wholly owned subsidiary NMSI, is an Independent Sales Organization that
markets and services electronic credit card authorization and payment systems to
merchants  located  throughout the United States. In accordance with our overall
operating  and growth  strategies,  NMSI seeks to enlarge its  customer  base of
small and medium-sized  merchants through merchant  portfolio  acquisitions,  as
well as through bank referrals, direct sales, independent sales agents and trade
association affiliations. It seeks to retain its customer base through efficient
operations and superior customer service.

     To further  our  internal  growth  strategy,  we formed a new wholly  owned
Independent Sales Organization,  Pipeline Data Processing,  Inc. ("Processing"),
in July 2004. We appointed  former Concord EFS (NYSE:FDC)  senior vice president
Kevin Smith as President of Processing and also as our Chief Operating  Officer.
Smith's primary  objective with Processing is to aggressively grow the number of
merchant accounts serviced by targeting the wholesale  processing  industry.  We
believe  Processing's  platform of services is very flexible,  enabling merchant
customization  and  scalability  to meet the  requirements  of high  transaction
volumes.   Processing  conducts  underwriting  and  risk  management  operations
in-house,  where we believe  we can add the most  value due to our  management's
experience  and  expertise in these  areas.  We consider  underwriting  and risk
management highly important to our operations and overall success.  We outsource
our remaining processing services to third parties, including the evaluation and
acceptance of card numbers and receipt and  settlement of funds.  By outsourcing
these non-core  services,  we believe we can achieve lower costs per transaction
through higher volume purchasing.

                                       3
<PAGE>

     In accordance  with our external  growth  strategy,  we have identified the
small to medium-sized merchant segment of the payment processing market as being
ripe for  acquisition.  This  business  segment is serviced by many  independent
service  organizations  that lack the resources to generate  sufficient scale in
this underserved market. We believe opportunities exist for us to purchase these
businesses or its portfolios when, among other things,  their resources begin to
limit  their  ability to continue  to grow  independently.  We decided to access
financing to take advantage of acquisition opportunities.  On February 27, 2004,
we entered into a series of financing arrangements with Laurus Master Fund, Ltd.
("Laurus Funds" or "Laurus"),  a financial  institution  specializing in funding
small  and   micro-capitalization   companies,   to  provide  our  company  with
convertible debt financing.  Under the arrangement,  we issued Laurus a total of
$6,000,000 in convertible  notes; a $2,000,000  convertible note on February 27,
2004,  a  $1,000,000  convertible  note  on  June  16,  2004,  and a  $3,000,000
convertible note on August 31, 2004. These secured convertible term notes mature
on February 27, 2007, June 16, 2007 and August 31, 2007, respectively,  and bear
interest at an  adjustable  rate  commencing  at six  percent  (6.0%) per annum.
Convertible  notes in the principal  amount of $5,000,000 are  convertible  into
registered  shares of our common stock at a fixed  conversion price of $1.00 per
share.  Convertible  notes in the principal amount of $1,000,000 are convertible
into registered  shares of our common stock at a fixed conversion price of $1.20
per share. We granted to Laurus a first priority security interest in our assets
to secure the obligations  under the note pursuant to security  agreements dated
February 27, 2004, June 16, 2004 and August 31, 2004.

     Pursuant to these transactions, we issued warrants to Laurus to purchase up
to an aggregate of 1,450,000 shares of our common stock. Laurus may exercise the
warrant for 500,000  shares  through  February 27, 2011, the warrant for 250,000
shares  through June 16, 2011, the warrant for 600,000 shares through August 31,
2011 and the warrant for 100,000  shares  through  March 11, 2012.  The exercise
price under the warrant is as follows:  a price of $1.25 per share for the first
250,000 shares acquired upon exercise of the warrant; a price of $1.50 per share
for the next 250,000 shares  acquired upon exercise of the warrant;  and a price
of $1.75 per share for the third 250,000 shares.  The warrant for 600,000 shares
may be  exercised  at a price of $1.40 per share and the warrant for the 100,000
shares may be exercised  at a price of $1.25 per share.  Neither the warrant for
600,000 or the warrant for 100,000 can be exercised on a cashless basis.

     With the proceeds  from the Laurus  financing,  we fulfilled  our agreement
under the NMSI acquisition agreement and repurchased 2,000 Preferred Shares from
Kevin and Nancy Weller for $1,000,000,  and embarked upon a campaign for quality
portfolio  acquisitions to expand our merchant  account base. With $5,000,000 of
proceeds  from the  Laurus  financing,  we  acquired  a total of 4,850  merchant
accounts from four independent  service  organizations.  The 4,850 accounts have
represented  approximately  $119,603,008  in annual  consumer charge volume on a
historical basis.  Although we cannot make assurances of future results based on
past performance,  should the charge volume remain constant,  we anticipate that
these  acquisitions  will  greatly  enhance  our  revenues.  A summary  of these
acquisitions are as follows:
                                       4

<PAGE>

     o    On March 15,  2004,  our  subsidiary  NMSI,  purchased  the  rights to
          residual payments from three independent sales  representatives for an
          aggregate  purchase price of $268,080 plus 32,952 shares of our common
          stock.

     o    On May 18,  2004,  we  entered  into an asset  purchase  agreement  to
          purchase the Residual  Rights to 1801 merchant  accounts  representing
          $68,911,364  in annual  consumer  charge volume on a historical  basis
          from Millennium  Merchant Services,  Inc. and Kent Stiritz in a series
          of  transactions.  A total of 4.2 million  shares of our common  stock
          have been set aside for the purchase of the Residual  Rights  (subject
          to  adjustments  in the event of a reverse  stock split or other stock
          recombination  and with a price  adjustment  right over a three  month
          look back period). To date,  2,246,764 shares of our common stock have
          been issued to Mr. Stiritz.

     o    On May 25, 2004,  our  subsidiary  Northern  Merchant  Services,  Inc.
          purchased from United Processing  Corporation Ltd. its Residual Rights
          under two merchant solicitation  agreements  representing an aggregate
          of 2,300  merchant  accounts and  36,174,288  annual  consumer  charge
          volume on a historical basis The aggregate purchase price was $312,000
          and 21,000  shares of our common  stock.  The two merchant  agreements
          under which  Residual  Rights were  transferred  are: (i) an Agreement
          dated  April 30,  1996 with EFS  National  Bank and (ii) an  Agreement
          dated April 2, 1998 with National  Payment  Systems,  Inc., a New York
          Corporation, d/b/a Card Payment Systems.

     o    On  October  1,  2004  our   subsidiary,   Pipeline   Data   Portfolio
          Acquisitions,  Inc.  purchased the Residual  Rights to an aggregate of
          511 merchant  accounts  representing  $10,496,180  in annual  consumer
          charge  volume,  on a historical  basis,  from  Diversified  Debit and
          Credit, Inc. for an aggregate purchase price of $119,372.

     o    On  December  1,  2004,   our   subsidiary   Pipeline  Data  Portfolio
          Acquisitions,  Inc. purchased the Residual Rights from an aggregate of
          238  merchant  accounts  representing  $4,021,176  in annual  consumer
          charge  volume on a historical  basis from Merchant  Select  Services,
          Inc. The purchase price was $56,320.

     During 2005 the following  merchant  portfolios  were acquired  using funds
from the Laurus financing:

     o    On  February  21,  2005,  our   subsidiary   Pipeline  Data  Portfolio
          Acquisitions, Inc. purchased the Residual Rights from an aggregate 830
          merchant accounts from CPS of New York, Inc. for the purchase price of
          $1,090,011.23.  This agreement  provides  guarantees as to the monthly
          income level from the Residual Rights purchased.

     o    On March 1, 2005, our subsidiary Pipeline Data Portfolio Acquisitions,
          Inc. purchased Residual Rights from an aggregate 775 merchant accounts
          from Advanced Internet Services,  LLC. for an aggregate purchase price
          of $589,589 plus 64,010 shares of our restricted common stock.

     Our acquisitions  have enhanced our revenues and increased our portfolio of
merchant accounts. To this end, we formed Pipeline Data Portfolio  Acquisitions,
Inc.  ("Acquisitions")  in  November  2004 to locate  merchant  portfolios  that
complement  our  existing  customer  base of  small to  medium-sized  merchants.
Acquisitions  performs an extensive review of the cash flow  characteristics  of
each portfolio,  the types of business conducted  therein,  the credit status of
the  merchants  in the  portfolio,  our  ability  to  control  attrition  of the
portfolio and the opportunities the portfolio  provides for revenue  enhancement
and cost reduction.  Acquisitions  then determines a valuation of each portfolio
acquisition  opportunity  based on a  combination  of these factors and moves to
acquire the acquisition candidate.

                                       5
<PAGE>

Our Business

The Products and Services We Provide

Merchant Payment Processing Services

     We provide comprehensive services and support to merchants accepting credit
and debit-based payment cards, including the various services described below:

     o    Application  Evaluation/  Underwriting.  We  recognize  that there are
          varying degrees of risk  associated with different  merchants based on
          the  nature  of  their  businesses,   processing  volume  and  average
          transaction  amounts.  We apply  varying  levels  of  scrutiny  in our
          application  evaluation  and  underwriting  of  prospective  merchants
          accounts,  ranging from basic due diligence  for merchants  with a low
          risk profile to a more  thorough  and detailed  review for higher risk
          merchants.  The  results  of this  review  serve as the  basis for our
          decision  whether  to  accept or reject a  merchant  account  and also
          provide the criteria for  establishing  rolling reserve  requirements,
          processing limits andaverage  transaction  amounts and pricing,  which
          assists us in monitoring merchant transactions for those accounts that
          exceed pre-determined criteria.

     o    Merchant  Set-up and  Training.  After we establish a contract  with a
          merchant,  we create the software  configuration that is downloaded to
          the merchant's  credit card terminal or computer.  This  configuration
          includes the merchant identification number, which allows the merchant
          to accept Visa and MasterCard, as well as any other payment cards such
          as American  Express,  Discover  and Diners Club  provided  for in the
          contract.  The configuration might also accommodate check verification
          and gift and  loyalty  programs.  If a merchant  requires a pin-pad to
          accept  debit  cards,  the  configuration  allows for the  terminal or
          computer to communicate with the peripheral device. After the download
          has been  completed,  we may conduct a training  session on use of the
          products.

     o    Card Transaction  Processing.  A transaction begins with authorization
          of the  customer's  credit  or debit  card.  The  transaction  data is
          captured by the processor and electronically transmitted to the issuer
          of the card,  which then  determines  availability  of credit or debit
          funds. The issuer then  communicates an approval  decision back to the
          merchant through the purchaser. This process typically takes less than
          five  seconds.  After the  transaction  is  completed,  the  processor
          transmits the final transaction data to the card issuer for settlement
          of funds.  Generally,  we  outsource  these  services to third-  party
          processors.

     o    Risk   Management/Detection  of  Fraudulent  Transactions.   Our  risk
          management  staff  relies  on the  criteria  set  by the  underwriting
          department to assist merchants in identifying and avoiding  fraudulent
          transactions  by monitoring  exceptions and providing  access to other
          resources  for fraud  detection.  By  employing  these and other  risk
          management procedures,  we enable our merchants to balance the risk of
          fraud against the loss of a valid transaction.

     o    Merchant  Service  and  Support.  We provide  merchants  with  ongoing
          service and support.  Customer service and support includes  answering
          billing  questions,  responding  to requests for  supplies,  resolving
          failed payment transactions,  troubleshooting and repair of equipment,
          educating  merchants on Visa and  MasterCard  compliance and assisting
          merchants  with pricing  changes and purchases of additional  products
          and services.  We maintain a toll-free help-line,  which is staffed by
          our customer service representatives.

                                       6
<PAGE>

     o    Chargeback  Service.  In the  event of a  billing  dispute  between  a
          cardholder and a merchant, we assist the merchant in investigating and
          resolving the dispute as quickly and as accurately as possible. Before
          instructing the cardholder's bank to debit the merchant's  account for
          the  chargeback,  we provide  the  merchant  with the  opportunity  to
          demonstrate  that the transaction was valid. If the merchant is unable
          to  demonstrate  that the  transaction  was valid and the  dispute  is
          resolved in favor of the  cardholder,  the transaction is charged back
          to the merchant,  and that amount is credited to the cardholder.  This
          service is provided by third parties on our behalf.

     o    Merchant Reporting.  We organize our merchants'  transaction data into
          various files for merchant  accounting  purposes.  We use this data to
          provide merchants with information,  such as charge volume, discounts,
          fees and funds  held for  reserves  to help them track  their  account
          activity.  Merchants may access this archived  information through our
          customer service  representatives or online through our Internet-based
          customer service system.

     The  transactions  for which we provide  processing  services  involve  the
following third parties:


     o    Merchants.  Merchants are the  businesses  that accept  payment cards,
          including Visa and MasterCard, for their merchandise and services.

     o    Sponsoring Banks. Sponsoring banks are financial institutions that are
          card  association  members and provide the funds on behalf of the card
          user, enabling merchants to accept payment cards.

     o    Processors.   Processors,   which  may  include  banks,  gather  sales
          information  from  merchants,   obtain  authorization  for  merchants'
          transactions  from card issuers,  facilitate  the  collection of funds
          from  sponsoring  banks for payment to merchants and provide  merchant
          accounting and settlement services on our behalf.

     Our primary source of revenue is the discount rate paid by the merchant for
each  credit  card  transaction  processed  for that  merchant.  In  addition to
revenues derived from the discount rate, we receives  periodic fees from most of
our merchants for providing  various  services  which are reflected in the table
below as "Average Fees per Transaction." We negotiate the discount rate and fees
with each of the merchants to whom we provides services.  We contract with third
parties  to  provide  a  portion  of the  services  to the  merchant,  including
communication  networks,  transaction  processing  and  monthly  preparation  of
detailed  merchant  statements.   Additionally,   we  comply  with  the  pricing
structures  established by Visa and MasterCard  associations for the interchange
fee paid to the retail consumers' card-issuing banks and the associations' fees.
The primary costs we incur in delivering  our services to merchants  are: (i) an
interchange  fee  paid to the  card-issuing  bank  which  is set by the Visa and
MasterCard  associations  and  which  is  calculated  as  a  percentage  of  the
transaction  amount and/or an associated  transaction fee, (ii) a fee calculated
as a percentage of the transaction amount that is paid to the Visa or MasterCard
association  which is established by the member banks of the Visa and MasterCard
associations,  (iii) a fixed,  per-transaction  fee paid to the network  service
provider which we negotiate with the network service  provider and (iv) a fixed,
per-  transaction  fee paid to the  processing  bank which we negotiate with the
processing  bank. We believe,  based on  information  received from our merchant
customers,  that the range of discount rates offered by other service  providers
is  approximately  1.4% to 4.0%.  The  discount  rates we offer are within  this
range.

                                       7
<PAGE>


     A standard pricing model is illustrated below for a merchant with a $100.00
retail sale with consumer credit card present at the transaction.  The breakdown
is as follows for a discount rate of 1.79% and a per item fee of $.25:

------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Sale                                                            $100.00
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Cost to merchant                          $100.00 x 1.79% =       $1.79

------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Transaction fee                                                  $  .25
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
         Total cost to merchant                                   $2.04
                                                                  =====
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
PPDA costs
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Processing cost                                                   0.12%
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Interchange Cost                                                 $1.54%
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Processing Per Item Cost                                          $0.09
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Interchange per item                                              $0.10
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
PPDA Profit
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Discount spread                                                    .13%
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
Per item spread                                                   $0.06
------------------------------- ---------------------------------------
------------------------------- ---------------------------------------
             Total Profit                                         $0.19
                                                                  =====
------------------------------- ---------------------------------------


     The  previous  example  is  for  illustration  purposes  only.  Costs  vary
depending  on volume,  as well as  industry  type.  Thus,  costs and profits are
subject to change.


                                       8
<PAGE>

     In most cases, in accordance with our contracts with processing  banks, the
funds collection and disbursement function for each of the items listed above is
performed on our behalf.  At month end, the  processing  bank collects the total
discount rate and various fees from the merchants via electronic  withdrawal and
disburses to each of the service  providers its fees, except for the interchange
fee paid to the card-issuing  bank for which the  disbursements  are made daily.
Shortly after month end, the  processing  bank  disburses to us the remainder of
the funds  collected  from the merchant.  We then  disburse  funds to agents and
other  service  providers.  Several  factors  can  alter our  profitability  for
merchant  transactions.  Primarily,  these  include (i) improper use of the card
reading  terminal by the merchant  resulting in higher  interchange fees paid to
the  card-issuing  bank,  (ii) lower than  anticipated  average  dollar sales of
credit card transactions,  thereby reducing our gross transaction margin because
many of the  transaction  costs are fixed and (iii) the inability to collect the
discount rate because of insufficient funds in the merchant's bank account.

Virtual Terminal/Gateway

     Our virtual terminal and gateway is the core SecurePay product which allows
payment  processing via any Internet  connected device. The virtual terminal and
gateway can process sales, voids, forces and returns.  Our address  verification
system confirms shipping and cardholder address information to protect merchants
from fraud.  It will process  recurring  transactions  and allows  access to the
entire  suite of reporting  functions.  All  transactions  are  encrypted  using
industry standard SSL technology.

Wireless Authorization Services

     We provide  electronic  transaction  authorization  services  for all major
credit and charge cards  originating  from certain  wireless  cell phone and PDA
devices and transactions originating over the Internet.  Authorization generally
involves approving a cardholder's  purchase at the point-of-sale after verifying
that the card is not lost or stolen and that the  purchase  amount is within the
cardholder's credit or account limit. The electronic authorization process for a
credit card transaction  begins when the merchant  "swipes" the card through its
POS terminal or enters the card via the Internet and enters the dollar amount of
the purchase.  After capturing the data, the device transmits the  authorization
request via the  SecurePay  system to our  switching  center,  where the data is
routed to the appropriate credit card association network for authorization. The
transaction  is approved or  declined  by the credit card  association,  and the
response is transmitted  back to our switching  center where it is routed to the
appropriate merchant.

Data Capture and Reporting Services

     At the time of authorization, data relating to the transaction, such as the
purchase price and card number, is encrypted and stored by the SecurePay system.
This  maximizes  accurate  transaction  reconciliation  with each  merchant  and
protects  against  potential loss of data.  This  information  also allows us to
provide  merchants  with  information  services such as  specialized  management
reports,  accounting  export files and to assist in our other  customer  service
operations. Merchants can access this archived information through the SecurePay
system,  which allows the merchant direct access to our database through a PC or
wireless device.

                                       9
<PAGE>

Cell Phone  Devices

     The SecurePay  gateway  allows the  acceptance of credit card payments over
wireless  Internet  devices,  such as certain  cell phones that utilize Palm OS,
Java and Windows CE platforms.  Cell phone-based applications over the SecurePay
gateway  include  signature  capture,  error  correction and  customizable  data
fields.  The  application  also  affords a price  point  less  than  traditional
wireless credit card processing  terminals.  The wireless  solution  enables the
merchant to process transactions  utilizing airwaves,  as opposed to traditional
phone lines, for wireless  transaction  authorization  and processing.  Wireless
enabled   transaction   authorization  and  processing  in  environments   where
traditional  phone  lines are  unavailable,  inconvenient  and/or  prohibitively
expensive,  affords merchants  increased  flexibility,  mobility and security in
processing card transactions. Further, wireless technology allows merchants that
have relied on paper-based  processing,  where the ability to check if a card is
stolen or credit limits exceeded is generally  unavailable or  inconvenient,  to
convert to electronic processing. In so doing, such merchants can also avoid the
higher rates imposed by both Visa and MasterCard for paper-based transactions or
key entered transactions.

Shopping Cart Technology

     The shopping  cart (Easy Shop) is a powerful,  yet  user-friendly  shopping
cart that is fully  integrated  to our  proprietary  gateway.  The shopping cart
gives  merchants  an easy way to create  either a "Buy Now"  button on their Web
site or a simple  HTML link to the Easy Shop cart.  It can be used with most Web
sites. Core features include sales tax and shipping cost calculations, real-time
card processing, automatic customer configuration and e-mail order notification,
advance cart support for product size and color selections,  unlimited number of
products  supported,  product  import  and  export to  accounting  applications,
support of downloadable items (soft goods) such as documents, program images and
audio  files,  promotion  of items and coupons and  allowance  of order  viewing
summaries by date or order detail via quick link technologies.

Gateway and Communication Interfaces

     Our gateway solutions allow value added reseller's  ("VAR") and programmers
access to the card  authorization  systems by  integrating  their product to our
system  for card  processing.  We have  eight  different  communication  objects
allowing  flexibility  to  programmers  who  wish to  create  their  own  custom
applications.

Software Application Products And Value-Added Services

     In addition  to card  transaction  processing,  we offer  related  software
application products and value-added  services to our merchant customers.  These
products and services  are designed to run on Internet  connected  Windows-based
PCs and wireless devices.  For example, our payment gateway enables merchants to
securely  pass  customer  credit card  information  to a  processing  center for
verification.  When  combined with the  SecurePay  shopping  cart, or previously
existing  shopping  cart,  multiple  items  or  combinations  of  items  may  be
purchased.  The SecurePay Web terminal is an Internet-based  product that allows
merchants to accept orders over the telephone.  Unlike many  traditional  credit
card terminals,  a Web terminal allows  merchants to input certain data required
by Visa and  MasterCard in order to qualify for the lowest  possible  processing
rates. Offering a broad range of products and services historically  unavailable
to small to medium  -sized  merchants  is an  integral  part of our  strategy of
focusing on these  merchants and  differentiating  ourselves among the banks and
Independent Sales Organization's (ISO's) serving this market segment. We believe
that the  quality and  reliability  of our  products  and  services  enhance our
ability to attract and retain merchant customers.

                                       10

Industry Overview and Our Market

     For more than a decade,  the use of  card-based  forms of payment,  such as
credit  and debit  cards,  by  consumers  in the U.S.  has  steadily  increased.
According  to the  Nilson  Report,  total  expenditures  by U.S.  consumers  for
transactions using card-based payment systems grew from $500 billion in 1991, or
19% of total  consumer  payments,  to $1.8  trillion  in  2001,  or 32% of total
consumer  payments.  Total purchases by U.S. consumers using Visa and MasterCard
card-based systems grew from $1.741 trillion in 2003 to $1.961 trillion in 2004.
Such  expenditures  are expected to grow to $4.2  trillion by 2011 and represent
48% of total consumer  payments.  According to Nellie Mae, the number of college
students  who have credit  cards grew from 67% in 1998 to 83% in 2001.  As these
consumers who have witnessed the wide adoption of card products,  technology and
the Internet  comprise a greater  percentage of the population and  increasingly
enter the work force, we expect that purchases using card-based  payment methods
will comprise an even greater percentage of total consumer spending.

     We  believe  there  is  great  opportunity  in the  transaction  processing
business to procure small to medium -sized  merchants in retail physical stores,
over the Internet through  e-commerce,  mobile payment  processing and municipal
payment processing.

The Small to Medium - Sized Merchant Market

     The  proliferation  of credit and debit  cards has made the  acceptance  of
card-based payment a necessity for businesses, both large and small, in order to
remain competitive. In 1997, the U.S. Census Bureau estimated that approximately
20 million  businesses  which  average less than $1.0 million in annual sales in
the  United  States or which had no  payroll,  generated  an  aggregate  of $1.7
trillion  in annual  sales.  We believe  that the lower  costs  associated  with
card-based payment methods are making these services more affordable to a larger
segment of the small business market.  In addition,  we believe these businesses
are  experiencing  increased  pressure to accept  card-based  payment methods in
order to remain competitive and to meet consumer expectations. As a result, many
of these small  businesses are seeking,  and we expect many new small businesses
to seek,  to  provide  customers  with the  ability to pay for  merchandise  and
services using credit or debit cards,  including  those in industries  that have
historically  accepted  cash and checks as the only  forms of payment  for their
merchandise and services. Historically, the larger acquiring banks have marketed
credit  card  processing  services  to  national  and  regional  merchants,  not
emphasizing  small to  medium-sized  merchants,  as small  merchants  are  often
difficult to identify and expensive to service.  This created an opportunity for
non-banks,  such as our company,  which  recognized  the  business  potential of
providing  electronic  processing to these small merchants.  We have focused our
marketing efforts s on small to medium-sized merchants, which have traditionally
been underserved by processing  banks. We understand the unique  characteristics
of this market  segment and have tailored our  marketing  and servicing  efforts
accordingly.  We are able to provide electronic processing systems at rates that
generally are lower than those available from small local processors as a result
of our transaction volume. We serve a diverse portfolio of small to medium-sized
merchants.  As  of  December  31,  2004,  we  provided  processing  services  to
approximately 10,000 active small merchants located across the United States and
engaged in a wide variety of businesses. We define a merchant as "active" if the
merchant  account  status is considered  open by our company and the merchant is
able to process payment transactions.

     No single merchant accounted for more than 5% of our aggregate  transaction
volume  for 2004.  This  merchant  diversification  makes us less  sensitive  to
shifting economic conditions in the industries or regions in which our merchants
operate.  We  believe  that the loss of any  single  merchant  would  not have a
material adverse effect on our financial condition or results of operations.

                                       11

<PAGE>

     Merchant  attrition  is an expected  aspect of the credit  card  processing
business.  Historically,  our  attrition  has related to merchants  going out of
business,   merchants   returning  to  local   processing   banks  or  merchants
transferring to competitors for rates we were unwilling to match.

     Merchant  fraud is another  expected  aspect of the credit card  processing
business.  Currently,  we  are  only  responsible  for  fraudulent  credit  card
transactions  of our  merchants  on less  than  20% of our  merchant  customers.
Examples of merchant fraud include  inputting false sales  transactions or false
credits.  We, along with our processing  banks,  monitor merchant charge volume,
average charge and number of transactions, as well as check for unusual patterns
in the  charges,  returns  and  chargebacks  processed.  As  part  of our  fraud
avoidance  policies,  we  generally  will  not  process  for  certain  types  of
businesses  which provide future services  wherein  incidents of fraud have been
common.  Generally, we are not responsible for cardholder fraud. We evaluate our
risks and estimate the potential loss for  chargebacks  and merchant fraud based
on historical experience. We also maintain a rolling reserve account, meaning we
withhold a varying  percentage  of at risk  merchants'  processing  volume,  for
potential  losses.  Generally,  our agreements with merchants are for one or two
years and  automatically  renew for additional one year periods unless otherwise
terminated.  Our  sponsoring  banks  are also a party to these  agreements.  The
merchants are obligated to pay for all chargebacks, fines, assessments, and fees
associated  with their  merchant  account,  and in some cases,  statement  fees,
monthly minimum fees and early termination fees. Generally,  the sponsoring bank
may terminate  the agreement for any reason on 30 days notice,  and the merchant
may  terminate  the  agreement on 30 days notice,  subject to the payment of any
applicable  early  termination  fees.  Typically,  the  agreement  may  also  be
terminated by the sponsoring bank  immediately  upon a breach by the merchant of
any of its terms.  Generally,  the agreement may not be assigned by the merchant
without the prior written consent of the sponsoring bank.

     Merchant  attrition is expected in the payment  processing  industry in the
ordinary  course of business;  however,  we believe the low average  transaction
volume of the  merchants  whose  accounts  we service  make them less  likely to
change  providers  because of the  inconveniences  associated  with a  transfer.
During 2004, we experienced an average monthly  attrition of approximately 1% of
our total charge  volume,  taking into  consideration  each of the  acquisitions
during this  period.  Much of our  attrition  is related to newly  formed  small
businesses  that  ultimately  fail.  Because  the  transaction  volumes of these
unsuccessful  businesses  typically never reach meaningful  levels,  they do not
significantly contribute to the profitability of our business.  Accordingly, our
merchant  attrition related to failed  businesses does not significantly  reduce
our revenues.

     We believe that we have extensive experience and resources in assessing the
risks associated with providing payment processing  services to small merchants.
These  risks  include  the  limited  operating  history  that  many of the small
merchants we serve have and the risk that these  merchants could be subject to a
higher  rate of  insolvency  which could  adversely  affect us  financially.  In
addition,   because  a  larger  portion  of  their  sales  are  card-not-present
transactions in relation to transactions  of larger  merchants,  small merchants
are more vulnerable to customer fraud.

Mobile Payment Processing

     Global mobile  commerce  revenue are projected to grow from $400 million in
2000,  to $22.2 billion by 2005.  We believe the mobile  transaction  processing
market is ripe for exploitation,  and, therefore,  offer a suite of products and
services  through  our  SecurePay   subsidiary  to  service  mobile  transaction
processing merchants. We intend to aggressively market our products and services
to the mobile merchant sector.

Municipal Payment Processing

     We also view the  government  payment  sector as an  emerging  and  growing
market.  The IRS  reported  that as of April 2,  2004,  card-based  payments  of
federal  income taxes were up 177% from the same period the previous  year.  Our
subsidiary,  SecurePay,  has developed  and begun  marketing  municipal  payment
processing  technology,  which has now been adopted on an exclusive basis by St.
Lawrence County, NY for payment of government obligations.

                                       12

<PAGE>

Our Strategy

     Our strategy is to build our business by aggressively growing the number of
merchant accounts serviced and by creating a processing and servicing  operation
that is efficient and scalable, meaning that we can easily expand our operations
without  significantly  increasing our fixed costs.  Management has more than 70
years  of  experience  in the  payment  processing  business  and a  history  of
providing reliable,  customer-focused  service to our merchants. Our platform of
services is very flexible,  enabling  merchant  customization and scalability to
meet the requirements of high transaction volumes.

Our objectives are to:

-    Expand our portfolio of merchant clients focusing on:

     o    small to medium -sized merchants who use payment processing services,

     o    mobile merchants who use wireless payment processing services and

     o    municipalities  who use payment  processing  services for taxes, fines
          and other municipal payments.

-    Grow our  relationships  with  banks and direct  salespersons,  Independent
     Service Organizations  ("ISOs") and Value Added Resellers ("VARs"). We have
     found  relationships  with  banks  and  direct  salespersons  to be a  cost
     -effective  and  valuable  method of reaching  small  merchants  that would
     otherwise be difficult  to identify  and locate using  customary  marketing
     practices.  Pursuant to these  relationships,  bank and direct salespersons
     endorse the  processing  systems we market and service and  participate  in
     referring new customers.  We believe the utilization of ISOs and VARs to be
     another effective way of increasing the volume of merchant  referrals.  Our
     experience in the industry, coupled with our ability to evaluate and manage
     the risks related to providing payment  processing  services,  allows us to
     accept and approve a high rate of merchant  applications  and  positions us
     well to continue  to increase  the size of our sales team and the number of
     new applications our existing team members refer to us.

-    Maintain a stable and growing  recurring  revenue  base.  Through  merchant
     retention  and  increased  credit card use, we have  developed a stable and
     recurring base of revenues. In addition to our high customer service level,
     our endorsements from banks/direct  salespersons provide an additional link
     to our merchants  that tend to reduce  attrition.  Furthermore,  we believe
     that the size of the merchants we service make the merchants less likely to
     change providers because of the up-front costs associated with a transfer.

-    Make  strategic   acquisitions  of  merchant  account   portfolios  and  of
     compatible payment businesses. We intend to continue to expand our merchant
     base by acquiring other providers of payment processing  services,  as well
     as  portfolios  of merchant  accounts.  The small  merchant  segment of the
     payment  processing  market is serviced by many  independent  providers  of
     payment processing  services that lack the resources to generate sufficient
     scale in this underserved market. We believe  opportunities exist for us to
     purchase these businesses when their resources begin to limit their ability
     to continue to grow independently.  Other sources of portfolio acquisitions
     include  commercial  banks,  which,  in an  effort  to focus on their  core
     competencies  often sell or outsource their card-based  payment  processing
     operations,  creating the  opportunity for buyers to acquire their existing
     merchant portfolios.

-    Continue  to  deliver  cost-effective,  reliable  and  responsive  customer
     service and support. We believe that providing cost-effective, reliable and
     responsive  service is the most effective  long-term strategy to retain our
     merchant  client base.  The size of our merchant  client base enables us to
     support a customer service program designed to provide consultative problem
     solving and account  management.  We are continuing to upgrade our customer
     service  information  systems  by  installing  new  hardware  and  creating
     proprietary  software  applications to further enhance the customer service
     we provide and to accommodate future growth.

-    Increase operating efficiencies. Generally, we outsource our processing and
     network  services  to  third-parties  which have  excess  capacity  and the
     expertise to handle our needs.  We believe  that because our merchant  base
     generates  significant  transaction  volume in the aggregate,  we have been
     able to  negotiate  competitive  pricing  from our  processing  and network
     providers.  We have achieved  significant  reductions in certain  operating
     expenses through operational efficiencies,  economies of scale and improved
     labor  productivity.  We will outsource  processing and network services as
     long as it is  economically  more  attractive  than to develop  and support
     these services within our company, allowing management to focus on its core
     business of sales, marketing and customer service.

                                       13

<PAGE>

Marketing and Sales of Our Services and Products

     In order to reach our  target  market in an  effective  and  cost-efficient
manner,  we market our  services  through  three  principal  channels:  (i) bank
alliances,  through which we offer our services to merchants in cooperation with
community and regional banks, allowing us to capitalize on the presence of those
banks in particular  geographic markets;  (ii) partnering with Independent Sales
Organizations  ("ISOs") that market and sell our services to merchants and (iii)
direct sales, to allow  cost-effective  access to smalltomedium -sized merchants
dispersed  throughout  the United States and  otherwise to  supplement  the bank
alliance and ISO sales.  In addition,  we utilize other  marketing  efforts that
include  agreements  with various  trade and other  associations  and  marketing
through value added resellers ("VARs") that integrate our transaction processing
services with specialized business management software.

Bank Alliances

     We have  an  established  marketing  strategy  of  forming  alliances  with
regional and community  banks and offer our services to merchants  through these
banks. Under these arrangements, we obtain the exclusive endorsement of the bank
and  receive  both  its  initial  and  ongoing  marketing  assistance.  Our bank
alliances consist of three types of relationships:  (i) relationships created as
a result of our acquisition of a bank's merchant portfolio, pursuant to which we
provide  transaction  processing  services on a  co-branded  basis with the bank
("Acquisition  Alliances");  (ii)  agent  bank  relationships,  where  the  bank
purchases  our  services  and  markets and resells  those  services  directly to
merchants ("Agent Bank Alliances"); and (iii) bank referral relationships, where
the bank refers our company to merchants  who desire or otherwise  inquire about
transaction processing services ("Bank Referral Alliances").

     An integral part of our overall  strategy is to offer banks the opportunity
to  transfer  management  and  operational  responsibility  for  their  merchant
portfolios,  while  continuing  to offer  transaction  processing  services on a
co-branded  basis in  cooperation  with us.  We can often  effect  an  invisible
transition of services from the merchants' perspective.

     We compensate our bank alliance partners through varying means. Acquisition
Alliance partners  typically are compensated by remitting a residual payment for
each  transaction  we process for merchants  attributable  to the  alliance.  We
compensate  our Bank  Referral  Alliance  partners  typically  by paying  them a
one-time   referral  fee.   Agent  Bank  Alliance   partners  are  not  directly
compensated,  but  rather,  they derive  revenue by  reselling  our  services to
merchants at a price determined by the Agent Bank.

Independent Sales Organization Partnering

     Generally,  Independent Sales Organization  partnering involves engaging an
Independent Sales Organization to market and sell our products and services on a
non-exclusive  basis. An Independent Sales  Organization that desires to refer a
merchant  customer to us will  procure the  merchant  and submit it to us on the
merchant's behalf.  Thereafter,  the Independent Sales Organization will sell or
lease  hardware and software to the merchant.  We compensate  Independent  Sales
Organizations by paying them a residual  payment for each transaction  processed
by it for  merchants  they refer to us, or they derive  revenue by reselling our
services to merchants at a price  determined by the ISO. The  Independent  Sales
Organization's  determination  of whether to refer a particular  merchant to our
company depends on a variety of factors,  including the terms of the residual we
offer and the industry in which the merchant conducts its business.

Direct Sales

     We will continue to expand our direct sales activities. We intend to deploy
a telemarketing  sales force to generate  further  internal growth from existing
relationships with regional and community banks, Independent Sales Organizations
and merchant trade and other associations.  We believe that our direct sales and
telemarketing  efforts constitute a significant  opportunity to augment our bank
alliance and Independent Sales Organization partnering efforts.

                                       14
<PAGE>

Internet Marketing

     We also  market  over  the  Internet,  targeting  small  to  medium  -sized
e-commerce  businesses.  Internet  marketing methods employed  include:  pay per
click advertising, search engine positioning and affiliate Internet marketing.

Other Marketing Efforts

     In  addition  to bank  alliances,  ISO/VAR  partnering  and  direct  sales,
telemarketing and Internet marketing,  we engage in other marketing efforts that
we believe complement and diversify further our overall marketing strategy:

Association Marketing

     Through our  association  marketing  program,  we negotiate  and enter into
marketing  agreements  with various  trade and other  associations.  Pursuant to
these  relationships,  associations  endorse and promote to their membership the
transaction  processing services we provide,  creating additional  opportunities
for us to reach small to medium- sized merchants.

Marketing Through VAR's and Strategic Partners

     Our marketing  efforts are  diversified  further through the integration of
our transaction  processing  services with the specialized  business  management
software of a growing number of VAR's. VAR's perform a marketing function for us
since  their  software  often is  offered on a  fully-integrated  basis with our
transaction  processing  services,  creating additional  opportunities for us to
reach small to medium-sized merchants.

     We periodically  review our marketing efforts and distribution  channels to
minimize channel conflict.  Although conflict among bank alliances,  Independent
Sales  Organization  partnering and direct sales marketing may occur, to date we
have not experienced  any significant  conflict while pursuing our overall sales
strategy.

Customer Service and Support

     We are dedicated to providing  reliable and effective  customer service and
support  to  our  merchant  customers.  The  information  access  and  retrieval
capabilities of networked systems,  where real-time  information is available to
any of our customer service representatives, allow us to provide a high level of
customer service, reporting and support to small to medium -sized merchants that
was historically available only to much larger merchants.

     We maintain a call center for customers of our SecurePay subsidiary and for
bank  customers  who are brought to us through  direct bank  referrals.  We will
measure the  efficiency of our customer  service  through  certain  quantitative
data,  such as the  number of rings  prior to  operator  pick-up,  the number of
abandoned  calls,  the  number  of calls  per day and the  number  of calls  per
customer  service  representative.  We will develop  comprehensive  programs and
procedures  for  training  our customer  service  representatives  to assist our
merchant clients in a timely and efficient  manner with any problems,  issues or
concerns  they may have.  We are  dedicated  to providing  outstanding  customer
service and support and  continually  review our policies and  procedures  in an
effort to improve these services.

                                       15
<PAGE>
Relationships with Sponsors and Processors

     In order to provide  payment  processing  services for Visa and  MasterCard
transactions,  we  must  be  sponsored  by a  financial  institution  that  is a
principal member of the Visa and MasterCard card associations.  Additionally, we
must be  registered  with Visa as an  Independent  Sales  Organization  and with
MasterCard as a Member Service Provider.

     We have agreements with several banks that sponsor us for membership in the
Visa and  MasterCard  card  associations  and settle card  transactions  for our
merchants. Our sponsoring banks include Global Payments Direct, Inc., US Bancorp
and JP Morgan  Chase Bank.  All may  terminate  their  agreements  with us if we
materially  breach the  agreements and do not cure the breach within 30 days, if
our membership  with Visa or MasterCard  terminates,  if we enter  bankruptcy or
file for bankruptcy,  or if applicable  laws or regulations,  including Visa and
MasterCard regulations,  change to prevent either the applicable bank or us from
performing its services under the agreement.  We provide transaction  processing
and  transmittal,  transaction  authorization  and data  capture,  and access to
various reporting tools pursuant to non-exclusive contractual relationships with
processing  banks that are  members  of Visa and  MasterCard.  These  processors
include CTS  Holdings,  Inc.(a  wholly owned  subsidiary of First Data Corp) and
Nova Information Systems, Inc.. Our processing banks withhold from the merchants
a  discount  rate  and  various  fees for the  processing  of each  credit  card
transaction.  From our discount rate  revenues,  amounts are paid to the issuing
bank,  the network  service  provider,  Visa or MasterCard and to the processing
bank.

     Generally,  our agreements  with  processing  banks contain aspects of both
marketing and service.  The marketing  portions of the  agreements  permit us to
originate new merchants,  which then enter into contractual  agreements with the
processing  banks for  credit  card  processing.  The  service  portions  of the
agreements  permit us to provide services  (including  terminal  programming and
shipping,  employee  training,  equipment  supply  and  repair  and  operational
support) to the  merchants  solicited.  Although the  marketing  portions of the
agreements have limited terms,  the service portions of these agreements do not.
Accordingly,  we have a  right  to  continue  to  receive  revenues  from  these
processors, so long as we remain in compliance with the service agreement.

     To date,  we have relied on four banks to process our client's  credit card
transactions: JPMorgan Chase Bank, Global Payments Direct, Inc., U.S.Bancorp and
Nova  Information  Systems,  Inc.  ("NIS").  Currently,  our agreement  with our
principal processing bank, Nova Information Systems,  Inc. ("NIS"), a subsidiary
of U.S. Bancorp , applies to approximately  80% of our aggregate  merchant base.
We have  agreements  with our processing  banks to provide for us to continue to
receive  revenues  so long as the  merchants  subject to the  agreement  process
credit card transactions with the banks, we provide  appropriate  service to the
merchants and we otherwise remain in compliance with the terms of the agreement.
Under the NIS agreement,  we bear no liability for any unfulfilled  chargebacks.
The agreement  with the second  processing  bank,  CTS Holdings,  Inc. (a wholly
owned subsidiary of First Data Corp.) also provides for no liability,  while the
third has limited liability. Each of our processing agreements may be terminated
by either party in the event of default, insolvency or receivership,  failure to
make  payments  when due or to abide by the  rules and  regulations  of Visa and
MasterCard.


                                       16
<PAGE>
Competition and our Competitive Position in the Market

     The payment processing industry is highly  competitive.  We compete in this
market on the basis of:


   o quality of service;

   o support and reliability of service;

   o ability to evaluate, undertake and manage risk;

   o speed in approving merchant applications;

   o technological  capability;

   o price; and

   o availability of additional features.

     Both  large  and  small  companies  compete  with us in  providing  payment
processing  services and related services.  Large competitors include First Data
Merchant  Services Corp.,  National  Processing,  Inc.,  Global Payments,  Inc.,
iPayment and Nova Information Systems,  Inc., a subsidiary of U.S. Bancorp, that
serve a broad market  spectrum from large to small merchants and provide ATM and
other  payment-related  services and systems in addition to  card-based  payment
processing.  There are also a large  number  of  smaller  competing  transaction
processors that provide various  services to small and medium -sized  merchants.
We also compete with local, regional and national banks that have internal sales
forces   and/or  have   developed   relationships   with   independent   service
organizations   that  are  our   competitors.   Many  of  our  competitors  have
substantially greater capital resources than we have and operate as subsidiaries
of financial  institutions or bank holding companies,  which may allow them on a
consolidated  basis to own and conduct  depository and other banking  activities
that we do not have the regulatory authority to own or conduct.

     We believe we have core competitive strengths, which include:

          Our focus on small to  medium-sized  merchants.  We  believe  that our
          specific focus on smaller merchants,  in addition to our understanding
          of the needs and risks  associated with providing  payment  processing
          services to small  merchants,  gives us a competitive  advantage  over
          larger  competitors,  which have a broader market perspective and over
          competitors  of a similar or smaller size that may lack our  extensive
          experience and resources.

          Our  utilization  of  bank/direct  sales  relationships.  We  consider
          utilizing  bank/direct  sales  relationships  to provide us a distinct
          competitive  advantage in maintaining  primary  relationships with the
          underserved, small to medium -sized merchant segment of the market.

          Our  scalable,  efficient  operating  structure.  We believe that as a
          result of our experience in payment  processing,  we have been able to
          develop   operating   efficiencies   which  we  believe  allow  us  to
          competitively bid for new business. Our scalable,  efficient operating
          structure   allows  us  to  easily  expand  our   operations   without
          significantly  increasing our fixed costs. We conduct our underwriting
          and risk management  operations in-house,  where we believe we can add
          the most value due to our  management's  experience  and  expertise in
          these  areas.  We consider  underwriting  and risk  management  highly
          important to our  operations  and overall  success.  We outsource  our
          remaining   processing  services  to  third  parties,   including  the
          evaluation  and  acceptance of card numbers and receipt and settlement
          of funds. By outsourcing  these non-core  services,  we believe we are
          able to maintain a highly efficient  operating  structure.  We believe
          there is sufficient  capacity  among third parties to meet our current
          and future  outstanding  needs.  Many of our contracts include pricing
          terms  that  are  more  favorable  to us  as  the  transaction  volume
          generated by our merchant base increases.
                                       17

<PAGE>

          Technical monitoring and value of the SecurePay system. We continually
          monitor and make technological improvements to our system and thus are
          able  to  respond  to  the  unique   needs  of  merchants  in  various
          industries.  We also maintain that the quality,  speed and reliability
          of  the   SecurePay   system   and  the   breadth,   flexibility   and
          user-friendliness  of its software  application  products and services
          constitute a competitive advantage.

          Advantages  of our cell  phone  payment  application.  Our cell  phone
          application  also  provides  distinct  competitive  advantages.  It is
          considerably less expensive than traditional wireless terminals, which
          can have a price point up to 70% higher. Competing wireless terminals,
          by contrast,  are single  function  only. In addition,  our cell phone
          application offers superior coverage area.

          Proven  acquisition  and  integration  strategy.  We have  significant
          experience acquiring providers of payment processing services, as well
          as portfolios of merchant accounts, having acquired several portfolios
          of merchant  accounts during and since 2004. We have enhanced revenues
          and  improved  operating  efficiencies  of our  acquired  entities  by
          improving the services, support and benefits we offer to the ISOs that
          serve the entities and merchant accounts we acquire.  In addition,  we
          have  increased  operating  efficiencies  of many of the businesses we
          have  acquired  by  conducting   profitability  analyses  of  acquired
          merchant accounts and reducing processing fees and overhead.

          Strong position and substantial experience in our target market. As of
          December 31, 2004, we were providing  card-based payment processing to
          approximately  10,000 active small merchants located across the United
          States. We believe our understanding of the unique payment  processing
          needs  and risks of small  merchants  provides  us with a  competitive
          advantage  over larger  service  providers  that have a broader market
          perspective. We also believe that we have a competitive advantage over
          service  providers  of a  similar  or  smaller  size that may lack our
          extensive experience and resources.

          Experienced,  efficient sales force. We market our services  primarily
          through  our  contractual  relationships  with  over 100 ISOs and VARs
          throughout  the United  States.  Although it is not  customary  in our
          industry to obligate ISOs to refer their merchant  applications to any
          one processing provider,  many currently refer a majority of their new
          merchant  applications  to us as a result of our strong  relationships
          with them.  Our sales approach  provides us with an experienced  sales
          force who market our services with minimal direct  investment in sales
          infrastructure  and  management.  We continually  strive to strengthen
          these relationships by delivering superior service and support.

          Comprehensive  underwriting and risk management  systems.  Through our
          experience and cumulative knowledge in assessing risks associated with
          providing  payment  processing  services to small  merchants,  we have
          developed business  procedures and systems that provide effective risk
          management and fraud  prevention  solutions.  Through our underwriting
          processes,  we evaluate  merchant  applicants and balance the risks of
          accepting  a merchant  against  the  benefit  of the charge  volume we
          anticipate  the  merchant  will  generate.  We believe our systems and
          procedures enable us to identify  potentially  fraudulent activity and
          other questionable business practices quickly,  thereby minimizing our
          losses and those of our merchants.

                                       18
<PAGE>
Patents, Trademarks, Licenses, Franchises,  Concessions,
Royalty Agreements

     We  have  no  patents,  trademarks,   franchises,  concessions  or  royalty
agreements.  However,  we are continuously  developing  software for use in four
principal areas: (i) applications for Internet- based and wireless transactions;
(ii) transaction switching;(iii) the SecurePay system; and (iv) customer service
and fraud. We regard our  proprietary  software as protected by trade secret and
copyright  laws of general  applicability.  We attempt to safeguard our software
through the  protection  afforded by the  above-referenced  laws,  employee  and
third-party non-disclosure agreements, licensing agreements and other methods of
protection.  Despite  these  precautions,  it may be possible  for  unauthorized
third-  parties to copy,  obtain or reverse  engineer  certain  portions  of our
software  or  to  otherwise  obtain  or  use  other  information  we  regard  as
proprietary.  While our  competitive  position may be affected by our ability to
protect our  software  and other  proprietary  information,  we believe that the
protection  afforded by trade secret and copyright  laws is less  significant to
our success than other factors such as the knowledge,  ability and experience of
our  personnel  and the continued  pursuit and  implementation  of our operating
strategies.

We currently license certain software from third-parties to supplement our
internal 9software and technology development and to shorten time-to-market
software application product deliveries.

Employees and Labor Contracts

     As of December 31,  2004,  we employed 38  full-time  personnel,  including
eight information systems and technology employees, four in operations and 26 in
sales and  administration.  Many of our  employees  are highly  skilled,  and we
believe our future  success  will depend in large part on our ability to attract
and retain such  employees.  We have  employment  agreements  with our our Chief
Operating Officer,  our Chief Technology Officer and the President of NMSI. None
of our employees are  represented by a labor union,  and we have  experienced no
work stoppages. We consider our employee relations to be good.

Reports to security holders.

     As a  reporting  company,  we are  required  to file  annual and  quarterly
reports, proxy and information  statements,  and other information regarding our
company with the  Securities  and Exchange  Commission.  The public may read and
copy any  materials we file with the SEC at the SEC's Public  Reference  Room at
450  Fifth  Street,  N.W.,  Washington,   D.C.  20549.  The  public  may  obtain
information on the operation of the Public  Reference Room by calling the SEC at
1-800-SEC-0330.  The SEC maintains an Internet site that contains reports, proxy
and information  statements,  and other information  regarding issuers, like us,
that file electronically with the SEC at (http://www.sec.gov).

                                       19

<PAGE>
                                  Risk Factors

     In addition to the risks and other  considerations  discussed  elsewhere in
this annual  report,  set forth below is a  discussion  of certain  risk factors
relating  to our  business  and  operations.  These risk  factors are drafted in
"Plain  English"  format  in  accordance  with Rule 421 of the  Securities  Act.
Accordingly,   references   to  "we"  and  "our"  refer  to  Pipeline   and  its
subsidiaries.

Risks Relating to our Business

We have a history  of  operating  losses and will need to  generate  significant
revenue to achieve or maintain our profitability.

     Since  inception,  we have been  engaged in  start-up  activities  and have
acquired payment  processing  businesses and portfolios of merchant  accounts to
grow  our  business,  both  of  which  require  substantial  capital  and  other
expenditures. As a result, we have not sustained profitability, and may continue
to incur losses in the future.  We had a net loss of $297,221 for the year ended
December  31, 2004 and a net loss of $299,790  for the year ended  December  31,
2003.  We expect our cash needs to increase  significantly  for the next several
years as we:


     o    acquire  additional  payment  processing  businesses and portfolios of
          merchant accounts;

     o    increase awareness of our services;

     o    expand our customer support and service operations;

     o    hire  additional   marketing,   customer  support  and  administrative
          personnel; and

     o    implement  new  and  upgraded   operational  and  financial   systems,
          procedures and controls.

As a result of these continuing expenses, we need to generate significant
revenues to achieve and maintain profitability. To date, our operations have
been supported by financings. If we do not continue to increase our revenues,
our business, results of operations and financial condition could be materially
and adversely affected.


The full impact of our recent acquisitions on our operating results is not fully
reflected  in our  historical  financial  results,  which as a  result,  are not
necessarily indicative of our future results of operations.

     Since December 31, 2004, we have expanded our card-based payment processing
services  through the acquisition of two portfolios of merchant  accounts in the
first quarter of 2005.  These  acquisitions  have  contributed  to a substantial
portion of our total  revenues.  The full  impact of these  acquisitions  on our
operating  results  are  not  fully  reflected  in  our  historical  results  of
operations  due to the recent  nature of these  acquisitions  and their  varying
stages of integration. As a result of these acquisitions, our historical results
may not be indicative of results to be expected in future periods.

Increased   consolidation  in  the  marketplace  has  an  impact  on  price  and
availability of acquisition, joint venture and alliance opportunities.

     Historically,  our growth strategy has been  materially  dependent upon the
purchase  of  additional   merchant  portfolios  and  acquisition  of  operating
businesses and transaction  processing  assets. We face significant  competition
from other transaction processors for available  acquisition,  joint venture and
alliance opportunities. These acquisitions potentially deprive us of acquisition
opportunities.  We cannot give any  assurances  that the  historical  or current
level of acquisition  opportunities will continue to exist, that we will be able
to acquire merchant portfolios,  operating businesses or transaction  processing
assets  that  satisfy  our  criteria,  or that any such  transaction  will be on
favorable terms.

                                       20
<PAGE>
We have faced, and may in the future face,  significant  chargeback liability if
our merchants refuse or cannot reimburse  chargebacks resolved in favor of their
customers,  and we face potential  liability for merchant or customer  fraud; we
may not accurately anticipate these liabilities.

     We  have  potential   liability  for   chargebacks   associated   with  the
transactions  we  process.  If a  billing  dispute  between  a  merchant  and  a
cardholder is not  ultimately  resolved in favor of the  merchant,  the disputed
transaction is "charged back" to the merchant's bank and credited to the account
of the cardholder.

     We also have  potential  liability for losses  caused by fraudulent  credit
card  transactions.  Card fraud occurs when a merchant's  customer uses a stolen
card (or a stolen card  number in a  card-not-present  transaction)  to purchase
merchandise  or services.  In a  traditional  card-present  transaction,  if the
merchant swipes the card,  receives  authorization  for the transaction from the
card issuing bank and verifies the signature on the back of the card against the
paper receipt  signed by the customer,  the card issuing bank remains liable for
any loss.  In a fraudulent  card-not-present  transaction,  even if the merchant
receives authorization for the transaction,  the merchant is liable for any loss
arising  from the  transaction.  Many of the small  merchants  that we serve are
small businesses that transact a substantial  percentage of their sales over the
Internet or in response to  telephone or mail  orders.  Because  their sales are
card-not-present  transactions,  these merchants are more vulnerable to customer
fraud than larger  merchants.  Because we target these merchants,  we experience
chargebacks  arising from  cardholder  fraud more  frequently  than providers of
payment processing services that service larger merchants.

     If we or our processing banks are unable to collect the chargeback from the
merchant's  account,  or if the merchant refuses or is financially unable due to
bankruptcy or other reasons to reimburse the merchant's bank for the chargeback,
we bear the loss for the amount of the refund paid to the cardholder's bank.

     Merchant  fraud occurs when a merchant,  rather than a customer,  knowingly
uses a stolen  or  counterfeit  card or card  number  to  record  a false  sales
transaction,  or intentionally fails to deliver the merchandise or services sold
in an  otherwise  valid  transaction.  Anytime a merchant is unable to satisfy a
chargeback,  we are responsible for that chargeback. We have established systems
and procedures to detect and reduce the impact of merchant fraud. In addition to
credit review,  we monitor merchant  transactions  against a series of standards
developed to detect merchant fraud and excessive  chargebacks.  In addition,  we
maintain rolling reserves,  meaning we withhold a varying  percentage of at risk
merchants' processing volume, to offset potential losses. Despite our efforts to
detect  merchant  fraud, we cannot assure you that these measures are or will be
effective.  It is  possible  that  we will  experience  significant  amounts  of
merchant fraud in the future,  which could  increase our  chargeback  liability.
Increased  chargeback  liability  may  have a  material  adverse  effect  on our
business, financial condition and results of operations.

     Charges  incurred by us relating to  chargebacks  were $-0-,  and less than
$20,000, or less than 1% of revenues,  for the years ended December 31, 2003 and
2004, respectively.

If our merchants experience adverse business conditions, they may generate fewer
transactions for us to process or become  insolvent,  increasing our exposure to
chargeback liabilities.

     General  economic  conditions have caused some of the merchants we serve to
experience  difficulty in supporting  their current  operations and implementing
their business  plans. If these merchants make fewer sales of their products and
services,  we will  have  fewer  transactions  to  process,  resulting  in lower
revenues.

     In addition, in a recessionary environment, the merchants we serve could be
subject  to a  higher  rate  of  insolvency  which  could  adversely  affect  us
financially.  We bear credit risk for  chargebacks  related to billing  disputes
between credit card holders and bankrupt  merchants.  If a merchant seeks relief
under  bankruptcy  laws or is  otherwise  unable or  unwilling to pay, we may be
liable for the full transaction amount of a chargeback.

                                       21

<PAGE>

We have incurred  substantial debt, which can impair our financial and operating
flexibility.

     We have incurred  substantial  debt in connection with the financing of our
operations and  acquisitions.  As of December 31, 2004, we had total debt in the
form of a convertible note to The Laurus Funds of $5,833,335,  total debt in the
form of  convertible  debts to  individual  investors  of  $739,204  , and a net
working capital deficit of $47,248.  We may incur  additional debt in the future
in order to pursue our acquisition  strategy or for other purposes.  Substantial
indebtedness could impair our ability to obtain additional financing for working
capital,  capital expenditures or further acquisitions.  Covenants governing any
indebtedness  we incur  would  likely  restrict  our  ability  to take  specific
actions,  including our ability to pay dividends or distributions  on, or redeem
or repurchase,  our capital stock, issue, sell or allow distributions on capital
stock of our  subsidiaries,  enter into  transactions  with  affiliates,  merge,
consolidate  or sell our  assets or make  capital  expenditure  investments.  In
addition,  the  use of a  substantial  portion  of  the  cash  generated  by our
operations to cover debt service obligations and any security interests we grant
on our assets could limit our financial and business flexibility.

We rely on bank  sponsors,  which have  substantial  discretion  with respect to
certain  elements  of our  business  practices,  in  order to  process  bankcard
transactions; if these sponsorships are terminated and we are not able to secure
or successfully migrate merchant portfolios to new bank sponsors, we will not be
able to conduct our business.

     Because we are not a bank,  we are unable to belong to and directly  access
the Visa and MasterCard  bankcard  associations.  Visa and MasterCard  operating
regulations  require us to be sponsored  by a bank in order to process  bankcard
transactions.  We are currently  registered with Visa and MasterCard through the
sponsorship  of  banks  that are  members  of the  card  associations.  If these
sponsorships are terminated and we are unable to secure a bank sponsor,  we will
not be able to process bankcard transactions.  Furthermore,  our agreements with
our  sponsoring  banks  give the  sponsoring  banks  substantial  discretion  in
approving   certain   elements  of  our  business   practices,   including   our
solicitation,  application and qualification procedures for merchants, the terms
of our  agreements  with  merchants,  the  processing  fees that we charge,  our
customer  service  levels and our use of  Independent  Sales  Organizations.  We
cannot guarantee that our sponsoring  banks' actions under these agreements will
not be detrimental to us.

                                       22
<PAGE>
If we or our bank  sponsors  fail to  adhere  to the  standards  of the Visa and
MasterCard credit card  associations,  our registrations with these associations
could  be  terminated  and we  could  be  required  to  stop  providing  payment
processing services for Visa and MasterCard.

     Substantially   all  of  the   transactions  we  process  involve  Visa  or
MasterCard.  If we or our bank  sponsors  fail to  comply  with  the  applicable
requirements  of the Visa  and  MasterCard  credit  card  associations,  Visa or
MasterCard could suspend or terminate our  registration.  The termination of our
registration  or any changes in the Visa or  MasterCard  rules that would impair
our registration could require us to stop providing payment processing services.

We rely on other card payment processors and service providers;  if they fail or
no longer agree to provide their services,  our merchant  relationships could be
adversely affected and we could lose business.

     We  rely  on  agreements  with  several  other  large  payment   processing
organizations  to  enable  us  to  provide  card  authorization,  data  capture,
settlement  and merchant  accounting  services  and access to various  reporting
tools for the  merchants  we serve.  We also  rely on third  parties  to whom we
outsource  specific  services,  such  as  reorganizing  and  accumulating  daily
transaction data on a merchant-by-merchant  and card issuer-by-card issuer basis
and forwarding the accumulated data to the relevant bankcard associations.

     The termination by our service  providers of their  arrangements with us or
their  failure  to  perform  their  services  efficiently  and  effectively  may
adversely  affect our  relationships  with the merchants whose accounts we serve
and may cause those merchants to terminate their processing agreements with us.

To acquire  and  retain  merchant  accounts,  we depend on a group of banks as a
referral  source  and a loss of this  referral  source  may  cause us to lose an
effective method of marketing our products and services to merchants.

     We have contractual  relationships with over 500 bank branch locations that
serve as exclusive  referral  sources for our products and services to merchants
seeking  to  establish  an  account  with a payment  processor.  Our  failure to
maintain our relationships  with these banks could adversely affect our revenues
and internal growth and increase our merchant attrition.

To acquire and retain merchant accounts,  we depend on ISOs and VARs that do not
serve us exclusively.

     We rely on the efforts of ISOs and VARs to market our services to merchants
seeking to  establish  an account  with a payment  processor.  ISOs and VARs are
companies  that seek to introduce  both  newly-established  and  existing  small
merchants,  including  retailers,  restaurants  and service  providers,  such as
physicians,  to providers of transaction  payment  processing  services like us.
Most of the ISOs and VARs that refer  merchants  to us are  exclusive to us, yet
all of them retain the right to refer merchants to other service providers.  Our
failure to maintain our  relationships  with our existing ISOs and those serving
other service  providers  that we may acquire,  and to recruit and establish new
relationships  with other ISOs, could adversely affect our revenues and internal
growth and increase our merchant attrition.

                                       23
<PAGE>
On occasion,  we experience increases in interchange and sponsorship fees; if we
cannot pass these increases  along to our merchants,  our profit margins will be
reduced.

     We pay  interchange  fees or  assessments  to card  associations  for  each
transaction  we process  using their credit and debit cards.  From time to time,
the card associations  increase the interchange fees that they charge processors
and the sponsoring  banks. For example,  Visa and MasterCard will increase their
interchange fees for retail  transactions by an average of .09% in April,  2005.
At their  sole  discretion,  our  sponsoring  banks  have the  right to pass any
increases in interchange  fees on to us. In addition,  our sponsoring  banks may
seek to increase their Visa and MasterCard  sponsorship fees to us, all of which
are based upon the dollar amount of the payment  transactions we process.  If we
are  not  able  to  pass  these  fee  increases   along  to  merchants   through
corresponding  increases  in our  processing  fees,  our profit  margins will be
reduced.

Unauthorized  disclosure of merchant and cardholder data, whether through breach
of our computer  systems or otherwise,  could expose us to protracted and costly
litigation.

     We collect  and store  sensitive  data  about  merchants  and  cardholders,
including names,  addresses,  social security numbers,  drivers license numbers,
checking  and  savings  account  numbers and payment  history  records,  such as
account  closures and returned  checks.  In addition,  we maintain a database of
cardholder  data  relating  to specific  transactions,  including  payment  card
numbers and cardholder  addresses,  in order to process the transactions and for
fraud  prevention  and other  internal  processes.  If a person  penetrates  our
network security or otherwise  misappropriates  sensitive merchant or cardholder
data,  we could be subject to liability or business  interruption.  These claims
also could result in protracted and costly litigation.

     Although we generally require that our agreements with our ISOs and service
providers who have access to merchant and customer data include  confidentiality
obligations that restrict these parties from using or disclosing any customer or
merchant data except as necessary to perform their services under the applicable
agreements,  we cannot assure you that these  contractual  measures will prevent
the  unauthorized  disclosure  of merchant or customer  data.  In addition,  our
agreements  with financial  institutions  require us to take certain  protective
measures  to ensure the  confidentiality  of merchant  and  consumer  data.  Any
failure to adequately take these protective  measures could result in protracted
or costly  litigation.  Although we are working with  Visa/MasterCard to fulfill
our  requirements  to them regarding their  cardholder  information and security
procedures,  we are  currently  not  compliant.  Noncompliance  could  result in
material interruptions in our ability to store and transmit card data.

The loss of key personnel or damage to their  reputations could adversely affect
our  relationships  with ISOs,  card  associations,  bank sponsors and our other
service providers, which would adversely affect our business.

     Our success  depends upon the continued  services of our senior  management
and other key employees,  in particular  MacAllister  Smith, our Chief Executive
Officer,  all of whom have  substantial  experience  in the  payment  processing
industry  and the small  merchant  markets  in which we offer our  services.  In
addition,  our success  depends in large part upon the  reputation and influence
within the industry of Mr. Smith, who has, along with our other senior managers,
over their years in the industry,  developed  long-standing and highly favorable
relationships  with ISOs,  card  associations,  bank  sponsors and other payment
processing and service providers.  We would expect that the loss of the services
of one or more of our key  employees,  particularly  Mr.  Smith,  would  have an
adverse  effect on our  operations.  We would also expect that any damage to the
reputation of our senior managers,  including Mr. Smith,  would adversely affect
our business.  We do not currently  maintain any "key person" life  insurance on
any of our employees.

                                       24
<PAGE>

We may become  subject  to certain  state  taxes that  currently  are not passed
through to our merchants.

     We, like other transaction  processing  companies,  may be subject to state
taxation of certain  portions of our fees charged to merchants for our services.
Application  of this  tax is an  emerging  issue in the  transaction  processing
industry  and the states  have not yet  adopted  uniform  guidelines.  If we are
required to pay such taxes and are not able to pass this tax expense  through to
our merchant customers,  our financial condition and results of operations could
be adversely affected.

The payment  processing  industry is highly  competitive and such competition is
likely  to  increase,  which  may  further  adversely  influence  our  prices to
merchants, and as a result, our profit margins.

     The market for card processing services is highly competitive. The level of
competition  has  increased in recent years,  and other  providers of processing
services  have  established  a  sizable  market  share  in  the  small  merchant
processing  sector.   Some  of  our  competitors  are  financial   institutions,
subsidiaries of financial  institutions or  well-established  payment processing
companies that have substantially greater capital and technological,  management
and  marketing  resources  than we have.  There are also a large number of small
providers of  processing  services  that provide  various  ranges of services to
small and medium -sized merchants.  This competition may influence the prices we
can charge and requires us to control  costs  aggressively  in order to maintain
acceptable profit margins. In addition,  our competitors continue to consolidate
as large banks merge and combine their  networks.  This  consolidation  may also
require that we increase the  consideration  we pay for future  acquisitions and
could  adversely  affect  the  number of  attractive  acquisition  opportunities
presented to us.

Increased  attrition  in  merchant  charge  volume due to an  increase in closed
merchant  accounts  that we cannot  anticipate  or offset with new  accounts may
reduce our revenues.

     We experience attrition in merchant charge volume in the ordinary course of
business 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, and contract breaches by, a
merchant.  During 2004, we experienced average volume attrition of 1% per month.
In addition, substantially all of our processing contracts with merchants may be
terminated by either party on relatively  short  notice,  allowing  merchants to
move  their  processing  accounts  to other  providers  with  minimal  financial
liability  and cost.  Increased  attrition in merchant  charge volume may have a
material adverse effect on our financial condition and results of operations. We
cannot predict the level of attrition in the future,  particularly in connection
with our  acquisitions of portfolios of merchant  accounts.  If we are unable to
increase our  transaction  volume and  establish  accounts with new merchants in
order to counter the effect of this  attrition,  or, if we  experience  a higher
level of attrition in merchant  charge volume than we  anticipate,  our revenues
will decrease.

Our operating results are subject to seasonality,  and if our revenues are below
our seasonal norms during our  historically  stronger third and fourth quarters,
our net income could be lower than expected.

     We have  experienced  in the past,  and expect to continue  to  experience,
seasonal fluctuations in our revenues as a result of consumer spending patterns.
Historically,  revenues  have been weaker  during the first two  quarters of the
calendar  year and stronger  during the third and fourth  quarters.  If, for any
reason,  our  revenues  are  below  seasonal  norms  during  the third or fourth
quarter, our net income could be lower than expected.


                                       25
<PAGE>
Our systems may fail due to factors  beyond our control,  which could  interrupt
our business or cause us to lose business and would likely increase our costs.

     We depend on the  efficient  and  uninterrupted  operations of our computer
network  systems,  software and data  centers.  We do not  presently  have fully
redundant  systems.  Our  systems and  operations  could be exposed to damage or
interruption  from  fire,  natural  disaster,  power  loss,   telecommunications
failure,  unauthorized  entry and  computer  viruses.  Our property and business
interruption  insurance  may not be adequate to  compensate us for all losses or
failures  that may  occur.  Defects  in our  systems,  errors  or  delays in the
processing of payment transactions or other difficulties could result in:


     o    additional development costs;

     o    diversion of technical and other resources;

     o    loss of merchants;

     o    loss of merchant and cardholder data;

     o    negative publicity;

     o    harm to our business or reputation; or

     o    exposure to fraud losses or other liabilities.

We face uncertainty about additional financing for our future capital needs,
which may prevent us from growing our business.

     If we are unable to increase our revenues, we will need to raise additional
funds to finance our future  capital  needs.  We may need  additional  financing
earlier than we anticipate if we:


     o    Decide to expand faster than planned;

     o    need to respond to competitive pressures; or

     o    need to acquire complementary products, businesses or technologies.

     If we raise additional funds through the sale of equity or convertible debt
securities,  these  transactions may dilute the value of our outstanding  common
stock. We may also decide to issue securities,  including debt securities, which
have rights,  preferences  and privileges  senior to our common stock. We cannot
assure you that we will be able to raise  additional funds on terms favorable to
us or at all.  If future  financing  is not  available  or is not  available  on
acceptable  terms, we may not be able to fund our future needs. This may prevent
us from increasing our market share, capitalizing on new business opportunities,
remaining competitive in our industry or continuing our business operations as a
whole.


                                       26
<PAGE>

We  currently  rely solely on common law to protect our  intellectual  property;
should we seek additional  protection in the future, we may fail to successfully
register our trademarks,  causing us to potentially lose our rights to use these
marks.

     Currently,  we do not have any patents or  trademarks  and,  other than one
copyright,  we rely on common law rights to protect  our marks and logos.  We do
not rely  heavily  on the  recognition  of our  marks  to  obtain  and  maintain
business. We have recently applied for trademark registration for certain of our
marks.  However,  we  cannot  assure  you  that any  such  applications  will be
approved.  Even if they  are  approved,  these  trademarks  may be  successfully
challenged  by others or  invalidated.  If our trademark  registrations  are not
approved because third parties own these trademarks, our use of these trademarks
will be restricted or completely prohibited unless we enter into agreements with
these parties which may not be available on commercially reasonable terms, or at
all.

New and potential  governmental  regulations designed to protect or limit access
to  consumer  information  could  adversely  affect our  ability to provide  the
services we provide our merchants.

     Due  to  the  increasing  public  concern  over  consumer  privacy  rights,
governmental  bodies in the  United  States  and abroad  have  adopted,  and are
considering  adopting additional laws and regulations  restricting the purchase,
sale and sharing of personal  information  about  customers.  For  example,  the
Gramm-Leach-Bliley Act requires  non-affiliated third party service providers to
financial  institutions to take certain steps to ensure the privacy and security
of consumer financial information.  We believe our present activities fall under
exceptions to the consumer notice and opt-out requirements contained in this law
for third -party service providers to financial institutions.  The law, however,
is new and there have been very few  rulings on its  interpretation.  We believe
that current  legislation permits us to access and use this information as we do
now. The laws governing  privacy generally remain  unsettled,  however,  even in
areas   where   there   has  been   some   legislative   action,   such  as  the
Gramm-Leach-Bliley Act and other consumer statutes, it is difficult to determine
whether and how existing and proposed  privacy laws will apply to our  business.
Limitations  on our  ability  to  access  and  use  customer  information  could
adversely  affect our ability to provide the services we offer to our  merchants
or could impair the value of these services.

     Several  states  have  proposed  legislation  that would  limit the uses of
personal information  gathered using the Internet.  Some proposals would require
proprietary  online service  providers and Web site owners to establish  privacy
policies.  Congress has also considered  privacy  legislation that could further
regulate  use of consumer  information  obtained  over the  Internet or in other
ways. The Federal Trade  Commission has also recently  settled a proceeding with
one  on-line  service  regarding  the manner in which  personal  information  is
collected  from users and provided to third parties.  Our compliance  with these
privacy laws and related regulations could materially affect our operations.

                                       27

<PAGE>


     Changes to  existing  laws or the  passage of new laws  could,  among other
things:

     o    create uncertainty in the marketplace that could reduce demand for our
          services;

     o    limit our ability to collect and to use merchant and cardholder data;

     o    increase the cost of doing business as a result of litigation costs or
          increased operating costs; or

     o    in some other manner have a material  adverse  effect on our business,
          results of operations and financial condition.

We do not intend to pay cash  dividends on our common  stock in the  foreseeable
future.

     We currently anticipate that we will retain all future earnings, if any, to
finance the growth and development of our business and do not anticipate  paying
cash  dividends on our common stock in the  foreseeable  future.  Any payment of
cash dividends will depend upon our financial condition,  capital  requirements,
earnings and other factors deemed  relevant by our board of directors.  Further,
under  the  terms  of a loan  agreement,  we are  restricted  from  paying  cash
dividends  and  making  other  distributions  to our  stockholders.  Please  see
"Dividend Policy" for additional information.

There are  potential  conflicts  of interest as our  company  lacked  sufficient
disinterested directors to ratify certain past transactions.

     Our board of directors unanimously ratified all past transactions.  In some
cases,  fewer than two members of our three member  board of directors  were not
interested in the transaction.

                         Risks Relating to Acquisitions

We have previously acquired,  and expect to continue to acquire, other providers
of payment processing services and portfolios of merchant  processing  accounts.
These  acquisitions  entail risks in addition to those  incidental to the normal
conduct of our business.

     Revenues generated by acquired businesses or account portfolios may be less
than  anticipated,  resulting  in  losses or a decline  in  profits,  as well as
potential impairment charges.

In evaluating and determining the purchase price for a prospective acquisition,
we estimate the future revenues from that acquisition based on the historical
transaction volume of the acquired provider of payment processing services or
portfolio of merchant accounts. Following an acquisition, it is customary to
experience some attrition in the number of merchants serviced by an acquired
provider of payment processing services or included in an acquired portfolio of
merchant accounts. Should the rate of post-acquisition merchant attrition exceed
the rate we have forecasted, the revenues generated by the acquired providers of
payment processing services or portfolio of accounts may be less than we
estimated, which could result in losses or a decline in profits, as well as
potential impairment charges.


                                       28
<PAGE>
We may fail to uncover all liabilities of acquisition targets through the due
diligence process prior to an acquisition, exposing us to potentially large,
unanticipated costs.

     Prior to the  consummation of any  acquisition,  we perform a due diligence
review of the provider of payment  processing  services or portfolio of merchant
accounts that we propose to acquire. Our due diligence review,  however, may not
adequately uncover all of the contingent or undisclosed liabilities we may incur
as a consequence of the proposed acquisition.

We may encounter delays and operational difficulties in completing the necessary
transfer of data processing functions and connecting systems links required by
an acquisition, resulting in increased costs for, and a delay in the realization
of revenues from, that acquisition.

     The acquisition of a provider of payment processing services,  as well as a
portfolio of merchant processing accounts, requires the transfer of various data
processing  functions and  connecting  links to our systems and those of our own
third -party  service  providers.  If the transfer of these  functions and links
does not occur rapidly and smoothly,  payment  processing  delays and errors may
occur,  resulting  in a loss  of  revenues,  increased  merchant  attrition  and
increased  expenditures  to  correct  the  transitional  problems,  which  could
preclude our attainment of, or reduce, our profits.

Special  non-recurring and integration costs associated with acquisitions  could
adversely  affect  our  operating   results  in  the  periods   following  these
acquisitions.

     In connection with some acquisitions,  we may incur non-recurring severance
expenses,  restructuring charges and change of control payments. These expenses,
charges and payments,  as well as the initial costs of integrating the personnel
and  facilities of an acquired  business with those of our existing  operations,
may adversely affect our operating  results during the initial financial periods
following  an  acquisition.  In  addition,  the  integration  of newly  acquired
companies  may lead to  diversion of  management  attention  from other  ongoing
business concerns.

Our  facilities,  personnel  and  financial  and  management  systems may not be
adequate to  effectively  manage the future  expansion  we believe  necessary to
increase our revenues and remain competitive.

     We anticipate that future  expansion will be necessary in order to increase
our  revenues.  In order to  effectively  manage our  expansion,  we may need to
attract and hire  additional  sales,  administrative,  operations and management
personnel. We cannot assure you that our facilities, personnel and financial and
management systems and controls will be adequate to support the expansion of our
operations, and provide adequate levels of service to our merchants and ISOs. If
we fail to effectively manage our growth, our business could be harmed.

We have significant intangible assets and goodwill, the carrying value of which
we may have to reduce if our revenues relating to these assets decline.

     We have acquired numerous intangible assets related to purchased portfolios
of merchant accounts and business operations.  The intangible assets represent a
substantial  portion of our total  assets.  Statement  of  Financial  Accounting
Standards  Nos. 141 and 142 require us to  periodically  re-examine the value of
our purchased  assets. A material decline in the revenues  generated from any of
our  purchased  portfolios  of merchant  accounts or business  operations  could
reduce the fair value of the  portfolio or  operations.  In that case, we may be
required to reduce the carrying value of the related  intangible  asset.  Please
see "Management's  Discussion and Analysis of Financial Condition and Results of
Operations  -- Critical  Accounting  Policies"  for a discussion  of how we test
impairment of the assets. Additionally,  changes in accounting policies or rules
that affect the way in which we reflect these intangible assets in our financial
statements, or the way in which we treat the assets for tax purposes, could have
a material adverse effect on our financial condition.

                                       29
<PAGE>
Item 2. Properties.

     Our principal  executive offices are located in approximately  4,429 square
feet  of  leased   office  space  in  Quincy,   Massachusetts.   We  also  lease
approximately  4,079 square feet of office space in Alpharetta,  Georgia,  3,000
square feet in Brasher Falls, N.Y and  approximately  865 square feet in Dallas,
Texas. We believe that these facilities are adequate for our current  operations
and, if necessary, can be replaced with little disruption to our company.

Item 3. Legal Proceedings.

Pipeline:

     The  are no  material  legal  proceedings  pending  or,  to our  knowledge,
threatened against us or our subsidiary, NMSI.

Our Subsidiary, SecurePay:

     Except for that certain suit in the United States District Court of Arizona
by Net MoneyIN,  Inc. (plaintiff) vs. Mellon Financial Corp., et al (defendants)
(Cause No.  CV-01-441-TUC-RCC),  there are no material legal proceedings pending
or, to our knowledge,  threatened against SecurePay.  The outstanding lawsuit is
an  industry  -wide  suit  against  numerous  defendants  based on  intellectual
property  infringement.  A default judgment has been rendered against several of
the parties,  including  SecurePay.  Removal of this judgment is currently being
sought. SecurePay views this suit to be without merit.

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

     As of March 1, 2004, we became subject to the proxy rules of Section 14. No
matters were submitted to shareholder approval during the fourth quarter 2004.

                                       30
<PAGE>

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

(a) Market information.

     Our common stock and class A redeemable  warrants  commenced trading on the
OTC  Bulletin  Board on October  19, 2000 under the  trading  symbol  "PPDA" and
"PPDAW,"  respectively.  Our class B redeemable  warrants trade under the symbol
"PPDAZ". The following table sets forth the highest and lowest prices quoted for
our common stock,  class A redeemable  warrants and class B redeemable  warrants
during the four  quarters  between  January 1, 2004 and December  31, 2004,  the
first quarter of 2005.  The closing quote for our common stock on March 24, 2005
was $1.07. The quotations reflect  inter-dealer  prices, with no retail mark-up,
mark-down  or  commissions,  and  may not  represent  actual  transactions.  The
information presented has been derived from the OTC Bulletin Board.
<TABLE>
<CAPTION>

                                  Year Ended                          Year Ended
                                December 31, 2004           December 31, 2003
                             -----------------------------------------------------------
                                High          Low              High           Low
                                 Ask          Bid              Ask            Bid
                             ------------ ------------   --------------- --------------
<S>                          <C>          <C>               <C>             <C>
First Quarter
   PPDA                        1.45           .65              .25           .15
   PPDAW                        .70           .19              .02           .02
   PPDAZ                        .30           .10              .02           .02
Second Quarter
   PPDA                        1.45           .98              .35           .08
   PPDAW                        .60           .33              .05           .02
   PPDAZ                        .28           .13              .02           .02
Third Quarter
   PPDA                        1.32           .90              .23           .13
   PPDAW                        .65           .30              .10           .02
   PPDAZ                        .15           .11              .05           .02
Fourth Quarter
   PPDA                        1.04           .78              .65           .21
   PPDAW                        .33           .21              .19           .05
   PPDAZ                        .15           .12              .10           .04

 First Quarter 2005              High         Low
                                 Ask          Bid
     PPDA                       1.22          .76
     PPDAW                       .35          .20
     PPDAZ                       .14          .08
</TABLE>

     On March 30, 2005, the closing price for our common stock, as quoted by the
Nasdaq OTC Bulletin Board, was $1.02 per share, and there were  approximately 56
shareholders.

  (b) Holders.

     As of December 31, 2004 there were  approximately 56 shareholders of record
of our common  stock.  This number does not include  shares held in street name,
which we estimate at 298 holders.

                                       31
<PAGE>

   (c) Dividends.

     Our company has never  declared or paid any cash  dividends  on its capital
stock. We currently intend to retain all available funds and any future earnings
of our business for use in the  operation of our business and do not  anticipate
paying any cash dividends in the foreseeable  future.  The declaration,  payment
and amount of future  dividends,  if any, will depend upon the future  earnings,
results of  operations,  financial  position  and  capital  requirements  of our
company, among other factors, and will be at the sole discretion of our board of
directors.

     Under the  Delaware  General  Corporation  Law,  our  company  may only pay
dividends  out of capital and  surplus,  or out of certain  enumerated  retained
earnings,  as those terms are defined in the Delaware  General  Corporation Law.
The  payment of  dividends  on our common  stock is,  therefore,  subject to the
availability  of capital  and  surplus or  retained  earnings as provided in the
Delaware General Corporation Law.

(d) Recent sales of securities.

     The following material  transactions have occurred in the past fiscal year.
They are identified below:

     Pursuant to the NMSI  Acquisition  Agreement,  dated,  August  26th,  2002,
whereby we  purchased  our NMSI  subsidiary,  we agreed  that during the initial
36-month  period of the this  agreement  (August  26,  2005),  we would offer to
repurchase the Preferred  Shares from Kevin and Nancy Weller for $2,500,000.  In
the event we failed to do this, the merchant  portfolio would revert back to the
Wellers.  On February 27, 2004 we complied with this  provision and  repurchased
2,000 Preferred Shares for $1,000,000 and the Wellers  exercised their option to
convert  3,000  shares  into  3,000,000  million  shares.  As a  result  of this
transaction, the NMSI merchant portfolio cannot revert back to the Wellers.

     A part of the NMSI  Acquisition  Agreement,  the Wellers are  afforded  the
opportunity  to borrow an  aggregate  amount of $200,000  from our  company.  On
November 18, 2003,  Kevin Weller borrowed $85,000 from our company pursuant to a
promissory note with a term of eighteen  months bearing  interest at the rate of
4%. This note was paid in full on March 10, 2004.

     On February 27, 2004, we entered into a financing  arrangement  with Laurus
Master Fund, Ltd.  ("Laurus  Funds"),  a financial  institution  specializing in
funding small and micro-capitalization companies, to provide our company with up
to $3.0 million in financing. Under the arrangement, we issued $2,000,000 of our
6% convertible  term notes at a conversion  price of $1.00 to Laurus Funds,  and
Laurus  Funds  agreed,  subject  to certain  conditions,  to  purchase  up to an
additional  $1,000,000  of  Pipeline's  6%  convertible  term  notes.  Under the
arrangement,  Laurus  Funds was also  issued  warrants to purchase up to 500,000
shares of our common stock.  We used $1,000,000 of the proceeds of the financing
to fulfill our  repayment  obligation  under the NMSI  Acquisition  Agreement to
repurchase  a portion of the Weller  stock and  intend to use the  remainder  to
acquire merchant portfolios in order to grow our business.

     On March 14, 2002,  Accu-Search  renegotiated their note with us. We agreed
to convert the $200,000 note with  interest  totaling  $224,000  into  preferred
stock of  Accu-Search.  They also paid an upfront  payment of $4,000 in cash. In
addition,  Accu-Search  would  provide  Pipeline  Data two  years' Web access to
Accu-Search's  online data and map system.  Contracts  were finalized and signed
and monies  delivered on or about April 30th,  2002.  During  2004,  $55,407 was
received  from  Accu-Search  representing  the  redemption  of 5,746  shares  of
Accu-Search  preferred stock for $34,508 and payments of interest of $20,899. On
December 16, 2004, the remaining  25,656 shares of Accu-Search were converted to
cash upon the merger of Accu-Search  into a wholly owned subsidiary of Datatrace
Information  Services LLC.  Accu-Search shares outstanding as of the merger were
automatically converted to a right to receive cash.

     On March 8th, 2002, Jack  Rubinstein,  our Chairman of the Board,  lent our
company  $100,000 for working capital  purposes.  The promissory note evidencing
this transaction has a term of one year and bears simple interest at the rate of
8%. The principal and interest of the note is  convertible  into common stock of
Pipeline at the then current market price of $0.35 per share.  Upon conversion ,
Mr.  Rubinstein  shall  receive  warrants  equal to 100% of the number of shares
converted with minimum warrant issuance of 100,000 shares. On March 8, 2003, the
note was renegotiated and the term was extended to March 8, 2005. As of December
31, 2004, Mr.  Rubinstein  converted the note into shares of common stock at the
rate of $.35 per share.


                                       32

<PAGE>

     As  of  December  31,  2004,  our  company  had  issued  $1,117,423  in  8%
convertible  notes . Of that amount,  $739,204 is outstanding as of December 31,
2004. The outstanding  notes have a two year term, accrue interest at the annual
interest rate of 8% and have 33% warrant  coverage at a conversion price of $.35
per share.  Beginning  November 1, 2003 the conversion price was $.50 per share.
As of January 2004, the conversion  price was $0.65 per share and as of March 8,
2004, the conversion price was $1.00 per share.



                               8% Convertible Note

Date              Name                                                   Amount

3.12.03           Cara J. Fascione                                      200,000*

3.31.03           Chasm Holdings                                         26,120

6.9.03            William Haas                                            5,000

6.26.03           Lane Gordon                                            50,000

5.6.03            Chasm Holdings                                          2,000

8.8.03            Tracy Bertolino                                        46,873

9.25.03           Chasm Holdings                                         15,000

9.2.03            Michael Greenburg                                       8,000

10.27.03          Chasm Holdings                                          8,950

10.31.03          Lane Gordon                                            50,000

11.13.03          Lane Gordon                                            50,000

12.18.03          Tracy Bertolino                                         1,400

1.8.04            Chasm Holdings                                         10,000

1.14.04           Chasm Holdings                                          4,000

1.20.04           Elaine Greenburg                                        5,000

1.20.04           Michael Greenburg                                    3,333.50

1.26.04           G. Timothy Kane                                        35,000

1.27.04           Barbara Klein                                           5,000

1.27.04           Alexis Rudolph                                          5,000

1.28.04           Tanya Crowley                                          15,000

1.28.04           Barbara Klein                                          10,000

2.3.04            Barry Shore                                             5,000

2.4.04            Robin & William Maher                                  10,000

2.5.04            Ken & Linda Swift                                      10,000

2.6.04            Joe Chang                                               5,000

2.9.04            Terry Buckley                                           5,000

2.13.04           Jill Johnson                                            5,000

2.13.04           Chris Bertolino                                         5,000

2.13.04           Louis Bertolino                                         5,000

                                       33

<PAGE>

2.13.04           Blair & Jill Johnson                                   16,000

2.17.04           Louis Bertolino                                        10,500

2.17.04           Carolyn Bertolino                                       5,000

2.19.04           David Cushing                                          20,000

2.25.04           Melvin Chait                                            9,000

2.25.04           Trudy Becker                                            5,000

2.25.04           Bob Erlichman                                           5,000

2.27.04           Peter Thompson                                         25,000

2.27.04           Carmen Lopez                                            4,000

2.27.04           Lane Gordon                                            50,400

3.5.04            Bob Erlichman                                           7,500

3.8.04            David Cushing                                          20,000

4.22.04           Donald Swift                                            3,000

* Note converted into Pipeline Data common stock during March 2005.


                                       34
<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operation.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDING
                           DECEMBER 31, 2003 AND 2004


     The following  discussion relates to the results of our operations to date,
and our financial condition:

     This annual report  contains  forward  looking  statements  relating to our
Company's  future economic  performance,  plans and objectives of management for
future operations, projections of revenue mix and other financial items that are
based  on the  beliefs  of,  as well  as  assumptions  made  by and  information
currently  known to, our  management.  The words  "expects,  intends,  believes,
anticipates,  may, could, should" and similar expressions and variations thereof
are intended to identify forward-looking  statements.  The cautionary statements
set forth in this  section are  intended to  emphasize  that actual  results may
differ materially from those contained in any forward looking statement.

     On August 26, 2002, we  consummated  an  acquisition  of Northern  Merchant
Services, Inc. ("NMSI"), a New York corporation.  We issued five thousand shares
of Series A Preferred Convertible Stock. Each share of stock is convertible into
1,000  shares of our common  stock at the  conversion  price of $0.50 per common
share and one million of our common  shares in  exchange  for all of the capital
stock of NMS. The  transaction  has been accounted  using the purchase method of
accounting,  and the  purchase  price  of the  transaction  is based on the fair
market value of our common stock issued. The purchase price was allocated to the
NMSI's  assets  acquired and  liabilities  assumed by our company based on their
relative  fair  market  values at the  acquisition  date for as the  issuance of
shares of common stock.

     We agreed that  during the  36-month  period  from the date (the  "36-month
Period") of the NMSI Acquisition  Agreement (August 26, 2005), we would offer to
repurchase the Preferred  Shares from the Kevin and Nancy Weller for $2,500,000.
In the event we failed to do this, the merchant  portfolio  would revert back to
the  Wellers.  On  February  27,  2004  we  complied  with  this  provision  and
repurchased  2,000  Preferred  Shares for $1,000,000  and the Wellers  exercised
their option to convert 3,000 shares into 3,000,000  million shares. As a result
of this  transaction,  the NMSI  merchant  portfolio  cannot  revert back to the
Wellers.

     Our subsidiary  Northern Merchant Services,  Inc. ("NMSI") is the successor
entity to Northern Merchant Services,  a New York sole  proprietorship  company,
which  started  business in 1997.  This transfer was accounted for as a purchase
with the recording of the net assets acquired at their fair value.

     NMSI is engaged in the business of promoting  the sale of and  marketing of
credit card indebtedness  service,  leasing services,  Internet services,  scan,
debit, of certain providers of such services.

     A part of the NMSI  Acquisition  Agreement,  the Wellers are  afforded  the
opportunity  to borrow an  aggregate  amount of $200,000  from our  company.  On
November 18, 2003,  Kevin Weller borrowed $85,000 from our company pursuant to a
promissory note with a term of eighteen  months bearing  interest at the rate of
4%. This note was paid in full on March 10, 2004.


Critical Accounting Policies and Estimates
-------------------------------------------

     The  discussion  and  analysis of our  financial  condition  and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect our reported assets,  liabilities,  revenues
and expenses,  and our related  disclosure of contingent assets and liabilities.
On an ongoing  basis,  we evaluate our  estimates,  including  those  related to
revenue recognition, bad debts, intangible assets and income taxes.

     We believe  the  following  critical  accounting  policies  and the related
judgments and estimates  affect the  preparation of our  consolidated  financial
statements.

                                       35

<PAGE>

          Revenue and Cost Recognition.

     The Company and subsidiaries  derive revenues primarily from the electronic
processing of credit, charge and debit card transactions that are authorized and
captured  through  third-party  networks.  Typically,  merchants are charged for
these  processing  services  based on a percentage  of the dollar amount of each
transaction  and in  some  instances,  additional  fees  are  charged  for  each
transaction.  Certain merchant  customers are charged a flat fee transaction and
may also be charged  miscellaneous  fees,  including  fees for  handling  charge
backs,  monthly  minimums,   equipment  rentals,  sales  or  leasing  and  other
miscellaneous  services.  Revenues are reported gross of amounts paid to sponsor
banks as well as interchange  and assessments  paid to credit card  associations
(MasterCard  and Visa) under revenue sharing  agreements  pursuant to which such
parties  receive  payments based  primarily on processing  volume for particular
groups  of  merchants.  Included  in cost of  goods  and  services  sold are the
expenses covering  interchange and bank processing directly  attributable to the
furnishing  of  transaction  processing  and  other  services  to the  Company's
merchant  customers and are recognized  simultaneously  with the  recognition of
revenue.

     We follow the  requirements  of EITF 99-19,  Reporting  Revenue  Gross as a
Principal  Versus  Net  as an  Agent,  in  determining  our  revenue  reporting.
Generally,  where we have merchant portability,  and ultimate responsibility for
the  merchant,  revenues are reported at the time of sale on a gross basis equal
to the full amount of the discount charged to the merchant. This amount includes
interchange  paid to card  issuing  banks and  assessments  paid to credit  card
associations  pursuant to which such parties receive payments based primarily on
processing volume for particular groups of merchants.

     Accounting  for  Goodwill and  Intangible  Assets.  In July 2001,  the FASB
issued Statement No. 142,  "Goodwill and Other Intangible  Assets" ("SFAS 142"),
which  requires  that  goodwill  and  certain  other  intangible  assets  having
indefinite  lives no longer be amortized to earnings,  but instead be subject to
periodic testing for impairment. Intangible assets determined to have definitive
lives will continue to be amortized over their useful lives.  This Statement was
effective for the Company's 2003 fiscal year.  However,  goodwill and intangible
assets   acquired   after  June  30,  2001  are  subject   immediately   to  the
non-amortization and amortization provisions of this Statement.  The adoption of
SFAS  142 did  not  have an  impact  on the  Company's  results  of  operations,
financial position or cash flows.

     We maintain  allowances  for the estimated  losses from  doubtful  accounts
which result when our  customers are unable to make  required  payments.  If the
financial  condition  of our  customers  were to  deteriorate,  resulting  in an
impairment  of their  ability to make  payments,  additional  allowances  may be
required which would result in an additional general and administrative  expense
in the period such determination was made.

     Accounting for Stock-Based Compensation.  In December 2004, the FASB issued
SFAS No.  123  (Revised  2004),  Share-Based  Payment  ("SFAS No.  123R").  This
standard requires expensing of stock options and other share-based  payments and
supersedes SFAS No. 123, which had allowed companies to choose between expensing
stock options or showing proforma disclosure only. This standard is effective as
of January  2006 and will apply to all awards  granted,  modified,  cancelled or
repurchased  after that date as well as the  unvested  portion of prior  awards.
SFAS No. 123R permits public  companies to adopt its  requirements  using one of
three methods: the "modified  prospective" method, the "modified  retrospective"
method to January 1, 2005, or the "modified  retrospective"  method to all prior
years for which SFAS No. 123 was  effective.  We have not yet  determined  which
adoption  method to utilize.  Further,  we have not yet decided  whether we will
adopt the  provisions  of this  standard  on  January  1, 2006 as  required,  or
earlier, as allowed.

     As permitted by SFAS No. 123, we currently  follow APB Opinion No. 25 which
accounts for share-based  payments to employees using the intrinsic value method
and, as such,  generally  recognizes  no  compensation  cost for employee  stock
options.  Accordingly, the adoption of SFAS No. 123R fair value method will have
a significant impact on our consolidated results of operations, although it will
have no impact on our cash flows.  The exact  impact of the adoption of SFAS No.
123R cannot be  determined  at this time because it will depend on the number of
options  issued  during  fiscal 2005 as well as the  assumptions  and  valuation
method  used to  measure  compensation  cost  under  the fair  value  method  of
accounting.  The  historical  pro  forma  income  statement  impact  is  not  be
indicative of future results due to the  uncertainty of the number of new option
grants as well as the assumptions and valuation method used.


                                       36

<PAGE>

     We do not have any of the following:

     o    Off-balance sheet arrangements

     o    Certain trading activities that include  non-exchange traded contracts
          accounted for at fair value.

     o    Relationships  and  transactions  with persons or entities that derive
          benefits  from any  non-independent  relationships  other than related
          party transactions discussed herein.

                                       37
<PAGE>

<TABLE>
<CAPTION>


                               PIPELINE DATA, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                     For the years ended
                                                                          December 31, 2003       December 31, 2004
<S>                                                                       <C>                     <C>

Revenue                                                                      $   10,246,955          $  15,565,134

Interchange                                                                       5,736,108              8,532,958
Cost of services sold                                                             4,000,070              2,605,904
Cost of goods sold                                                                  175,939                190,946
                                                                                  ---------                -------

         Total Cost of Goods and Services Sold

          Gross profit                                                            1,713,997              3,128,609

                                                                                   -------                --------

Operating Expenses
    Salaries and payroll costs                                                   1,152,865               1,928,121
    Selling, general and administrative                                            773,123               1,140,923
    Depreciation and Amortization                                                   35,222                  46,128

                                                                                     -----                  ------

          Total operating Expenses                                               1,961,210               3,115,172

                                                                                 ----------              ---------


          Net Income (loss) from operations                                       (247,213)                  5,992

Other income and expenses
     Interest income                                                                24,235                  64,226
     Interest expense                                                              (76,812)               (367,479)
                                                                                   -------                  ------

           Total other income (expenses)                                           (52,577)               (303,213)


                                                                                   --------                ------

                  Income (loss)                                                $  ( 299,790)           $  (297,221)

                                                                                 -------------         -------------


Basic  earnings (loss) per common share                                        $      (0.02)           $      (.01)

                                                                             ================        ===============

Weighted average shares outstanding, basic                                       12,902,851             21,107,818

</TABLE>

                                       38


<PAGE>

Results of Operations 2004 Compared with 2003
----------------------------------------------

     For the year ended December 31, 2004, the company generated net revenues of
$15,565,134 as compared to revenues of  $10,246,955  for the year ended December
31, 2003. The company's cost of goods and services sold  aggregated  $12,443,970
as compared to  $8,532,958  for the year ended  December  31, 2003 and yielded a
gross profit of $3,121,164 as compared to $1,713,997 for the year ended December
31,  2003.   The  company's   general  and   administrative   costs   aggregated
approximately  $ 1,140,923  for the year ended  December 31, 2004 as compared to
$773,123  for the year ended  December  31,  2003  consisting  of the  following
categories  as a percentage  of revenues  for the year ended  December 31, 2004:
Rent 74,901 (0.5%)  Professional  Fees 216,499  (1.4%)  Telephone  121,747 (.8%)
Postal 15,689 (.1%) Office 34,844 (.2%)

     The company increased its cash position to $693,852 at December 31, 2004
from a balance of $95,120 as of December 31, 2003. The company continued to be
funded in part from an increase in accounts payable and accrued expenses by
$165,015. The company expended cash to increase accounts receivable by $223,949
at December 31, 2004.

     On November 1, 2000, we loaned  $200,000 to Accu-Search  Inc., a New Jersey
corporation. The loan was evidenced by Accu-Search,  Inc.'s promissory note that
accrues  interest  at the rate of 12%  annually.  The  principal  amount  of the
promissory  note together with accrued  interest was due and payable on December
31, 2001.

     On March 14, 2002,  Accu-Search  renegotiated their note with us. We agreed
to convert the $200,000 note with  interest  totaling  $224,000  into  preferred
stock of  Accu-Search.  They also paid an upfront  payment of $4,000 in cash. In
addition,  Accu-Search  will  provide  Pipeline  Data two  years  web  access to
Accu-Search's  on-line data and map system.  During  2004,  $55,407 was received
from  Accu-Search  representing  the  redemption of 5,746 shares of  Accu-Search
preferred  stock in the amount of $34,508 and interest  payments of $20,899.  On
December 16, 2004, the remaining  25,656 shares of Accu-Search were converted to
cash upon  Accu-Search's  merger into a wholly  owned  subsidiary  of  Datatrace
Information  Services LLC.  Accu-Search shares outstanding as of the merger date
were  automatically  converted  to a right  to  receive  cash in the  amount  of
$106,191.

     Management  believes  that it will be able to fund the company  through its
present cash position and the  continuation of revenue  producing  activities by
its subsidiaries Northern Merchant Services,Inc,  SecurePay.com,  Inc., Pipeline
Data Processing,  Inc and Pipeline Data Portfolio Acquisitions,  Inc It may need
to seek further  capital  through  exercise of its warrants or by other  capital
raising needs in order to continue to grow the company.


                                       39
<PAGE>

     Management believes that it is moving toward profitability. Pipeline plans
to attain profitability and meet cash flow needs going forward as follows:

     1.   Management   believes  that  the  increase  in  revenue  Pipeline  has
          experienced  will  continue  as a  result  of  the  operations  of its
          subsidiaries,  NMSI, SecurePay and a newly created division,  Pipeline
          Data  Processing.  NMSI is an  Independent  Sales  Organization  which
          markets and services  electronic credit card authorization and payment
          systems to merchants  located  throughout  the United  States.  NMSI's
          operating and growth  strategies  focus on expanding its customer base
          of small and  medium-sized  merchants  through bank referrals,  direct
          sales,   independent   sales  agents,   trade  and  other  association
          affiliations,  merchant  portfolio  purchases  and  superior  customer
          service.  SecurePay  is a custom  credit  card  transaction  processor
          serving  as a  gateway  intermediary  between  the  customer  and  the
          financial  networks  for the  acceptance  of credit  card  payments by
          merchants.  An integral  aspect of  SecurePay's  operating  and growth
          strategy  focuses on offering a broad range of products  and  services
          historically  unavailable to  small-to-medium  sized merchants,  which
          differentiates it from the banks and Independent Sales  Organization's
          serving this market segment.  Management believes that the quality and
          reliability of its products and services enhance  SecurePay's  ability
          to attract and retain merchant  customers.  Pipeline Data Processing's
          core strategy is to provide wholesale payment processing solutions and
          services  to other bank card  Independent  Sales  Organizations.  This
          subsidiary become operational at the end of the third quarter of 2004.

  Other aspects of our Financial Condition

     2.   Pipeline is seeking to eliminate non-recurring expenses.

     3.   Pipeline is seeking to eliminate non-cash charges,  such as payment in
          stock for services rendered to Pipeline.

     4.   Pipeline  continues to actively  seek capital for the  acquisition  of
          merchant portfolios.


                                       40
<PAGE>

Liquidity and Capital Resources
-------------------------------
Working Capital, Debt and Liquidity.
------------------------------------


     The Company increased its cash and cash equivalents to $693,582 at December
31, 2004 from a balance of $95,120 as of December 31, 2003.

     Net cash used by  operating  activities  in 2004 was  $507,581 for the year
ended December 31, 2004. The net loss of $297,221,  offset by  depreciation  and
amortization of $46,128,  the issuance of $116,400 of common stock for services,
and the issuance of stock for $123,493 for accrued interest on convertible notes
was  further  adjusted  by a use of cash for  changes  in  operating  assets and
liabilities of $879,419. Net cash increase for the year 2004 was $598,732.

     Net cash used in investing  activities was $3,903,881,  while net cash used
in investing activities for the year ended December 31, 2003 was $8,133.  During
the year ended December 31, 2004,  $665,456 was invested in purchasing  residual
rights  from  our  sales  agents,  $574,582  in the  acquisition  of a  merchant
portfolio, and $567,168 invested in the cost of our convertible loan from Laurus
Master Fund,  Ltd. In addition,  $257,962 of funds were invested in computer and
office equipment.  During the year 2003, capital expenditures were primarily for
computer  and  office  equipment.  We expect to  continue  to engage in  capital
spending in the  ordinary  course of  business.  Non-cash  investing  activities
included  the  issuance  of  5,800,000  shares  of  common  stock to the  former
shareholders  of  Securepay.com,  Inc and  Northern  Merchant  Services  Inc. in
accordance with the reaching of benchmarks set in those  acquisition  agreements
for the payment of contingent consideration.

     Net cash provided by financing  activities was  $5,382,032  during the year
2004.  The  Company  continued  to be funded in part  through a net  increase in
convertible  note  issuances in the amount of $289,400 and an additional  37,310
was provided from the exercise of warrants  related to these notes.  In addition
two 3-year  convertible  notes in the amount of $3,000,000  each, were issued to
Laurus  Master Fund,  Ltd.  $1,000,000  of these funds were used to retire 2,000
shares of Series A Preferred  Convertible  Stock held by Kevin and Nancy Weller,
$665,456 was used to purchase  residual  payment rights from our sales agents as
well  as  an  $574,582  of  these  funds  were  used  for   merchant   portfolio
acquisitions.  Kevin Weller was issued an  additional  100,000  shares of common
stock  as  additional  consideration  for  releasing  his  lien on the  Northern
Merchant  Services,  Inc. merchant  portfolio.  Laurus Master Fund, Ltd was also
issued  warrants to purchase up to 1,100,000  shares of stock at prices  ranging
from $1.25 to $1.75 per share.  During the year 2003,  net cash of $430,532  was
provided  by  financing  activities.  This was  primarily  from the  issuance of
convertible  notes of $383,120 and the proceeds of lease financing for equipment
purchases  of  $18,392.  Debt  repayment  of  $12,500  was made in  2003.  Lease
obligation  reductions  of $11,310  and $5,353  were made for the years 2004 and
2003, respectively.

     As of December 31, 2004, the Company had notes,  capital lease obligations,
and convertible debt  outstanding of $5,756,734 owed to officers,  directors and
third parties.  $6,565,424 is convertible  into 13,905,015  shares of our common
stock at  conversion  prices  ranging  from $0.35 to $1.20 per share.  The notes
mature  between  June 2004 and August  2007.  $739,204  of the debt issued as of
December 31, 2004 have 33% warrant  coverage at conversion  prices  ranging from
$.35 to $1.00 per share. Our weighted average interest rate was approximately 5%
as of December 31, 2004 excluding amortization of finance costs.

                                       41

     On March 8th, 2002, Jack  Rubinstein,  our Chairman of the Board,  lent our
Company  $100,000 for working capital  purposes.  The promissory note evidencing
this transaction has a term of one-year and bears simple interest at the rate of
8%. The principal and interest of the note is  convertible  into common stock of
Pipeline at the then current market price of $0.35 per share.  Upon conversion ,
Mr.  Rubinstein  shall  receive  warrants  equal to 100% of the number of shares
converted with a minimum warrant  issuance of 100,000 shares.  On March 8, 2003,
the  note  was  renegotiated  and the term was  extended  to March 8,  2005.  On
December 31, 2004 Mr.  Rubinstein  converted  the note plus accrued  interest to
shares of our Common Stock at the conversion rate of $.35 per common share.

     Management  believes  that it will be able to fund the Company  through its
present cash position and the  continuation of revenue  producing  activities by
its  subsidiaries,  SecurePay,  NMSI and Pipeline Data Processing as well as the
acquisition of additional  merchant  accounts and their underlying cash streams.
We may need to seek further capital through exercise of its warrants or by other
capital raising needs in order to continue to grow the Company.

     Management  believes  that it will be able to fund the company  through its
present cash position and the  continuation of revenue  producing  activities by
its subsidiaries  SecurePay and NMSI It may need to seek further capital through
exercise of its warrants or by other capital  raising needs in order to continue
to grow the company.
Management's Review of Company Progress

     For the year ended  December 31, 2004,  gross  revenues grew 52% from $10.2
million in 2003 to $15.6  million.  During the same time  period,  gross  profit
margin grew 19.8% from 16.7% to 20.0%.  Management  believes  that the growth in
gross  revenues  derives  from  both its  successful  acquisition  strategy  and
accelerated  organic  growth.  The increase in gross margin is  attributable  to
operating  efficiencies  obtained from repurchase  agreements and  consolidating
operations  at its Atlanta  wholesale  and  operations  division.  Results  from
operations changed from a net loss of $247,213 in 2003 to a profit of $5,992 for
the year ended  December 31, 2004.  EBITDA for the year ended  December 31, 2004
was $132,763  versus  ($184,703) for the year ended December 31, 2003.  Earnings
per share  were  ($.01)  per share  versus  ($.02)  per share for the year ended
December 31, 2003.  The company has a loss carry forward of  approximately  $2.0
million and has elected not to recognize any of its  accumulated  tax benefit in
2004.  The net losses  resulting in these tax  benefits are  available to offset
future taxable income and can be carried forward for a period of 5 to 15 years.

     During the third quarter ended  September  30, 2004,  Pipeline  received an
additional three million  ($3,000,000) dollars in funding from The Laurus Master
Fund  Ltd.  ("Laurus")  for  acquisition   purposes,   aggregating  six  million
($6,000,000) dollars in total Laurus funding. $2,919,638 dollars of the proceeds
from the  Laurus  financings  and  2,464,726  restricted  shares  of stock  were
directly  deployed to purchase 6 portfolios  of merchant  accounts  (including 2
portfolios  at the beginning of 2005) and rights to residual  income  underlying
merchant  accounts.  The placement of these funds and stock is expected to yield
$2,418,965 in annual gross profit.


     In  the  second  quarter  ended  June 30,  2004,  Pipeline  reported  its
first-ever  net profit of  $165,078,  and net profit of $112,845 for the first 6
months of the year as compared to a loss of $151,073  for the second  quarter of
2003. Management announced at that time its plans to substantially grow top-line
revenue by  re-investing  any  potential  future  profits  for the next  several
quarters into acquisitions and the development of its  Atlanta-based  operations
and wholesale  center.  As anticipated,  the third quarter  produced a loss as a
direct  result  of the  opening  of the  Atlanta  facility  and  assembling  the
management  team  required to operate  the  division.  While the fourth  quarter
showed a loss of $246,295, primarily as a result of the Atlanta operation, there
has been  significant  growth in the number of accounts the Atlanta facility has
generated and is currently  servicing.  In February 2005, the division processed
more than 500 merchant applications, representing an approximately 150% increase
in monthly application growth over February 2004.


                                       42
<PAGE>

     During the year, the company was fortunate to bolster the  management  team
with several quality  additions.  In May 2004,  Kevin Smith,  former Sr. V.P. of
Concord EFS (acquired by First Data Corp.  (NYSE:FDC))  joined Pipeline as Chief
Operating Officer, as well as President of Pipeline Data Processing, Inc. "PDP",
a wholly owned subsidiary. During his four year tenure at Concord EFS, Smith was
responsible for the wholesale  credit card processing  division,  which included
both operations and sales. In that capacity, he brought net pretax revenues from
$18 million to $30 million in a 24-month  period.  He also increased new monthly
merchant  application  count from 1800 to 3750,  and managed the portfolio  from
75,000 to 115,000 merchant accounts.

     In addition to his role as COO,  Mr.  Smith also oversaw the launch of PDP.
The Atlanta-based  facility enables Pipeline to provide application  processing,
risk management and a complete suite of payment tools to ISO's.  Smith's mandate
is to aggressively grow the number of merchant accounts  serviced.  On September
28,  2004,  Pipeline  announced  the  formal  debut  of PDP to the  credit  card
processing  industry.  Approximately  90 days  elapsed  from the time Mr.  Smith
joined the company,  identified  suitable  office space,  assembled a management
team and made the facility operational.

     In July  2004,  the  company  welcomed  Thomas  Tesmer  as Chief  Technical
Officer.  Mr. Tesmer is an experienced and talented  senior  executive with over
twenty-five  years  experience  in  the  transaction   processing  industry.  At
Heartland Payment Systems,  one of the nation's largest bankcard acquirers,  Mr.
Tesmer  served  as  Senior  V.P.  and  created  and  implemented  the  company's
stand-alone  transaction  processing  division.  He  served  as  Executive  Vice
President and Director of the POS Technology  Division of Southeast Switch, Inc.
(HONOR), the precursor to STAR. The company was subsequently sold to Concord EFS
and most  recently  to First Data  (NYSE:FDC).  In his role as CTO,  Tesmer will
oversee the  implementation  of processing  technologies  to Pipeline's  growing
suite of product and service offerings.

     In March 2005, the company  announced  that it had  consummated a letter of
intent to acquire Charge.com,  an industry leader in merchant account acquiring.
The  transaction  is significant in that it is expected to bring Pipeline to the
milestone of servicing over 25,000  accounts.  On an ongoing basis, the combined
entity is expected to generate in excess of 1,000 new merchant accounts monthly.

     Charge.com has  capitalized on highly  optimized  search engine  placement,
exclusive  affiliate channels and unique referral  programs.  It has developed a
comprehensive   Internet-based  sales  organization  that  is  highly  respected
industry-wide.  In each of the last 3 years, Charge.com has experienced earnings
growth in excess of 30%.  Management  views the acquisition as  complimentary to
Pipeline's  wholesale  division.  Through  the  placement  of  Charge.com's  new
merchants,  historically approximately 500 per month, onto Pipeline's technology
platform, improved margins are expected. Monthly merchant gateway revenue, which
was  formerly   outsourced,   will  provide  Pipeline  with  another  source  of
incremental  revenue.   Higher  transaction  volume  and  the  boarding  of  new
Charge.com  accounts on  Pipeline's  own  platform  should  result in  increased
economies of scale for Pipeline as a whole,  and  therefore  contribute  towards
increased  profit  margins.   Furthermore,   Pipeline  expects  to  borrow  from
Charge.com's  e-commerce marketing expertise to enhance its existing initiatives
in that area.

     We believe  that we are meeting our target  objectives  and are  optimistic
about the future  prospects  for Pipeline  Data.  As planned,  we added  several
employees to focus exclusively on our Internet  marketing  initiative,  which to
date we have deemed a success. The creation of our new wholesale division,  PDP,
is a  significant  development  in our  company's  evolution.  With its expanded
operational  capabilities,  PDP allows us to offer a  complete  suite of payment
tools and services to ISOs.  The division has enjoyed  tremendous  growth in its
brief history, while affording margin gains throughout the organization.

     We continue to focus on increasing  margin  through the  enhancement of the
capabilities of the  Atlanta-based  wholesale  operations  division,  as well as
through  continued  strong  organic  sales  growth and  accretive  acquisitions.
Additionally,  we believe that our  management  team and operations  center,  as
presently  constituted,  have the  ability to  service  up to  100,000  merchant
accounts without incurring significant  additional costs. We expect,  therefore,
that gross margin will continue to increase  through the ongoing  acquisition of
merchant account portfolios and substantive internal growth.


                                       43
<PAGE>

     Our wireless and government  payment  initiatives remain very much a growth
focus for the company.  We have witnessed  increased market  acceptance in these
key  areas  and  anticipate  more of such in 2005.  We view the  success  of our
Atlanta-based  wholesale  division as validation of the capital outlay  required
for its  creation.  It was this  investment in a  state-of-the-art  facility and
first-class  management team that will make it possible to easily  integrate the
Charge.com  acquisition and profit from the economies of scale created  therein.
Furthermore,  we believe  that our industry is ripe for  consolidation  and thus
expect acquisition and merger activity to be robust in 2005.

     Upon completion of the Charge.com  acquisition,  and with continued success
of our  internal  sales  initiatives,  we expect  Pipeline  to achieve  top-line
revenue growth with a more concerted emphasis on bottom-line results in 2005.

                                       44





<PAGE>

Item 7. Financial Statements.  Following pages F-1 - F-22

    PART I

                          ITEM 1. FINANCIAL STATEMENTS

     The consolidated financial statements included herein have been prepared By
the  Company,  pursuant  to the  rules and  regulations  of the  Securities  and
Exchange Commission.

     In the opinion of the Company,  all adjustments,  consisting of only normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of December 31, 2004,  and the results of its  operations and changes
in its financial  position from January 1, 2004, through December 31, 2004, have
been made.

                                      F-1

<PAGE>



                          INDEX TO FINANCIAL STATEMENTS



Part 1 - Financial Information

                                                                          Page

Item 1 - Financial Statements


      Balance Sheets as of December 31, 2004 and 2003                       F-4


      Statements of Operations for the years ended December 31,
         2004 and 2003                                                      F-5



      Statements of Stockholders' Equity  for the years ended December 31,
            2004 and 2003                                                   F-6



      Statements of Cash Flows for the years ended December 31, 2004
            and  2003                                                       F-7





      Notes to Financial Statements                                  F-8 - F-22



                                      F-2

<PAGE>


                           DRAKEFORD & DRAKEFORD, LLC
                          CERTIFIED PUBLIC ACCOUNTANTS


REPORT OF INDEPENDENT ACCOUNTANTS


To  the  Shareholders  and  Directors  of
Pipeline Data, Inc.

     We have audited the  consolidated  balance sheets of Pipeline Data, Inc. as
of December  31,2004,  and  2003,and  the  related  consolidated  statements  of
operations, changes in stockholders' equity (deficiency), and cash flows for the
years ended  December  31, 2004 and 2003.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Pipeline  Data,  Inc.,  as of December 31, 2004 and 2003,  and the  consolidated
results of its  operations  and its cash flows for the two years then ended,  in
conformity with accounting principles generally accepted in the United States of
America.



/S/Drakeford & Drakeford, LLC
-------------------------------------

March 29, 2005



                                      F-3
<PAGE>

<TABLE>
<CAPTION>


                               PIPELINE DATA, INC.

                           CONSOLIDATED BALANCE SHEETS

                                                                               December 31, 2004      December 31, 2003
<S>                                                                            <C>                    <C>
                                   ASSETS

CURRENT ASSETS
    Cash and cash equivalents                                                      $    693,852            $    95,120
    Accounts receivable                                                                 518,906                294,957
     Interest receivable                                                                 21,584                  5,394
     Inventory                                                                           40,087                 21,910
     Advances and prepaid expenses                                                       79,644                 51,316
     Note receivable                                                                    175,000                 85,000
                                                                                        -------                 ------

           Total current assets                                                       1,529,073                553,697
                                                                                      ---------                -------

PROPERTY AND EQUIPMENT, net                                                             347,092                135,258
                                                                                        -------                -------

OTHER ASSETS
     Restricted cash                                                                  2,011,022                      0
     Investment- preferred stock                                                              0                172,309
     Merchant portfolio                                                               5,280,812              2,500,000
     Residual rights purchase                                                           665,456                      0
     Deferred and debt issuance costs                                                   567,168                      0
     Note receivable                                                                    550,000                      0
     Deposits                                                                            31,867                    850
     Goodwill                                                                         2,324,762                176,005
                                                                                      ---------                -------

              Total other assets                                                     11,431,087              2,849,164
                                                                                     ----------              ---------

                       TOTAL ASSETS                                               $  13,307,252           $  3,538,119
                                                                                  -------------           ------------

         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable and accrued expenses                                          $    471,198            $   306,183
    Accrued salaries                                                                     76,232                 72,974
    Payroll taxes and withholdings                                                       67,736                 50,586
    Taxes payable                                                                        15,547                 30,942
    Lease obligations-equipment                                                          14,766                  4,839
    Loan payable-revolving line of credit                                                43,987                 36,228
    Notes payable                                                                       878,522                 12,500
                                                                                        -------                 ------

            Total current liabilities                                                 1,567,988                514,252
                                                                                      ---------                -------

LONG-TERM LIABILITIES
     Officer loans payable                                                                    0                100,000
     Lease obligations-equipment                                                         62,717                 13,039
     Officers right of mandatory redemption (Note H)                                          0              2,500,000
     Laurus Master Fund convertible debt                                              4,954,813                      0
     Notes payable-convertible 8%                                                       739,204                726,023
                                                                                        -------                -------

            Total long-term liabilities                                               5,756,734              3,339,062
                                                                                      ---------              ---------

STOCKHOLDERS' EQUITY (DEFICIT)
    Preferred stock, authorized 5,000,000 shares $.001 par value each. At
     December 31, 2004 and 2003, there are 0 and 5,000
     shares outstanding, respectively                                                         0                      5
      Common stock authorized 95,000,000 shares, $.001
      each. At December 31, 2004 and December  31, 2003, there
      are 26,102,022 and 13,146,250 shares outstanding respectively                      26,101                 13,146
     Deferred compensation                                                               34,126                      0
     Additional paid-in capital                                                       7,999,691              1,451,821
    Retained Earnings (deficit)                                                      (2,077,388)            (1,780,167)
                                                                                     -----------            -----------

         Total stockholders' equity (deficit)                                         5,982,530               (315,195)
                                                                                      ---------               ---------

               TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $   13,307,252         $    3,538,119
                                                                                  =============          =============

The accompanying notes are an integral part of these statements.

                                      F-4
</TABLE>
<PAGE>


<TABLE>
<CAPTION>
                               PIPELINE DATA, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS






                                                                                       For the years ended
                                                                          December 31, 2004          December 31, 2003
<S>                                                                       <C>                        <C>


Revenue                                                                    $    15,565,134          $  10,246,955
                                                                           ---------------          -------------

Interchange                                                                      8,267,961              5,736,108
Cost of services sold                                                            4,000,070              2,605,904
Cost of goods sold                                                                 175,939                190,946
                                                                                  --------                -------

          Total cost of goods and services sold                                 12,443,970              8,532,958
                                                                                ----------              ---------

          Gross profit                                                           3,121,164              1,713,997
                                                                                 ---------              ---------

Operating Expenses
    Salaries and payroll cost                                                    1,928,121              1,152,865
    Selling, general and administrative                                          1,140,923                773,123
    Depreciation and amortization                                                   46,128                 35,222
                                                                                    ------                 ------

          Total operating Expenses                                               3,115,172              1,961,210
                                                                                 ---------              ---------


          Net (loss) from operations                                                 5,992               (247,213)

Other income and expenses
     Interest and other income                                                      64,266                 24,235
     Interest expense                                                             (367,479)               (76,812)
                                                                                  ---------               --------

           Total other income (expenses)                                          (303,213)               (52,577)
                                                                                  ---------               --------

                  Income (loss)                                               $  ( 297,221)          $  ( 299,790)
                                                                              -------------          -------------


Basic  earnings (loss) per common share                                    $         (.01)        $         (.02)
                                                                           ===============        ===============

Weighted average shares outstanding, basic                                      21,107,818             12,902,851


The accompanying notes are an integral part of these statements.
</TABLE>

                                      F-5

<PAGE>


<TABLE>
<CAPTION>

                               PIPELINE DATA, INC.

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ( DEFICIT)

                                                                                       Additional
                                                          Common stock          Paid-in     Accumulated   Deferred
                                                      Shares         Amount     Capital     Loss        Compensation      Total
<S>                                                   <C>            <C>        <C>         <C>         <C>               <C>


Balance at December 31, 2002                        12,706,723     $ 12,707  $ 1,324,896   $ (1,480,377)     $ 0         $ (142,769)

Issuance of common stock for services                  160,979          161       29,839                                     30,000

Conversion of 8% convertible note                       43,686           43       15,191                                      15,234

Sale of common stock on August 8, 2003                 134,286          134       46,739                                      46,873

Issuance of common stock on December 31, 2003
 for services and debt                                 100,576          101       35,156                                      35,257

Net loss for the year ended December  31, 2003       _________       _______      ________     (299,790)   _________       (299,790)
                                                    -----------     ---------    ---------    ---------    ---------       ---------

Balance at December 31,2003                         13,146,250        13,146    1,451,821    (1,780,167)        0          (315,195)

  Conversion of 3,000 shares of series A preferred
     conv. stock to 3,000,000 shares of common       3,000,000         3,000    1,497,000                                  1,500,000

  (5,000 shares of series A preferred conv.)                                            5
Canceled

Issuance of common stock for services                  218,319           218       116,482                                   116,700

Issuance of common stock for residual rights            32,952            33        29,967                                    30,000

Issuance of common stock for additional portfolio    2,367,764         2,368     2,071,078                                 2,073,446

Issuance of common stock-employment agreements          69,422            69        86,708                                    86,777

Exercise of warrants                                   106,665           107        37,203                                    37,310

Exercise of stock options                               10,000            10         3,490                                     3,500

Conversion of 8% conv. note to common stock          1,170,153         1,170       408,384                                   409,554

Issuance of common stock for interest                  256,497           256       123,237                                   123,493

Issuance of common stock due to earnings level       5,674,000         5,674     2,124,366                                 2,130,040

Issuance of common stock for note payment               50,000            50        49,950                                    50,000

Deferred stock compensation, net of unvested
    stock bonus outstanding                                                                                   34,126          34,126

Net loss for the year ended December  31, 2004         ________        _______     _________     (297,221)   ________      (297,221)
                                                       --------        -------     ---------     ---------   --------      ---------



Balance at December 31, 2004                         26,102,022     $  26,101   $ 7,999,691  $ (2,077,388) $  34,126    $  5,982,530
                                                     ==========     =========    =========== ============= ============ ============

The accompanying notes are an integral part of this statement.
</TABLE>

                                       F-6

<PAGE>
<TABLE>
<CAPTION>
                               PIPELINE DATA, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                For the year ended          For the year ended
                                                                                 December 31, 2004           December 31, 2003
<S>                                                                             <C>                          <C>

OPERATING ACTIVITIES
    Net (loss)                                                                    $  ( 297,221)             $  (299,790)
    Adjustments for noncash and nonoperating items:
            Depreciation and amortization                                               46,128                   35,222
          Common stock for services, other                                             248,321                   65,257
          Conversion of 8% convertible notes                                             5,800                   18,350
     Changes in operating assets and liabilities:
         Receivables                                                                  (223,949)                 (41,250)
         Note receivable                                                              (640,000)                 (84,000)
         Accrued interest receivable                                                   (16,190)                     875
         Inventory                                                                     (18,177)                   7,584
         Deposits                                                                      (31,017)                       0
         Advances and prepaid expenses                                                 (28,328)                 (44,976)
          Officer loans payable                                                       (100,000)                 (11,552)
                Accounts payable and accrued expenses                                  165,015                   63,165
                Accrued salaries                                                         3,258                   18,598
                Payroll taxes and withholdings                                          17,150                   (5,930)
                Other loans and notes payable                                           (4,741)                (112,572)
                Lease obligations-equipment                                              9,927                    4,839
                Taxes payable                                                          (15,395)                 (42,828)
                                                                                       --------                 --------

     Cash  (used) by operating activities                                             (879,419)                (429,008)
                                                                                      ---------                ---------

INVESTING ACTIVITIES
    Capital expenditures                                                              (257,962)                 (28,541)
    Merchant portfolio                                                                (574,582)                       0
    Residual rights purchase                                                          (665,456)                       0
    Debt issuance costs                                                               (567,168)                       0
    Change in restricted cash                                                       (2,011,022)                       0
     Proceeds from preferred stock                                                     172,309                   36,674
                                                                                       -------                   ------

    Cash provided (used) by investing activities                                    (3,903,881)                   8,133
                                                                                    -----------                   -----

FINANCIAL ACTIVITIES
    Proceeds from sale of stock                                                        172,309                   46,873
    Proceeds from lease financing                                                       60,988                   18,392
    Proceeds from convertible notes                                                    289,400                  383,120
    Proceeds from exercise of warrants                                                  37,310                        0
    Purchase of preferred stock from officer                                        (1,000,000)                       0
    Lease obligation payments                                                          (11,310)                  (5,353)
    Proceeds from Laurus convertible debt                                            6,000,000                        0
    Loan payments                                                                     (166,665)                 (12,500)
                                                                                      ---------                 --------

    Cash provided by financing activities                                            5,382,032                  430,532
                                                                                     ---------                  -------

NET  INCREASE  IN CASH                                                                 598,732                    9,657

    CASH BALANCE BEGINNING OF PERIOD                                                    95,120                   85,463
                                                                                        ------                   ------

    CASH BALANCE END OF PERIOD                                                     $   693,852               $   95,120
                                                                                   -----------               ----------

    NON CASH ACTIVITIES:
            Interest                                                              $    367,479             $     54,821
            Corporate income taxes                                            $              0          $             0

The accompanying notes are an integral part of these statements

</TABLE>

                                      F-7
<PAGE>




                               PIPELINE DATA, INC.


                          NOTES TO FINANCIAL STATEMENTS

                                December 31, 2004


NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
                    POLICIES

1.       Nature of Operations/ Basis of Presentation

         Nature of Operations

     Pipeline Data, Inc. (the  "Company"),  was incorporated in June 1997 in the
     state of Delaware. On March 19, 2002, the Company acquired all of the stock
     of SecurePay.com,  Inc., ("SecurePay") and on August 26, 2002, acquired all
     of the stock of Northern Merchant Services, Inc.("Northern Merchants"). The
     Company is a custom  credit  card  transaction  processor  that serves as a
     intermediary  between  the  customer  and the  financial  networks  for the
     acceptance of credit card payments by merchants.

         Basis of Presentation

     The accompanying  consolidated  financial  statements of the parent holding
     company,  Pipeline Data,  Inc., and its  majority-controlled  subsidiaries,
     SecurePay.com,  Inc.  and  Northern  Merchant  Services,  Inc.,  have  been
     prepared in accordance with accounting principles generally accepted in the
     United  States of America.  The  preparation  of  financial  statements  in
     conformity  with  generally   accepted   accounting   principles   requires
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities  and disclosure of contingent  assets and
     liabilities  at the  date of the  financial  statements  and  the  reported
     amounts of  revenues  and  expenses  during the  reporting  period.  Actual
     results could differ from those  estimates.  All  significant  intercompany
     accounts and transactions have been eliminated.

2.   Cash Equivalents

     Investments having an original maturity of 90 days or less that are readily
     convertible into cash have been included in, and are a significant  portion
     of, the cash and cash equivalents balances.

         Restricted Cash:

      Restricted cash represents funds held-on-deposit with Laurus Master Fund,
      Ltd. (as defined in the Restricted Account Agreement), per closing and
      delivery agreement as of August 31, 2004. (Note-J).

3.   Inventories

     Inventories  consist of technical parts and supplies valued at the lower of
     cost or market.


4.   Property and Equipment

     Property and equipment are stated at cost and are  depreciated  principally
     on  methods  and at rates  designed  to  amortize  their  costs  over their
     estimated useful lives.


                                       F-8
<PAGE>



                               PIPELINE DATA, INC.


                          NOTES TO FINANCIAL STATEMENTS

                                December 31, 2004


NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
                    POLICIES (continued)

4. Property and Equipment (continued)

     The estimated  service lives of property and equipment are  principally  as
     follows:

                Furniture and fixtures                         5- 7 years
                   Computer equipment                          3- 7 years
                   Computer software                           2- 7 years

     Repairs  and  maintenance  are  expensed  as  incurred.  Expenditures  that
     increase the value or productive capacity of assets are capitalized.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
     or  Disposal of  Long-Lived  Assets.  This  statement  addresses  financial
     accounting  and  reporting  for the  impairment  or disposal of  long-lived
     assets and  supersedes  FASB No.  121,  Accounting  for the  Impairment  of
     Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The Company does
     not believe the adoption of these  standards will have a material impact on
     the Company's financial statements.

5.       Accounts and Notes Receivable

     The Company uses the allowance method to account for uncollectible accounts
     receivable.  Accounts  receivable  are  presented  net of an allowance  for
     doubtful  accounts  of $18,572  and $9,729 at  December  31, 2004 and 2003,
     respectively.

     The Company has three demand notes totaling  $175,000 at the simple rate of
     10% per annum and two  secured  promissory  notes in the amount of $550,000
     together  with  interest at the rate equal to 6% per annum due on or before
     July 7, 2007 and May 7, 2008.  The  $500,000  note is secured by  1,000,000
     shares,  subject  to calls for  additional  shares  in the  event  that the
     average  closing bid price per share in any 30 day period  decreases  below
     $.65 per share.

6.  Revenue and Cost Recognition

     The Company and subsidiaries  derive revenues primarily from the electronic
     processing  of  credit,   charge  and  debit  card  transactions  that  are
     authorized and captured through third-party networks. Typically,  merchants
     are charged for these  processing  services  based on a  percentage  of the
     dollar amount of each  transaction and in some  instances,  additional fees
     are charged for each transaction.  Certain merchant customers are charged a
     flat fee transaction and may also be charged  miscellaneous fees, including
     fees for handling charge backs, monthly minimums,  equipment rentals, sales
     or leasing and other miscellaneous services. Revenues are reported gross of
     amounts paid to sponsor banks as well as interchange and  assessments  paid
     to credit card  associations  (MasterCard  and Visa) under revenue  sharing
     agreements pursuant to which such parties receive

                                      F-9
<PAGE>




                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004

NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
                    POLICIES (continued)



6. Revenue and Cost Recognition (continued)

     payments  based  primarily on processing  volume for  particular  groups of
     merchants.  Included in cost of goods and  services  sold are the  expenses
     covering  interchange  and bank  processing  directly  attributable  to the
     furnishing of  transaction  processing  and other services to the Company's
     merchant customers and are recognized  simultaneously  with the recognition
     of revenue.

     We follow the  requirements  of EITF 99-19,  Reporting  Revenue  Gross as a
     Principal  Versus Net as an Agent,  in determining  our revenue  reporting.
     Generally,  where we have merchant portability and ultimate  responsibility
     for the  merchant,  revenues  are  reported  at the time of sale on a gross
     basis equal to the full  amount of the  discount  charged to the  merchant.
     This amount includes interchange paid to card issuing banks and assessments
     paid to credit card  associations  pursuant to which such  parties  receive
     payments  based  primarily on processing  volume for  particular  groups of
     merchants.

7.        Advertising Cost

     Advertising  cost are expensed as incurred.  Advertising  expense totaled $
     34,773 for 2004 and $ 19,056 for 2003.


8.       Recent Accounting Pronouncements

     New accounting  statements issued, and adopted by the Company,  include the
     following:

     In July 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement No. 14 "Business  Combinations"  ("SFAS 141"), which requires all
     business  combinations  initiated  after June 30, 2001 to be accounted  for
     using  the  purchase  method  of  accounting.  As  a  result,  use  of  the
     pooling-of-interests   method  is  prohibited  for  business   combinations
     initiated  thereafter.  SFAS 141 also establishes criteria for the separate
     recognition of intangible  assets acquired in a business  combination.  The
     adoption  of SFAS  141 did not  have a  material  impact  on the  Company's
     results of operations, financial position or cash flows.

                                      F-10
<PAGE>



                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004


NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
                    POLICIES (continued)

8. Recent Accounting Pronouncements (continued)

     In July 2001,  the FASB  issued  Statement  No.  142,  "Goodwill  and Other
     Intangible  Assets" ("SFAS 142"),  which requires that goodwill and certain
     other intangible  assets having  indefinite lives no longer be amortized to
     earnings,  but  instead be  subject to  periodic  testing  for  impairment.
     Intangible  assets  determined to have definitive lives will continue to be
     amortized  over their useful  lives.  This  Statement is effective  for the
     Company's  2003  fiscal  year.  However,  goodwill  and  intangible  assets
     acquired   after   June  30,   2001   are   subject   immediately   to  the
     non-amortization  and  amortization  provisions  of  this  Statement.   The
     adoption  of SFAS 142 did not have an impact on the  Company's  results  of
     operations, financial position or cash flows.

     In October 2001,  the FASB issued  Statement No. 144,  "Accounting  for the
     Impairment or Disposal of Long-Lived  Assets" ("SFAS 144"),  which excludes
     from the  definition of long-lived  assets  goodwill and other  intangibles
     that are not amortized in accordance  with SFAS 142. SFAS 144 requires that
     long-lived  assets to be  disposed  of by sale be  measured at the lower of
     carrying  amount or fair  value  less  cost to sell,  whether  reported  in
     continuing operations or in discontinued operations.  SFAS 144 also expands
     the reporting of discontinued operations to include components of an entity
     that  have  been  or  will  be  disposed  of  rather  than   limiting  such
     discontinuance to a segment of a business.  This Statement is effective for
     the  Company's  2003 fiscal  year,  and early  adoption is  permitted.  The
     adoption  of SFAS  144 did not  have a  material  impact  on the  Company's
     results of operations, financial position or cash flows.


                                      F-11
<PAGE>

                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004

NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
                    POLICIES (continued)

8. Recent Accounting Pronouncements (continued)

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
     No.  4, 44 and 64,  Amendment  of FASB  Statement  No.  13,  and  Technical
     Corrections.   Among  other  provisions,   this  Statement  eliminates  the
     requirement that gains and losses from extinguishment of debt be classified
     as extraordinary items. The Company will adopt SFAS 145 in fiscal 2003, and
     has determined it will not impact the Company's financial position, results
     of operations or cash flows.

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
     with Exit or Disposal Activities.  This Statement requires that a liability
     for a cost associated with an exit or disposal  activity be recognized when
     the  liability is incurred,  rather than when a company  commits to an exit
     plan as was previously required. SFAS 146 is effective for exit or disposal
     activities  that are initiated  after  December 31, 2002.  The Company will
     adopt SFAS 146 in fiscal 2003,  and has  determined  it will not impact the
     Company's financial position, results of operations or cash flows.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation-Transition  and  Disclosure."  This statement  amends SFAS No.
     123,  transition for a voluntary change to the  fair-value-based  method of
     accounting  for  stock-based  employee  compensation.   In  addition,  this
     statement  amends  the  disclosure  requirements  of  SFAS  123 to  require
     prominent disclosures in both annual and interim financial statements about
     the method of accounting  for  stock-based  employee  compensation  and the
     effect of the method used on reported  results.  The Company  accounts  for
     stock-based  employee  compensation  arrangements  in  accordance  with the
     provisions of Accounting  Principles Board Opinion No. 25,  "Accounting for
     Stock Issued to Employees," and complies with the disclosure  provisions of
     SFAS 123 and SFAS 148.

     In November 2002, FASB Interpretation No. 45,  "Guarantor's  Accounting and
     Disclosure  Requirements for Guarantees,  Including Indirect Guarantees and
     Indebtedness  of Others,"  was issued.  This  interpretation  requires  the
     initial recognition and initial  measurement,  on a prospective basis only,
     to guarantees  issued or modified  after  December 31, 2002.  Additionally,
     certain  disclosures  requirements  are effective for financial  statements
     ending after December 15, 2002.  There were no disclosures  required of the
     Company in the fiscal 2002 and 2003 financial statements.

     In January 2003, FASB  Interpretation  No. 46,  "Consolidation  of Variable
     Interest Entities,"  ("VIE's") was issued.  This  interpretation  clarifies
     situations  in which  entities  shall be  subject  to  consolidation.  This
     interpretation  is effective  for all VIE's created after January 31, 2003.
     The Company does not believe that the adoption of this  interpretation will
     have any impact on its financial statements.

                                      F-12
<PAGE>



                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004



NOTE B--EARNINGS PER SHARE

     Basic net earnings  (loss) per common share is computed by dividing the net
earnings  (loss) by the weighted  average  number of common  shares  outstanding
during the period.  Diluted net earnings  (loss) per common share is  determined
using the  weighted  average  number of common  shares  outstanding  during  the
period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options. In periods
where  losses  are  reported,  the  weighted  average  number of  common  shares
outstanding excludes common stock equivalents,  because their inclusion would be
anti-dilutive.



  NOTE C - INCOME TAXES

     The Company  provides for the tax effects of  transactions  reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences  between the basis of assets and
liabilities for financial and income tax reporting.  The deferred tax assets and
liabilities,  if any,  represent  the future tax  return  consequences  of those
differences,  which will  either be taxable  or  deductible  when the assets and
liabilities  are recovered or settled.  As of December 31, 2004, the Company had
no material current tax liability, deferred tax assets, or liabilities to impact
on the Company's  financial  position  because the deferred tax asset related to
the  Company's  net  operating  loss  carry  forward  and was fully  offset by a
valuation allowance.

     At December 31, 2004, the Company has net operating loss carry forwards for
income tax purposes of  $2,024,920.  These carry forward losses are available to
offset  future  taxable  income,  if any,  and  expire  in the  year  2012.  The
components of the net deferred tax assets are as follows:

         Deferred tax assets:
         Net operating loss carry forward                         $     604,816
         Current year loss                                              101,055
         Deferred revenue                                                   367
         Deferred stock compensation                                     18,819
                                                                         ------
              Total deferred tax assets                                 725,057
                                                                        -------

         Deferred tax liabilities:
         Difference between book and tax
            depreciation and amortization                                94,403
         Capital loss                                                    10,747
                                                                         ------
               Total deferred tax liabilities                           105,150
                                                                        -------

         Net deferred tax asset before
                valuation allowance                                $    619,907

         Valuation allowance                                           (619,907)
                                                                       ---------
         Net deferred tax asset                                    $        -0-
                                                                        =======

     The Company  recognized  no income tax benefit from the loss  generated for
the  period  from the date of  inception  to  December  31,  2004.  SFAS No. 109
requires  that a valuation  allowance  be provided if it is more likely than not
that some  portion or all of a  deferred  tax asset  will not be  realized.  The
Company's  ability to realize  benefit of its  deferred tax asset will depend on
the  generation  of  future  taxable  income.  Because  the  Company  has yet to
recognize  significant  revenue  from  the  sale of its  products,  the  Company
believes that a full valuation allowance should be provided.


                                      F-13
<PAGE>

                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004

NOTE D - COMMITMENTS AND CONTINGENCIES

     Lease agreements

     The offices of the  Company's  subsidiary,  SecurePay,  Inc. are located at
1599 Washington Street, Braintree,  Massachusetts at a monthly rental of $1,410.
The term of this  lease  shall be for  three  years  with  self-renewing  unless
terminated  in writing no later than one  hundred  and eighty  (180) days before
each  expiration.  Each lease year  shall be subject to a rent  increase  not to
exceed the most current  consumer price index increase from the prior year. Each
extension  shall be for the same terms as the  original  lease.  The  operations
center for  SecurePay is located at 13339 North  Central  Expressway  Suite 103,
Dallas, Texas. This is a four year lease that commenced on June 2002. An initial
deposit of $850 and monthly rental of $768 is required on the leased square foot
area of 865 square feet.  As of September  22, 2004,  the Company  expanded it's
operations  center to One Point  Royal,  4400  Northpoint  Parkway,  Alpharetta,
Georgia  and signed a lease with  Highwoods  DLF  98/29,LP.  This is a sixty-two
month lease with annual  rent from  $38,070 to $64,273.  Total base rent for the
sixty-two months is $304,699.04.

     Beginning  January 1, 2005 Pipeline  Data,  Inc. will pay the sum of $3,400
per month in rent and have the occupancy  rites to the property at 166 West 72nd
street. This sub-lease will extend for a period of six months and terminate June
30, 2005. In taking possession of the rental property January 1, 2005,  Pipeline
Data, Inc. will bear the full  responsibility  for all utilities and maintenance
of the property.

                 Leases-Related Party:

     The  office's of  Northern  Merchant  Services,  Inc. is located in Brasher
Falls, New York, and has an annual lease with Kevin and Nancy Weller,  officers'
of the Company.  The lease  commenced on September  2002, with monthly rental of
$1,000. The lease can be renewed annually with the option of the landlord not to
renew, with just cause.


                  Capital Equipment Lease:

     On January 28, 2003,  the Company  entered into a capital  equipment  lease
with Hewlett Packard Financial  Services Company,  Murray Hill, New Jersey.  The
initial  term of the lease is for a period of 48 months with a base lease amount
of $661.77 per month and an advance lease payment of $1,412.87. The lease has an
equipment purchase option on " all or none" and "as-is, where-is" basis, without
any representations or warranties, including no warranties of merchantability or
fitness  for a  particular  purpose.  The  equipment  consist  of  five  servers
($17,025),  ten  network  products  ($1,986.60),  and  four  units  of  software
($3,559.50).  The  Company  has an  option  to renew  the Lease at the then Fair
Market  Rental Value and also has an option to return the equipment on or before
the last day of the Lease term or purchase the equipment  for $1.00.  On July 1,
2004, the Company entered into two capital leases with American Express Business
Finance for software  installation  services and equipment and MAS200  software.
Both  leases  are for a term of sixty  months  with a buyout  option  of  $1.00.
Monthly  payments on the  equipment and software are $908.03 and $256.60 for the
software installation  services. On September 16, 2004, the Company entered into
a capital  lease  with Ikon  Financial  Services  for fax,  copier  and  printer
equipment.  This  lease is for a term of sixty  months  with a buyout  option of
$1.00 and monthly payments of $520.16.

                                      F-14
<PAGE>

                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004


NOTE E - STOCK OPTION ISSUANCES

     In February  2001, the company  instituted the 2001-02 Non Statutory  Stock
Incentive  Plan in order to award  stock  options,  restricted  stock  and stock
bonuses to selected  individuals  who make  contributions  to the success of our
company. This plan was extended to the year 2004.


     During the year ended December 31, 2004,  the Company's  Board of Directors
approved  the  grant  of  430,478  stock  options  also  to  key  employees  and
independent  consultants with a weighted average exercise price of $0.95. Of the
430,478 options  awarded to employees  during the year, vest one-third each year
beginning  January 1, 2005. The options awarded to the Directors at December 31,
2004,  (94,737 options),  vest on January 1, 2005. The independent  consultant's
options of 30,000 shares, vest one-third each year beginning January 1, 2005.

     The above options  shall have  piggyback  registration  rights and shall be
included in any S-8 registration statement.


     As of December 31, 2004, no options have been exercised and the Company has
reserved an aggregate of 2,968,115  shares of common stock  pending the exercise
of the options.  In addition,  the Company has contractual  obligations to issue
1,500,000 and 1,000,000 stock options pursuant to employment agreements.

     Stock option activity is summarized as follows:

      Options outstanding at beginning of year             2,547,637
      Forfeited                                                -0-
      Exercised                                              (10,000)
      Issued                                                 430,478
                                                             -------

      Options outstanding at end of the period             2,968,115
                                                           =========

                                      F-15
<PAGE>

                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004




NOTE E - STOCK OPTION ISSUANCES (continued)

     In December 2004, the FASB issued SFAS No. 123 (Revised 2004),  Share-Based
Payment ("SFAS No. 123R"). This standard requires expensing of stock options and
other  share-based  payments  and  supersedes  SFAS No.  123,  which had allowed
companies  to  choose  between  expensing  stock  options  or  showing  proforma
disclosure  only.  This  standard is effective as of July 2005 and will apply to
all awards granted,  modified,  cancelled or repurchased after that date as well
as the unvested portion of prior awards.  SFAS No. 123R permits public companies
to adopt its requirements using one of three methods: the "modified prospective"
method, the "modified retrospective" method to January 1, 2005, or the "modified
retrospective"  method to all prior years for which SFAS No. 123 was  effective.
We have not yet determined  which adoption method to utilize.  Further,  we have
not yet decided whether we will adopt the provisions of this standard on July 1,
2005, as required, or earlier, as allowed.

     The Company  applies APB No. 25 in accounting for its employee stock option
plans  and,  accordingly,  recognizes  employee  compensation  expense  for  the
difference  between  the fair  value of the  underlying  common  shares  and the
exercise  price of the option at the date of grant.  The effect of applying SFAS
No. 123 on pro forma net loss as stated above is not necessarily  representative
of the effects on reported  net loss for future years due to, among other things
(1) the vesting period of the stock options and (2) the fair value of additional
stock options in future years (3) the exercise price was equal to or higher than
the market price as of the date of the grant.


NOTE F - RELATED PARTY TRANSACTIONS

     The Company's subsidiary,  Northern Merchant Services,  Inc., leases office
space  from  Kevin and Nancy  Weller.  (see Note D ) See Note I for  details  of
repurchase of 5,000 shares of the Company's preferred stock from Kevin and Nancy
Weller.

     When the  acquisitions of SecurePay and Northern  Merchant  Services,  Inc.
were  purchased,  certain  earn-in  capabilities  based upon revenue  milestones
achieved  were  recorded  as  a  contingency   based  on  SFAS   No.141-Business
Combinations.  Since the future  earnings  was  achieved  during the end of this
quarter, the consideration paid in stock (5,800,000 shares of common stock), was
recorded as an additional cost to the Company.  The Northern Merchant  Services,
Inc. acquisition amounted to an additional 2,000,000 shares of common stock at a
price of $.22 per share and the acquisition of  SecurePay.com,  Inc. amounted to
3,800,000  shares of common  stock at a price of $.46 per share.  An  additional
4,800,000  shares of  common  stock are  being  held in escrow  for the  earn-in
capabilities with the deadline for meeting these revenue targets  terminating on
March 31, 2005 for SecurePay and August 31, 2005 for Northern Merchant Services,
Inc.

     Chasm  Holding,  Inc., a related party,  was paid $244,554  during the year
2004 for management services.

                                      F-16
<PAGE>




                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004




NOTE G - SHORT-TERM AND LONG-TERM DEBT OBLIGATIONS
<TABLE>
<CAPTION>

         Borrowings under Revolving Line of Credit

     The  Company's  revolving  line of credit with a major  credit card company
amounted  to $43,987 and $36,228 at December  31, 2004 and  December  31,  2003,
respectively.

         Details of Short-Term Debt:

                                                            December 31,
                                                    2004                   2003
<S>                                                 <C>                    <C>

           Ladco Financial Group              $        0            $     12,500
           Laurus Master Fund                 $  878,522            $          0

         Details of Long-Term Debt:

           Laurus Master Fund                 $4,954,813            $          0
           Officer's Loan Payable             $        0            $    100,000
            8% Convertible notes              $  739,204            $    726,023
            Officer preferred stock subject
                 to mandatory redemption
                 (see Note I)                 $        0            $  2,500,000
</TABLE>

                                      F-17
<PAGE>

                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004


NOTE G - SHORT-TERM AND LONG-TERM DEBT OBLIGATIONS (continued)

         Conversion of Convertible Note:

     The Holder shall have the right, at its option, at any time during the term
of the  Convertible  Note,  to convert the principal  amount of the  Convertible
Note, or any portion of such  principal  amount,  into that number of fully paid
and  nonassessible  shares of Common Stock (as such shares shall be constituted)
determined pursuant to the terms of the agreement.  The term "Conversion Amount"
means, with respect to any conversion on of the Convertible Note, the sum of (1)
the principal  amount of the Convertible Note to be converted in such conversion
plus (2) accrued and unpaid  interest,  if any, on such principal  amount at the
determined interest rate.

         Capital Lease Obligations:

     See Note D-Lease  Agreements  for lease  obligation  with  Hewlett  Packard
Financial Services Company,  Murray Hill, New Jersey,  American Express Business
Finance and Ikon  Financial  Services.  As of  December  31,  2004,  the current
portion amounted to $14,766, and the long-term portion amounted to $62,717.


NOTE H - ADOPTION OF STATEMENT OF FINANCIAL STANDARDS (SFAS) NO. 150

     In May of 2003 the Financial  Accounting Standards Board (FASB) issued SFAS
No. 150- Accounting for certain Financial  Instruments with  Characteristics  of
Both  Liabilities and Equity.  This Statement  establishes  standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics  of both  liabilities  and equity.  It  requires  that an issuer
classify a financial  instrument  that is within its scope as a liability  or an
asset.  The effective date of SFAS NO. 150 is the beginning of the first interim
period beginning after June 15, 2003. Also,  restatement of financial statements
of prior periods presented is not permitted.

     By  adopting  SFAS No. 150,  the  Company  recognizes  the  requirement  to
repurchase 5000 shares of Series A Preferred  Convertible Stock that were issued
to Kevin Weller and Nancy Smith-Weller,  officers' of the Company, that was part
of the acquisition of Northern  Merchant  Services,  Inc.(NMSI).  This preferred
convertible  stock was issued in conjunction  with the acquisition  agreement of
NMSI  from the  Wellers.  Under the terms of the  agreement,  the stock  must be
repurchased  by August 26, 2005 for a sum of  $2,500,000.  The Wellers  have the
option of refusing  this offer.  They may  convert the  Preferred  shares at any
time,  in whole or in part, to common stock at a rate of $0.50 per common share,
reducing the repurchase commitment on a pro-rata basis.

                                      F-18
<PAGE>



                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004


NOTE H - ADOPTION OF STATEMENT OF FINANCIAL STANDARDS (SFAS) NO. 150
                       (continued)



INTANGIBLE ASSET-MERCHANT PORTFOLIO

     In  adopting  the new (SFAS) No.  150,  the  Company  hired an  independent
third-party  appraiser  to  render a  reasonable  value of the  acquisition  and
carrying value of the purchase price and transaction  costs  associated with the
business  acquisitions of NMSI.  Management will  periodically  evaluate whether
certain   circumstances   may  affect  the   estimated   useful   lives  or  the
recoverability  of the  unamortized  balance of the intangible  asset using both
objective and subjective  factors.  Objective factors include  management's best
estimates  of  projected  future  earnings and cash flows and analysis of recent
sales and earnings trends.  Subjective factors include competitive  analysis and
the Company's strategic focus.


NOTE I - DEBT/FINANCING

         Debt/Financing:

     On February 27, 2004, the Company entered into a Secured  Convertible  Term
Note (the Loan Agreement) with Laurus Master Fund, LTD., c/o Ironshore Corporate
Services Ltd.,  Grand Cayman,  Cayman Islands.  The Loan Agreement  provides for
borrowings  of two  million  dollars,  together  with  any  accrued  and  unpaid
interest,  to be paid on February 27, 2007, if not sooner paid. Interest payable
on this  Note  shall  accrue  at a rate  per  annum  equal to the  "prime  rate"
published in The Wall Street  Journal from time to time,  plus two percent (2%).
Amortizing  payments of the aggregate  principal amount  outstanding  under this
Loan  Agreement  at any time shall begin on September 1, 2004 and shall recur on
the first calendar day of each succeeding  month  thereafter  until the maturity
date.  Monthly  payments shall be $33,333.00 and will be increased to $41,667.00
from April 1, 2005 through March 1, 2007.

     Laurus Master Fund also agreed to make available to the Company, subject to
the terms and  conditions set forth in the  agreement,  an additional  aggregate
principal amount of up to $1,000,000 in increments of $500,000.  This option was
exercised on June 16, 2004, in the amount of $1,000,000.

     On August 31, 2004, the Company  entered into another  Secured  Convertible
Term Note with Laurus Master Fund,  LTD. in the amount of three million  dollars
which is convertible into shares of the Company's common stock,  $.001 par value
per  share at an  initial  fixed  conversion  price of $1.00 per share of common
stock.

     Under  Article II of the Loan  Agreement,  there is a conversion  repayment
option.  Subject to the terms of the Loan Agreement,  Laurus Master Fund,  LTD.,
shall have the sole option to  determine  whether to elect to accept  payment of
the monthly  amount on each repayment date either in cash or in shares of Common
Stock, or a combination of both. This election notice has to be delivered to the
Company in writing by the fifth business day prior to each amortization date.

                                      F-19
<PAGE>
                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004


NOTE I - DEBT/FINANCING (continued)


     Also,  on February  27,  2004,  the  Company  entered  into a Common  Stock
Purchase Warrant with Laurus Master Fund, LTD., that entitles Laurus Master Fund
to purchase  from the Company,  from and after the Issue Date and at any time or
from time to time  before  February  27,  2011,  up to  500,000  fully  paid and
nonassessable  shares  of common  stock,  $.001  par  value  per  share,  at the
applicable  exercise  price per share as follows:

          (i) a price of $1.25 -125% of the Fixed Conversion Price for the first
     166,667 shares acquired,

          (ii) a price of $1.50 -125% of the Fixed Conversion Price for the next
     166,667 shares acquired,

          (iii) a price of $1.75  -125% of the  Fixed  Conversion  Price for any
     additional shares acquired.

     All stock  conversion  prices and exercise prices are subject to adjustment
for stock splits,  stock  dividends or similar events.  In conjunction  with the
term loan, Laurus Capital Management, LLC was paid a fee of $105,000.

     Of  the  $2,000,000  from  Laurus  Master  Fund,  $1,000,000  was  used  to
repurchase 2,000 shares of Pipeline Data,  Inc.'s preferred stock from Kevin and
Nancy Weller.

     On August 31,  2004,  the  Company  entered  into a Common  Stock  Purchase
Warrant with Laurus  Master Fund,  LTD.,  that  entitles  Laurus  Master Fund to
purchase  from the  Company,  from and after the Issue Date,  and at any time or
from  time to time  before  August  31,  2011,  up to  600,000  fully  paid  and
nonassessable  shares  of common  stock,  $.001  par  value  per  share,  at the
applicable exercise price per share as follows:

          (i) a price of $1.25 -125% of the Fixed Conversion Price for the first
     200,000 shares acquired,

          (ii) a price of $1.50 -125% of the Fixed Conversion Price for the next
     200,000 shares acquired,

          (iii) a price of $1.75  -125% of the  Fixed  Conversion  Price for any
     additional shares acquired.

     All stock  conversion  prices and exercise prices are subject to adjustment
for stock splits,  stock  dividends or similar events.  In conjunction  with the
term loan, Laurus Capital Management, LLC was paid a fee of $125,000.



NOTE J - MERCHANT PORTFOLIO AND RESIDUAL RIGHTS PURCHASE


                Asset Purchase Agreement

     On March 15, 2004,  Northern Merchant  Services,  Inc. (a subsidiary of the
Company)  entered into an Asset  Purchase  Agreement  with Leslie E.  McElhiney,
Michael  Hornung,  and Patricia  Thornton,  for Residuals Rights which relate to
certain  merchant  accounts.  As  consideration  for the assets  sold,  Northern
Merchants  shall pay an  aggregate  purchase  price of  $131,363.00  plus 21,968
shares of restricted  Pipeline Data, Inc. common stock to McElhiney;  $42,093.33
plus 0 shares to  Hornung;  and,  $94,624.68  plus 10,984  shares of  restricted
Pipeline Data, Inc. common stock to Thornton.

                                      F-20
<PAGE>



                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004



NOTE J - MERCHANT PORTFOLIO AND RESIDUAL RIGHTS PURCHASE (continued)

     On May 18, 2004,  we entered into an asset  purchase  agreement to purchase
the Residual Rights to 1801 merchant accounts representing $68,911,363 in annual
consumer charge volume on a historical basis from Millennium  Merchant Services,
Inc. and Kent Stiritz in a series of transactions. A total of 4.2 million shares
of our common stock have been set aside for the purchase of the Residual  Rights
(subject  to  adjustments  in the event of a reverse  stock split or other stock
recombination  and with a price  adjustment  right over a three  month look back
period).  To date,  2,246,764 shares of our common stock have been issued to Mr.
Stiritz.

     On May 25, 2004, our subsidiary Northern Merchant Services,  Inc. purchased
from United  Processing  Corporation Ltd. its Residual Rights under two merchant
solicitation agreements representing an aggregate of 2,300 merchant accounts and
36,174,287  annual consumer charge volume on a historical  basis.  The aggregate
purchase  price was  $312,000  and 21,000  shares of our common  stock.  The two
merchant  agreements  under which Residual Rights were  transferred  are: (i) an
Agreement  dated April 30,  1996 with EFS  NATIONAL  BANK and (ii) an  Agreement
dated April 2, 1998 with NATIONAL PAYMENT SYSTEMS, INC., a New York Corporation,
d/b/a Card Payment Systems.

     On October 1, 2004 our  subsidiary,  Pipeline Data Portfolio  Acquisitions,
Inc  purchased  the Residual  Rights to an  aggregate  of 511 merchant  accounts
representing  $10,496,180 in annual  consumer  chanrge  volume,  on a historical
basis, from Diversified Debit and Credit, Inc for an aggregate purchase price of
$119,372.

     On December 1, 2004, our subsidiary  Pipeline Data Portfolio  Acquisitions,
Inc  purchased  the Residual  Rights from an aggregate of 238 merchant  accounts
representing  $4,021,176 in annual consumer charge volume on a historical  basis
from Merchant Select Services, Inc. The purchase price was $56,320.


                                      F-21
<PAGE>

                               PIPELINE DATA, INC.


                    NOTES TO FINANCIAL STATEMENTS (continued)

                                December 31, 2004



NOTE K - SUBSEQUENT EVENTS

     As of March 11, 2005, the Company and Laurus Master Fund, LTD., amended the
terms of (i) that certain  Registration  Rights Agreement,  dated as of June 16,
2004, and (ii) that certain  Registration  Rights Agreement,  dated as of August
31,  2004,  have  agreed to make  certain  changes to each  Registration  Rights
Agreement as set forth as follows:

     Laurus has agreed to cancel that  certain  Common  Stock  Purchase  warrant
issued  by  Company  dated  August  31,  2004,  and  the  Company  will  issue a
replacement  warrant  for  600,000  shares of the  Common  Stock of the  Company
exercisable at $1.40 per share and the Company shall issue an additional  common
stock purchase  warrant to Laurus to purchase up to 100,000 shares of the Common
Stock of the Company.  On March 16, 2005,  Pipeline Data, Inc. announced that it
had signed a letter of intent to  acquire  Florida-based  Charge.com.  Under the
terms of the agreement,  Pipeline Data,  Inc. will purchase  Charge.com for $7.5
million in cash, $3.5 million in the form of a promissory note, 5 million shares
of Pipeline  Data,  Inc.'s  common stock and an  additional 1 million  shares of
Pipeline  Data,  Inc.'s  common  stock based on  Charge.com  fulfilling  certain
performance  requirements.  During 2005 the following  merchant  portfolios were
acquired  using funds from the Laurus  financing:  On  February  21,  2005,  our
subsidiary  Pipeline Data Portfolio  Acquisitions,  Inc.  purchased the Residual
Rights from an aggregate 830 merchant  accounts  from CPS of new York,  Inc. for
the purchase  price of $1,090,011  and on March 1, 2005,  purchased 775 merchant
accounts from Advanced Internet  Services,  LLC. for an aggregate purchase price
of $589,589 plus 64,010 shares of our restricted common stock.

                                      F-22
<PAGE>



   Item 8. Changes In and  Disagreements  With  Accountants  on Accounting an
Financial Disclosure.

     There have been no changes in, and no  disagreements  with,  our  company's
public accountants.

Item 8A. Controls and Procedures.

    As of December 31, 2004, an evaluation was performed  under the supervision
and with the participation of the Company's management,  including the Corporate
Executive  Committee  ("CEC")  and CFO, of the  effectiveness  of the design and
operation of the Company's  disclosure  controls and  procedures.  Based on that
evaluation, the Company's management,  including the CEC and CFO, concluded that
the Company's  disclosure  controls and procedures were effective as of December
31,  2004.  There have been no  significant  changes in the  Company's  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to December 31, 2004.

     Disclosure  controls and procedures  are our controls and other  procedures
that are designed to ensure that  information  required to be disclosed by us in
the  reports  that  we  file or  submit  under  the  Exchange  Act is  recorded,
processed,  summarized  and reported,  within the time periods  specified in the
Securities and Exchange  Commission's rules and forms.  Disclosure  controls and
procedures  include,  without  limitation,  controls and procedures  designed to
ensure that  information  required to be  disclosed by us in the reports that we
file under the Exchange Act is accumulated  and  communicated to our management,
including our principal  executive officers and principal  financial officer, as
appropriate to allow timely decisions regarding required disclosure.

                                       68

<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons.
Directors, Executive Officers, Promoters And Control Persons

The following table provides information about our directors and executive
officers as of March 31, 2005:


Name                           Age            Position
--------------------------------------------------------------------------------

MacAllister Smith              42              Chief Executive Officer,
                                                  President and Director
Jack Rubinstein                57              Chairman of the Board
Kevin Weller                   38              Director
Kevin Smith                    37              Chief Operating Officer
Donald Gruneisen               50              Chief Financial Officer
Philip Chait                   41              Secretary
Thomas Tesmer                  58              Chief Technical Officer

MacAllister  Smith,  42,  Pipeline and  SecurePay,  President,  Chief  Executive
Officer and Director, NMSI and Pipeline Data Processing, Director

     Mr. Smith has over fourteen years of experience in the merchant  processing
industry  and has held  ownership  positions in three  companies  that have been
merged with public  corporations.  Mr.  Smith was most  recently  Regional  Vice
President of Nova Information Systems (NYSE:NIS) (employed from 1996 to 1998), a
$2 billion  corporation  and one of the largest  credit card  processors  in the
industry.  He was President  and CEO of Pinnacle  Financial  Technologies,  Inc.
(employed  from  1994-1998),  a  nationally  recognized  firm and a  pioneer  in
electronic  benefits  transfer  (EBT)  programs.  The  company  merged with Nova
Information Systems in 1998. Mr. Smith was also co-founder and Senior Partner of
AccesServices,  Inc.  (employed from 1997 to 1998). He was part of the team that
designed and built a nationwide  network processing switch for retail and online
MasterCard, Visa, American Express and debit card transactions.  The company was
sold to Digital Courier Technologies, Inc. (NASDAQ:DCTI) in 1999.


Jack Rubinstein, 57, Chairman of the Board

     Mr. Rubinstein,  age 57, has been the General Partner of DICA Partners,  an
investment hedge fund located in Hartsdale,  New York, since the commencement of
its operations in 1991. Mr.  Rubinstein  also acts as a management and financial
consultant to various public companies in the  telecommunications  industry.  He
was a founding public board member of CD Radio, Inc.(Sirius Satellite Radio) and
aided in the funding of the Molloy Group,  a help desk software  developer.  Mr.
Rubinstein  is also a  founding  member  of The  Capital  Advisory  Services,  a
consortium of consultants  aiding the capital  market needs of emerging  private
and smaller public companies.

     Mr.  Rubinstein  began his  business  career as a  securities  analyst with
Shearson  Hammill & Co.,  specializing in the electrical  equipment and business
services  industries.  After seven years as an analyst, he joined Bear Stearns &
Co.  where  he was a  Director,  managing  the  proceeds  of  corporate  insider
securities sales. At Bear Stearns,  he also managed the derivatives  investments
of several senior officers, as well as a few select individual clients. In 1988,
Mr.  Rubinstein  joined  Morgan  Stanley & Co.  where,  in  addition  to serving
corporate officers and select individual  clients,  he provided his expertise to
private  investment  partnerships.  Mr.  Rubinstein  is a  graduate  of  Cornell
University and received an MBA in Finance from New York University.

Kevin J. Weller, 38, Pipeline, Director; NMSI, President and Director

     Mr.  Weller has over eight years of  experience  in the payment  processing
industry.   His  entry  was  in  1992  with  Netcom   Data  Corp.   as  a  sales
representative.   In  August  1997,  Mr.  Weller  co-founded  Northern  Merchant
Services.  Since 1997, he has consistently  placed Northern Merchant Services at
the top of Nova  Information  System's  MSP Program in new account  acquisition.
Northern Merchant Services amassed over 6,000 customers prior to its acquisition
by Pipeline.  Northern  Merchant  Services was also selected as 2002 Business of
the Year by the St.  Lawrence  County  Chamber of Commerce.  Mr.  Weller holds a
degree in Business Administration from SUNY Canton.


                                       69
<PAGE>

Kevin Smith, 37, Pipeline,  Chief Operating  Officer;  Pipeline Data Processing,
President and Director

     Mr. Smith has over 14 years experience in the merchant processing industry.
He was employed by Concord EFS (recently acquired by First Data  Corp.(NYSE:FDC)
from 1998 to 2004  serving as its Senior Vice  President of ISO Sales and COO of
Concord Payment Systems, a wholly owned subsidiary of Concord EFS. Mr. Smith was
responsible for the wholesale  credit card processing  division,  which included
all  aspects  of  operations  and  sales.  Prior to that,  Mr.  Smith  served as
Operations Director for Bancard Systems of Irvine, CA from 1991 to 1998.

Donald W. Gruneisen, 50, Pipeline, SecurePay, NMSI and Pipeline Data Processing,
Chief Financial Officer

     Mr. Gruneisen has over 20 years of experience in the volatile,  high-growth
telecommunications industry, with expertise in the areas of finance, management,
accounting and top executive  corporate  management.  Mr. Gruneisen holds an MBA
from Clarkson University in Accounting and Management Information Systems and is
a Certified  Public  Accountant  with  twelve  years  experience  as a corporate
officer  (including  serving in  positions  of chief  executive  officer/general
manager).  He has been the  Treasurer and Director of Finance of NMSI since July
2001.  From June 2000 to July 2001,  Mr.  Gruneisen  was a consultant  providing
strategic guidance with  specialization in billing,  accounting,  and tax issues
associated with the telecommunications  industry and financial management.  From
January 1999 to June 2000, he was a senior accountant at Whalen, Davey & Looney,
LLP.  From 1977 to 1998, he worked for  Nicholville  Telephone  Company,  a $3.5
million ESOP-owned local exchange  carrier/utility.  He started with the company
in 1977 as an accountant  and  accounting  manager and  ultimately  became Chief
Executive  Officer,  General Manager and Treasurer from 1990 to 1998. His duties
included  the  management  of  wireless  network  services  and joint  ventures,
including the sale of interests within those areas.

Philip Chait, 41, Pipeline and SecurePay,  Secretary

     Mr. Chait has over ten years experience in the merchant processing industry
and has held an  ownership  position  in two  companies  that  have been sold to
national  corporations.  He was  most  recently  the  Assistant  Clerk  for Nova
Information  Systems  (NYSE:  NIS).  He was Vice  President  and COO of Pinnacle
Financial  Technologies,  Inc.,  a nationally  recognized  firm and a pioneer in
electronic  benefits  transfer  (EBT)  programs.  The  company  merged with Nova
Information  Systems in 1998. Mr. Chait also served as CFO and Senior Partner of
Access Services,  Inc. His team formed,  designed and built a nationwide network
processing  switch  for  MasterCard,  Visa,  American  Express  and  debit  card
transactions.  The  company  merged  with  Digital  Courier  Technologies,  Inc.
(NASDAQ: DCTI) in 1999.

Thomas W. Tesmer, 58, Pipeline Data, Chief Technical Officer

     Mr.  Tesmer is an  experienced  and  talented  senior  executive  with over
twenty-five years in the transaction  processing industry.  From October 2002 to
his joining our company,  Mr.  Tesmer  served as president  and chief  executive
officer of Symmetrex,  Inc., a private company,  a processing company supporting
third party clients  fielding stored value card programs into the US and foreign
markets.  From June 1999 to September  2002, Mr. Tesmer served as Executive Vice
President  of the Front End  Systems  division  of  Heartland  Payment  Systems.
Heartland  Payment Systems is one of the nation's  largest  bankcard  acquirers.
During his tenure at Heartland, Mr. Tesmer created and implemented the company's
stand-alone transaction processing division. From November 1996 to May 1999, Mr.
Tesmer  was  President  and CEO of Access  Services,  Inc.  a  provider  of risk
management services, which was later sold to Digital Courier Technologies,  Inc.
From August 1992 to October 1996,  Mr. Tesmer served as Executive Vice President
and Director of the POS Technology  Division of Southeast Switch,  Inc. (HONOR),
the precursor to STAR. The company was subsequently sold to Concord EFS and most
recently to First Data (FDC).  As President of TransNet,  now  Paymentech  and a
joint  venture of Bank One ONE and First Data, he  established  and directed all
aspects of operations, strategy and product development.

                                       70
<PAGE>

Item 10.  Executive Compensation

     The following table summarizes the cash  compensation paid or to be paid by
us, as well as certain  other  compensation  paid or accrued,  during the fiscal
year ended  December  31, 2003 and December  31,  2004,  to our Chief  Executive
Officer and each of our seven other most-highly  compensated executive officers,
which we refer to as our "named executive  officers," in all capacities in which
they served.
<TABLE>
<CAPTION>

                           Summary Compensation Table




                                                            Restricted    Securities
Name and                                  Other Annual       Stock         Underlying      LTIP           All
Principal         Salary        Bonus     Compensation      Award(s)       Options        Payout         Other
Position           ($)           ($)          ($)            ($)           $/SARs (#)      ($)        Compensation
----------        ----          ------    ------------    ----------    ----------      -------      -------------
<S>               <C>           <C>       <C>             <C>           <C>             <C>          <C>


2003
Jack
Rubinstein(1)      -0-           -0-          -0-            -0-           66,667          -0-           -0-
Board
Chairman

MacAllister      70,854          -0-          -0-           -0-           279,291          -0-           -0-
Smith(2)

Philip           70,854          -0-          -0-           -0-            25,833          -0-           -0-
Chait(3)

Kevin
Weller (4)      200,000          3,846        7,213         -0-           160,000          -0-           -0-

Nancy           150,000          2,885        7,661         -0-            51,250          -0-           -0-
Weller (5)

Donald           50,000          2,885        3,658         -0-            34,167          -0-           -0-
Gruneisen (6)

2004
Jack
Rubinstein(1)      -0-            -0-          -0-          -0-            42,105          -0-           -0-
Board
Chairman

MacAllister     122,227           -0-          -0-          -0-           116,000          -0-           -0-
Smith(2)

Philip          122,227           -0-          -0-          -0-            16,316          -0-            -0-
Chait(3)

Kevin
Weller (4)      200,000         3,846       11,659          -0-           101,053          -0-            -0-

Nancy           150,000         2,885       10,694          -0-            32,368          -0-            -0-
Weller (5)

Donald           79,342         1,923        1,051          -0-            21,579          -0-            -0-
Gruneisen (6)

Kevin
Smith           100,502           -0-          676          55,540         13,755          -0-            -0-

Thomas
Tesmer           73,846           -0-          -0-          24,990         11,660          -0-            -0-

</TABLE>

                                       71
<PAGE>

     (1) On December 31, 2004,  Jack  Rubinstein was awarded options to purchase
26,316  shares of common  stock at the  exercise  price of $0.95 per  share.  On
December 31, 2003, Jack Rubinstein was awarded options to purchase 66,667 shares
of common stock at the exercise price of $0.60 per share.  On December 28, 2002,
Jack Rubinstein was awarded options to purchase 96,666 shares of common stock at
the above  market  exercise  price of $0.35 per share.  On June 28,  2002,  Jack
Rubinstein  was  awarded  100,000  shares  of common  stock in lieu of  monetary
compensation.  On October 1, 2001, Fali Rubinstein was awarded 160,000 shares of
restricted   stock  in  lieu  of  monetary   compensation   for   research   and
administrative  services rendered to our company.  The ownership of these shares
is attributed to Jack  Rubinstein.  On February 28, 2001,  Jack  Rubinstein  was
awarded  options to  purchase  350,000  shares of our common  stock at the above
market  exercise  price of $2.50 per share.  These  options were  rescinded.  On
October 18, 2001, Jack Rubinstein was awarded options to purchase 350,000 shares
at the market price of $0.40 per share. On March 8th, 2002, Jack Rubinstein lent
our  company  $100,000  for  working  capital  purposes.   The  promissory  note
evidencing this  transaction has a term of one year and bears simple interest at
the rate of 8%. The  principal  and  interest  of the note is  convertible  into
common  stock of Pipeline at the then  current  market price of $0.35 per share.
Upon  conversion,  Mr.  Rubinstein  shall receive  warrants equal to 100% of the
number of shares converted with minimum warrant  issuance of 100,000 shares.  On
December 31, 2004, the 8% note  converted to shares of Pipeline  common stock at
the price of $0.35 per  share.  Mr.  Rubinstein,  our  Chairman  of the Board is
entitled to receive an incentive bonus and a performance  bonus as determined by
the board. On March 8, 2003, the note was renegotiated and the term was extended
to March 8, 2005.  Mr.  Rubinstein,  our  Chairman of the Board,  is entitled to
receive a performance  bonus for services rendered since 2002 of up to $180,000,
payable in cash or kind, as determined by the Board of Directors.

     (2) On December 31, 2004, MacAllister Smith was awarded options to purchase
116,000  shares of common  stock at the  exercise  price of $0.95 per share.  On
December 31, 2003,  MacAllister  Smith was awarded  options to purchase  279,291
shares of common  stock at the  exercise  price of $0.60.  On December 28, 2002,
MacAllister  Smith was awarded options to purchase 96,666 shares of common stock
at the above market exercise price of $0.35. On June 28,  MacAllister  Smith was
awarded  100,000  shares of common  stock in lieu of monetary  compensation.  On
March 15, 2002, MacAllister Smith was awarded options to purchase 350,000 shares
of our common stock at the market price of $0.40 per share to replace options he
received from SecurePay.  Pipeline paid MacAllister  Smith 749,496 shares of our
common stock for his interest in SecurePay.  His sister, Catherine Brannon, owns
50% of Chasm Holdings,  Inc. which received 4,118,545 shares of our common stock
for her interest in SecurePay.  This has not been listed as  compensation  as it
was in consideration of assets.  MacAllister  Smith has been awarded a salary of
$240,000  per annum,  which is  currently  being  deferred  on a partial  basis.
MacAllister  Smith is  entitled  to receive an  incentive  bonus up to an amount
equal to his salary and a performance  bonus as  determined  by the board,  upon
meeting or exceeding  certain  financial,  sales or other goals set forth by the
board of directors of our company.  Mr. Smith is also  entitled to an automobile
or an automobile  allowance of $700 per month. As MacAllister Smith is President
of Chasm Holdings, Inc and it is owned 50% by his sister, we have attributed 50%
of amounts paid to Chasm Holdings since it is a related party.

     (3) On December  31,  2004,  Philip  Chait was awarded  options to purchase
16,316  shares of common  stock at the  exercise  price of $0.95 per  share.  On
December 31, 2003, Philip Chait was awarded options to purchase 25,833 shares of
common stock at the exercise  price of $0.60.  On June 28, 2002 Philip Chait was
awarded  100,000  shares of common stock in lieu of monetary  compensation.  Mr.
Chait's  sister,  Barbara  Klein,  owns 50% of Chasm  Holdings,  which  received
4,118,545 shares of our common stock for her interest in SecurePay. This has not
been listed as compensation as it was in consideration  of assets.  Philip Chait
has been  awarded a salary of  $100,000  per  annum,  which is  currently  being
deferred on a partial  basis.  Mr. Chait is also entitled to an automobile or an
automobile  allowance  of $600 per month.  As Philip Chait is Secretary of Chasm
Holdings,  Inc.  and it is owned 50% by his sister,  we have  attributed  50% of
amounts paid to Chasm Holdings since it is a related party.

                                       72
<PAGE>

     (4) On December  31,  2004,  Kevin  Weller was awarded  options to purchase
101,053  shares of common  stock at the  exercise  price of $0.95 per share.  On
December 31, 2003,  Kevin Weller was awarded options to purchase  160,000 shares
of common stock at the  exercise  price of $0.60.  On December  28, 2002,  Kevin
Weller,  was awarded  options to purchase  96,668  shares of common stock at the
above market exercise price of $0.35.  Salary  indicated is from August 26, 2002
to December 31, 2002. Pursuant to the NMSI Acquisition Agreement,  on August 26,
2002 Mr.  Weller was issued (i) two  thousand  five  hundred  shares of series A
preferred  convertible stock (the "Preferred  Shares").  Each preferred share is
convertible  into  one  thousand  (1,000)  shares  of our  common  stock  at the
conversion price of $0.50 per common share and (ii) five hundred thousand of our
common  shares.  We agreed  that during the  36-month  period from the date (the
"36-month Period") of the NMSI Acquisition Agreement (August 26, 2005), we would
offer to  repurchase  the  Preferred  Shares  from  Kevin and Nancy  Weller  for
$2,500,000.  In the event we failed to do this,  the  merchant  portfolio  would
revert back to the Wellers. On February 27, 2004 we complied with this provision
and repurchased  2,000 Preferred Shares for $1,000,000 and the Wellers exercised
their option to convert 3,000 shares into 3,000,000  million shares. As a result
of this  transaction,  the NMSI  merchant  portfolio  cannot  revert back to the
Wellers.  In addition,  he has certain earn-in  capabilities  based upon account
retention milestones achieved within a specified period of time. Each time NMSI,
as our wholly owned subsidiary,  attains 5,000 merchant accounts, we shall issue
to Mr. Weller five hundred thousand  (500,000) common shares, up to an aggregate
of 1,500,000 common shares. This earn- in restriction shall expire on the fourth
anniversary  of the  date of the  acquisition  agreement  pursuant  to  which we
acquired  NMSI.  Further,  Mr. Weller is afforded the  opportunity  to borrow an
amount that, when added to the amount borrowable by Nancy Weller, shall equal up
to an aggregate of $200,000. On November 18, 2003, Kevin Weller borrowed $85,000
from our company  pursuant to a promissory  note with a term of eighteen  months
bearing  interest  at the rate of 4%.  This  note was paid in full on March  10,
2004.  None of the  foregoing  has  been  listed  as  compensation  as it was in
consideration of assets.  Mr. Weller is paid a salary of $200,000 per annum. Mr.
Weller is entitled to receive an  incentive  bonus up to an amount  equal to his
salary and a  performance  bonus as  determined  by the board,  upon  meeting or
exceeding  certain  financial,  sales or other  goals  set forth by the board of
directors of our company.  Mr.  Weller is also  entitled to an  automobile or an
automobile allowance of $600.00 per month . Kevin and Nancy Weller are married.

     (5) On December  31,  2004,  Nancy  Weller was awarded  options to purchase
32,368  shares of common  stock at the  exercise  price of $0.95 per  share.  On
December 31, 2003, Nancy Weller was awarded options to purchase 51,250 shares of
common stock at the exercise  price of $0.60.  Pursuant to the NMSI  Acquisition
Agreement,  on August 26, 2002,  Mrs.  Weller was issued (i) two  thousand  five
hundred shares of series A preferred convertible stock (the "Preferred Shares").
Each  preferred  share is  convertible  into one thousand  (1,000) shares of our
common  stock at the  conversion  price of $0.50 per common  share and  (ii)five
hundred thousand of our common shares. We agreed that during the 36-month period
from the date (the "36-month Period") of the NMSI Acquisition  Agreement (August
26,  2005),  we would offer to repurchase  the  Preferred  Shares from Kevin and
Nancy  Weller for  $2,500,000.  In the event we failed to do this,  the merchant
portfolio  would  revert back to the  Wellers.  On February 27, 2004 we complied
with this provision and repurchased  2,000  Preferred  Shares for $1,000,000 and
the Wellers  exercised  their  option to convert  3,000  shares  into  3,000,000
million shares.  As a result of this  transaction,  the NMSI merchant  portfolio
cannot  revert  back  to the  Wellers.  In  addition,  she has  certain  earn-in
capabilities based upon account retention milestones achieved within a specified
period of time.  Each time NMSI, as our wholly owned  subsidiary,  attains 5,000
merchant accounts, we shall issue to Mrs. Weller five hundred thousand (500,000)
common  shares,  up to an aggregate of 1,500,000  common  shares.  This earn- in
restriction  shall  expire  on  the  fourth  anniversary  of  the  date  of  the
acquisition agreement pursuant to which we acquired NMSI. Further Mrs. Weller is
afforded  the  opportunity  to borrow an amount  that,  when added to the amount
borrowable  by Kevin  Weller,  shall equal up to an aggregate  of  $200,000.  On
November 18, 2003,  Kevin Weller borrowed $85,000 from our company pursuant to a
promissory note with a term of eighteen  months bearing  interest at the rate of
4%. This note was paid in full on March 10, 2004. None of the foregoing has been
listed as compensation as it was in consideration of assets. Mrs. Weller is paid
a salary of $150,000 per annum.  Mrs. Weller is entitled to receive an incentive
bonus up to an amount equal to her salary and a performance  bonus as determined
by the board, upon meeting or exceeding certain financial,  sales or other goals
set forth by the board of directors of our company. Mrs. Weller is also entitled
to an automobile or an automobile allowance of $600.00 per month minimum.  Kevin
and Nancy Weller are married.

     (6) On December 31, 2004,  Donald Gruneisen was awarded options to purchase
21,579  shares of common  stock at the  exercise  price of $0.95 per  share.  On
December 31, 2003,  Donald  Gruneisen,  was awarded  options to purchase  34,167
shares of common  stock at the  exercise  price of $0.60.  On December 18, 2002,
Donald  Gruneisen was awarded  options to purchase 75,000 shares of common stock
at the above market  exercise price of $0.35,  of which 37,500 shares to vest on
January 1, 2003 and 37,500 shares to vest on January 1, 2004.  Mr.  Gruneisen is
currently receiving a salary of $100,000.

                                       73
<PAGE>

Relationships Amongst Management

     There are no family  relationships  among any of the persons  listed  above
except that Kevin Weller and Nancy Smith-Weller, Vice President and Secretary of
NMSI, are married.

     The  following  table sets forth the option and stock  appreciation  rights
granted  during the fiscal  year  ended  December  31,  2004,  to our  company's
Chairman of the Board and each of our company's officers and directors.

<TABLE>
<CAPTION>

                            Option/SAR Grants in Last Fiscal Year
                                      Individual Grants
       (a)          (b) (c) (d) (e) Number of Securities Options/SARs Granted
                    Exercise or
                  Underlying Options/SARs  to Employees
Name                Granted (#)                  in Fiscal Year    Base Price   Expiration Date
<S>                 <C>                          <C>               <C>          <C>

Jack Rubinstein,
Chairman of the
Board                42,105 options                9.8%         $0.95 per       December 31, 2009
                                                                    Share
MacAlllister
Smith                116,000  options             27.0%         $0.95 per       December 31, 2009
                                                                    Share

Kevin Weller                                      23.5%         $0.95 per       December 31, 2009
                     101,053 options                                Share

Don Gruneisen                                      5.09%         $0.35 per      December 31, 2009
                     21,579 options                                Share

Kevin Smith          13,755 options                3.2%         $0.95 per       December 31, 2009
                                                                    Share

Tom Tesmer           11,660 options                2.6%         $0.95 per       December 31, 2009
                                                                    Share
</TABLE>


     In February 2001, the company  instituted the 2001-02 Non -Statutory  Stock
Incentive  Plan in order to award  stock  options,  restricted  stock  and stock
bonuses to selected  individuals  who make  contributions  to the success of our
company.  The  Incentive  Plan was amended on December 1st, 2003 to increase the
number of options awardable by 2,000,000 to 4,000,000 options.

     During the year ended  December 31, 2002,  the company issued the following
options:  200,000  options to Sheila Corvino,  Esq., for legal services,  strike
price $0.35. 150,000 options to Sheila Corvino, Esq., for legal services, strike
price $0.40.  350,000  0ptions to MacAllister  Smith for services,  strike price
$0.40.  150,000 options to R. Scott Barter for analytical and financial research
services, strike price $0.35.

     The following are options  granted on December 18, 2002:  50,000 options to
Jody Latimer for sales work  performed,  strike  price $0.35.  25,000 to vest on
January 1, 2003 and 25,000 to vest on January 1, 2004. 50,000 options to Barbara
Denis for  services,  strike price $0.35.  25,000 to vest on January 1, 2003 and
25,000 to vest on January  1,  2004.  75,000  options  to Donald  Gruneisen  for
accounting  services,  strike price $0.35. 37,500 to vest on January 1, 2003 and
37,500 to vest on  January  1,  2004.  96,666  options  to Jack  Rubinstein  for
directorial  services,  strike price $0.35. All 96,666 shares to vest on January
1, 2003.  96,666 options to MacAllister Smith for directorial  services,  strike
price $0.35.  All 96,666  shares to vest on January 1, 2003.  96,666  options to
Jack Rubinstein for directorial services,  strike price $0.35. All 96,666 shares
to vest on January  1, 2003.  96,668  options  to Kevin  Weller for  directorial
services,  strike  price  $0.35.  All 96,668  shares to vest on January 1, 2003.
Sheila Corvino, Esq. was issued 30,000 options, for legal services, strike price
$0.35,  for the year  ended  December  31,  2003 and 30,000  options,  for legal
services, strike price $0.35, for the year ended December 31, 2004.

                                       74
<PAGE>

     The above options  shall have  piggyback  registration  rights and shall be
included in any S-8 registration statement.

     Stock option activity is summarized as follows:

      Options outstanding at beginning of year              2,547,637
      Granted                                                 430,478
      Exercised                                               (10,000)
                                                              --------
      Options outstanding at end of the period              2,968,115*

*    In addition,  pursuant to employment contracts with each of Kevin Smith and
     Thomas  Tesmer  we  have  contractual  obligations  to  issue  each of them
     1,500,000 and 1,000,000, respectively.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

     Except as otherwise set forth below, the following table sets forth certain
information  regarding  beneficial  ownership of our common stock as of December
31, 2004 , and as adjusted to reflect the sale of shares offered hereby, by:

     o    each person who is known by us to own more than 5% of the  outstanding
          shares of our common stock,

     o    each of our directors,

     o    each named executive officer, and

     o    all of our directors and executive officers as a group.

     Beneficial  ownership is  determined  in  accordance  with the rules of the
Securities and Exchange  Commission and generally  includes voting or investment
power with respect to  securities.  Unless  otherwise  indicated,  the principal
address  of each  officer,  director  and 5%  stockholders  listed  below is c/o
Pipeline Data Inc.,  1515 Hancock St.,  Suite 301,  Hancock  Plaza,  Quincy,  MA
02169.  We believe that all persons named in the table have sole voting and sole
investment  power with  respect to all shares  beneficially  owned by them.  All
figures  include shares of common stock issuable upon the exercise of options or
warrants exercisable,  or the conversion of convertible  subordinated promissory
notes convertible,  within 60 days of March 18, 2005 and, which are deemed to be
outstanding  and to be  beneficially  owned by the person holding those options,
warrants  or  convertible  subordinated  promissory  notes  for the  purpose  of
computing  the  percentage  ownership of that  person,  but are not deemed to be
outstanding  for the purpose of computing the percentage  ownership of any other
person. Percentage of shares beneficially owned is based on 26,102,022 shares of
our common stock  outstanding as of December 31, 2004.


                                       75
<PAGE>

<TABLE>
<CAPTION>


Name of                                    Number of Shares         % ofShares
Beneficial Owner                           Beneficially Owed        Beneficially
                                                                    Owned
---------------------------                 ----------------        ------------
<S>                                         <C>                     <C>
Jack Rubinstein(1)                                 1,399,075                5.1%
Chairman of the Board
370 Clayton Road
Scarsdale, NY  10583-1504

MacAllister Smith(2)                               2,878,252               11.0%
President and CEO
and Director
1515 Hancock St., Suite 301
Quincy, MA  02169-5243

Chasm Holdings, Inc(2)                             4,945,465               18.9%
1515 Hancock St., Suite 301
Quincy, MA  02169-5243

Philip E. Chait                                      100,000                0.4%
1515 Hancock St., Suite 301
Quincy, MA  02169-5243

Gilbert Anthony Reynolds                             500,000                1.9%
13339 North Central
Expressway Suite 103
Dallas, Texas

Kevin Weller (3)                                   3,058,057               11.7%
12 West Main Street
Brasher Falls, NY

Nancy Weller(3)                                    3,066,000               11.7%
12 West Main Street
Brasher Falls, NY

Kent Stiritz                                       2,246,764                8.6%

Kevin Smith                                            44,432               0.2%
4400 Northpoint Parkway
Alpharetta, GA  30022-2429

Thomas Tesmer                                          24,990               0.1%
4400 Northpoint Parkway
Alpharetta, GA  30022-2429

Lane P. Gordon                                         667,086              2.6%
1515 Hancock St., Suite 301
Quincy, MA  02169-5243

ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP
(11 persons)                                        18,870,121             72.3%

</TABLE>



                                       76

<PAGE>

     (1) On December 31, 2004,  Jack  Rubinstein was awarded options to purchase
26,316  shares of common  stock at the  exercise  price of $0.95 per  share.  On
December 31, 2003, Jack Rubinstein was awarded options to purchase 66,667 shares
of common stock at the  exercise  price of $0.60.  On December  28,  2002,  Jack
Rubinstein was awarded  options to purchase 96,666 shares of common stock at the
above market  exercise price of $0.35.  On October 1, 2001,  Fali Rubinstein was
awarded 160,000 shares of restricted stock in lieu of monetary  compensation for
research and  administrative  services rendered to our company.  Fali Rubinstein
and Jack Rubinstein are married.  The ownership of these shares is attributed to
Jack  Rubinstein.  On October 18, 2001,  Jack  Rubinstein was awarded options to
purchase  350,000  shares at the market price of $0.40 per share.  These options
are immediately exercisable. Further, subsequent to the 2001 fiscal year end, on
March 8th, 2002, Jack  Rubinstein lent our company  $100,000 for working capital
purposes. The promissory note evidencing this transaction has a term of one year
and bears simple  interest at the rate of 8%. The  principal and interest of the
note is  convertible  into common stock of Pipeline at the then  current  market
price of $0.35 per share. Upon conversion, Mr. Rubinstein shall receive warrants
equal to 100% of the number of shares converted with minimum warrant issuance of
100,000  shares.  On March 8, 2003, the note was  renegotiated  and the term was
extended  to March 8, 2005.  Mr.  Rubinstein,  our  Chairman  of the  Board,  is
entitled to receive a performance  bonus for services  rendered since 2002 of up
to $180,000, payable in cash or kind, as determined by the Board of Directors.

     (2) Chasm  Holdings is 50% owned by Catherine  Brannon who is the sister of
MacAllister Smith. The other 50% owner is Barbara Klein,  Philip Chait's sister.
On June 28, 2002,  100,000  shares of  unregistered  common stock were issued to
MacAllister Smith in lieu of fees outstanding. On December 31, 2003, MacAllister
Smith was awarded  options to  purchase  279,291  shares of common  stock at the
exercise  price of $0.60.  On December 28, 2002,  MacAllister  Smith was awarded
options to purchase  446,666 shares of common stock at the above market exercise
price of $0.35.

     (3) Kevin Weller is a director of our company. Nancy Weller is his wife and
her shares may be  attributed  to him. On December  31,  2004,  Kevin Weller was
awarded options to purchase 101,053 shares of common stock at the exercise price
of $0.95 per share.  On December 31,  2003,  Mr.  Weller was awarded  options to
purchase  160,000  shares of common  stock at the  exercise  price of $0.60.  On
December 28, 2002, Mr. Weller was awarded  options to purchase  96,668 shares of
common stock at the above market  exercise price of  $0.35.Pursuant  to the NMSI
Acquisition  Agreement,  on August 26, 2002,  Kevin and Nancy Weller were issued
(i) five thousand shares of series A preferred convertible stock (the "Preferred
Shares"),  each preferred share is convertible  into one thousand (1,000) shares
of our common stock at the  conversion  price of $0.50 per common share and (ii)
one million of our common shares. We agreed that during the 36-month period from
the date (the "36-month  Period") of the NMSI Acquisition  Agreement (August 26,
2005),  we would offer to repurchase  the Preferred  Shares from Kevin and Nancy
Weller for $2,500,000. In the event we failed to do this, the merchant portfolio
would revert back to the Wellers.  On February 27, 2004,  we complied  with this
provision and repurchased  2,000 Preferred Shares for $1,000,000 and the Wellers
exercised  their option to convert  3,000  shares into  3,000,000  shares.  As a
result of this  transaction,  the NMSI merchant  portfolio cannot revert back to
the Wellers.

                                       77
<PAGE>
Item 12. Certain Relationships and Related Transactions.

     In February 2001, the company  instituted the 2001-02 Non -Statutory  Stock
Incentive  Plan in order to award  stock  options,  restricted  stock  and stock
bonuses to selected  individuals  who make  contributions  to the success of our
company.  The  Incentive  Plan was amended on December 1st, 2003 to increase the
number of options awardable by 2,000,000 to 4,000,000 options.

     During the year ended  December 31, 2003,  the company issued the following
options:  200,000  options to Sheila Corvino,  Esq., for legal services,  strike
price $0.35. 150,000 options to Sheila Corvino, Esq., for legal services, strike
price $0.40.  350,000  options to MacAllister  Smith for services,  strike price
$0.40.  150,000 options to R. Scott Barter for analytical and financial research
services, strike price $0.35.

     The following are options  granted on December 18, 2002:  50,000 options to
Jody Latimer for sales work  performed,  strike  price $0.35.  25,000 to vest on
January 1, 2003 and 25,000 to vest on January 1, 2004. 50,000 options to Barbara
Denis for  services,  strike price $0.35.  25,000 to vest on January 1, 2003 and
25,000 to vest on January  1,  2004.  75,000  options  to Donald  Gruneisen  for
accounting  services,  strike price $0.35. 37,500 to vest on January 1, 2003 and
37,500 to vest on  January  1,  2004.  96,666  options  to Jack  Rubinstein  for
directorial  services,  strike price $0.35. All 96,666 shares to vest on January
1, 2003.  96,666 options to MacAllister Smith for directorial  services,  strike
price $0.35.  All 96,666  shares to vest on January 1, 2003.  96,666  options to
Jack Rubinstein for directorial services,  strike price $0.35. All 96,666 shares
to vest on January  1, 2003.  96,668  options  to Kevin  Weller for  directorial
services, strike price $0.35. All 96,668 shares to vest on January 1, 2003.

     The following material  transactions have occurred in the past fiscal year.
They are identified below:

     Pursuant to the NMSI  Acquisition  Agreement,  dated,  August  26th,  2002,
whereby we  purchased  our NMSI  subsidiary,  we agreed  that during the initial
36-month  period of the this  agreement  (August  26,  2005),  we would offer to
repurchase the Preferred  Shares from Kevin and Nancy Weller for $2,500,000.  In
the event we failed to do this, the merchant  portfolio would revert back to the
Wellers.  On February 27, 2004 we complied with this  provision and  repurchased
2,000 Preferred Shares for $1,000,000 and the Wellers  exercised their option to
convert 3,000 shares into 3,000,000 shares. As a result of this transaction, the
NMSI merchant portfolio cannot revert back to the Wellers.

     As part of the NMSI  Acquisition  Agreement,  the Wellers are  afforded the
opportunity  to borrow an  aggregate  amount of $200,000  from our  company.  On
November 18, 2003,  Kevin Weller borrowed $85,000 from our company pursuant to a
promissory note with a term of eighteen  months bearing  interest at the rate of
4%. This note was paid in full on March 10, 2004.


     On March 14, 2002,  Accu-Search  renegotiated their note with us. We agreed
to convert the $200,000 note with  interest  totaling  $224,000  into  preferred
stock of  Accu-Search.  They also paid an upfront  payment of $4,000 in cash. In
addition,  Accu-Search  would  provide  Pipeline  Data two  years' Web access to
Accu-Search's  online data and map system.  Contracts  were finalized and signed
and monies  delivered on or about April 30th,  2002.  During  2004,  $55,407 was
received  from  Accu-Search  representing  payments  of interest of 24,620 and a
partial  redemption  of  Accu-Search's  preferred  5,746  shares of  Accu-Search
preferred  stock in the amount of $34,508 and interest  payments of $20,899.  On
December 16, 2004, the remaining  25,656 shares of Accu-Search were converted to
cash upon  Accu-Search's  merger into a wholly  owned  subsidiary  of  Datatrace
Information  Services LLC.  Accu-Search shares outstanding as of the merger date
were automatically converted to a right to receive cash.

                                       78
<PAGE>

     On March 8th, 2002, Jack  Rubinstein,  our Chairman of the Board,  lent our
company  $100,000 for working capital  purposes.  The promissory note evidencing
this transaction has a term of one year and bears simple interest at the rate of
8%. The principal and interest of the note is  convertible  into common stock of
Pipeline at the then current market price of $0.35 per share.  Upon  conversion,
Mr.  Rubinstein  shall  receive  warrants  equal to 100% of the number of shares
converted with minimum warrant issuance of 100,000 shares. On March 8, 2003, the
note was  renegotiated  and the term was extended to March 8, 2005.  On December
31, 2004 Mr. Rubinstein converted this note and accrued interest to common stock
at a conversion rate of $.35 per share.

     Mr.  Rubinstein,  our  Chairman  of the  Board,  is  entitled  to receive a
performance bonus for services rendered since 2002 of up to $180,000, payable in
cash or kind, as determined by the Board of Directors.

     As  of  December  31,  2004,  our  company  had  issued  $1,117,423  in  8%
convertible  notes.  Of that amount,  $739,204 is outstanding as of December 31,
2004.

     The outstanding  notes have a two year term,  accrue interest at the annual
interest rate of 8% and have 33% warrant  coverage at a conversion price of $.35
per share.  Beginning  November 1, 2003 the conversion price was $.50 per share.
As of January 1, 2004, the conversion  price was $0.65 per share and as of March
8, 2004, the conversion  price was $1.00 per share. The names and amounts of the
recipients are as follows:


                               8% Convertible Note

Date              Name                                       Amount

3.12.03           Cara J. Fascione                                      200,000*

3.31.03           Chasm Holdings                                         26,120

6.9.03            William Haas                                            5,000

6.26.03           Lane Gordon                                            50,000

5.6.03            Chasm Holdings                                          2,000

8.8.03            Tracy Bertolino                                        46,873

9.25.03           Chasm Holdings                                         15,000

9.2.03            Michael Greenburg                                       8,000

10.27.03          Chasm Holdings                                          8,950

10.31.03          Lane Gordon                                            50,000

11.13.03          Lane Gordon                                            50,000

12.18.03          Tracy Bertolino                                         1,400

1.8.04            Chasm Holdings                                         10,000

1.14.04           Chasm Holdings                                          4,000

1.2.04            Elaine Greenburg                                        5,000

1.20.04           Michael Greenburg                                    3,333.50

1.26.04           G Timothy Kane                                         35,000

1.27.04           Barbara Klein                                           5,000

                                       79

<PAGE>


1.27.04           Alexis Rudolph                                          5,000

1.28.04           Tanya Crowley                                          15,000

1.28.04           Barbara Klein                                          10,000

2.3.04            Barry Shore                                             5,000

2.4.04            Robin & William Maher                                  10,000

2.5.04            Ken & Linda Swift                                      10,000

2.6.04            Joe Chang                                               5,000

2.9.04            Terry Buckley                                           5,000

2.13.04           Jill Johnson                                            5,000

2.13.04           Chris Bertolino                                         5,000

2.13.04           Louis Bertolino                                         5,000

2.13.04           Blair & Jill Johnson                                   16,000

2.17.04           Louis Bertolino                                        10,500

2.17.04           Carolyn Bertolino                                       5,000

2.19.04           David Cushing                                          20,000

2.25.04           Melvin Chait                                            9,000

2.25.04           Trudy Becker                                            5,000

2.25.04           Bob Erlichman                                           5,000

2.27.04           Peter Thompson                                         25,000

2.27.04           Carmen Lopez                                            4,000

2.27.04           Lane Gordon                                            50,400

3.5.04            Bob Erlichman                                           7,500

3.8.04            David Cushing                                          20,000

4.22.04           Donald Swift                                            3,000


     * Note and accrued interest converted into Pipeline Data stock during March
2005.

                                       80

<PAGE>

Item 13. Exhibits.

(a) The following exhibits are included as part of this report:

EXHIBIT
NUMBER DESCRIPTION LOCATION


Exhibit No.   Description

3.1* Certificate of Incorporation

3.2* Amended and Restated Certificate of Incorporation

3.3* By-laws of registrant

3.4* Form of class A Redeemable Warrant

3.5* Form of class B Redeemable Warrant

3.6* Form of class A Warrant Agreement

3.7* Form of class B Warrant Agreement

3.8* Form of Lock-up Agreement

5*   Opinion on Legality of Sheila G. Corvino

10.1* Web site development and servicing agreement

10.2* Consulting Agreement with Unifund America, Inc.

10.3* Agreement with Rainbow Media

10.4*Promissory Note dated November 1,2000 issued by Accu-Search, Inc. as Debtor
     to Pipeline Date Inc.as Payee

10.5*License  Agreement for Technology  dated November 1, 2000 between  Pipeline
     Date Inc. and Accu-Search Inc.

10.6* Amended Promissory Note by Accu-Search as Debtor to Pipeline as Payee

10.7*Acquisition Agreement dated March 19, 2002 between the Registrant and
     SecurePay.Com, Inc.

10.8*Acquisition  Agreement  dated August  26,2002  between the  Registrant  and
     Northern Merchant Services, Inc.

10.9*Securities  Purchase  Agreement  dated  February 27, 2004 between  Pipeline
     Data Inc. and Laurus Master Fund, Ltd.

10.10*Convertible Term Note dated February 27, 2004, made by Pipeline Data Inc.
                      in favor of Laurus Master Fund, Ltd.

10.11*Security  Agreement  dated February 27, 2004 by and between  Pipeline Data
     Inc. and Laurus Master Fund, Ltd.

10.12*Registration  Rights  Agreement  dated  February  27,  2004 by and between
     Pipeline Data Inc. and Laurus Master Fund, Ltd.

10.13*Common Stock Purchase Warrant dated February 27, 2004 issued by Pipeline
     Data Inc, in favor of Laurus Master Fund, Ltd.


                                       81
<PAGE>

10.14* Asset Purchase Agreement dated May 18, 2004.

10.15* Secured Term Note dated May 18, 2004.

10.16* Pledge Agreement dated May 18, 2004.

10.17* Asset Purchase Agreement dated May 24, 2004.

10.18*Convertible Term Note dated August 31, 2004, made by Pipeline Data Inc. in
     favor of Laurus Master Fund, Ltd.

10.19*Security Agreement dated August 31, 2004 by and between Pipeline Data Inc.
     and Laurus Master Fund, Ltd.

10.20*Security  Agreement  dated  August 31, 2004 by and between  SecurePay.com,
     Inc. and Laurus Master Fund, Ltd.

10.21*Security Agreement dated August 31, 2004 by and between NMSI and Laurus
     Master Fund, Ltd.

10.22*Security  Agreement  dated  August 31, 2004 by and between  Pipeline  Data
     Processing, Inc. and Laurus Master Fund, Ltd.

10.23*Stock Pledge  Agreement dated August 31, 2004 by and between Pipeline Data
     Inc. and Laurus Master Fund, Ltd.

10.24*Stock Pledge  Agreement dated August 31, 2004 by and between Pipeline Data
     Processing, Inc. and Laurus Master Fund, Ltd.

10.25*Registration  Rights  Agreement  dated  August  31,  2004  by and  between
     Pipeline Data Inc. and Laurus Master Fund, Ltd.

10.26*Common Stock Purchase Warrant dated August 31, 2004 issued by Pipeline
     Data Inc, in favor of Laurus Master Fund, Ltd.

10.27*Guaranties dated August 31, 2004 issued in favor of Laurus Master Fund,
     Ltd.

23.1* Consent of Sheila G. Corvino, Esq. (part of Exhibit 5)

23.2 Consent of Drakeford & Drakeford, Certified Public Accountant

* previously filed in our registration statement


<PAGE>

                                       82

Item 14.  Principal Accountant Fees and Services.

(a) Audit Fees

     For the year ended  December 31, 2003 billed audit fees were  $41,800.  For
the year ended December 31, 2004 billed audit fees were $41,400.



(b) Tax Fees

     For the year ended  December 31, 2003 billed tax fees were $3,500.  For the
year ended December 31, 2004 no tax fees were billed.

(

                                       83
<PAGE>

                                   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: March 31, 2005


                                   Pipeline Data Inc..
                                  -----------------------------------------
                                  (Registrant)



                                   /s/ MacAllister Smith
                                   -----------------------------------------
                                   MacAllister Smith
                                   President




                                   /s/ Donald Gruneisen
                                   -----------------------------------------

                                   Donald Gruneisen
                                   Chief Financial Officer
                                   (Principal Financial and
                                   Accounting Officer)

<PAGE>


                                 CERTIFICATIONS

I, MacAllister Smith, certify that:

1.   I have reviewed this annual report on Form 10-KSB of Pipeline Data Inc;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

March 31, 2005

                                              /s/ MacAllister Smith
                                              ----------------------------------
                                              MacAllister Smith
                                              President



<PAGE>


I, Donald Gruneisen, certify that:

1.   I have reviewed this annual report on Form 10-KSB of Pipeline Data Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


March 31, 2005
                                              /s/ Donald Gruneisen
                                              ----------------------------------
                                              Donald Gruneisen
                                              Chief Financial Officer



<PAGE>




                                                                    EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection  with the Annual Report of Pipeline Data Inc. (the "Company")
on Form 10-KSB for the year ended December 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, MacAllister Smith,
President,  Chief  Executive  Officer,  and  Director  and I, Donald  Gruneisen,
Principal  Financial Officer,  certify,  pursuant to 18 U.S.C.  Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the  requirements  of section 12(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects,  the financial condition and result of operations of the Company,
     as of, and for the periods presented in the Report.


                                            /s/ MacAllister Smith
                                            -----------------------------------
                                            Principal Executive Officer,
                                            Principal Accounting Officer

                                            /s/Donald Gruneisen
                                            -----------------------------------
                                             Principal Financial
                                             Officer


                                             March 31, 2005



     A signed  original of this  written  statement  required by Section 906 has
been  provided to Pipeline  Data Inc. and will be retained by Pipeline Data Inc.
and  furnished  to the  Securities  and  Exchange  Commission  or its staff upon
request.



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