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, 2005  |_|
    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. Employerincorporation 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: (617) 405-2600 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. $24,097,575  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,  2005,  there were  38,594,070 shares  of  the   registrants   common  stock,  par  value  $0.001  issued  and outstanding. As of March 21,  2006,  the  market  value of  securities  held by non-affiliates is $11,800,530 based on the average of the high and low bid prices as reported by Yahoo.com. 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. 39,687,537 shares of common stock, par value $0.001, as of March 21, 2006     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|






TABLE OF CONTENTS






Item Number and CaptionPART IITEM 1. BusinessITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPART IIITEM 5. Market for Common Equity and Related Stockholder MattersITEM 6. Managements Discussion and Analysis of Financial Condition andResults of OperationsITEM 7. Financial StatementsITEM 8. Changes in and Disagreements with Accountants onAccounting and Financial MattersPART IIIITEM 9. Directors and Executive OfficersITEM 10. Executive CompensationITEM 11. Security Ownership of Certain Beneficial Owners and  ManagementITEM 12. Certain Relationships and Related TransactionsITEM 13. ExhibitsITEM 14. Principal Accountant Fees and Services




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, 2005  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.


PART I



Item 1. Business.



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, 2005, we provided our services to approximately 23,000 active merchants located throughout the United States. We believe our experience and knowledge in providing payment processing services to small to medium-sized merchants gives us the ability to effectively evaluate and manage the payment processing needs and risks that are specific to small businesses. We were formed as
a Delaware corporation in June 1997, and we currently operate through several wholly owned subsidiaries:



        SecurePay, which we acquired in March 2002;
        Northern Merchant Services, Inc., which we refer to herein as NMSI, amd which we acquired in August 2002;
        Pipeline Data Process, Inc., which we refer to herein as PDP;
        Pipeline Data Portfolio Acquisitions, Inc, which we refer to herein as Pipeline Acquisitions;
        Aircharge, Inc., which we refer to herein as Aircharge and which we acquired effective September 30, 2005; and
        Charge.com, Inc., which we refer to herein as Charge, and that we acquired on December 19, 2005.On January 12, 2006, our stockholders approved a reverse stock split; however, the reverse stock split has not yet been implemented. Readers should note that unless otherwise indicated all share information in this Business section is presented on a pre-reverse stock split basis. Readers should also note that when we use the term recurring revenue payments herein, we do not mean to imply that such revenue payments are guaranteed, but rather that services for which payments are made are provided continually over a period of  time, as opposed to on a one-time basis, and, thus, we seek monthly recurring payments therefor.

Small to 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 to medium-sized merchants we target to increasingly accept and benefit from the increased usage of card-based payment systems. According to the Nilson Report, there are approximately 4.9 million merchants in the United States, representing 6.1 million locations. The Nilson Report forecasts that purchase volume by U.S. consumers using Visa credit cards will increase 63% from 2003 to 2008 and that purchase volume by U.S. consumers using MasterCard will increase 46% from 2003 to 2008. The Federal Services Policy Committee of the Federal Reserve System reported that for the first time in United States history, electronic payment transactions (44.5 billion) exceeded the number of check
transactions (36.7 billion) in 2003. This expected shift in electronic payment reflects the expanding role of technology and its impact on consumer spending within retail, financial and banking businesses that is likely to continue for the foreseeable future. As a result, many small to medium-sized businesses are seeking, and we expect many new small to medium-sized 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.



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Our historic and continuing strategy is to grow our company by aggressively growing the number of merchant accounts serviced and by creating a processing and servicing operation that is efficient and scalable. We believe this will allow us to more easily expand our operations without significantly increasing our fixed costs. We also 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 differentiating between what should be serviced in house and what should be outsourced, in order to maximize resources while providing better service to our clients. We believe that the development of our company to date demonstrates how we have implemented our strategy.

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, American Express, 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. SecurePays president, MacAllister Smith, serves as our President, Chief Executive Officer and Director.

In March 2002, we acquired all of the stock of SecurePay in exchange for seven  million six hundred  thousand  (7,600,000) shares of our common stock at closing and up to 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. This milestone period has now expired and three million eight hundred thousand  (3,800,000) shares have been issued to compensate for milestones achieved prior to expiration.

Our wholly-owned subsidiary NMSI is an Independent Sales Organization, which we refer to herein as an ISO, which we define as any non-bank party that sells card-based payment processing services to merchants.  In accordance with our overall operating and growth strategies, NMSI seeks to enlarge its customer base of small to 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.

On August 26, 2002, we acquired all the stock of NMSI in exchange for five thousand shares (5,000) of our series A preferred convertible stock and one million (1,000,000) shares of our common stock at closing, with the opportunity to earn an additional three million (3,000,000) shares of our common stock based upon milestones involving the acquisition of additional new merchant accounts within a specified period of time. Each Series A preferred share was convertible into one thousand  (1,000)  shares of our common stock at the conversion price of $0.50 per common share. Pursuant to our acquisition agreement, we agreed that during the 36-month period from the date of acquisition, we would offer to repurchase such preferred shares from the former NMSI stockholders, 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 series A preferred shares for $1,000,000 and the Wellers exercised their option to convert 3,000 series A 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.

In terms of the Wellers earn-in opportunity, two million (2,000,000) shares have been issued pursuant to achieved milestones. On July 5, 2005, our board of directors determined that it is in the best interest of the company to change the nature of the earn-in requirement for the final one million shares and requested that a new milestone be created. Thus, the final one million share earn-in is available if Kevin and Nancy Weller successfully (i) oversee and open a new facility in Brasher Falls and (ii) develop and launch a government payment processing solution. The board is currently reviewing completion of this milestone.

  

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To
    further our internal growth strategy, in July 2004 we formed PDP as our a
    new, wholly-owned wholesale processing division. We appointed former Concord
    EFS (NYSE:FDC) Senior Vice President Kevin Smith as President of PDP and also
    as our chief operating officer. Mr. Smiths primary objective with
    PDP is to grow the number of merchant accounts serviced by targeting the wholesale
    processing industry. PDP conducts underwriting and risk management operations
    in-house. We consider underwriting and risk management highly important to
    our operations. 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.

We entered into a several financing arrangements over the past two years to facilitate our business development. On February 27, 2004, we entered into a series of financing arrangements with Laurus Master Fund, Ltd.., which we refer to herein as Laurus,  to provide our company with convertible debt financing. Under the arrangement, we issued Laurus a total of $6,000,000 in secured convertible notes as follows; a $2,000,000 secured convertible note on February 27, 2004, a $1,000,000 secured convertible note on June 16, 2004, and a $3,000,000 secured convertible note on August 31, 2004. These secured convertible term notes were scheduled to mature on February 27, 2007, June 16, 2007 and August 31, 2007, respectively, and bore interest at an adjustable rate of Wall Street Journal Prime Rate plus two percent (2.0%), commencing at six percent (6.0%) per annum. Convertible notes in the principal
amount of $5,000,000 were 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 were 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 notes pursuant to security agreements dated February 27, 2004, June 16, 2004 and August 31, 2004. This loan was paid off in full on December 20, 2005 with the proceeds of a loan from Sheridan Capital Advisors, LLC, which is described below.

On September 30, 2005, we entered into a financing arrangement with CAMOFI Master LDC, an affiliate of Centrecourt Asset Management LLC. Under the arrangement, we issued CAMOFI Master LDC a $2,000,000 convertible note that will mature on September 30, 2008. The convertible note bears interest at an adjustable rate of Wall Street Journal Prime Rate plus two and one-half percent (2.5%). The note is convertible into registered shares of our common stock at a fixed conversion price of $1.10 per share. To secure the obligations under our CAMOFI Master LDC note, we entered into a security agreement, dated September 30, 2005, under which we granted to CAMOFI Master LDC a second priority security interest in our assets, which interest was junior to the then outstanding security interest we issued to Laurus Master Fund Ltd. Pursuant to the financing arrangement, we issued CAMOFI Master LDC warrants
to purchase 700,000 shares of our common stock. The warrants have a five year term and have an exercise price of $1.10 per share. The shares of our common stock underlying the CAMOFI Master LDC note and warrant are being registered for resale pursuant to a separate registration statement filed with the Securities and Exchange Commission.

On December 20, 2005, we entered into a financing arrangement with Sheridan Capital Advisors, LLC, which we refer to herein as Sheridan. Under the arrangement, we issued Sheridan Capital Advisors, LLC. a $15,000,000 secured senior note that will mature on December 20, 2006. The Sheridan note bears interest at seventeen percent (17%). We also granted to Sheridan a first priority security interest in our assets pari passu with our $2,000,000 obligation of CAMOFI Master LDC. No equity in our company was issued in connection with the Sheridan financing. The proceeds from the financing have enabled us to complete our acquisition of Charge.com, Inc., as described below, and to repay all amounts outstanding under the $6,000,000 convertible debt obligation to Laurus.

Upon a public offering of our equity securities, we shall be required to repay at least $7.5 million in aggregate principal amount of the Note (plus accrued interest to the date of repayment). Upon the sale of any of our assets in a transaction or series of transactions in excess of $50,000, we shall be required to use 100% of the proceeds of such asset sale to repay the principal amount of the Note (plus accrued interest to the date of repayment).

We have the right to prepay, in cash, all or a portion of the Note at 110% of the principal amount thereof plus accrued interest to the date of repayment. Notwithstanding the foregoing, in the event we prepay the Sheridan note in full or repays it at maturity and the aggregate amount received by the Sheridan from all prepayments and interest shall not be less than $2 million, then Sheridan shall receive an additional amount such that Sheridan has received $2. million in the aggregate from interest payments and prepayments.



3


With the proceeds from the Laurus financings, 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 during 2004 The 4,850 accounts have represented approximately $119,603,008 in annual consumer charge volume on a historical basis. In addition, with the proceeds from the Sheridan financing we were able to complete our acquisition of Charge.com. 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:



        On March 15, 2004, our subsidiary, NMSI, purchased the rights to receive recurring revenue payments from three independent sales representatives for an aggregate purchase price of $268,081 plus 32,952 shares of our common stock (Ms. Thornton chose to take $94,624.68 and 10,984 shares of stock after agreement was finalized. The stock represented a conversion of $10,000 into 10,984 shares of our common stock.)
        On May 18, 2004, we entered into an asset purchase agreement to purchase the rights to receive recurring revenue payments 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 rights to receive recurring revenue payments  (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). We purchased the first tranche of merchant portfolios in consideration for 2,246,764 shares of our unregistered common stock. On February 1st 2006, we purchased the second tranche of merchant portfolios. The number of shares
of our unregistered common stock to be issued as consideration for these portfolios will be determined in accordance with the formula set forth in the agreement, i.e. the actual average annual gross receipts for the three month period following the purchase. At closing, Millenniums outstanding loan to us in the amount of $804,592 was repaid with Millennium Bankcard portfolios valued in accordance with this same formula.
        On May 25, 2004, NMSI purchased from United Processing Corporation Ltd. its rights to receive recurring revenue payments 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 rights to receive recurring revenue payments 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 Acquisitions, purchased the rights to receive recurring revenue payments 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.
        On December 1, 2004, Pipeline Acquisitions purchased the rights to receive recurring revenue payments 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:
        On February 21, 2005, Pipeline Acquisitions purchased the rights to receive recurring revenue payments to an aggregate of 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 rights to receive recurring revenue payments purchased.

4



        On March 1, 2005, Pipeline Acquisitions purchased rights to receive recurring revenue payments to an aggregate of 775 merchant accounts from Advanced Internet Services, LLC for an aggregate purchase price of $589,589 plus 512,080 shares of our restricted common stock.
        On October 7, 2005, and effective September 30, 2005, we acquired World Products, Inc dba Aircharge. In consideration for all the stock of Aircharge, we paid the former stockholders of Aircharge: $200,000, a $525,000 convertible promissory note bearing interest at LIBOR, and 900,000 shares of our restricted common stock. An additional 1,000,000 shares of our restricted common stock may be issued subject to performance incentives.
        On December 20, 2005, we completed the acquisition of Florida-based Charge.com, Inc. through a newly formed wholly-owned subsidiary. We acquired all the stock of Charge.com in exchange for $7.5 million in cash and $9.5 million in shares of our restricted common stock. The stock component resulted in 9,398,059 shares of restricted common stock being issued to the former Charge.com stockholders.Our revenues are derived primarily from the electronic processing of credit, charge and debit card transactions that are authorized and captured through third-party networks. Typically, fees charged to merchants for these processing services are based on a variable percentage of the dollar amount of each transaction as well as an additional pre-determined transaction fee; we refer to these fees as interchange fees in this prospectus. Merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, monthly minimums fees, fees for handling payment chargebacks, gateway fees 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 (such as MasterCard and Visa) under revenue sharing agreements pursuant to which such parties receive payments based
primarily on processing volume for particular groups of merchants.

Our acquisitions have enhanced our revenues and increased our portfolio of merchant accounts. To this end, we formed Pipeline Acquisitions in November 2004 to locate merchant portfolios that complement our existing customer base of small to medium-sized merchants. Pipeline 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. Pipeline Acquisitions then determines a valuation of each portfolio acquisition opportunity based on a combination of these factors and moves to acquire the acquisition candidate.

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:



        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 and average transaction amounts and pricing, which assists us in monitoring merchant transactions for those accounts that exceed
pre-determined criteria.

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
        MerchantSet-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.
        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.
        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.
        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 helpline, which is staffed by our customer service representatives.
        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.
        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:


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

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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 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 wireless 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. The system maximizes accurate transaction reconciliation with each merchant and protects against potential loss of data. The data collected 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.

Cell Phone and PDA 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. 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. We intend to aggressively market our products and services to the wireless and mobile merchant sector. We believe the wireless and mobile transaction processing market is poised for exploitation, and, therefore, will market a suite of products and services through our Aircharge subsidiary to service mobile transaction processing merchants. In its May 2004 report, Mobile Merchants POS Terminals: Revisiting Untethered Card Acceptance, research firm the TowerGroup said that targeting mobile merchants, plumbers, non-store retailers, restaurants and taxi and limousine services who accept a majority of payments through cash and checks will greatly affect the wireless market, especially through handheld devices.  By 2009, the TowerGroup predicts that both countertop and handheld wireless devices will account for one in four new POS terminals delivered in the
United States; in 2003, there were 12 million POS terminals in place.

Shopping Cart Technology

  The
    shopping cart (Easy Shop) is a powerful, yet user-friendly tool that is fully
    integrated into 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



7


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 resellers (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 ISOs 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.

Primary Sources of Revenue

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 receive periodic fees from most of our merchants for providing various services. 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.

  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s 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, chargeback or other fees because of insufficient
    funds in the merchants bank account.



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Industry Overview and Our Market

Over the past ten years, the usage of non-cash forms of payment, such as credit and debit cards, has steadily increased. According to The Nilson Report, a leading industry publication that tracks the transaction processing industry, purchases by U.S. consumers using credit cards will grow from $1.47 trillion in 2003 to $2.28 trillion in 2008. In February 2006, Nilson reported that Visa, MasterCard, American Express and Discover credit and debit cards generated $2.141 trillion in purchase volume in 2005, up 13.2%. The Nilson Report additionally forecasts that similar expenditures are anticipated to grow to $4.2 trillion, representing a potential compounded annual growth rate of 11.5% between 2003 and 2011. For the first time in United States history, electronic payment transactions (44.5 billion) exceeded the number of check transactions (36.7 billion) in 2003. The dollar volume on
electronic payment transactions reported by Nilson totaled $27.4 trillion in 2004 versus checks sustaining dollar volume of $39.3 trillion. The evident shift in electronic payment reflects the expanding role of technology and its impact on consumer spending within retail, financial and banking businesses that are likely to continue of the foreseeable future.

The significant industry drivers appear to include convenience, incentive-based programs, and a maturing demographic shift in younger U.S. adults migrating towards a cashless society. We believe there is a great opportunity in the transaction processing business to procure small to medium-sized merchants in retail environments, online transactions via e-commerce, mobile payment processing, municipal payment processing and others.

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. We believe that 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 to medium-sized businesses are seeking, and we expect many new small to medium-sized 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 and have not focused on small to medium-sized
merchants, as small to medium-sized merchants are often perceived as too 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 to medium-sized merchants. We have focused our marketing efforts 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, 2005, we were providing these services to 23,000 active small to medium-sized merchants located across the United States. 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 2005. 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.

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. We expect merchant attrition is in



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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 2005, 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.

Merchant fraud is another expected aspect of the credit card processing business. Currently, we are responsible for fraudulent credit card transactions of our merchants on approximately 33% of our merchant customers, but we expect this percentage to increase. 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, and 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 merchant may not assign the agreement without the
prior written consent of the sponsoring bank.

We believe that we have extensive experience and resources in assessing the risks associated with providing payment-processing services to small to medium-sized merchants. These risks include the limited operating history that many of the small to medium-sized 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.

Our Strategy

Our strategy is to build our business through growth (mainly through acquisition of recurring revenue payments and complimentary businesses) and efficiency. We intend to aggressively grow the number of merchant accounts serviced through the solicitation of new merchant accounts and the acquisition of merchant portfolios and compatible businesses. We intend to achieve efficiency 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 extensive 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 strategic objectives are to:



        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 to medium-sized 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.



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
        Expand our portfolio of merchant clients.Our target market is small to medium-sized merchants who use payment processing services. We are seeking to expand our market presence through our internal sales efforts, banks and ISOs as well as mobile merchants who use wireless payment processing services.

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, we believe, 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.



        Grow our relationships with banks and ISOs.We have found relationships with banks to be a cost -effective and valuable method of reaching small to medium-sized merchants that would otherwise be difficult to identify and locate using customary marketing practices. Pursuant to these relationships, banks endorse the processing systems we market and service and participate in referring new customers. We believe the utilization of ISOs to be another effective way of increasing the volume of merchant referrals.



        Maintain a stable and growing recurring revenue base.Through merchant retention and increased credit card use, we have developed what we believe is a stable and recurring base of revenues. In addition to our high customer service level, endorsements from banks and direct salespersons provide an additional link to our merchants that should 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.



        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 retention.

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 four 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 ISOs that market and sell our services to merchants; (iii) direct sales, to allow cost-effective access to small to medium-sized merchants dispersed throughout the United States and otherwise to supplement the bank alliance and ISO sales; and (iv) internet marketing, utilizing optimal search engine placement and affiliate referral programs.  In addition, we utilize other marketing efforts that encompass cross-selling our Aircharge and Securepay products. We also make use of  various trade and other associations as well as value
added resellers (VARs) to further market our products and services.

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 two types of relationships:  (i) agent bank relationships, where the bank purchases our services and markets and resells those services directly to merchants (which we refer to herein as Agent Bank Alliances); and (ii) bank referral relationships, where the bank refers our company to merchants who desire or otherwise inquire about transaction processing services (which we refer to herein as Bank Referral Alliances).


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We compensate our bank alliance partners through varying means. 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, ISO partnering involves engaging an ISO to market and sell our products and services on a non-exclusive basis. An ISO 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 ISO will sell or lease hardware and software to the merchant.

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 ISOs. ISOs 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 compensate ISOs 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 ISO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.

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

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, ISOs 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 ISO partnering efforts.

Internet Market

We also market over the Internet, targeting small to medium-sized e-commerce businesses. Internet marketing methods used include pay per click advertising, search engine positioning through our Charge.com subsidiary 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. Through our Aircharge subsidiary, we provide wireless, mobile payment solutions and, through our SecurePay subsidiary, we provide gateway solutions and  internet card accept tools.

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.



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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 and Aircharge subsidiaries as well as 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 are developing 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.

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 ISO 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 HSBC, US Bancorp and Wells Fargo Bank N.A. 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 our services under the agreement. We have agreements with our processing banks to provide for us to continue to receive revenues so long as (i) the merchants subject to the agreements process credit card transactions with the banks, (ii) we provide appropriate service to the merchants and (iii)
we otherwise remain in compliance with the terms of 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 agreements.

To date, we have relied primarily on two banks/processors to process our clients credit card transactions: Wells Fargo Bank N.A./CTS Holdings, Inc., or Wells/CTS, and U.S.Bancorp/Nova Information Systems, Inc., or USB/NIS. Currently, our arrangement with our principal bank/processor, Wells/CTS, constitutes approximately 55% of our aggregate merchant base. Under this relationship, we bear liability for approximately 23% of any unfulfilled chargebacks. Our arrangement with our second largest bank/processor, USB/NIS, constitutes approximately 35% of our aggregate merchant base. Under this relationship, we bear no liability for any unfulfilled chargebacks. The remaining 10% of our aggregate merchant base consists of various



13


rights to receive  recurring revenue payments agreements, which, in the main, do not subject us to chargeback liability but have limited contractual rights to the merchants serviced. Our primary 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.

Competition and our Competitive Position in the Market

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



        quality of service;
        support and reliability of service;
        ability to evaluate, undertake and manage risk;
        speed in approving merchant applications;
        technological capability;
        price; and
        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, Heartland Payment Systems, Inc. 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 to 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 strengths which will allow us to compete in our industry. These include::



        Our focus on small to medium-sized merchants.We believe that our specific focus on small to medium-sized merchants, in addition to our understanding of the needs and risks associated with providing payment processing services to small to medium-sized 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 utilize 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. 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 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.

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
        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 specific 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 our 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, including Chareg.com in December 2005 and Aircharge in September, 2005. 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, 2005, we were providing these services to 23,000 active small to medium-sized merchants located across the United States. We believe our understanding of the payment processing needs and risks of small to medium-sized 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 markets 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 to medium-sized 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.
        Superior Internet marketing.We have a comprehensive Internet-based sales organization through our subsidiary, Charge.com, that capitalizes on highly optimized search engine placement, extensive affiliate channels, unique referral programs and a dynamic internet marketing sales team.Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements

We have no patents, trademarks, franchises, concessions or royalty agreements; however, we regard our proprietary software as protected by trade secret and copyright laws of general applicability. However we



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are continuously developing software for use in four principal areas:  (i) applications for Internet-based and wireless transactions; (ii) transaction switching; (iii) the SecurePay suite of products; and (iv) customer service and fraud. We regard our proprietary software as protected by trade secret and copyright laws of general applicability and attempt to safeguard our software through the protection afforded by the above-referenced laws, 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 us 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 software and technology development and to shorten time-to-market software application product deliveries.

Employees and Labor Contracts

As of March 1, 2006, we employed 74 full-time and 1 part-time personnel, including 10 information systems and technology employees, 14 in operations and 51 in sales and administration. Many of our employees are highly skilled, and we believe our future viability will depend in large part on our ability to attract and retain such employees. We have employment agreements with our chief operating officer, our chief technology officer,  chief marketing 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.



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CHARGE.COM ACQUISITION

On December 20, 2005, we completed our acquisition of Charge.com, an industry leader in merchant account acquiring. We acquired all the stock of Charge.com in exchange for:



        Seven Million Five Hundred Thousand ($7,500,000) Dollars in immediately negotiable funds; and
        9,398,059 shares of our restricted common stock issued to the former stockholders of Charge.com, which shares are subject to twelve month lock up provisions and of which shares 5,500,000 shares are afforded certain price protection provisions as follows:  if the price of our common stock is not at least $1.25 per share by the earlier of the twenty-four (24) month anniversary of the issuance of the shares or the date on which we are required to register the shares, then we will be required to (i) return the domain name Charge.com to the former Charge.com, (ii) pay the former stockholders of Charge.com in cash the difference between $1.25 per share and the market value of the price protected shares, or (iii)  pay the former stockholders of Charge.com in shares of our common stock the difference between $1.25 per share and the market
value of the price protected shares. The former Charge.com stockholders were granted standard piggy-back registration rights with respect to the shares received in the acquisitions, commencing from the expiration of a twelve (12) month lock up period commencing from the closing of this offering.Charge.com markets merchant payment processing services and related hardware and software. Charge.com services both traditional retail businesses that conduct transactions face-to-face as well as businesses that conduct transactions over the phone, by mail, and via the Internet. As of December 31, 2005, Charge.com serviced more than 8,000 merchant accounts throughout the United States. Charge.com promotes its services utilizing a three-pronged marketing approach consisting of optimized search engine placement, its widespread affiliate program, and effective paid advertising. Charge.com produced over 500 new merchant accounts per month in 2005. For the year ended December 31, 2005, Charge.com reported $2.8 million in unaudited operating income. Charge.com has experienced earnings growth in excess of 30% in each of the last three years.

Mr. Gregory Danzig, former officer of Charge.com, has each entered into a three year employment agreement with us. Mr. David Danzig, former officer of Charge.com, has each entered into a three year consulting agreement with us.

Strategic Rationale

We view this acquisition as complementary to our wholesale division.   Monthly merchant gateway revenue, which was formerly outsourced, will provide us with another source of incremental revenue. Higher transaction volume and the boarding of new Charge.com accounts on our own platform should result in increased economies of scale for Pipeline as a whole, and therefore contribute towards increased margins. Furthermore, we expect to borrow from Charge.coms e-commerce marketing expertise to enhance our existing initiatives in this area.





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RISK FACTORS

An investment in our securities involves a high degree of risk. In addition to the other information in this prospectus, including our financial statements and related footnotes, you should carefully consider the following risk factors before deciding to invest in our securities. If any of the following risks actually occur, it is likely that our business, financial condition and operating results would be harmed. As a result, the trading price of our common stock could decline, and you could lose part or all of your investment.

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 maintained profitability and may continue to incur losses in the future. While gross profit for the year ended December 31, 2005 grew to  $6,522,970 from $3,121,164 for the year ended December 31, 2004, we had a net income of  $713,385 for the year ended December 31, 2005, and a net loss of $297,221 for the year ended December 31, 2004. We expect our cash needs to increase significantly for the next several years as we:



        acquire additional payment processing businesses and portfolios of merchant accounts;
        increase awareness of our services;
        expand our customer support and service operations;
        hire additional marketing, customer support and administrative personnel; and
        implement new and upgraded operational and financial systems, procedures and controls.As a result of these continuing and new expenses, we need to generate significant revenues to achieve and maintain profitability. To date, our operations have been supported by financings and through sales of our securities, including an aggregate $2,000,000 convertible debt facility secured from CAMOFI Master LDC as well as a $15,000,000 senior secured note, secured from Sheridan Capital Advisors, LLC. If we do not continue to increase our revenues, our business, results of operations and financial condition could be materially and adversely affected.

We have incurred substantial levels of debt, which could 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, 2005, the outstanding principal and interest under a series of convertible notes to individual investors was $371,250. As of December 31, 2005 we have additional debt in the principal amount of: (i) $2,000,000 in a private placement, and (ii) $525,000 in connection with our acquisition of Aircharge, and (iii) $15,000,000 in a financing arrangement with Sheridan Capital Advisors, LLC. 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 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, 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 is used to cover debt service obligations. Security interests granted on our assets could limit our financial and business flexibility.



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If an event of default occurs under the secured note we issued to Sheridan Capital Advisors, LLC, it could result in a material adverse effect on our business operating results, or financial condition as Sheridan maintains a first priority security interest in all of our assets and the assets of our business.

On December 20, 2005, we issued to Sheridan Capital Advisors, LLC a $15 million senior secured note. Sheridan Capital Advisors, LLC has a first priority security interest in all of our assets pari passu with a security interest granted to CAMOFI Master LDC. Investors should be aware that the following events constitute events of default under these notes:



        failure to pay interest and principal payments when due;
        a breach of any material covenant or term or condition in the note in any agreement made in connection therewith;  or
        a default or event default occurring under any of the agreements made in connection with note or any other material agreement, lease, mortgage, indenture agreement, factoring agreement, or other instrument, to which the Company or any of its subsidiaries is bound;
        breach of any warranty or material representation made in the note or in any agreement made in connection therewith;
        any form of bankruptcy or insolvency proceeding instituted by or against us which is not vacated in sixty (60) days;
        failure to timely file all reports required to be filed under the Securities Exchange Act of 1934;
        a change in control.The restrictions on our activities contained in the Sheridan Capital Advisors, LLC financing documents could negatively impact our ability to obtain financing from other sources.

So long as any portion of the principal amount of the senior secured note in favor of Sheridan Capital Advisors, LLC, aggregate principal amount of $15,000,000, remains outstanding, we are restricted from incurring additional indebtedness other than certain permitted indebtedness. To the extent that additional debt financing is required for us to conduct our operations, these restrictions could materially adversely impact our ability to achieve our operational objective.

If an event of default occurs under the secured convertible note we issued to CAMOFI Master LDC, it could result in a material adverse effect on our business, operating results, or financial condition as CAMOFI Master LDC maintains a first priority security interest in all of our assets and in the assets of our subsidiaries.

In September 2005, we issued $2,000,000 of Senior Subordinated Convertible Notes to CAMOFI Master LDC. CAMOFI Master LDC has a first priority security interest in all of our assets and in the assets of our subsidiaries. The following events constitute events of default under these notes:



        failure to pay interest and principal payments when due;
      a
          breach of any material covenant or term or condition of the note, in
          any agreement made in connection therewith or in any other material
          agreement, lease, document or instrument to which the we or our subsidiaries
          are bound;
      a
          breach of any material representation or warranty made in the note or
          in any agreement made in connection therewith;
      an
          assignment for the benefit of our creditors, or a receiver or trustee
          is appointed for us;

19



        any form of bankruptcy or insolvency proceeding instituted by or against us, which is not vacated within 60 days;
        any money judgment or similar final process filed against us for more than  $50,000, which shall remain unvacated, unbonded or unstayed for a period of 90 days;
        our failure to timely deliver registered shares of our common stock when due upon conversions of the note;
        quotation or trading of our common stock suspended for 5 consecutive trading days or more than 10 consecutive trading days or 15 non-consecutive trading days during any 12 month period; or
        a change in control.If we default on our obligations to CAMOFI Master LDC under applicable agreements, the cash required to pay such amounts will most likely come out of our working capital. Since we rely on our working capital for our day to day operations, such a default on the note would have a material adverse effect on our business, operating results, or financial condition. In such event, we may be forced to restructure, file for bankruptcy, sell assets or cease operations, any of which would put your investment dollars, and the value of our common stock, at significant risk. Further, our obligations under the notes are secured by substantially all of our assets. Failure to fulfill our obligations under the notes and related agreements could lead to loss of these assets, which would be detrimental to our operations.

Low market prices for our common stock would result in greater dilution to our stockholders, and could negatively impact our ability to convert the CAMOFI Master LDC debt into equity.

The market price of our common
stock significantly impacts the extent to which the CAMOFI Master LDC debt is
convertible into shares of our common stock and the dilution that will occur to
our stockholders. The lower the market price of our common stock as of the time
of any such conversion on the obligation owed to CAMOFI Master LDC, the more
shares we will be required to issue to CAMOFI Master LDC to convert the
principal and interest payments then due. If the market price of our common
stock falls below thresholds of $1.10 with respect to the CAMOFI Master Fund LDC
debt, we will be unable to convert any such repayments of principal and interest
into equity, and we will be required to make such repayments in cash. Our
operations could be materially adversely impacted if we are required to make
repeated cash payments on the CAMOFI Master LDC debt.

There is a risk that the
SEC may rule unfavorably on our current revenue and cost recognition accounting policies
and, inthis event, the way in which we recognize and disclose our revenues may need
to be altered, which may materially and adverselyeffect our currently disclosed gross
revenue figures, potentially resulting in such figures being substantially lower.


Our
company and our 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.


Our
reported revenue figures (including those appearing in this Report) 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 our 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 our merchant customers and are recognized simultaneously
with the recognition of revenue.


We
follow the requirements of FASBs Emerging Issues Task Force statement 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent, in
determining our revenue reporting and believe that our current and historical revenue
figures are consistent with EITF 99-19. 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. Interchange fees are set by Visa and MasterCard
and are based on transaction processing volume and are recognized at the time transactions
are processed. Revenues generated from certain agent bank portfolios are reported net of
interchange, as required by EITF 99-19, where we may not have credit risk, portability or
the ultimate responsibility for the merchant accounts.


We
are aware, however, that the SEC accounting staff has recently raised certain revenue
recognition concerns regarding companies in our industry. There is a risk that if the SEC
were to determine that our current revenue recognition policies were incorrect, such
policies may need to be altered and our recognition of revenues on a going forward basis
may be materially and adversely effected. Moreover, this change may require us to restate
prior financial statements to reflect substantially lower revenue numbers, which could
effect public confidence in our accounting controls and have a negative impact on our
public stock price. However, as there would be a corresponding reduction in our reported
cost of services sold, we do not believe that any such change in revenue recognition
policy would require us to restate our previous EBITDA, net earnings or stockholders
equity results.


Additional authorized shares of our common stock and preferred stock available
for issuance may adversely affect the market for our common
stock.

  We
    are authorized to issue 95,000,000 shares of our common stock. As of December
    31, 2005, there were 38,594,070 shares of common stock issued and outstanding.
    However, the total number of shares of our common stock issued and outstanding
    does not include an aggregate of 8,883,672 shares reserved in anticipation
    of the exercise of options or warrants and an additional 3,524,384 shares
    of our common stock issuable upon the exercise or conversion of warrants and
    a convertible note held by CAMOFI Master LDC exclusive of any accrued interest
    on the Convertible Notes. In addition, we issued 9,398,058 shares of our restricted
    common stock in connection with the acquisition of Charge.com and we may be
    required to issue additional shares in connection with price protection provisions
    for certain of such shares. We also issued Nine Hundred Thousand (900,000)
    shares of our restricted common stock in connection with the acquisition of
    Aircharge, and we may issued additional shares in connection with the conversion
    of a $525,000 promissory note and a potential One Million (1,000,000) share
    issuance in connection with performance incentives. To the extent such options
    or warrants are exercised or additional issuances are made in connection with
    the acquisition of Charge.com or Aircharge, the holders of our common stock
    may experience further dilution. In addition, to the extent we issue securities
    in future acquisitions or financings that are convertible into or exchangeable
    for equity securities, investors will experience additional dilution.



20


In addition to the above referenced shares of common stock which may be issued without stockholder approval, we have Five Million (5,000,000) shares of authorized preferred stock, the terms of which may be fixed by our board of directors. We have issued preferred stock in the past, and our board of directors has the authority, without stockholder approval, to create and issue one or more additional series of such preferred stock and to determine the voting, dividend, conversion and other rights of holders of such preferred stock. The issuance of any of such series of preferred stock will have an adverse effect on the holders of common stock.

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. Additional financing may be required if we:



        Decide to expand faster than planned;
        need to respond to competitive pressures; or
        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 or trigger contractual obligations to issue additional shares of our common stock to CAMOFI Master LDC. 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.

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 Charge.com in December 2005, World Products, Inc dba Aircharge in September 2005, and two portfolios of merchant accounts in the first quarter of 2005. These acquisitions have contributed to and will contribute to a substantial portion of our anticipated total pro forma revenues for 2005. The full impact of these acquisitions on our operating results are not fully reflected in our historical results of operations for the fiscal year ended December 31, 2005, due to the recent nature of these acquisitions and their varying stages of integration. Accordingly, our results for the fiscal year ended December 31, 2005, may not be indicative of our results of the fiscal year ended December 31, 2006, and comparisons of our results for the year ended December 31, 2005, versus the fiscal
year ended December 31, 2004, may not be indicative of results to be expected in future periods.

Increased consolidation in the market in which we operate will have 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 this strategy
    will continue in the future. We face significant competition from other transaction
    processors for available acquisition, joint venture and alliance opportunities.
    These transaction processors potentially deprive us of acquisition opportunities
    and may cause the purchase price of such transactions to increase. We cannot
    give any assurances that the historical or current level or pricing 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.



21


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.

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 merchants that we serve are businesses that transact a 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. Because we target merchants that process card-not-present transactions over the Internet, by telephone and by mail, we experience and expect to continue to experience chargebacks arising from cardholder fraud. Such chargebacks could negatively impact our financial results. Moreover, if we, or our processing banks, are unable to collect the chargeback from the merchants account, or if the merchant ceases operations, 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. We are not insured against this risk.

We face potential liability for merchant or customer fraud. We may not be able to accurately anticipate this liability, which could result in lost sales to us.

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. Any time 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. We apply varying levels of scrutiny in our evaluation of applications 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 whether to maintain a reserve of a portion of a merchants processing volume, the particular reserve requirements, processing limits, average transaction amounts and pricing. It also assists us in monitoring merchant transactions for those accounts that exceed pre-determined criteria. We maintain rolling reserves, meaning we withhold a varying percentage of at risk merchants processing volume, to offset potential losses. On merchants whom we have instituted a rolling reserve,   we maintain an average of 13% of their merchants processing volume. 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, results of operations and ability to continue business operations.

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



  22


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.

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 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. Our sponsoring banks include HSBC, US Bancorp and Wells Fargo Bank N.A. 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 ISOs, which we define as any non-bank party that sells card-based payment processing services to merchants, that markets and services electronic credit card authorization and payment systems to merchants located throughout the United States. We are unable to guarantee that our sponsoring banks actions under these agreements will not be detrimental to us.

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 their or 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. Our card payment processors include CTS Holdings, Inc. (a wholly owned subsidiary of First Data Corp.) and Nova Information Systems, Inc.

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 and ISOs as referral sources and loss of any of these referral sources may cause us to lose an effective method of marketing our products and services to merchants.

We have contractual relationships with 54 banks, comprising over 420 bank branch locations, and 48 credit unions that serve as 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.

We have contractual relationships with over 30 ISOs to market our services to merchants seeking to establish an account with a payment processor. Our failure to maintain our relationships with our existing ISOs



  23


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.

On occasion, we experience increases in interchange and sponsorship fees; if we cannot pass these increases along to our merchants, our 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 have increased their interchange fees for card-present retail transactions by an average of 0.09% 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 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 closely with an authorized Visa/MasterCard compliance auditor to fulfill our requirements to them regarding cardholder information and security procedures
and expect to be certified compliant in the second quarter of 2006, we are currently not compliant. Noncompliance could result in material interruptions in our ability to store and transmit card data.

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 2005, we experienced average attrition of 1% of merchant transaction charge volume 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 may not be able to accurately predict the level of attrition in the future,
particularly in connection with our recent acquisitions of merchant account portfolios. If we are unable to increase our transaction volume or 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.



  24


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 ability to run our business 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 to medium-sized merchant markets in which we offer our services. In addition, our ability to execute our business strategy will depend 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. Currently, we do not maintain key person life insurance on any employees.

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 to medium-sized 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. Some of our competitors are large associations, such as Costco, BJs Wholesale Club, chambers of commerce, community associations and trade associations that may offer lower rates based on a better buy rate or as a loss leader and, thus, attract customers who shop price or, alternatively, attract business out of association loyalty. There are also a large number of
small providers of processing services that provide various ranges of services to small to medium-sized merchants. Our competition may influence the prices we can charge, attract employees and our sales force away from us 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 2005, we experienced average attrition of 1% of merchant transaction charge volume 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 may not be able to accurately predict the level of attrition in the future,
particularly in connection with our recent acquisitions of merchant account portfolios. If we are unable to increase our transaction volume or 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.



  25


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 operating results could be negatively affected.

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:



        additional development costs;
        diversion of technical and other resources;
        loss of merchants;
        loss of merchant and cardholder data;
        negative publicity;
        harm to our business or reputation; or
        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. Additional financing may be required if we:



        Decide to expand faster than planned;
        need to respond to competitive pressures; or
        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 or trigger contractual obligations to issue additional shares of our common stock to CAMOFI Master LDC. 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


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

Currently, we have no patents or trademarks or copyrights and 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 challenged by others and/or invalidated. Our trademark registrations may not be approved because third parties own these trademarks, or our use of these trademarks may 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 because we provide business-to-business services and not business-to-consumer services. 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, and 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 use 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.

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



        create uncertainty in the marketplace that could reduce demand for our services;
        limit our ability to collect and to use merchant and cardholder data;
        increase the cost of doing business as a result of litigation costs or increased operating costs; or
        in some other manner have a material adverse effect on our business, results of operations and financial condition.We are subject to federal and state laws regarding anti-money laundering, including the Patriot Act, and if we break any of these laws we could be subject to significant fines and/or penalties, and our ability to conduct business could be limited.

  We
    are subject to U.S. federal anti-money laundering laws and the requirements
    of the Office of Foreign Assets Control, which prohibit us from transmitting
    money to specified countries or on behalf of prohibited individuals. The money
    transfer business has been subject to increased scrutiny following the events



  27


of September
    11, 2001. The Patriot Act, enacted following those events, mandates several
    new anti-money laundering requirements. The federal government or the states
    may elect to impose additional anti-money laundering requirements. Changes
    in laws or regulations that impose additional regulatory requirements, including
    the Patriot Act, could increase our compliance and other costs of doing business,
    and therefore have an adverse effect on our results of operation.

Failure to comply with the laws and regulatory requirements of federal and state regulatory authorities could result in, among other things, revocation of required registrations, loss of approved status, termination of contracts with banks, administrative enforcement actions and fines, class action lawsuits, cease and desist orders and civil and criminal liability. The occurrence of one or more of these events could materially adversely affect our business, financial condition and results of operations.

If we were to inadvertently transmit money on behalf of, or unknowingly conduct business with, a prohibited individual, we could be required to pay significant damages, including fines and penalties. Likewise, any intentional or negligent violation of anti-money laundering laws by our employees could lead to significant fines and/or penalties, and could limit our ability to conduct business in some jurisdictions.

Risks Relating to Acquisitions

We may not be able to integrate Charge.com, Aircharge, other recent acquired companies or potential future acquisitions into our company, and resources available to assist our acquired companies may be insufficient.

We have made strategic acquisitions and we intend to continue to make such acquisitions in accordance with our business plan. On December 20, 2005, we completed our acquisition of Charge.com. In addition, we have also recently acquired Aircharge. Each acquisition involves a number of risks, including:



        the diversion of our managements attention to the assimilation and ongoing assistance with the operations and personnel of the acquired business, which could strain the management resources;
        the potential for our affiliated companies to grow rapidly and adversely affect our ability to assist our affiliated companies as intended;
        possible adverse effects on our results of operations and cash flows,
        possible inability by us to achieve the intended objective of the acquisition;
        possible inability by acquisition target to achieve promised goals; and
        possible inability by acquisition target to retain and maintain strategic contracts.Our inability to assist our affiliated companies as intended or to acquire and integrate businesses under our business plan could negatively impact our operations, financial results and cash flows.

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, and failure to make acquisitions in general could significantly impair our growth.

To date, our revenue growth has been generated in large part through acquisitions of complimentary businesses and portfolios of accounts. We expect such acquisitions to be key to our growth strategy going forward. We may not be able to find suitable acquisition candidates or to consummate acquisitions on favorable terms, if at all. Our failure to make such acquisitions could have a material adverse effect on our ability to grow our company.



  28


Moreover, even if we make such acquisitions, revenues generated, or expenses incurred, by acquired businesses or account portfolios may not comport to our projections, resulting in losses or a decline in revenue and profits, if any, 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 of asset charges.

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. If any undiscovered, contingent or undisclosed liabilities materialize, our results of operations could be negatively affected.

Acquisitions that we may undertake would involve a number of inherent risks, any of which could cause us not to realize the anticipated benefits to result.

Our strategy has been and will likely continue to include expanding our operations and capabilities through acquisitions of businesses and assets. Acquisition transactions involve various inherent risks, such as:



        uncertainties in assessing the value, strengths and potential profitability of, and identifying the extent of all weaknesses, risks, contingent and other liabilities (including environmental liabilities) of, acquisition or other transaction candidates;
        the potential loss of key customers, management and employees of an acquired business;
        the ability to achieve identified operating and financial synergies anticipated to result from an acquisition or other transaction;
        problems that could arise from the integration of the acquired business; and
        unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition or other transaction rationale.Any one or more of these factors could cause us not to realize the benefits anticipated to result from the acquisition of businesses or assets or could result in unexpected liabilities associated with acquisition candidates.



  29


We may not fully maximize our business relationship with Sprint Nextel Corp.

We acquired Aircharge in part due to its classification as a national Industry Solutions Partner of Sprint Nextel Corp. (NYSE:S). We believe that this classification should allow us to provide credit card acceptance solutions to Sprint Nextel Corp.s business customers. There can be no assurance, however, that Sprint Nextel Corp. will continue such classification or that such classification will be successfully integrated into our business model. If Sprint does not continue such classification or we are unable to successfully integrate such classification into our business model, there can be no assurance that Sprint Nextel Corp. will continue to provide us with such access to their customers.

The inability of the sellers of companies we may acquire to fulfill their indemnification obligations to us under our acquisition agreements could increase our liabilities, our costs for acquisition and adversely affect our results of operations and financial position.

We have required in the past, and expect that in the future, under our acquisition agreements, the respective sellers will agree to retain responsibility for and indemnify us against damages resulting from certain third-party claims or other liabilities. Our inability to obtain such agreements or the failure of any seller to satisfy its obligations with respect to claims and retained liabilities covered by the acquisition agreements could have an adverse effect on our results of operations and financial position, as claimants may successfully assert that we are liable for those claims and/or retained liabilities. In addition, we expect that certain obligations of the sellers to indemnify us will terminate upon expiration of the applicable indemnification periods and will not cover damages in excess of the applicable coverage limits. The incurrence of unexpected losses and assertion of
third-party claims after the expiration of the applicable indemnification period or in excess of the applicable coverage limit, or the failure of any seller to satisfy its indemnification obligations with respect to breaches of its representations and warranties, could have an adverse effect on our results of operations and financial position.

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

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 operating results.

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, 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.



  30


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. These 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 and Estimates 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.

Risks Relating to Our Company Generally

Our executive officers, directors and principal stockholders have substantial control over our business, and their interests may not be aligned with the interests of our other stockholders.

As of the date of this Report, our officers and directors, together with the founders of Charge.com and the respective affiliates, beneficially own approximately  80.4% of our outstanding common stock. Accordingly, these stockholders, acting together, will be able to exert significant influence over all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders may dictate the day-to-day management of our business. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination or a sale of all or substantially all of our assets.

Future sales of our common stock, or the perception in the public markets that these sales may occur, could depress our stock price.

Sales of substantial amounts of our common stock in the public market, or the perception in the public markets that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our equity securities or to make acquisitions through the issuance of additional shares of our common stock or other equity securities.

We currently have a significant number of shares of common stock which may be issued in the future. As of the date of this Report, there are39,687,537shares of our common stock outstanding.  In addition, there are 9,387,829 options to purchase an equal number of shares outstanding under our Non-Statutory Incentive Stock Option Plan, including, without limitation, options issued to former executives of Aircharge and options issued to the principals of Charge.com. In addition, we anticipate that we will issue additional shares in connection with price protection provisions for certain of shares issued in the Charge.com acquisition. We also anticipate that: (i) pursuant to our acquisition of Aircharge, we will issue additional shares in connection with the conversion of a $525,000 promissory note and a potential one million (1,000,000) share issuance
(on a pre-reverse stock split basis) in connection with performance incentives and (ii) pursuant to our recently completed private placement with CAMOFI Master LDC, we may issue up to an additional 2,819,508 shares (on a pre-reverse stock split basis) in connection with the conversion of a $2,000,000 convertible promissory note, including interest thereon, and the exercise of warrants or pursuant to certain anti-dilution provisions. Our current stock option and warrant holders and holders of convertible promissory notes, on a fully-diluted basis assuming exercise of all outstanding options and warrants and conversion of the convertible promissory notes, are expected to own  27% of the outstanding shares of our common stock.

In addition, from time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one year holding



  31


period may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by our stockholders that are non-affiliates that have satisfied a two year holding period. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and operating results. In addition, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our stock price.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Commencing July 15, 2007, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. Although we intend to augment our internal controls procedures and expand our accounting staff, there is no guarantee that this effort will be adequate.

During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal accounting controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Moreover, in the course of our testing, financial reporting deficiencies may be uncovered which could cause us to restate our financial results. Failure to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of
which could have an adverse effect on our stock price.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses, which as a smaller public company may be disproportionately high.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, new SEC regulations and stock market rules, are creating uncertainty for development companies such as us. These new and changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards will likely result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firms audit of that assessment will require the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could slow down our business. If we are unable to fully comply with new or changed laws, regulations and standards, or if our efforts differ from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, our reputation may be harmed and our stock price may suffer.



  32


The price of our common stock may be volatile, which could cause our investors to incur trading losses and fail to resell their shares at or above the price they paid for them. Our securities are currently quoted on the OTCBB and, thus, your ability to sell your shares in the secondary market may be limited.

We do not current maintain an active market for our common stock, and we cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock. The failure to achieve and maintain an active and liquid market for our common stock means that you may not be able dispose your common stock in a desirable manner and the price for our shares may fluctuate greatly.

Moreover, some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our managements attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that preserve our current management.

Our certificate of incorporation and by-laws may discourage, delay or prevent a change in our management team that stockholders may consider favorable. These provisions include:



        authorizing the issuance of blank check preferred stock without any need for action by stockholders;
        eliminating the ability of stockholders to call special meetings of stockholders;
        permitting stockholder action by written consent; and
        establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
These provisions could allow our board of directors to affect your rights as a stockholder since our board of directors can make it more difficult for common stockholders to replace members of the board. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace our current management team.

Provisions of Delaware law could discourage a takeover you may consider favorable or could cause current management to become entrenched and difficult to replace.

We are subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holders acquisition of our stock was approved in advance by our board of directors. These provisions could affect our stock price adversely.

Penny stock regulations may impose certain restrictions on the marketability of our securities.

The Securities and Exchange Commission has adopted regulations which generally define a penny stock to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our common stock and warrants may become subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such



  33


securities and have received the purchasers written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealers presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell
our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities.

Investors should be aware that, according to the Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:



        Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
        Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
        Boiler room practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
        Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
        The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
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.



[remainder of page intentionally left blank]



  34


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, and  5,578 square feet in Brasher Falls, N.Y. All our facilities are insured. 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.



Our wholly owned subsidiary, SecurePay, is a named defendant in an action in the United States District Court of Arizona by Net MoneyIN, Inc. vs. Mellon Financial Corp., et al (No. CV-01-441-TUC-RCC), March 3, 2002. 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 to federal court is currently being sought. We believe this action to be without merit.

Except for the above, there are no material legal proceedings pending against any of our affiliates or us.

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



We held our 2005 annual meeting on January 12, 2006. A total of 27,443,547 shares (94.14%) of our issued and outstanding votes were cast. Of the 27,443,547 votes cast, 19,755,816 shares were cast by individual voters and 7,687,731 shares were cast by brokers on behalf of individual shareholders. The purposes for which the annual meeting was called and the results of the votes cast are as follows:

The election of seven (7) members of the Board of Directors to serve until the 2006 Annual Meeting of Stockholders, and until their successors have been duly elected and qualified.


»
        All seven directors were elected by 93.78% of the vote. The vote for each director was the same at 27,340,567 shares for each director and 102,980 shares withheld.The approval of an up to an eight for one reverse stock split of the Companys issued and outstanding common stock, $.001 par value.


»
        This motion carried by 93% of the vote. The number of votes for was 27,112,417. The number of shares voted against was 280,130. The number of shares abstained was 51,000. There were no broker non-votes.
        The approval of the adoption of the Companys 2005 Stock Option Plan.»
        This motion carried by 70.41% of the vote. The number of votes for was 20,525,669. The number of shares voted against was 146,708. The number of shares abstained was 979,334. The number of broker non-votes was 5,791,836.The ratification of the appointment of Drakeford & Drakeford, LLC as the Companys independent auditors for the fiscal year ending December 31, 2005.


»
        This motion carried by 91.83% of the vote. The number of votes for was 26,770,567. The number of shares voted against was 94,980. The number of shares abstained was 578,000. There were no broker non-votes.The names of the directors newly elected at the meeting are:


John ReederHarold Denton





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Larry GoldsteinMichael M. Greenburg
The names of previously serving directors whose terms continued after the meeting are:




Jack RubinsteinMacAllister SmithKevin Weller

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, 2005 and December  31, 2005,  the first quarter of 2006. The closing quote for our common stock on March 17, 2006 was $1.35. 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.



Year Ended December 31, 2005
        
        Year Ended December 31, 2004High Bid
        
        Low Ask
        
        High Bid
        
        Low AskFirst QuarterPPDA
        
        
        $1.22
        
        
        $0.76
        
        
        $1.44
        
        
        $0.65PPDAW
        
        
        $0.35
        
        
        $0.20
        
        
        $0.70
        
        
        $0.19PPDAZ
        
        
        $0.15
        
        
        $0.08
        
        
        $0.30
        
        
        $0.10Second QuarterPPDA
        
        
        $1.04
        
        
        $0.85
        
        
        $1.45
        
        
        $0.98PPDAW
        
        
        $0.35
        
        
        $0.20
        
        
        $0.60
        
        
        $0.33PPDAZ
        
        
        $0.14
        
        
        $0.08
        
        
        $0.28
        
        
        $0.13Third QuarterPPDA
        
        
        $1.07
        
        
        $0.87
        
        
        $1.32
        
        
        $0.90PPDAW
        
        
        $0.23
        
        
        $0.23
        
        
        $0.65
        
        
        $0.30PPDAZ
        
        
        $0.17
        
        
        $0.13
        
        
        $0.15
        
        
        $0.11Fourth QuarterPPDA
        
        
        $1.03
        
        
        $0.94
        
        
        $1.04
        
        
        $0.78PPDAW
        
        
        $0.00
        
        
        $0.00
        
        
        $0.33
        
        
        $0.21PPDAZ
        
        
        $0.00
        
        
        $0.00
        
        
        $0.15
        
        
        $0.12

(b) Holders.




As of December 31, 2005 there were approximately 551 shareholders of record of our common  stock.


(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


  36


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:



        On February 21, 2005, Pipeline Acquisitions purchased the rights to receive recurring revenue payments to an aggregate of 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 rights to receive recurring revenue payments purchased.
        On March 1, 2005, Pipeline Acquisitions purchased rights to receive recurring revenue payments to an aggregate of 775 merchant accounts from Advanced Internet Services, LLC for an aggregate purchase price of $589,589 plus 512,080 shares of our restricted common stock.
        On October 7, 2005, and effective September 30, 2005, we acquired Aircharge. In consideration for all the stock of Aircharge, we paid the former stockholders of Aircharge: $200,000, a $525,000 convertible promissory note bearing interest at LIBOR, and 900,000 shares of our restricted common stock. An additional 1,000,000 shares of our restricted common stock may be issued subject to performance incentives.
        On December 20, 2005, we completed the acquisition of Florida-based Charge.com, Inc. through our wholly-owned subsidiary. We acquired all the stock of Charge.com in exchange for $7.5 million in cash and $9.5 million in shares of Pipeline restricted common stock. The stock component resulted in 9,398,059 shares of restricted common stock being issued to the former Charge.com stockholders.Certain of the transactions described above were approved at a time in which we did not have a majority of the independent directors as required by NASD rules. Due to the lack of independent directors, certain of such transactions may have presented a conflict of interest for some of the directors who approved the transactions. We believe, however, that the transactions were fair and comply with Section 144 of the Delaware General Corporation Law and that they were in our best interests. It is our current policy that all transactions between us and any of our officers, directors, 5% stockholders and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested independent directors, are on terms no less favorable to us than could be obtained from unaffiliated parties and are reasonably expected to benefit us.



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



MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This prospectus contains forward looking statements relating to our 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, would 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.

Overview

We are an integrated provider of merchant payment processing services and other related software products. We currently deliver credit and debit card-based payment processing solutions and services to over 23,000 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. Our payment processing services enable merchants to process both traditional card-present, or swipe, transactions, as well as card-not-present transactions. A traditional card-present transaction, occurs whenever a cardholder physically presents a credit or debit card to a merchant at the point-of-sale. Card-not-present transactions occur whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet or by mail,
fax or telephone.

Our primary customer base consists of small to medium-sized merchants. These merchants generally have a lower volume of credit card transactions, are difficult to identify and we believe have traditionally been underserved by credit card processors. We market and sell our services primarily through three lines of distribution: banks, ISOs and the Internet. We have contractual relationships with 54 banks, comprising over 420 bank branch locations, and with 48 credit unions that serve as referral sources for our products and services. We also have relationships with over 30 ISOs that act as a non-employee, external sales force in communities throughout the United States. We also market over the Internet, targeting small to medium-sized e-commerce businesses.

We derive the majority of our revenue from fee income related to payment transaction processing, which is primarily comprised of a percentage of the dollar amount of each transaction we process, as well as a flat fee per transaction. In the event we have outsourced any of our services provided in the transaction, we remit a portion of the fee income to the third parties that have provided these services.

During the year ended December 31, 2005, we continued our growth by both acquiring new merchant accounts through our sales channels, through merchant portfolio acquisitions, and improved vendor pricing.

For the year ended December 31, 2005, we generated net revenues of $24,097,575 as compared to revenues of $15,565,134 for the year ended December 31, 2004. Our cost of goods and services sold aggregated $17,574,605 as compared to $12,443,970 for the year ended December 31, 2004, and yielded a gross profit of $6,522,970 as compared to $3,121,164 for the year ended December 31, 2004.

  During
    the year ended December 31, 2005, the following merchant portfolios were acquired
    using funds from the Laurus Master Fund Ltd. financing: On February 21, 2005,
    our subsidiary, Pipeline Acquisitions, purchased the rights to receive recurring
    revenue payments from an aggregate of 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 512,080 shares of our restricted common stock.
    These purchases are expected to produce a gross profit of approximately $70,000
    per month. On December 20, 2005, we completed our acquisition of Charge.com
    and paid all of our outstanding debt to Laurus Master Fund Ltd. with proceeds
    from a $15,000,000 financing



  38


arrangement with Sheridan
    Capital Advisors, LLC. On October 18, 2005, and effective September 30, 2005,
    we completed our acquisition of Aircharge. Our results of operations for the
    fiscal year ended December 31, 2005, includes the results of operation of
    Charge.com commencing December 20, 2005, Aircharge commencing September 30,
    2005, and the acquisition of two merchant portfolios commencing as of their
    respective dates of acquisition and, therefore, do not reflect the results
    had the companies been combined for the entire year. Pro forma financial results
    of the Company, Charge.com and Aircharge are presented in note K of the financial
    statements of this annual report , which should be read together with this
    Managements Discussion and Analysis of Financial Condition and Result
    of Operations.



  It
    is our policy to periodically review the estimated useful lives of our intangible
    assets.  Historically, we have reviewed our acquired merchant portfolios
    and residual rights purchases for impairment on a yearly basis. We have now
    chosen a more conservative approach. We now estimate for accounting purposes
    the remaining useful life to be seven years. The effect of this estimate is
    to increase our amortization expense, which is a non-cash expense, by $718,415
    for the year 2005.  Our examination of the combined cash flow produced
    from our acquired merchant portfolios and residual rights purchases indicates
    that aggregate cash flow has not been impaired and, actually, remains at a
    level exceeding the level of cash flow generated by these intangible assets
    when acquired.  We will continue to amortize these intangibles in future
    years and periodically test them for impairment.  The amortization expense
    represents a recognition and estimated allocation of the initial cost of the
    acquired merchant portfolios and residual rights as a non-cash expense against
    the income generated by these assets.




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.

Revenue and Cost Recognition.

We 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 our 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.

We
are aware that the SEC accounting staff has recently raised certain revenue recognition
concerns regarding companies in our industry. There is a risk that if the SEC were to
determine that our current revenue recognition policies were incorrect, such policies may
need to be altered and our recognition of revenues on a going forward basis may be
materially and adversely effected. Moreover, this change may require us to restate prior
financial statements to reflect substantially lower revenue numbers, which could effect
public confidence in our accounting controls and have a negative impact on our public
stock price. However, as there would be a corresponding reduction in our reported cost of
services sold, we do not believe that any such change in revenue recognition policy would
require us to restate our previous EBITDA, net earnings or stockholders equity
results.


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 our 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 our 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.



  39


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 and showing pro forma 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 shall use the modified
prospective method. We will adopt the provisions of this standard on January 1, 2006 and will apply to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards on that date.

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 may 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.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154), which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.  SFAS 154 provides guidance on accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by us in the first quarter of fiscal 2006. We are currently evaluating the effect that the adoption of SFAS 154 will
have on our consolidated results of operations and financial condition, but we do not expect it to have a material impact.

We do not have any of the following:



        Off-balance sheet arrangements;
        Certain trading activities that include non-exchange traded contracts accounted for at fair value; or
        Relationships and transactions with persons or entities that derive benefits from any non-independent relationships other than related party transactions discussed herein.

  40


Results of Operations

Twelve Months Ended December 31, 2005 Compared to Twelve Months Ended December 31, 2004

PIPELINE DATA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS




For
        the year ended December 312005
    
    2004Revenue
    
    $
    24,097,575
    
    $
    15,565,134Interchange
    
    
    12,049,353
    
    
    8,267,961Cost
        of services sold
    
    
    5,377,176
    
    
    4,000,070Cost
        of goods sold
    
    
    148,076
    
    
    175,939Total
        cost of goods and services sold
    
    
    17,574,605
    
    
    12,443,970Gross
        profit
    
    
    6,522,970
    
    
    3,121,164Operating
        ExpensesSalaries
        and payroll cost
    
    
    6,522,970
    
    
    1,928,121Selling,
        general and administrative
    
    
    1,705,680
    
    
    1,140,923Depreciation
        and amortization
    
    
    833,964
    
    
    46,128Total
        operating Expenses
    
    
    6,216,633
    
    
    3,115,172Net
        (loss) from operations
    
    
    306,337
    
    
    5,992Other
        income and expensesInterest
        and other income
    
    
    75,375
    
    
    64,266Interest
        expense
    
    
    (792,788
    )
    
    (367,479
    )Total
        other income (expenses)
    
    
    (717,413
    )
    
    (303,213
    )Income
        (loss) before incometax
        benefit
    
    
    (411,076
    )
    
    (297,221
    )Benefit
        from income taxes
    
    
    779,833
    
    
    -0
    -Net
        income (loss)
    
    $
    368,757
    
    $
    (297,221
      )

Revenues. Revenues increased $8.5 million or 55% to $24.1 million in 2005 from $15.6 million in 2004. This increase was primarily attributable to our acquisition of merchant account portfolios, our growth by acquiring new merchant accounts through our sales channels, and improved vendor pricing.

Interchange Expenses. Interchange expenses increased $3.8 million or 46% to $12.0 million in 2005 from $8.3 million in 2004. The increase was primarily attributable to increased charge volume from our merchant account portfolio acquisitions.

Other costs of goods and services sold. Other costs of goods and services sold increased $5,130,635or41.2% to $17,574,605 in 2005 compared to $4,176,009 in 2004, and yielded a gross profit of $6,522,970 as compared to $3,121,164 for the year ended December 31, 2004.







  41


Operating Expenses. Salaries and payroll related costs increased $1,748,868 or 90.7% to $3,676,989 in 2005 compared to $1,928,121 in 2004. Selling, general and administrative expenses increased $564,757 or 49.5% to $1,705,680 in 2005 compared to $1,140,923 in 2004. This increase was due primarily to personnel and facilities related to the establishment of our Alpharetta merchant processing center and increased customer support staff. Aggregate Selling, general and administrative expenses consisted of the following categories as a percentage of revenues for the year ended December 31, 2005: Rent: $193,248 (0.8%);  Professional Fees: $172,266 (0.7%); Telephone: $148,645 (0.6%);  Office: $42,555 (0.2%).

Other Expense.

Other
expense in 2005 primarily consisted of $792,788 in interest expense. This represents an
increase of $425,309 or115.7% from $367,479 in 2004 primarily due to an increase in
interest expense resulting from increased borrowings to fund merchant portfolio
acquisitions, the acquisition of World Products, Inc, the acquisition of Charge.com, Inc
and working capital needs.

Income Tax.

Income
tax benefit increased to $779,833 in 2005 from $-0- in 2004 due to an increase in taxable
income and the utilization of previously unrecognized net operating loss carryforwards
which has resulted in a favorable impact on the effective tax rate and a reduction to the
valuation allowance applied to net deferred tax assets.

Effects of Inflation

Our monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation. Our non-monetary assets, consisting primarily of intangible assets and goodwill, are not affected by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of services offered by us.

Liquidity and Capital Resources

In accordance with our external growth strategy, we have identified the small to medium-sized merchant segment of the payment processing market as one containing possible acquisition targets for us. 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 their 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. to provide our company with convertible debt financing. Under the arrangement, we issued Laurus Master Fund, Ltd. a total of $6,000,000 in secured convertible notes as
follows; a $2,000,000 secured convertible note on February 27, 2004, a $1,000,000 secured convertible note on June 16, 2004, and a  $3,000,000 secured convertible note on August 31, 2004. On September 30, 2005, we issued CAMOFI Master LDC a $2,000,000 senior secured convertible note. On December 20, 2005, we entered a Financing Agreement with Sheridan Capital Advisors, LLC. We issued Sheridan Capital Advisors, LLC a $15,000,000 senior secured note. The senior secured note matures on December 20, 2006 and bears interest at seventeen (17) percent. We used the proceeds from the Sheridan financing to repay all of our outstanding debt owed to Laurus Master Fund Ltd. and complete our acquisition of Charge.com. We granted Sheridan Capital Advisors, LLC a first priority security interest in our assets and the assets of our subsidiaries pari passu with a security interest granted to CAMOFI Master LDC. Upon a public offering of our equity securities, we will be required to repay at least $7.5
million of our outstanding debt to Sheridan Capital Advisors, LLC.

  We
    increased our cash and cash equivalents to $2,254,664 at December 31, 2005
    from a balance of $693,852 as of December 31, 2004. On September 30, 2005,
    we received $2,000,000 in gross proceeds from the issuance of $2,000,000 of
    Senior Subordinated Convertible Notes bearing interest at prime plus 21⁄2%
    and warrants to purchase 700,000 shares of common stock, and on December 20,
    2005, we received gross proceeds of $15,000,000 from the issuance of a $15,000,000
    Secured Senior Note bearing interest at 17% per annum.



  42


Operating activities

Net
cash used by operating activities was $878,828 for the year ended December 31, 2005. Net
income of $368,757, depreciation and amortization of $833,964 and the issuance of
$1,368,613 of common stock for services, debt, portfolio acquisition, was further adjusted
by a use of cash for changes in operating assets and liabilities of $512,244. The change
in operating assets and liabilities was primarily caused by an increase in accounts
receivable related our merchant portfolio growth and in tax liabilities and other short
term liabilities.

  Net cash used by operating activities was $879,419 for the year ended December
    31, 2004. Net loss of $297,221, depreciation and amortization of $46,128 and
    the issuance of $254,121 of common stock for services, debt, portfolio acquisition,
    was further adjusted by a use of cash for changes in operating assets and
    liabilities of $512,244. The change in operating assets and liabilities was
    primarily caused by an increase in accounts receivable related our merchant
    portfolio growth and decreases in payables and other short term liabilities.


Investing activities

Net
cash used in investing activities was $8,503,853 for the year ended December 31, 2005. Net
cash used by investing activities included $1,738,645 which was invested in purchasing
merchant portfolios, $7,500,000 to fund the purchase price of Charge.com, $200,000 to fund
the Purchase price of Aircharge, and an additional $200,000 invested in notes receivable
related to merchant portfolio acquisitions. In addition, $434,971 of funds were invested
in computer and office equipment.

Net cash used in investing activities was $3,903,881 in for the year ended December 31, 2004. $665,456 was invested in purchasing rights to receive recurring revenue payments from our sales agents, $574,582 was invested 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.

Financing activities

Net cash provided by financing activities was $10,943,493 for the year ended December 31, 2005. On September 30, 2005, we received gross proceeds of $2,000,000 from CAMOFI Master LDC in exchange for our senior convertible notes plus 700,000 warrants to purchase shares of our stock at a price of $1.10 per share.On December 20, 2005, we received gross proceeds of $15,000,000 from Sheridan Capital Advisors, LLC in exchange for our senior secured notes. $6,249,805 in funds were used to repay debt including the full repayment of Laurus Master Fund convertible debt of $5,833,335.  An additional  $121,685 was provided from the exercise of warrants. Lease obligations were  reduced by the use of $54,184. Lease financing provided a source of $125,797 of funding for the year ended December 31, 2005.

Net cash provided by financing activities was $5,356,937 for the year ended December 31, 2004. We 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, secured convertible notes aggregating $6,000,000 were issued to Laurus Master Fund, Ltd. Of such amount, $1,000,000 was used to retire 2,000 shares of Series A Preferred Convertible Stock held by Kevin and Nancy Weller, $665,456 was used to purchase the rights to receive recurring revenue payments from our sales agents and an additional $574,582 was 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 NMSI 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. Lease obligation were reduced by the use of $11,310. Lease financing provided a source of $60,988 of fundingfor the year ended December 31, 2004.

As of December 31, 2005, we had notes, capital lease obligations, and convertible debt outstanding of $18,017,440 consisting of $2,382,064 in long term debt and $15,635,376 in short term debt, with $525,000 owed to stockholders and $0.00 owed to officers and directors and $17,964,940 owed to third parties. With respect to our long term debt outstanding of $2,382,064, $2,247,734 is convertible into shares of our common stock at
conversion prices ranging from $0.60] to $1.50 per share. The notes mature between June 2005 and September 2008


  43


As of December 31, 2005, we had issued $322,734 in 8% convertible debt. The outstanding notes have a two- year term, accrue interest at an annual interest rate of 8% and have33 1/3% warrant coverage at conversion prices ranging from $.60 to $1.00 per share.In addition the exercise of warrants by the holders of 8% convertible notes which resulted in proceeds of $121,685. During 2005, we continued to be funded in part through a net increase in lease financing of $92,223.

As of December 31, 2005, we received $2,000,000 in gross proceeds from the issuance of $2.0 million of Senior Subordinated Convertible Notes bearing interest at prime plus 21⁄2% and warrants to purchase 700,000 shares of common stock, and we received gross proceeds of $15,000,000 from the issuance of a Senior Secured Note bearing interest at 17% per annum. In addition,  we issued $525,000 of convertible notes bearing interest at the LIBOR (London Interbank Offer Rate) rate per annum for deposits in US dollars for a period of 30 days to the former stockholders of World Products, Inc. (d.b.a. Aircharge) as a part of the amount exchanged for their shares of World Products, Inc. common stock. We also have capitalized debt issuance costs and discount on long term debt of $368,620 that are being amortized to interest expense over the life of these loans.

As of December 31, 2004, we had notes, capital lease obligations, and convertible debt outstanding of $5,756,734 owed to officers, directors and third parties. Of such amount, $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 had 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. Subsequent to December 31, 2004, 8% convertible note holders converted $416,470 of the convertible notes into share of our common stock.

On March 8, 2002, Jack Rubinstein, our Chairman of the Board, loaned our company  $100,000 for working capital purposes. The promissory note evidencing this transaction originally had a term of one-year and bears interest at the rate of 8% per annum. The principal and interest of the note is convertible into our common stock 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 the note plus accrued interest was converted to 348,825 shares of our common stock and the expiration date of the warrants was extended to March 8, 2008.

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, we agreed with Accu-Search to convert the $200,000 note (with interest, totaling $224,000) into preferred stock of Accu-Search. Accu-Search also paid an upfront payment of $4,000 in cash. In addition, Accu-Search will provide us two years for web access to Accu-Searchs on-line data and map system. During 2004, we received $55,407 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.

Our management believes that it will be able to fund our operations for at least the next 12 months through the use of the proceeds of this offering as well as our present cash position and the continuation of revenue producing activities by our operating subsidiaries. Our management may need to seek further capital through exercise of our warrants or by other capital raising needs in order to continue our growth. Other than this offering, we have no commitments, agreements or understanding with respect to any equity or debt financing.



  44


Managements Review of Company Progress

For the year ended December 31, 2005, we achieved record annual  financial growth in four key areas: gross revenue, gross profit, net profit and EBITDA, due to our continuing sales initiatives, the success of Pipeline Data Processing PDP and the receipt of the full impact of portfolio purchases made in the first quarter of 2005. We also acquired Charge.com and Aircharge. We continued, and expect to continue in the future, our efforts to eliminate non-recurring expenses and non-cash charges, such as payment in stock for services rendered to us.

Gross revenue for the year ended December 31, 2005 grew 54.8% to $24,097,575 from $15,565,134 for the year ended December 31, 2004. Gross revenue for the three months ended December 31, 2005 grew 59% to $7,062,713 from $4,442,941 for the three months ended December 31, 2004.

Gross
profit for the year ended December 31, 2005 grew 109% to $6,522,970 from $3,212,164 for
the year ended December 31, 2004. Net profit was $368,757 for the year ended December 31,
2005 as compared to a net loss of $297,221 for the year ended December 31, 2004. Gross
profit for the three months ended December 31, 2005 grew 125.1% to3,399,801 from $949,873
for the three months ended December 31, 2004. Net loss was $141,754 for the three months
ended December 31, 2005 as compared to a net loss of $246,295 for the three months ended
December 31, 2004.


Our
EBITDA, which means our earnings before interest, taxes, depreciation and amortization,
for the year ended December 31, 2005 was $1,215,677 as compared with $116,386 for 2004.
For the three months ended December 31, 2005 EBITDA was $381,431 as compared with negative
$92,659 for the three months ended December 31, 2004.Gross margin increased to 27.1% for
the year ended December 31, 2005 compared to 20.1% for the year ended December 31, 2004.
In addition, gross margin for the three months ended December 31, 2005 grew to 30.3% from
21.4% for the year ended December 31, 2004. Management believes that as a result of our
internal efficiencies and superior contract pricing, our gross profit margin will remain
higher than industry averages.

As of December 31, 2005, Pipeline Data serviced more than 23,000 accounts. We believe that our results for the year ended December 31, 2005 validate the decisions we made in 2005 regarding the direction of our business, the utilization of our assets and the use of our proceeds.

In February and March 2005, we entered into agreements to acquire two merchant portfolios totaling 1,605 accounts from two ISO. The 1,605 accounts represented $142,000,000 in annual consumer charge volume.

Prior to the creation of the Pipeline Data Processing (PDP) division, our Dallas location served as the companys technology and data center. Once PDP became operational in September 2004, the decision was made to gradually migrate all technology functions to the new facility. We accomplished this goal in July, and the Dallas location was formally closed. The relocation produced cost savings and eliminated redundancies. Currently, the Atlanta operations facility, PDP, provides state-of-the-art company-wide support for our IT, gateway and network functions, as well as underwriting, risk management and application boarding capabilities that are sufficient to meet the companies near term requirements.

In April, 2005 we relocated our corporate headquarters to Quincy, Massachusetts. The facility is suitable for our current operations, and we believe our new executive and sales offices allow for adequate expansion of our e-commerce sales initiatives. As of January 2006, we relocated our Brasher Falls, NY facility to a new 5,578 square foot location in the same town. The building houses our Northern Merchant Services division and our finance and accounting department.  It also furnishes additional space for sales production.

We believe at this time that with the completed relocations of the Dallas, Boston and Brasher Falls facilities, we have sufficient office space capacity to meet our current growth objectives.

On September 30, 2005, we entered into a financing arrangement with CAMOFI Master LDC, an affiliate of Centrecourt Asset Management LLC. Under the arrangement, we issued CAMOFI Master LDC a $2,000,000 convertible note that will mature on September 30, 2008. The convertible note bears interest at an adjustable rate of Wall Street Journal Prime Rate plus two and one-half percent (2.5%). The note is convertible



  45


into registered shares of our common stock at the current fixed conversion price of $1.10 per share on a pre-split basis. Pursuant to the financing arrangement, we issued CAMOFI Master LDC warrants to purchase 700,000 shares of our common stock. The warrants have a five year term and an exercise price of $1.10 per share on a pre-split basis.

On October 1, 2005, Jim Plappert joined our company and was named Chief Marketing Officer and Vice President of Business Development. Mr. Plappert brings extensive experience in electronic payment processing to his position with Pipeline Data. In addition to serving as Senior Vice President of National Processing Company (formerly NYSE:NPC), which was acquired by Bank of America in 2004, he is past president of the Electronic Transactions Association, the leading international trade association representing companies that offer electronic transaction products and services. With Pipeline, Mr. Plappert oversees specialized vertical market opportunities, such as AIRCHARGE, and will gradually focus on sales and marketing initiatives company-wide. We believe the addition of Mr. Plappert further enhances an already experienced management team.

On October 7, 2005, and effective September 30, 2005, we acquired World Products, Inc. d.b.a AIRCHARGE, the first company to deploy a cellular phone-based credit card acceptance solution for mobile business merchants. AIRCHARGE was founded in 1999 and provides wireless payment products and value-added services to the credit card and check-processing marketplace.

Subsequent to finalizing the AIRCHARGE acquisition, AIRCHARGE had entered into a marketing arrangement with Nextel. The arrangement provided for AIRCHARGE to be named an Industry Solutions Partner to provide credit card processing and wireless check conversion to Nextels business customers. The marketing plan called for the hiring and training of several regional representatives to educate and support Nextel representatives throughout the United States. After the acquisition, Pipeline began to execute on its acquired commitments to Nextel. However, the unexpected merger between Sprint and Nextel caused a three month delay in the rollout of the AIRCHARGE marketing initiatives. Consequently, losses for the fourth quarter from the AIRCHARGE division were a greater than expected with a loss of $180,692. Currently, the marketing initiatives have been resumed and AIRCHARGE was recently
selected by Sprint Nextel Corp. (NYSE:S) as a national Industry Solutions Partner to provide credit card acceptance solutions, credit card processing and wireless check conversion on all Nextel Java-enabled phones.

On November 9, 2005, we filed a Form SB-2 registration statement with the SEC for a stock offering valued at $24 million. In addition, we have applied for a national market listing of our securities. The listing application is subject to review by the exchange, which has sole discretion in determining its acceptance. Currently, our common stock is trading on the OTCBB under the symbol PPDA. Unless and until the application is accepted, our shares will continue to trade on the OTCBB.

On December 22, 2005, we announced that we had completed a $15 million debt financing arrangement led by Sheridan Capital Advisors, LLC. The proceeds from the financing have enabled us to complete our acquisition of Charge.com, Inc. (Charge.com) and repay all amounts outstanding under the $6,000,000 convertible debt obligation to Laurus Master Fund, Ltd., thereby reducing the potential dilution of shares associated with the Laurus convertible debt instrument.

The purchase price for Charge.com was $7.5 million in cash and $9.5 million in shares of Pipeline common stock. Charge.com generated $2.3 million in pretax income for the year ended December 31, 2004 and $1.9 million in pretax income for the nine months ended September 30, 2005.

We considered the acquisition of Charge.com complementary to our business for the following reasons: Pipeline will increase profitability of the newly acquired entity by: (a) relying on favorable vendor contracts, (b) utilizing our proprietary gateway, as well as our wholesale processing divisions infrastructure, and (c) employing our existing sales force to develop Charge.coms excess lead capacity, which we believe has been largely untapped by the Charge.com marketing force.

Pursuant to the acquisition of Charge.com, the majority of all new merchant applications and gateway boardings have been integrated onto the PDP platform and SecurePay gateway system. At present, we believe we have accomplished our objective of integrating the Charge.com application and boarding functions into Pipeline Data. The efficiencies obtain by the rapid and seamless integration of the two companies have enabled



  46


us to release all former Charge.com employees except the two founders. At the time the acquisition was announced in March 2005, we were accepting approximately 500 new merchant applications per month. As we anticipated, the combined entity is currently accepting 1,000 new merchant applications per month.

Recent Developments

On January 12, 2006, we held our 2005 Annual Meeting of Stockholders in Fort Lauderdale, Florida. The meeting was webcast live and will be archived and available atwww.pipelinedata.comfor up to 12 months.

The meeting was held for the purposes of electing seven (7) members of the Board of Directors to serve until the 2006 Annual Meeting of Stockholders, to approve an up to eight for one reverse stock split of the companys issued and outstanding common stock ($.001 par value) if required for a national market listing, to approve the adoption of the companys 2005 Stock Option Plan, to ratify the appointment of Drakeford & Drakeford, LLC as the companys independent auditors for the fiscal year ending December 31, 2005 and to transact such other business as may properly be brought before the Meeting or any adjournment thereof. All proxy recommendations set forth by the Board of Directors were approved.





[remainder of page intentionally left blank]



  47


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, 2005, and the results of its operations and changes in its financial position from January 1, 2005, through

December 31, 2005, have been made.





F-1


INDEX TO FINANCIAL STATEMENTS








Part 1 - Financial InformationPageItem 1 - Financial StatementsBalance Sheet as of December 31, 2005
        F-4Statements of Operations for the years ended December 31,  2005 and 2004
        F-5Statements of Operations for the three months ended December 31, 2005 and       2004
        F-6Statements
          of Stockholders Equity for the years ended December 31, 2005       
                and 2004
        F-7Statements of Cash Flows for the years ended December 31, 2005 and 2004
        F-8Notes to Financial Statements
        F-9
          - F-30





F-2


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 sheet of Pipeline Data Inc. as of December 31,2005 and the related consolidated statements of operations, changes in stockholders equity, and  cash flows for the years ended December 31, 2005 and 2004. 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, 2005 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.







//Drakeford & Drakeford, LLC



March 10, 2006









F-3


PIPELINE DATA INC.



CONSOLIDATED BALANCE SHEET




December 31, 2005ASSETSCURRENT ASSETSCash
        and cash equivalents
        
        $
        2,254,664Accounts
        receivable
        
        
        1,518,830Interest receivable
        
        
        57,214Inventory
        
        
        71,689Advances and prepaid expenses
        
        
        139,322Note receivable
        
        
        175,000Total current assets
        
        
        4,216,719PROPERTY AND EQUIPMENT, net
        
        
        666,514OTHER ASSETSRestricted cash
        
        
        75,489Merchant portfolio, residual rights and other intangibles
        
        
        10,316,935Deferred acquisition and debt issuance costs
        
        
        932,938Notes receivable
        
        
        750,000Deposits
        
        
        53,521Deferred tax assets, net
        
        
        780,138Goodwill
        
        
        24,556,638Total other assets
        
        
        37,465,659TOTAL ASSETS
        
        $
        43,348,892LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts
        payable and accrued expenses
        
        $
        1,320,334Lease
        obligations-equipment
        
        
        35,376Notes
        payable
        
        
        15,600,000Total current liabilities
        
        
        16,955,710LONG-TERM LIABILITIESNotes payable-World Products Shareholders
        
        
        525,000Note payable-Camofi Master LDC
        
        
        1,400,000Lease obligations-equipment
        
        
        134,330Notes payable-convertible 8%
        
        
        322,734Total long-term liabilities
        
        
        2,382,064STOCKHOLDERS EQUITYPreferred
        stock, $.001 par value: 5,000,000 shares authorized,no shares issued or outstanding at December 31, 2005Common stock,  $.001 par value: 95,000,000 shares authorized,38,594,070 shares issued and outstanding at December 31, 2005
        
        
        38,594Common stock subscribed
        
        
        5,780,207Deferred stock compensation and unvested stock bonus
        
        
        29,797Additional paid-in capital
        
        
        18,871,151Retained
        Earnings (deficit)
        
        
        (1,708,631

      )Total stockholders equity
        
        
        23,011,118TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        
        $
        42,348,892

The accompanying notes are an integral part of these statements.



F-4


PIPELINE DATA INC.



CONSOLIDATED STATEMENTS OF OPERATIONS






For
        the years endedDecember
        31, 2005
    
    December
        31, 2004Revenue
    
    $
    24,097,575
    
    $
    15,565,134Interchange
    
    
    12,049,353
    
    
    8,267,961Cost
        of services sold
    
    
    5,377,176
    
    
    4,000,070Cost
        of goods sold
    
    
    148,076
    
    
    175,939Total
        cost of goods and services sold
    
    
    17,574,605
    
    
    12,443,970Gross
        profit
    
    
    6,522,970
    
    
    3,121,164Operating
        ExpensesSalaries
        and payroll cost
    
    
    3,676,989
    
    
    1,928,121Selling,
        general and administrative
    
    
    1,705,680
    
    
    1,140,923Depreciation
        and amortization
    
    
    833,964
    
    
    46,128Total
        operating Expenses
    
    
    6,216,633
    
    
    3,115,172Net
        income from operations
    
    
    306,337
    
    
    5,992Other
        income and expensesInterest
        and other income
    
    
    75,375
    
    
    64,266Interest
        expense
    
    
    (792,788
    )
    
    (367,479
    )Total
        other income (expenses)
    
    
    (717,413
    )
    
    (303,213
    )(Loss)
          before income tax benefit
    
    
    (411,076
    )
    
    (297,221
    )Benefit
        from income taxes
    
    
    779,833
    
    
    0Net
        income (loss)
    
    $
    368,757
    
    $
    (297,221
    )Basic
        and diluted earnings (loss) per common share:Earnings
        (loss) per shareBasic
    
    $
    0.01
    
    $
    (.01
    )Diluted
    
    $
    0.01
    
    
    N/AWeighted
        average number of shares outstanding:Basic
    
    
    27,909,673
    
    
    21,107,818Diluted
    
    
    29,312,083
    
    
    N/A

The accompanying notes are an integral part of these statements.



  F-5


PIPELINE DATA INC.



CONSOLIDATED STATEMENTS OF OPERATIONS





  For
          the three months endedDecember
          31, 2005
      
      December
          31, 2004Revenue
      
      $
      7,062,713
      
      $
      4,442,941Interchange
      
      
      3,399,801
      
      
      2,373,199Cost
          of services sold
      
      
      1,462,106
      
      
      1,072,435Cost
          of goods sold
      
      
      62,294
      
      
      47,434Total
          cost of goods and services sold
      
      
      4,924,201
      
      
      3,493,068Gross
          profit
      
      
      2,138,512
      
      
      949,873Operating
          ExpensesSalaries
          and payroll cost
      
      
      1,188,192
      
      
      629,113Selling,
          general and administrative
      
      
      591,690
      
      
      437,590Depreciation
          and amortization
      
      
      752,221
      
      
      16,782Total
          operating Expenses
      
      
      2,532,103
      
      
      1,083,485(Loss)
          from operations
      
      
      (393,591
      )
      
      (133,612
      )Other
          income and (expenses)Interest
          income
      
      
      22,801
      
      
      24,171Interest
          expense
      
      
      (297,026
      )
      
      (136,854
      )Total
          other (expenses)
      
      
      (274,225
      )
      
      (112,683
      )(Loss)
          before income tax benefit
      
      
      (667,816
      )
      
      (246,295
      )Benefit
          from income taxes
      
      
      526,062
      
      
      0Net
          (loss)
      
      $
      (141,754
      )
      $
      (246,295
      )Basic
          and diluted earnings (loss) per common share:(Loss)
          per shareBasic
      
      $
      (0.1
      )
      
      (.01
      )Diluted
      
      $
      N/A
      
      
      N/AWeighted
          average number of shares outstanding:Basic
      
      
      30,436,164
      
      
      25,525,334Diluted
      
      
      N/A
      
      
      N/A



The accompanying notes are an integral part of these statements.



  F-6


PIPELINE DATA INC.



CONSOLIDATED  STATEMENT OF STOCKHOLDERS EQUITY






  AdditionalCommon
          Stock
      
      Paid-in
      
      Accumulated
      
      DeferredShares
      
      Amount
      
      Capital
      
      Loss
      
      Compensation
      
      TotalBalance
          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 preferredconv.
          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.) Canceled
      
      
      
      
      
      
      
      5Issuance
          of common stock for services
      
      218,319
      
      
      218
      
      
      116,482
      
      
      
      
      
      
      
      
      116,700Issuance
          of common stock for residual rights
      
      32,952
      
      
      33
      
      
      29,967
      
      
      
      
      
      
      
      
      30,000Issuance
          of common stock for additional portfolio
      
      2,367,764
      
      
      2,368
      
      
      2,071,078
      
      
      
      
      
      
      
      
      2,073,446Issuance
          of common stock-employment agreements
      
      69,422
      
      
      69
      
      
      86,708
      
      
      
      
      
      
      
      
      86,777Exercise
          of warrants
      
      106,665
      
      
      107
      
      
      37,203
      
      
      
      
      
      
      
      
      37,310Exercise
          of stock options
      
      10,000
      
      
      10
      
      
      3,490
      
      
      
      
      
      
      
      
      3,500Conversion
          of 8% conv. note to common stock
      
      1,170,153
      
      
      1,170
      
      
      408,384
      
      
      
      
      
      
      
      
      409,554Issuance
          of common stock for interest
      
      256,497
      
      
      256
      
      
      123,237
      
      
      
      
      
      
      
      
      123,493Issuance
          of common stock due to earnings level
      
      5,674,000
      
      
      5,674
      
      
      2,124,366
      
      
      
      
      
      
      
      
      2,130,040Issuance
          of common stock for note payment
      
      50,000
      
      
      50
      
      
      49,950
      
      
      
      
      
      
      
      
      50,000Deferred
          stock compensation, net of unvestedstock
          bonus outstanding
      
      
      
      
      
      
      
      
      
      
      
      
      
      34,126
      
      
      34,126Net
          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
      
      
      5,982,530Common
          stock subscribed
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      5,780,207Issuance
          of common stock for interest andconversion
          of principal on Laurus debt
      
      199,880
      
      
      200
      
      
      199,680
      
      
      
      
      
      
      
      
      199,880Conversion
          of 8% convertible notes & interest tocommon
          stock
      
      828,571
      
      
      828
      
      
      289,171
      
      
      
      
      
      
      
      
      289,999Exercise
          of warrants
      
      342,857
      
      
      343
      
      
      121,342
      
      
      
      
      
      
      
      
      121,685Issuance
          of common stock for services
      
      297,332
      
      
      297
      
      
      78,420
      
      
      
      
      
      
      
      
      78,717Issuance
          of common stock for additional portfolio
      
      64,010
      
      
      64
      
      
      70,347
      
      
      
      
      
      
      
      
      70,411Issuance
          of common stock for employmentagreements/Unvested
          stock bonus
      
      153,340
      
      
      153
      
      
      190,929
      
      
      
      
      
      (4,329
      )
      
      186,753Conversion
          of stock options
      
      308,000
      
      
      308
      
      
      (308
      )
      
      
      
      
      
      
      
      0Acquisitions/Mergers
      
      10,298,058
      
      
      10,300
      
      
      9,921,879
      
      
      
      
      
      
      
      
      9,932,179Net
          income for the year ended December 31, 2005
      
      
      
      
      
      
      
      
      
      
      368757
      
      
      
      
      
      368,757Balance
          at December 31, 2005
      
      38,594,070
      
      $
      38,594
      
      $
      18,871,151
      
      $
      (1,708,631
      )
      $
      29,797
      
      $
      23,011,118

  The
    accompanying notes are an integral part of this statement.


F-7


PIPELINE DATA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS




  For
          the year ended
      
      For
          the year endedDecember
          31, 2005
      
      December
          31, 2004OPERATING
          ACTIVITIES:Net
          Income (loss)
      $
      368,757
      
      $
      ( 297,221
      )Adjustments
          for noncash and nonoperating items:Depreciation
          and amortization
      
      833,964
      
      
      46,128Common
          stock for services, debt, portfolio, and other, net
      
      1,368,613
      
      
      254,121Deferred
          taxes
      
      (780,138
      )
      
      0Acquisitions
          of businesses, net of cash
      
      (2,157,780
      )
      
      0Changes
          in operating assets and liabilities:Receivables
      
      (999,924
      )
      
      (223,949
      )Note
          receivable
      
      0
      
      
      (640,000
      )Accrued
          interest receivable
      
      (35,630
      )
      
      (16,190
      )Inventory
      
      (31,602
      )
      
      (18,177
      )Deposits
          and other
      
      (51,654
      )
      
      (31,017
      )Advances
          and prepaid expenses
      
      (59,678
      )
      
      (28,328
      )Officer
          loans payable
      
      0
      
      
      (100,000
      )Accounts
          payable and accrued expenses
      
      645,634
      
      
      170,028Other
          loans and notes payable
      
      0
      
      
      (4,741
      )Lease
          obligations-equipment
      
      20,610
      
      
      9,927Cash
          used by operating activities
      
      (878,828
      )
      
      (879,419
      )INVESTING
          ACTIVITIES:Capital
          expenditures
      
      (434,971
      )
      
      (257,962
      )Merchant
          portfolio and residual rights purchase
      
      (1,738,645
      )
      
      (1,240,038
      )Acquisitions
          of businesses
      
      (7,700,000
      )
      
      0Note
          receivable-non-current
      
      (200,000
      )
      
      0Deferred
          acquisition and debt issuance costs
      
      (365,770
      )
      
      (567,168
      )Change
          in restricted cash
      
      1,935,533
      
      
      (2,011,022
      )Proceeds
          from preferred stock
      
      0
      
      
      172,309Cash
          used by investing activities
      
      (8,503,853
      )
      
      (3,903,881
      )FINANCING
          ACTIVITIES:Proceeds
          from sale of stock
      
      0
      
      
      172,309Proceeds
          from lease financing
      
      125,797
      
      
      60,988Proceeds
          from convertible notes
      
      0
      
      
      289,400Proceeds
          from exercise of warrants
      
      121,685
      
      
      37,310Purchase
          of preferred stock from officer
      
      0
      
      
      (1,000,000
      )Lease
          obligation payments
      
      (54,184
      )
      
      (11,310
      )Proceeds
          from Laurus, Camofi, Sheridan notes
      
      17,000,000
      
      
      6,000,000Loan
          payments
      
      (6,249,805
      )
      
      (166,665
      )Cash
          provided by financing activities
      
      10,943,493
      
      
      5,382,032NET
          INCREASE IN CASH
      
      1,560,812
      
      
      598,732CASH
          BALANCE BEGINNING OF PERIOD
      
      693,852
      
      
      95,120CASH
          BALANCE END OF PERIOD
      $
      2,254,664
      
      $
      693,852NON
          CASH ACTIVITIES:Interest
      $
      792,788
      
      $
      367,479Corporate
          income taxes
      $
      0
      
      $
      0

The accompanying notes are an integral part of these statements



  F-8


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS



December 31, 2005



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. 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 business environment, over the Internet, or in mobile or wireless settings via cellular-based wireless devices that the Company sales.




Basis of Presentation
The accompanying consolidated financial statements of the parent holding company,  Pipeline Data Inc., and its  wholly-owned subsidiaries,  SecurePay.com, Inc., Northern Merchant Services, Inc.,  Pipeline Data Processing, Inc., Pipeline Data Portfolio Acquisitions, Inc., Aircharge, Inc., Cardaccept.com, Inc. and Charge.com Acquisition, 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.






Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.







F-9


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS



December 31, 2005



NOTE A  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING


POLICIES (continued)

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 of $ 75,489 represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses.



3.   Inventories



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




4.
        Accounts and Notes Receivable, net

The Company uses the allowance method to account for uncollectible accounts receivable. Accounts receivable are presented net of an allowance for doubtful accounts of $ 123,251.

The Company has three demand notes agregating $175,000 at the simple rate of 10% per annum and six long term secured promissory notes aggregating $750,000 together with interest at the rate equal to 6%-10% per annum due on or before July 7, 2007 and May 7, 2008. The $750,000 notes are 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.




5.
        Property and Equipment, net

  Property
    and equipment are stated at cost less accumulated depreciation. Depreciation
    is calculated using the straight-line method for financial reporting purposes
    and primarily accelerated methods for tax purposes. For financial reporting
    purposes, equipment is depreciated over five to seven years. Leasehold improvements
    and property acquired under capital leases are amortized over the useful life
    of the asset or the lease term, whichever is shorter. Depreciat equipment
    for the years ended December 31, 2005 and 2004 was $ 88,266 and $ 38,250,



F-10


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE A  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING


POLICIES (continued)


5.
        Property and Equipment, net (continued)

respectively.


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


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 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. Interchange fees are set by Visa and
MasterCard and are based on transaction processing volume and are recognized at
the time transactions are processed. Revenues generated from certain agent bank
portfolios acquired as part of the FDMS acquisition are reported net of
interchange, as required by EITF 99-19, where we may not have credit risk,
portability or the ultimate responsibility for the merchant accounts.







F-11


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



NOTE A  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING


POLICIES (continued)

6.
        Revenue and Cost Recognition (continued)

We are aware, however, that the SEC accounting staff has recently raised certain revenue recognition concerns regarding companies in our industry. There is a risk that if the SEC were to determine that our current revenue recognition policies were incorrect, such policies may need to be altered and our recognition of revenues on a going forward basis may be materially and adversely effected. Moreover, this change may require us to restate prior financial statements to reflect substantially lower revenue numbers, which could effect public confidence in our accounting controls and have a negative impact on our public stock price. However, as there would be a corresponding reduction in our reported cost of services sold, we do not believe that any such change in revenue recognition policy would require us to restate our previous EBITA, net earnings or stockholders equity results.




7.
        Reserve for Losses on Merchant Accounts

We maintain a reserve for merchant losses necessary to absorb chargeback and other losses for merchant transactions that have been previously processed and which have been recorded as revenue. We analyze the adequacy of our reserve for merchant losses each reporting period. The reserve for merchant losses is comprised of three components: (1) specifically identifiable reserves for merchant transactions for which losses are probable and estimable, (2) a calculated reserve based upon historical loss experience applied to the previously processed transactions, and (3) a management analysis component for concentration issues and general macroeconomic and other factors. At December 31, 2005   our reserve for losses on merchant accounts included in accrued liabilities and other totaled $ 85,911.



8. Advertising Cost



  Advertising
    cost are expensed as incurred. Advertising expense totaled $ 55,300 for 2005 and
    $ 34,773 for 2004.





F-12


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



9. Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (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 pro forma disclosure only. SFAS 123R also supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,  Statement of Cash Flows. This standard will be adopted by us 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 shall use the modified prospective method. We will adopt the provisions of this standard on January 1, 2006 and will apply to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards on that date.

As permitted by SFAS No. 123, we currently follow APB Opinion No. 25 which provides for the accounting for share-based payments to employees and directors using the intrinsic value method and, as such, we generally recognized no compensation cost for such stock options. We are currently in the process of assessing the impact that SFAS No. 123R will have on our consolidated income statement in 2006. The historical pro forma income statement disclosure may 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.



  

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.





F-13


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE B--EARNINGS PER SHARE (Continued)



A
reconciliation of basic to diluted weighted average common shares outstanding is
as follows for the years ended:







Year 2005
        
        Income available
        
        Common shares
        
        Per share amountBasic earnings per share
        
        $
        368,757
        
        27,909,673
        
        $
        .01Effects of dilutive securities:Stock options
        
        
        0
        
        1,059,598
        
        
        .00Warrants
        
        
        0
        
        95,402
        
        
        .00Stock subscribed
        
        
        0
        
        247,410
        
        
        .00Diluted earnings per share
        
        $
        368,757
        
        29,312,083
        
        $
        .01


Year 2004
        
        Income available
        
        Common shares
        
        Per share amountBasic loss per share
        
        $
        (297,221
        )
        21,107,818
        
        $
        (.01
        )Effects of dilutive securities:N/A

  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.
  
  At
    December 31, 2005, the Company has net operating loss carry forwards for income
    tax purposes of $2,077,388. These carry forward losses are available to offset
    future taxable income, if any, and expire in the year 2018.






F-14

  
  PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



  

The components of the net deferred tax assets are as follows:

2005
        
        2004Deferred tax assets:Net operating loss carry forward
        
        $
        706,312
        
        $
        604,816Current year (income) loss
        
        
        (139,766
        )
        
        101,055Deferred revenue
        
        
        306
        
        
        367Deferred stock compensation
        
        
        10,131
        
        
        18,819Total deferred tax assets
        
        
        856,515
        
        
        725,057Deferred tax liabilities:Difference between book and taxdepreciation and amortization
        
        
        76,377
        
        
        94,403Capital loss
        
        
        0
        
        
        10,747Total deferred tax liabilities
        
        
        76,377
        
        
        105,150Net deferred tax asset beforevaluation allowance
        
        $
        780,138
        
        $
        619,907Valuation allowance
        
        
        0
        
        
        (619,907
        )Net deferred tax asset
        
        $

      780,138
        
        $
        0

SFAS No. 109,Accounting for Income Taxes,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. Management believes that the Company will utilize the loss carryforwards in the future because the acquired new businesses and merchant portfolios will be profitable and will generate taxable income in the near term. However, there can be no assurance that the Company  will generate taxable income or that all of its loss carryforwards will be utilized.




F-15


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE D - COMMITMENTS AND CONTINGENCIES




Lease agreements


The offices of the Companys  subsidiary,  SecurePay,  Inc. are located at 1515 Hancock Street,  Quincy,  Massachusetts  at a monthly rental of $6,644. The term of this lease shall be for five 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 was located at 13339 North  Central  Expressway  Suite 103, Dallas,  Texas. The facility lease was 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. This lease was terminated during August 2005 and a one time payment of $6,500
was made to satisfy any outstanding obligations under the lease. 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. On November 23, 2005, the first amendment to the Alpharetta lease was entered into for the expansion of an additional 1,290 square feet of office space with the following lease term: December 1, 2005 through July 31, 2006 ($775.07 monthly), August 1, 2006 through September 30, 2006 ($1,550.15 monthly) October 1, 2006 through September 30, 2007 ($1,596.38 monthly) October 1, 2007 through September 30, 2008 ($1,644.75 monthly) October 1, 2008 through September 30, 2009 ($1,694.20 monthly) October 1, 2009 through November 30, 2009 ($1,744.73 monthly).



As of October 1, 2005 the offices of the Companys subsidiary, Aircharge, Inc., will pay the sum of $1,950 per month on a one year lease, renewable for three additional years, located in Hawkston Hall Office Centre I, 1800 Nations Drive, Gurnee, Illinois. The monthly rent installments will increase to $2,313 the second year, $2,393 the third year, and to $2,478 the fourth year.



On December 19, 2005, the Companys subsidiary, Charge.com, Inc.s original lease was assumed, located at 3201 W. Commercial Blvd., Suite 206, Fort Lauderdale, Fl.. The lease was entered into as of September 11, 2003 with an annual basic rent of $19,980 plus applicable sales tax. Upon every anniversary date of the lease term the rent shall be adjusted to reflect a four percent increase in the basic rent. The lease expires November 30, 2006.







F-16


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



NOTE D - COMMITMENTS AND CONTINGENCIES (continued)




Lease agreements-continued

Our future minimum lease commitments under noncancelable leases are as follows at December 31, 2005.




Year Ending
        
        Amount2006
        
        $
        172,4212007
        
        
        137,6202008
        
        
        140,6832009
        
        
        144,0582010
        
        
        125,735Total
        $
        720,517



            Total rent expense for the years ended 2005 and 2004 was $ 193,248 and $ 74,901, respectively.




Leases-Related Party:
The office 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 Company moved in January 2006 to a new location in Brasher Falls and a new lease is being created by the Wellers and the Company. Estimated monthly rental expense will be $3,000.




Capital Equipment Leases:

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. On March 1, 2005, the Company entered into a capital equipment lease with VAResources, Inc. for computer related






  F-17


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE D - COMMITMENTS AND CONTINGENCIES (continued)




Lease agreements-continued



equipment in the amount of $47,199.32. The initial term of the lease is for a period of 36 months with monthly payments of $1,611.05 and an advance lease payment of $3,222.10. On March 30, 2005, the Company entered into two leases with VAResources, Inc. Both leases are for a term of 36 months with
advance lease payments. The office furniture lease totals $20,830.00 with monthly payments of $722.36 and the advance two months payment of $1,444.72. The computer equipment lease totals $14,016.00 with monthly payments of $487.35 and the advance two months payment of $974.70.



On November 30, 2005, the Company entered into a capital equipment lease with Key Equipment Finance, Inc., Houston, Texas. The initial term of the lease is for a period of 60 months with a base lease amount of $474.63 per month and an advance lease payment of $1,024.26. The equipment consists of MAS 200 software, installation, setup, training and consulting services, aggregating a total of $20,255.



On December 1, 2005, the Company entered into a capital lease with Highline Capital Corp, Boulder Colorado. The initial term of the lease is for a period of 36 months with a base lease amount of $871.89 per month and an advance lease payment of $1,743.78. The equipment consists of panels, shelves, and other office partitions aggregating a total of $23,497.10.



NOTE E - STOCK OPTIONS AND WARRANTS



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.



In September  2005, the Companys Board of Directors approved the adoption of the 2005 Pipeline Data Inc Stock Incentive Plan in order to award restricted stock, nonqualified stock options and incentive stock options. This plan was approved by the Companys stockholders in January 2006.



During the year ended December 31, 2005, the Companys Board of Directors approved the grant of 5,859,464 stock options to  employees and independent consultants with a weighted average exercise price of $1.60. Of the options awarded to employees during the year, 1,084,322 vested during the year and 579,006 vested as of January 1,  2006. The options awarded to the Directors at December 31, 2005,

75,000, vest on January 1, 2006.





  F-18


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE E - STOCK OPTIONS AND WARRANTS (continued)



As of December 31, 2005,  430,000 have been  exercised  and the Company has reserved an aggregate of 9,387,829 shares of common stock pending the exercise of the options. As of December 31, 2005,  3,885,178 were exercisable at a weighted average price of $1.04 per share.



We measure compensation expense for our stock option awards under the intrinsic value method in accordance with the provisions of Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees, ( APB25) and related interpretations. APB 25  requires compensation expense to be recognized based on the excess, if any, of the quoted market price of the stock at the date of the grant over the amount an employee must pay to acquire the stock.






Stock option activity is summarized as follows:




OptionsOptions outstanding, December 31, 2003
        
        2,547,637Forfeited
        
        -0-Exercised
        
        (10,000
        )Issued
        
        430,478Options outstanding, December 31, 2004
        
        2,968,115Forfeited
        
        (130,250
        )Exercised
        
        (430,000
        )Issued
        
        5,859,464Options outstanding, December 31, 2005
        
        9,387,829



  F-19


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



NOTE E - STOCK OPTIONS AND WARRANTS (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 pro forma 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 shall use the modified
prospective method.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.

Our accounting policy for the issuance of equity instruments in exchange for goods or services received from other than employees are accounted for based on the fair value of the consideration received or the equity instrument issued, whichever is more reliably measurable.



We have outstanding warrants as follows:




Description
    
    Quantity
    
    Exercise
        Price
    
    Expiration
        DateClass
        A redeemable Warrants
    
    785,210
    
    
    $1.50
    
    4/26/2006Class
        B redeemable Warrants
    
    971,233
    
    
    $2.50
    
    12/31/2007Warrants
        issued 2/27/04
    
    166,667
    
    
    $1.25
    
    2/27/2011Warrants
        issued 2/27/04
    
    166,667
    
    
    $1.50
    
    2/27/2011Warrants
        issued 2/27/04
    
    166,666
    
    
    $1.75
    
    2/27/2011Warrants
        issued 6/16/04
    
    83,334
    
    
    $1.50
    
    6/16/2011Warrants
        issued 6/16/04
    
    83,334
    
    
    $1.80
    
    6/16/2011Warrants
        issued 6/16/04
    
    83,334
    
    
    $2.10
    
    6/16/2011Warrants
        issued 3/11/05
    
    600,000
    
    
    $1.40
    
    8/31/2011Warrants
        issued 3/11/05
    
    100,000
    
    
    $1.25
    
    3/11/2012Warrants
        issued 9/30/05
    
    700,000
    
    
    $1.10
    
    9/30/2010Warrants 
        with 8% convertible notes issued in 2002
    
    100,000
    
    
    $0.35
    
    3/8/2008Warrants
        issued in 2004 with various 8% convertible notes
    
    153,718
    
    
    $0.65
    
    2006Warrants
        issued in 2004 with various 8% convertible notes
    
    24,334
    
    
    $1.00
    
    2006



  F-20


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005







NOTE F  RELATED PARTY TRANSACTIONS





The Companys subsidiary, Northern Merchant Services, Inc., leases office space from Kevin and Nancy Weller. (see Note D )


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. When Northern Merchant Services, Inc. was acquired from Kevin and Nancy Weller, two million (2,000,000) shares were issued in 2004 to the Wellers pursuant to these milestones. Our board of directors determined that it is in the best interest of the Company to change the nature of the earn-in requirement and requested that a new milestone be created. Thus, the final one million shares earn-in is available if Kevin and Nancy Weller successfully (i) oversee and open a new facility in Brasher Falls and (ii) develop and launch a government payment processing solution. The board is currently reviewing completion of this milestone. The Northern Merchant Services, Inc.
acquisition amounted to an additional 2,000,000 shares of common stock at a price of $.22 per share.

In March 2002, we acquired all of the stock of SecurePay in exchange for seven million six hundred thousand (7,600,000) shares of our common stock at closing and up to 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. The SecurePay acquisition amounted to an additional 3,800,000 shares of common stock at a price of $.46 per share. The remaining target was not met and the earn-in expired in March 2005.

Chasm Holding, Inc., a related party, was paid $265,333 during the year 2005 for management services.









  F-21


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE G  SHORT-TERM AND LONG-TERM DEBT OBLIGATIONS




Details of Short-Term Debt:


December
          31,2005Sheridan
        Asset Management, LLC
    
    $
    15,000,000Camofi
        Master LDC
    
    $
    600,000Details
        of Long-Term Debt:8%
        Convertible notes
    
    $
    322,734Camofi
        Master LDC
    
    $
    1,400,000World
        Products Shareholders
    
    $
    525,000





See Note-H for details.




Conversion of Convertible Notes:

The Holders 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. As of December 31, 2005, the current portion amounted to $35,376, and the long-term portion amounted to $134,330.





  F-22


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE H  DEBT/FINANCING




Debt/Financing:

On September 30, 2005, we entered into a financing arrangement with CAMOFI Master LDC, an affiliate of Centrecourt Asset Management LLC. Under the arrangement, we issued CAMOFI Master LDC a $2,000,000 convertible note that will mature on September 30, 2008. The convertible note bears interest at an adjustable rate of Wall Street Journal Prime Rate plus two and one-half percent (2.5%). The note is convertible into registered shares of our common stock at a fixed conversion price of $1.10 per share. To secure the obligations under our CAMOFI Master LDC note, we entered into a security agreement, dated September 30, 2005, under which we granted to CAMOFI Master LDC a second priority security interest in our assets. Pursuant to the financing arrangement, we issued CAMOFI Master LDC warrants to purchase 700,000 shares of our common stock. The warrants have a five year term and have an exercise
price of $1.10 per share.

Upon the terms of the Merger agreement with World Products, Inc., the Company issued convertible promissory notes payable to the shareholders in proportion to their respective share holdings in the Company, in the aggregate principal amount of $525,000, which shall be convertible at maturity, at the shareholders option, to shares of the Company at $1.50 per share.



On December 20, 2005, the Company and its wholly owned subsidiaries entered into a loan agreement with Sheridan Asset Management, LLC in the original aggregate principal amount of $15,000,000. The twelve month term loan is secured by collateral consisting of all assets of the Company and its wholly owned subsidiaries. Terms of the note consist of a 17% rate of interest with monthly interest only payments required with a balloon payment of principal at maturity at month twelve. A $300,000 (2%) origination fee was paid to the lender at closing. A portion of the Sheridan note proceeds were used to fully pay the balance of the Laurus Master Fund debt.






  F-23


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



NOTE I  MERCHANT PORTFOLIO, RESIDUAL RIGHTS AND OTHER INTANGIBLES





Intangible assets primarily include merchant accounts from portfolio acquisitions (i.e. the right to receive future cash flows related to transactions of these applicable merchants). We periodically evaluate the carrying value of long-lived assets, in relation to the respective projected future undiscounted cash flows, to assess recoverability. Merchant portfolio, residual rights and other intangibles are amortized over seven years for financial statement reporting purposes and fifteen years for income tax purposes.



Change in Accounting estimate:



It is the Companys policy to periodically review the estimated useful lives of its intangible assets. This review during 2005 indicated that actual lives for certain asset categories generally were shorter than the useful lives originally estimated. As a result, the Company revised the estimated useful lives of certain categories of the intangible assets, retroactive to January 1, 2005. The effect of this change in estimate was to increase amortization expense by $718,415 for the year 2005 and reduce net income by $344,628.

During the year ended December 31, 2005,  the following merchant portfolios were acquired : 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.



See Note-K for business acquisitions during the year 2005.



NOTE J- ACCOUNTING FOR GOODWILL



Cost in excess of net assets of businesses acquired (goodwill) represents the unamortized excess of the cost of acquiring a business over the fair values of the net assets received at the date of acquisition. Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets,addresses financial accounting and reporting for acquired goodwill and other intangible assets, and requires that goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment. If facts and circumstances indicate goodwill may be impaired, we perform a recoverability evaluation by comparing carrying value to estimated fair value. The calculation of fair value includes a number of estimates and assumptions, including projections of future
income and cash flows, the identification of appropriate market multiples and the choice of an appropriate discount rate.

The aggregate amount of goodwill acquired during the year 2005 was $22,231,876. Since goodwill recognized from acquisitions initiated after June 30, 2001 is assigned to the individual business acquired and is not amortized, our annual goodwill impairment review as of December 31, 2005 determined that no impairment charge for goodwill was required at that time.





  F-24


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE K  ACQUISITIONS



On October 7, 2005, and effective September 30, 2005, our wholly-owned subsidiary, Aircharge, Inc., acquired and merged with World Products, Inc. d.b.a. AIRCHARGE. The Company paid $200,000 in cash, $525,000 in convertible notes and 900,000 shares of common stock in exchange for all of the outstanding stock of World Products, Inc. The acquisition of World Products, Inc. was recorded under the purchase method with the purchase price primarily allocated to goodwill. Pursuant to the merger agreement with Aircharge, Pipeline Data Inc. acquired all the stock of Aircharge in exchange for:





        Two Hundred Thousand ($200,000) Dollars in immediately negotiable funds.
        A promissory note in the principal amount of Five Hundred Twenty-Five Thousand ($525,000) Dollars bearing interest at LIBOR, convertible into shares of our common stock at $1.50 per share.
        Nine Hundred Thousand Shares (900,000) of our restricted common stock. The former Aircharge stockholders will be subject to a twelve month lock-up period commencing from the closing.
        An additional Five Hundred Thousand Shares (500,000) of our restricted common stock may be issued subject to performance incentives.

Effective December 19, 2005, per the Agreement and Plan of Merger dated as of July 15, 2005,  entered into by and among Pipeline Data Inc. and Charge.com Acquisition, Inc. (wholly owned subsidiary) and Charge.Com, Inc., a Florida corporation, Pipeline Data Inc. acquired all the stock of Charge.com in exchange for:





        Seven Million Five Hundred Thousand ($7,500,000) Dollars in immediately negotiable funds; and
        The number of shares of our restricted common stock that have an aggregate market value of Nine Million Five Hundred Thousand ($9,500,000) Dollars, which shares are subject to twelve month lock up provisions and of which shares valued at Five Million Five Hundred Thousand ($5,500,000) Dollars shall be afforded certain price protection provisions. This resulted in Nine Million Three Hundred Ninety Eight Thousand Fifty-Eight (9,398,058) shares of restricted stock by using the value of $1.03 per share.

F-24


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005



  
  NOTE K  ACQUISITIONS (continued)



Pro Forma Disclosure for the Above Business Acquisitions:



World Products, Inc. D/B/A Aircharge



On October 7, 2005, the Company completed the purchase of  World Products, Inc. d.b.a. AIRCHARGE by acquiring all of the outstanding capital stock of Aircharge for a total purchase price of $1.6 million. The acquisition was accounted for using the purchase method of accounting and, accordingly, Aircharge, Inc.s results of operations have been included in the consolidated financial statements since the date of acquisition. The source of funds for the acquisition was a combination of the Companys available cash, loan funds from Camofi Master, LDC and common stock.

The following table presents the allocation of the acquisition cost, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed:




Cash and cash equivalents
        
        $
        1,914Accounts receivable
        
        
        885Accrued revenue receivable
        
        
        6,769Equipment
        
        
        3,487Deposits receivable
        
        
        1,950Goodwill
        
        
        1,754,461Total Assets
        
        $
        1,769,466Accounts payable
        
        $
        144,286Accrued expenses
        
        
        955Total liabilities
        
        $
        145,241Total acquisition cost
        
        $
        1,624,225

The $1,754,461 assigned to goodwill is subject to impairment testing annually.






  F-26


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE K  ACQUISITIONS (continued)





Pro Forma Disclosure for the Above Business Acquisitions:



World Products, Inc. D/B/A Aircharge



The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of Aircharge, Inc. had occurred at January 1, 2004.






December 31, 2005
        
        December 31, 2004Sales
        
        $
        24,381,151
        
        $
        15,931,310Net income (loss)
        
        
        67,808
        
        
        (294,492
        )Net income per share-basic
        
        
        0.01
        
        
        ( 0.01
        )Net income per share-diluted
        
        
        0.01
        
        
        N/A


The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.



Charge.com, Inc.



On December 19, 2005, the Company completed the purchase of Charge.com, Inc., by acquiring all of the outstanding capital stock of Charge.com, Inc. for a total purchase price of $24.7 million. The acquisition was accounted for using the purchase method of accounting and, accordingly, Charge.com, Inc.s results of operations have been included in the consolidated financial statements since the date of acquisition. The source of funds for the acquisition was a combination of the Companys available cash, loan funds from Sheridan Asset Management, LLC and common stock.





  F-27


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE K  ACQUISITIONS (continued)






Pro Forma Disclosure for the Above Business Acquisitions:

Charge.com, Inc.


The following table presents the allocation of the acquisition cost, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed:






Cash
          and cash equivalents
      
      $
      878,626Accounts
          receivable
      
      
      473,332Furniture
          and fixtures
      
      
      1,000Computer
          software
      
      
      12,000Merchant
          portfolio
      
      
      4,144,251Deposits
          receivable
      
      
      2,800Organization
          cost
      
      
      528Goodwill
      
      
      20,444,531Total
          Assets

    

    $

    25,957,068Accounts
          payable
      
      $
      1,251,012Other
          current liabilities
      
      
      4,070Total
          liabilities
      
      $
      1,255,082Total
          acquisition cost
      
      $
      24,701,986


Of the $24,588,782 of acquired intangible assets, $4,144,251 was assigned to merchant portfolio and will be amortized over seven years for financial purposes and fifteen years for tax purposes. The $20,444,531 assigned to goodwill is subject to impairment testing annually.






  F-28


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE K  ACQUISITIONS (continued)





Pro Forma Disclosure for the Above Business Acquisitions:



Charge.com, Inc.



The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of Charge.com, Inc. had occurred at January 1, 2004.






December 31, 2005
        
        December 31, 2004Sales
        
        $
        24,189,139
        
        $
        19,098,377Net income
        
        
        2,237,781
        
        
        1,958,367Net income per share-basic
        
        
        0.07
        
        
        0.05Net income per share-diluted
        
        
        0.06
        
        
        0.04



The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.





NOTE L- SEGMENT INFORMATION AND GEOGRAPHICAL INFORMATION



We consider our business activities to be in a single reporting segment as we derive greater than 90% of our revenue and results of operations from processing revenues and other fees from card-based payments. During 2005 and 2004, we had no single customer that represented 3% or more of revenues. All revenues are generated in the United States.









  F-29


PIPELINE DATA INC.



NOTES TO FINANCIAL STATEMENTS (continued)



December 31, 2005





NOTE M- SUBSEQUENT EVENTS




  On
    February 1, 2006, Pipeline Data Inc. entered into an asset purchase agreement
    with Millennium Merchant Services, Inc. and Kent Stiritz. Pursuant to the
    agreement, Millennium Merchant Services, Inc. and Kent Stiritz agreed to sell
    residual rights to certain agreements with IPayment, Inc. Cornstone, Concord
    EFS and Authorizenet to Pipeline Data Inc. in exchange forof
    Pipeline Data Inc. (the Agreement Shares) and certain other consideration.
    2,246,764 of the Agreement Shares have been issued to the sellers and 1,953,236
    shares of Pipeline Data Inc, remain available to be issued to the seller upon
    the transfer of additional residual rights under Future Agreements pursuant
    to the terms of the Agreement.



  F-30


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, 2005, 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,  2005. 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, 2005.



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.





48


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 1, 2 006.




Name
    
    Age
    
    PositionJack
        Rubinstein
    
    57
    
    Chairman
        of the BoardMacAllister
        Smith
    
    42
    
    Chief
        Executive Officer, President and DirectorKevin
        Weller
    
    39
    
    DirectorJohn
        Reeder
    
    64
    
    Director
        (Independent)Harold
        Denton
    
    62
    
    Director
        (Independent)Larry
        Goldstein
    
    62
    
    Director
        (Independent)Michael
        M. Greenburg
    
    49
    
    Director
        (Independent)Kevin
        Smith
    
    37
    
    Chief
        Operating OfficerDonald
        Gruneisen
    
    51
    
    Chief
        Financial OfficerThomas
        Tesmer
    
    59
    
    Chief
        Technical OfficerJames
        Plappert
    
    46
    
    Chief
        Marketing OfficerPhilip
        Chait
    
    42
    
    Secretary

Jack Rubinstein, 57,has been our Chairman since inception. Mr. Rubinstein 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, Inc.) 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.

  

49


MacAllister
    Smith, 42,has been our President, Chief Executive
    Officer and Director since March 2002. Mr. Smith has over fourteen years
    of experience in the merchant processing industryand
    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 three 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 programs. Pinnacle Financial Technologies,
    Inc. merged with Nova Information Systems in 1998. Mr. Smith was also
    co-founder and Senior Partner of AccesServices, Inc. (AccesServices)
    (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. AccesServices was sold to Digital
    Courier Technologies, Inc. (NASDAQ:DCTI) in 1999.
  Kevin J. Weller, 38, has been a director since August 2002. He has been president and director of NMSI since July 2001. Mr. Weller has over fourteen  of experience in the payment processing industry. His entry was in 1992 with Netcom Data Corp. (Netcom as a sales representative. He left Netcom in 1997. In August 1997, Mr. Weller co-founded NMSI. Since 1997, he has consistently placed NMSI at the top of Nova Information Systems MSP Program in new account acquisition. NMSI amassed over 6,000 customers prior to its acquisition by us. NMSI 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. Mr. Weller is married to Nancy Weller, who is the Vice President of our subsidiary NMSI.

John M. Reeder, 64,was elected to serve on our board of directors on January 12, 2006. From 1988 to the present, he has been the president of Peter D. Watson Agency, Inc., a large real estate brokerage firm in northern Vermont. From 1969 to 1973, he served as an officer and director of the gulf-coast regional insurance group, Gulf Central Group Inc., and as president of two of its subsidiaries, Edwards Insurance Agency Inc. and Indemnity Premiums Ltd. Mr. Reeder has served on numerous nonprofit boards, including Sterling College where he also served as treasurer, and is currently on the board of directors of the National Conference on Citizenship, a congressionally chartered, Washington D.C. based organization dedicated to the promotion of civic involvement in the United States.

Harold Denton, 62,was elected to serve on our board of directors January 12, 2006. From 1991 to the present, he has served as president of General Land Abstract Company, the largest Title Insurance company in the state of New Jersey where he initially began his career there in 1981. General Land underwrote over $4 billion of Title insurance in 2004 and was acquired by  First American Financial (NYSE: FAF) in the same year. Mr. Denton served as an 0fficer in the U.S. Navy subsequent to his graduation from the University of Michigan in 1965.

Larry Goldstein, 62,was elected to serve on our board of directors January 12, 2006. Since January 1974 to the present, Mr. Goldstein has been the president of PIRA (Petroleum Industry Research Associates). Mr. Goldstein is a prominent expert in the petroleum industry. He is a member of the National Petroleum Council (NPC) named by the Secretary of Energy. He is a contributor to NPC studies and has testified numerous times before various Congressional committees on legislative and regulatory issues. Mr. Goldstein is also a member of PIRINCs Board of Trustees and is a trustee of the Scientists Institute for Public Information. For the past two years, Mr. Goldstein has been a consultant to the Iraqi Coalition Provisional Authority on energy matters. Mr. Goldstein has been involved with the energy industry since his
graduation from the City College of New York.

  



50


Michael
    M. Greenburg, 49,was elected to serve on our board
    of directors January 12, 2006. He has been a practicing attorney since June
    of 1984. He is a 1983 graduate of Pepperdine University School of Law. He
    served as an editor of the Pepperdine Law Review from 1982 through
    1983 and has published two articles on constitutional law issues. He has been
    a member of the Massachusetts Bar since June of 1984, the Federal District
    Court for the District of Massachusetts since May of 1985, and the United
    States Supreme Court since April of 1991. For the first 10 years of his practice
    Mr. Greenburg worked as litigation counsel for varying individual and
    business concerns. From 1993 to the present he has been engaged in private
    practice with offices in Framingham, Massachusetts, with a focus on residential
    real estate transactions.

Kevin Smith, 37, has been our chief operating officer since May 13, 2004. He has been president and director of PDP. Mr. Smith has over 14 years experience in the merchant processing industry. Mr. Smith 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, 51,has been our chief financial officer since September 2002. He has been chief financial officer of NMSI since July 2001. Mr. Gruneisen has over 20 years of experience in the 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 the 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 Nicholville Telephone 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.

  Thomas
    Tesmer, 59, has been our chief technology officer
    since July 2004. Mr. Tesmer is an experienced and competent senior operations
    executive with more than 25 years in the transaction processing business.
    From October 2002 to July 2004, Mr. Tesmer was the president of Symmetrex,
    Inc., a processing company supporting third party clients that operated stored
    value card programs in the United States and foreign markets. From June 1999
    to December 2002, Mr. Tesmer was the executive vice president, front
    end systems of Heartland Payment Systems, the second largest independent merchant
    acquiring processing company in the nation and where Mr. Tesmer created
    and implemented a stand-alone transaction processing division. From November
    1996 to June 1999, Mr. Tesmer served as president and chief executive
    officer of Access Services, Inc., a credit card merchant payments processing
    corporation servicing merchant sales agencies and financial institutions nationwide.
    Mr. Tesmer is currently a member of the board of directors of Q Comm
    International, Inc., a publicly-traded technology company, which trades on
    the American Stock Exchange under the symbol QMM.



51


James
    Plappert, 46,has been our chief marketing officer
    since October 2005. Mr. Plappert has spent over 23 years in the payment
    systems and merchant bankcard industry, holding executive level positions
    in a number of prominent companies. After serving nine years as vice president
    of national sales for PNC/Citizens Fidelity, Mr. Plappert joined Financial
    Alliance Processing Services from 1992-1997. He was part of an executive team
    that orchestratedthe sale of the company to Deluxe Corporation
    (NYSE:DELUXE) in 1995. He also participated in an executive buy-back of the
    company from Deluxe Corporation the following year. In 1997, he joined National
    Processing Company (NPC), which was acquired by Bank of America in 2004. As
    senior vice president of NPC, Mr. Plappert managed Indirect Sales of
    business lines for the company, which was, at the time, the second largest
    merchant services provider in the U.S. Mr. Plappert assumed the positions
    of vice chairman and director of First National Processing, Inc. in 2000.
    Under his direction, the company was successfully repositioned, culminating
    in its eventual sale to iPayment (NASDAQ:IPMT) in 2001. In 2002, Mr. Plappert
    served as executive vice president of First American Payment Systems, where,
    as an equity investor in the company, he managed merger and acquisition activities.
    For over eleven years, Mr. Plappert held a number of executive level
    board positions, including president, with the Electronic Transaction Association
    (ETA), the leading international trade association representing companies
    that offer electronic transaction products and services. He currently serves
    or has served on the ETAs Industry Relations, Executive, Risk and Member
    Recognition Committees.
  Philip Chait, 42, has been our corporate secretary since March 2002. He has also been the corporate secretary of SecurePay since March 2002. On October 14, 2005, Mr. Chait filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code. We do not believe that this action will have a material impact on our operations. 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 programs. Pinnacle Financial Technologies, Inc. merged with NIS 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. Access Services, Inc. was sold to Digital Courier Technologies, Inc. (NASDAQ: DCTI) in 1999.

None of our executive officers or directors, other than our secretary Philip Chait, is currently subject to any legal proceedings. As set forth above, on October 14, 2005, Philip Chait filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code.

Board Composition

Our board of directors consists of seven (7) members. Four (4) of these directors qualify as independent pursuant to the rules of the NASDAQ National Market. Each of our directors was elected in accordance with our certificate of incorporation and bylaws. Our amended and restated certificate of incorporation provides that our board of directors will be elected to one-year terms.

Committees of the Board

  Our
    board of directors has designated an audit committee, a compensation committee,
    and a corporate governance committee. The members of each committee are appointed
    by the board of directors and serve one-year terms.

52


Audit
    Committee
  Our
    audit committee is comprised of Hal Denton, Michael Greenburg and Jack Rubinstein.
    We believe that Hal Denton meets the requirements for a financial expert
    under the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange
    Commission and isindependent, as that term is defined
    under the NASDAQ National Market listing requirements. Our audit committee
    is charged with the following responsibilities:
  
        the engagement, oversight and compensation of our independent public accountants;
        reviewing the plan, scope and results of the annual audit to be conducted by our independent public accountants;
        pre-approving services provided to us by our independent public accountants;
        meeting periodically with our independent public accountants and our Chief Financial Officer to review matters relating to our consolidated financial statements, our accounting principles and our system of internal accounting controls; and
        reporting its recommendations as to the approval of our consolidated financial statements to our board of directors.Compensation Committee

Our compensation committee is comprised of John Reeder and Michael Greenburg. The compensation committee determines our compensation policies and forms of compensation provided to our directors and officers. The compensation committee also reviews and determines bonuses for our officers and other employees. In addition, the compensation committee reviews and determines stock-based compensation for our directors, officers, employees and consultants and administrators our stock incentive plan. No interlocking relationship exists between our compensation committee and the compensation committee of any other company.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is comprised of John Reeder and Michael Greenburg. The corporate governance committee identifies, evaluates and recommends potential board and committee members. The committee also establishes and reviews board governance guidelines.

Code of Ethics

On December 31, 2003, our board of directors adopted a code of ethics that applies to our principal executive and financial officers. We intend to file amendments, changes or waivers to the code of ethics as required by SEC rules.





53


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 years ended December 31, 2005, December 31, 2004 and December 31, 2003 to our Chief Executive Officer and each of our four other most-highly compensated executive officers, which we refer to as our named executive officers, in all capacities in which they served.

SUMMARY COMPENSATION TABLE

Annual
        Compensation
    
    Long-TermCompensationName
        and PrincipalPosition
    
    Year
    
    Salary
        ($)
    
    Bonus
        ($)(1)
    
    OtherAnnualCompensation($)(2)
    
    SecuritiesUnderlyingOptions
    
    All
        OtherCompensation($)MacAllister
        Smith
    
    2005
    
    235,808
    (3)
    __
    
    
    
    147,400
    (4)
    __President
        and Chief
    
    2004
    
    122,227
    (3)
    __
    
    
    
    116,000
    (5)
    Executive
        Officer
    
    2003
    
    70,854
    (3)
    
    
    
    
    183,667
    (6)
    Kevin
        WellerDirector and President,Northern Merchant
    
    2005
    
    200,000
    (7)
    5,000
    
    7,200
    
    97,000
    (8)
    __Services
        Inc.
    
    2004
    
    200,000
    
    3,846
    
    11,659
    
    101,053
    (9)
    __2003
    
    200,000
    
    3,846
    
    7,213
    
    160,000
    (10)
    __Kevin
        Smith
    
    2005
    
    150,000
    (11)
    __
    
    7,200
    
    810,750
    (12)
    62,505
    (11)Chief
        Operating Officer
    
    2004
    
    100,502
    
    
    
    56,216
    
    1,013,755
    (13)
    __2003
    
    
    
    
    
    
    
    
    
    Thomas
        Tesmer
    
    2005
    
    150,000
    (14)
    __
    
    2,539
    
    60,750
    (15)
    __Chief
        Technical Officer
    
    2004
    
    72,038
    
    __
    
    __
    
    1,511,660
    (16)
    46,879
    (14)2003
    
    __
    
    __
    
    __
    
    __
    
    __James
        Plappert
    
    2005
    
    37,692
    (17)
    __
    
    __
    
    509,692
    (18)
    __Chief
        Marketing Officer
    
    2004
    
    __
    
    __
    
    __
    
    __
    
    __2003
    
    __
    
    __
    
    __
    
    __
    
    __Philip
        Chait
    
    2005
    
    133,688
    
    __
    
    __
    
    36,000
    (20)Secretary
    
    2004
    
    122,227
    
    
    
    
    
    16,316
    (21)
    2003
    
    70,854
    (19)
    
    
    
    
    25,833
    (22)
    


(1)
        The figures reported in the bonus column represent amounts earned and accrued for each year.(2)
        Other than as disclosed herein, the aggregate amount of any perquisites or other personal benefits for any individual executive officer was less than $50,000 or 10% of the total annual salary and bonus for such officer, and is therefore not included in the above table.

54


(3)
      Mr. Smith
          received annual compensation of $240,000 commencing January 1, 2006.
          On July 5, 2005, the board of directors approved the issuance to Mr. Smith
          of 3,583,756 shares of our restricted common stock as compensation for
          his services associated with successful acquisitions and in consideration
          of a waiver of prior rights to stock issuances under previous agreements
          including but not limited to his rights under the 2002 SecurePay acquisition
          agreement. The issuance of these additional shares was triggered upon
          the closing of the Charge.com merger consummated under Mr. Smiths
          direction but have not yet been issued. These includes payments to Chasm
          Holdings for management services which are attributed to him. Chasm
          Holdings is 50% owned by Catherine Brannon who is the sister of MacAllister
          Smith. The other 50% owner is Barbara Klein, Phillip Chaits sister.(4)
        During calendar year 2005, Mr. Smith was awarded options to  purchase  147,400shares of common  stock at the exercise  price of $1.20.(5)
        During calendar year 2004, Mr. Smith was awarded options to  purchase  116,000 shares of common  stock at the exercise  price of $0.95.(6)
        During calendar year 2003, Mr. Smith was awarded options to  purchase  183,667shares of common  stock at the exercise  price of $0.60.(7)
        Nancy Smith-Weller is Kevin Wellers wife and vice president of our subsidiary NMSI. Mrs.Smith-Weller earns a salary of $150,000 per year. On July 5, 2005, the board of directors approved the issuance to Mr. Weller of 25,000 shares of our restricted common stock and to Mrs. Smith-Weller of 20,000 shares of our restricted common stock as compensation for their services associated with successful acquisitions. The issuance of these additional shares was triggered upon the closing of the Charge.com merger.


(8)
        During calendar year 2005, Mr. Weller was awarded options to purchase  97,000 shares of common  stock at the exercise  price of $1.20. Mrs. Smith-Weller, the wife of Mr. Weller, was awarded options to  purchase  31,500 shares of common  stock at the exercise  price of $1.20.(9)
        During calendar year 2004, Mr. Weller was awarded options to purchase  111,053 shares of common  stock at the exercise  price of $0.95. Mrs. Smith-Weller, the wife of Mr. Weller, was awarded options to  purchase 32,368 shares of common  stock at the exercise  price of $0.95.(10)
        During calendar year 2003, Mr. Weller was awarded options to purchase  160,000 shares of common  stock at the exercise  price of $0.60. Mrs. Smith-Weller, the wife of Mr. Weller, was awarded options to  purchase 51,250 shares of common  stock at the exercise  price of $0.60.(11)
        On July 5, 2005, the board of
directors approved the issuance to Mr. K. Smith or to a trust of his choice of 80,000
shares of our restricted common stock as compensation for their services associated with
successful acquisitions. The issuance of these additional shares was triggered upon the
closing of the Charge.com merger but have not yet been issued. In addition, Mr. K. Smith
is entitled to receive 200,000 shares of our common stock, pursuant to his employment
agreement, 94,436 of which already have been issued. Although authorized, the remaining
105,564 shares have not been issued yet. During calendar year 2005, Mr. K. Smith was
issued 50,004 shares of our restricted common stock, which we have valued at $62,505.
During calendar year 2004, Mr. K. Smith was issued 44,432 shares of our restricted common
stock.(12)
        During calendar year 2005, Mr. K. Smith was awarded options to purchase an aggregate of  810,750 shares of common  stock, as follows:  60,750 at the exercise  price of $1.20, 750,000 at the exercise  price of $1.00.(13)
        During calendar year 2004, Mr. K. Smith was awarded options to  purchase an aggregate of  1,013,755 shares of common  stock, as follows:  250,000 at the exercise  price of $1.50, 250,000 at the exercise  price of $1.75, 250,000 at the exercise  price of $2.00, 250,000 at the exercise  price of $2.25, 13,755 at the exercise  price of $0.95.

55


(14)
        On July 5, 2005, the board of directors approved the issuance to Mr. Tesmer or
to a trust of his choice of 55,000 shares of our restricted common stock as
compensation for their services associated with successful acquisitions. The
issuance of these additional shares was triggered upon the closing of the
Charge.com merger but have not yet been issued. In addition, Mr. Tesmer is
entitled to receive 150,000 shares of our common stock, pursuant to his
employment agreement, 62,493 of which already have been issued. Although the
remaining 87,507 shares have not been issued yet, such issuance has been
authorized. During calendar year 2005, Mr. Tesmer was issued 37,502 shares of
our restricted common stock, which we have valued at $46,879. During calendar
year 2004, Mr. Smith was issued 24,991 shares of our restricted common stock.(15)
        During calendar year 2005, Mr. Tesmer was awarded options to purchase 60,750 shares of common  stock at the exercise  price of $1.20.(16)
        During calendar year 2004, Mr. Tesmer was awarded options to  purchase an aggregate of  1,511,660 shares of common  stock, as follows:  500,000 at the exercise  price of $1.50, 500,000 at the exercise  price of $2.25, 500,000 at the exercise  price of $3.00, 11,660 at the exercise  price of $0.95.(17)
        Mr. Plapperts employment contract provided for the issuance to Mr. Plappert or to a trust of his choice of  250,000 shares of our restricted common stock as compensation for their services associated with successful acquisitions. The issuance of these additional shares was triggered upon the closing of the Charge.com merger but have not yet been issued.(18)
        During calendar year 2005, Mr. Plappert was awarded options to purchase an aggregate of  509,692 shares of common  stock, as follows:  9,692 at the exercise  price of $1.20, 250,000 at the exercise  price of $1.00, 250,000 at the exercise  price of $1.00, to vest when the initial breakeven milestone in relation to the Aircharge merger is met, which event has not yet occurred.(19)
        Mr. Chait received annual compensation of $70,854 in 2003. These includes payments to Chasm Holdings for management services which are attributed to him. Chasm  Holdings is 50% owned by Catherine  Brannon who is the sister of MacAllister Smith. The other 50% owner is Barbara Klein, Phillip Chaits sister.(20)
        On December 31, 2005 Philip Chait was awarded options to purchase 36,000 shares of common stock at an exercise price of $1.20.(21)
        On December 31, 2004, Mr. Chait was awarded options to purchase 16,316 shares of common stock at an exercise price of $0.95.(22
        On December 31, 2003 Mr. Chait was awarded options to purchase 25,833 shares of common stock at an exercise price of $0.60.Option Grants in Last Fiscal Year

The following table sets forth information regarding stock options granted under our stock incentive plan in 2005 to each of our named executive officers.



56


OPTION/SAR GRANTS IN LAST FISCAL YEAR


Individual
          GrantsName
    Number
          ofSecurities Underlying Options/SARs Granted
    %
          of Total Options/SARs Granted in Fiscal Year
    Exercise
          orBase Price
    Expiration
          DateMacAllister
        SmithPresident and Chief Executive Officer
    40,800
        options
      40,800options
      40,800
        options
      25,000
        options
    2.5%
    $1.20
      per
        share
    January
        1, 2011
      January
        1, 2012
      January
        1, 2013
      January
        1, 2011Kevin
        WellerDirector and President of Northern Merchant Services Inc.
    24,000
        options
      24,000
        options
      24,000
        options
      25,000
        options
    1.7%
    $1.20
      per
        share
    January
        1, 2011
      January
        1, 2012
      January
        1, 2013
      January
        1, 2011Kevin Smith
      Chief
        Operating Officer and President of Pipeline Data Processing, Inc
    750,000 options
      83,333
        options
      83,333
        options
      83,333
        options
      83,333
        options
      83,333
        options
      83,333
        options
      83,333
        options
      83,333
        options
      83,334
        options
      83,334
        options
      83,334
        options
      83,334
        options
      20,250
        options
      20,250
        options
      20,250
        options
    32.6%
    $1.00
      $1.50
      $1.75
      $2.00
      $2.25
      $1.50
      $1.75
      $2.00
      $2.25
      $1.50
      $1.75
      $2.00
      $2.25
      $1.20
      $1.20
      $1.20
      
      per
        share
    July 5, 2010
      May
        13, 2010
      May
        13, 2010
      May
        13, 2010
      May
        13, 2010
      May
        13, 2011
      May
        13, 2011
      May
        13, 2011
      May
        13, 2011
      May
        13, 2012
      May
        13, 2012
      May
        13, 2012
      May
        13, 2012
      January
        1, 2011
      January
        1, 2012
      January
        1, 2013Thomas
        TesmerChief Technical Officer
    20,250
        options
      20,250
        options
      20,250
        options
      166,666
        options
      166,666
        options
      166,666
        options
      166,667
        options
      166,667
        options
      166,667
        options
      166,667
        options
      166,667
        options
      166,667
        options
    26.6%
    $1.20
      $1.20
      $1.20
      $1.50
      $2.25
      $3.00
      $1.50
      $2.25
      $3.00
      $1.50
      $2.25
      $3.00
      per
        share
    January
        1, 2011
      January
        1, 2012
      January
        1, 2013
      July
        1, 2010
      July
        1, 2010
      July
        1, 2010
      July
        1, 2011
      July
        1, 2011
      July
        1, 2011
      July
        1, 2012
      July
        1, 2011
      July
        1, 2011



57


James PlappertChief Marketing Officer

    3,231 options
3,231 options
3,230 options
83,333 options
83,333 options
83,334 options
83,333 options
83,333 options
83,334 options

    8.7%

    $1.20
$1.20
$1.20
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
per share

    January 1, 2011
January 1, 2012
January 1, 2013
January 1, 2011
January 1, 2012
January 1, 2012
Milestone not yet met
Milestone not yet met
Milestone not yet metPhilip ChaitSecretary
        12,000 options
12,000 options
12,000 options
        0.6%
        $1.20
per share
        January 1, 2011
January 1, 2012
January 1, 2013AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES

The following table sets forth certain information concerning unexercised stock options held by the Named Executive Officers as of December 31, 2005.




Name
        
        Shares Acquired on Exercise (No.)
        
        Value Realized ($)
        
        Number of Securities Underlying Unexercised Options at 2005 Fiscal Year-End(#) Exercisable/Unexercisable
        
        Value of Unexercised In-the-Money Options at 2005 Fiscal Year-End ($)(1) Exercisable/UnexercisableNameMacAllister SmithPresident and Chief Executive Officer
        
        None
        
        None
        
        639,210/254,523
        
        
        $426,058 / $37,992Kevin Weller
        
        None
        
        None
        
        268,452/186,269
        
        
        $153,885/$31,660Kevin Smith
        
        None
        
        None
        
        1,087,917/736,588
        
        
        $113,417/ $1834Thomas Tesmer
        
        None
        
        None
        
        503,885/1,068,525
        
        
        $777/ $1,555James Plappert
        
        None
        
        None
        
        -0-/509,692
        
        
        $-0- / $75,000Philip Chait
        
        None
        
        None
        
        22,661/55488
        
        
        $10,560 / $6,911

Stock Plan

On January 12, 2006, our stockholders approved our 2005 Stock Incentive Plan. The purposes of 2005 Stock Incentive Plan are to encourage ownership of Stock by eligible persons and to motivate eligible persons to exert their best efforts on our behalf, which is expected to benefit our stockholders by associating the interests of eligible persons with our stockholders and by enabling us to attract and retain personnel of the best available talent through the opportunity to share in the increased value of our common stock. All directors, officers, employees, consultants, advisors, agents, independent contractors or independent sales or service organizations providing us with services are eligible to participate in the 2005 Incentive Stock Plan. The 2005 Incentive Stock Plan is administered by a committee of non-employee directors designated by the Board of Directors. The 2005 Incentive Stock
Plan provides for grants of options to purchase our common stock and restricted stock. Options vest and become exercisable





58


at such times and upon such terms and conditions as determined by a committee designated by our Board of Directors. In general, the per share exercise price for any option may not be less than the fair market value of a share of our common stock on the date of grant. Both incentive and non-qualified stock options may be granted under the 2005 Incentive Stock Plan. The 2006 Incentive Stock Plan terminates on January 11, 2016 and no more than 10,000,000 shares of our common stock may be granted pursuant to the plan.

Compensation of Directors

We pay our independent directors $1,500 for each board meeting they attend that is within 75 miles of the directors home and $2,000 for each board meeting they attend that is more that 75 miles from the directors home. We pay independent directors $200 per hour for meetings held by conference call. We reimburse travel and incidental expenses and issue independent directors annual options to purchase 30,000 shares of our common stock at the then current market price. Payments to our other directors are as follows:



Mr. Jack Rubinstein, our chairman of the board, is entitled to receive an incentive bonus and a performance bonus annually, as determined by the Board as well as a performance bonus for services rendered since 2002 of up to $180,000, payable in cash or in kind. On July 31, 2005, the board of directors awarded Mr. Rubinstein 580,000 shares of our restricted common stock as compensation from 2002 through September as a performance bonus. On July 31, 2005, Mr. Rubinstein was issued 100,000 shares of restricted common stock as repayment of an accrued officer payable of $50,000. For his services as a director for the year ended December 31, 2005, Mr. Rubinstein was issued options to purchase 40,000 shares of our common stock at an exercise price of $1.20 per share. These shares expire on January 11, 2011.

Messrs. MacAllister Smith and Kevin Weller receive compensation for services rendered as our employees and officers. For their services as directors for the year ended December 31, 2005, they each were issued options to purchase 25,000 shares of our common stock at an exercise price of $1.20 per shares. These shares expire on January 11, 2011. These option issuances are also reflected in the Summary Compensation Table contained in this annual report.

Option terms are suspended for the periods of time during which directors may not exercise them, for example, due to contractual black-out periods.

Employment Contracts

MacAllister Smith is our chief
executive officer. He has entered into a written employment contract effective
January 1, 2006, pursuant to which he will be paid a salary of $240,000 and will
be entitled to receive an incentive bonus up to an amount equal to his salary
and a performance bonus as determined by the Board of Directors. Mr. Smith
will be issued 3,583,756 shares of our restricted common stock as compensation
for his services associated with successful acquisitions, the completion of a
successful merger and the waiver of prior rights to stock issuances under
previous agreements including but not limited to such rights under the 2002
SecurePay acquisition agreement.

  Pursuant
    to a written employment agreement, dated August 26, 2002, Mr. Kevin Weller
    was named a director of our company and president of our subsidiary NMSI.
    He is paid a salary of $200,000 per annum and is entitled to receive an incentive
    bonus up to an amount equal to his salary and a performance bonus as determined
    by the Board of Directors, upon meeting or



59


exceeding
    certain financial, sales or other goals set forth by the Board of Directors.
    Mr. Wellers employment agreement has a term of four years.Pursuant to a written employment agreement, dated August 26, 2002, Ms. Nancy Smith-Weller was named vice-president of our subsidiary NMSI. She is paid a salary of $150,000 per annum and is entitled to receive an incentive bonus up to an amount equal to her salary and a performance bonus as determined by the Board of Directors, upon meeting or exceeding certain financial, sales or other goals set forth by the Board of Directors. Ms. Smith-Wellers employment agreement has a term of four years.

Pursuant to a written employment agreement, dated April, 2004, Mr. Kevin Smith was named our chief operating officer and president of our subsidiary PDP. He is paid a salary of $150,000 per annum. Mr. Smith was granted 200,000 shares of our restricted common stock to vest over a three year period. He was also issued 1,000,000 options issued in 250,000 lots at strike prices of $1.50, $1.75, $2.00 and $2.25, respectively. One-third of the options shall vest on the first anniversary date of the employment agreement, one-third shall vest on the second anniversary of the date of the agreement and one-third of which shall vest on the third anniversary of the date of the agreement. The term of the options shall be 5 years from vesting. Mr. Smith may also receive up to 1,000,000 options based on milestones including on-budget operations and the profitable implementation of our ISO
division. The exercise price of the options shall be based on the trailing 5 day average stock price of our common stock on the date of the award. Mr. Smiths employment agreement has a term of three years.

Pursuant to a written employment agreement dated July 1, 2004, Mr. Thomas Tesmer was named our chief technology officer. He is paid a salary of $150,000 per annum. Mr. Tesmer was granted 150,000 shares of our restricted common stock to vest over a three year period. He was also issued 1,500,000 options in 500,000 lots at strike prices of $1.50, $2.25 and $3.00, respectively. The first 500,000 option lot vests on the first three anniversary date of the employment agreement, the next 500,000 lot vests on the second anniversary of the date of agreement and the third 500,000 option lot vests on the third anniversary of the date of agreement. The term of the options shall be 5 years from vesting. Mr. Tesmers employment agreement has a term of three years.

Pursuant to a written employment agreement dated October 1, 2005, Mr. James Plappert was named our chief marketing officer. He is paid a salary of $150,000 per annum. He was also issued options to purchase the Companys common stock with a value, equal to 25% of the monthly profit from the Aircharge subsidiary, up to a maximum of 500,000 Options. The strike price shall be the trailing 5 day average stock price of the Company common stock on the date of the award but, in any event, shall not be less than $1.00. He was also issued 250,000 options at a strike price of $1.00, which vest over three years.  Mr. Plappert was also issued 250,000 options with a strike price of $1.00, to be awarded for meeting the initial breakeven milestone in relation to the Aircharge merger. Options will be granted immediately following the first breakeven month whether before or after the milestone
referenced in the Supplemental Agreement. In addition and as an incentive, at the sole discretion of the CEO, we may pay the Mr. Plappert up to 250,000 Options, the strike price of which shall be the trailing 5 day average stock price of the Company common stock on the date of the award.

  Pursuant
    to a written employment agreement dated September 30, 2005, Mr. Robert
    Wallace was named co-president of our subsidiary Aircharge. He is paid a salary
    of $100,000 per annum with a bonus based on net income of the subsidiary of
    up to $20,000 per month and up to $240,000 per year. Mr. Wallace was
    issued 500,000 options in 62,500 lots at strike prices of



60


$1.50, $1.75, $2.00 and $2.25, respectively. One-third of the options vests
    on the first three anniversary date of the employment agreement, the next
    one-third vests on the second anniversary of the date of agreement and the
    third one-third vests on the third anniversary of the date of agreement. The
    term of the options shall be 5 years from vesting. Mr. Wallaces
    employment agreement has a term of three years.


Pursuant to a written employment agreement dated September 30, 2005, Mr. Richard Hoffman was named co-president of our subsidiary Aircharge. He is paid a salary of $100,000 per annum with a bonus based on net income of the subsidiary of up to $20,000 per month and up to  $240,000 per year. Mr. Wallace was issued 500,000 options in 62,500 lots at strike prices of $1.50, $1.75, $2.00 and $2.25, respectively. One-third of the options vests on the first three anniversary date of the employment agreement, the next one-third vests on the second anniversary of the date of agreement and the third one-third vests on the third anniversary of the date of agreement. The term of the options shall be 5 years from vesting. Mr. Hoffmans employment agreement has a term of three years.


Pursuant to a written employment agreement dated December 21, 2005, Mr. Gregory Danzig was named president of our subsidiary Charge.com. He is paid a salary of $150,000 per annum with yearly increases based on the United States Consumer- Price Index published by the Bureau of Labor Statistics, United States Department of Labor. Mr. Danzig will be awarded options to purchase our common stock, in accordance with our option plan in an amount no less favorable than the options provided to any executive officer of Pipeline or any executive officer of any subsidiary of Pipeline.



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



The following table sets forth information concerning ownership of shares of our common stock outstanding at March 1, 2006, by: (i) each person known by us to be the beneficial owner of more than five percent of our common stock; (ii) each director and director nominee; (iii) each of the executive officers named in the summary compensation table; and (iv) all our directors and executive officers as a group.




  Name and Address ofBeneficial Owner(1)

      

      Shares
          Beneficially Owned BeforeOffering(2)

      

      Percentageof Class(2)MacAllister Smith1515 Hancock St, Suite 301Quincy, MA 02169-5243
        
        6,178,508(3)
        
        13.9%Chasm Holdings, Inc.1515 Hancock St., Suite 301Quincy, MA 92606
        
        4,946,465(4)
        
        11.1%David Danzig168 Thompson Street, Apt. 1New York, NY 10012
        
        4,699,029(5)
        
        10.6%Gregory Danzig10950 Redhawk StreetPlantation, FL 33324
        
        4,699,029(6)
        
        10.6%



61


Kevin J Weller301 County Route 53Brasher Falls, NY 13613
    
    2,946,000(7)
    
    6.6%Nancy Smith Weller301 County Route 53Brasher Falls, NY 13613
    
    2,950,000(8)
    
    6.6%Centrecourt Asset Management LLC350 Madison Avenue,8th FloorNew York, NY 10017
    
    2,522,682(9)
    
    5.7%Kent Stiritz191 Park AvenueArlington MA 02476
    
    2,211,764
    
    5.0%Jack Rubinstein370 Clayton RoadScarsdale, NY 10583
    
    2,009,075(10)
    
    4.5%Lane P. Gordon9 Mountainview DriveFramingham, MA 01701
    
    1,470,588(11)
    
    3.3%Harold Denton363 Wertsvill RdRingoes, NJ 08551
    
    426,665
    
    1.0%Kevin Smith405 Joanna Tae CourtAlpharetta, GA 30004
    
    316,500(12)
    
    *James L. Plappert
      8 Anchorage Pointe
      Louisville, KY 40223
    
    250,500(13)
    
    *John Reeder828 N Shore RoadGreensboro, VT 05841
    
    122,000
    
    *Michael M. GreenbergDirector31 Broken Tree RdMedway, MA 02053
    
    121,847
    
    *Thomas W. Tesmer835 Jacobs Ridge LaneCumming, GA 30040
    
    205,000(13)
    
    *Philip E. Chait14 Jean RoadArlington, MA 02474
    
    272,586(15)
    
    *Larry GoldsteinDirector18 Johns Road  Strongs NeckSetauket, NY 11733
    
    0
    
    *All Directors and Executive Officers as a Group (18 persons)
    
    
    
    80.8%




*
        less than one percent.

62


(1)
        Each stockholder, director and executive officer has sole voting power and sole dispositive power with respect to all shares beneficially owned by it, unless otherwise indicated.(2)
        Based upon 39,687,537 shares of our common stock outstanding at March 17, 2006.(3)
        On July 5, 2005, the board of directors approved the issuance to Mr. Smith of 3,583,756 shares of our restricted common stock as compensation for his services associated with successful acquisitions and in consideration of a waiver of prior rights to stock issuances under previous agreements including but not limited to his rights under the 2002 SecurePay acquisition agreement. The issuance of these additional shares was triggered upon the closing of the Charge.com merger consummated under Mr. Smiths direction. While these shares have not yet been issued, they have been included in this table.(4)
        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.(5)
        Based on a Schedule 13D filed by David Danzig on December 30, 2005.(6)
        Based on a Schedule 13D filed by Gregory Danzig and Kauai Investment Holdings, LLC on December 30, 2005. Kauai Investment
      Holdings, LLC is a Florida limited liability company with a principal business address at 10950 Redhawk Street, Plantation,
      FL 33324. Gregory Danzig is the sole officer and manager of Kauai Investment Holdings, LLC and exercises sole voting power
      and dispostive power with regard to the shares.(7)
        Nancy Smith-Weller, Kevin Wellers wife, beneficially owns2,950,000shares of common stock. Mr. Weller disclaims beneficial ownership of the shares held by Mrs. Weller, except to the extent of his pecuniary interest therein.(8)
        Kevin Weller, Nancy Smith-Wellers husband, beneficially owns 2,946,000 shares of common stock.Mrs. Weller disclaims beneficial ownership of the shares held by Mr. Weller, except to the extent of her pecuniary interest therein.(9)
        Based on a Schedule 13G/A filed by Richard Smithline, Centrecourt Asset Management LLC and CAMOFI Master LDC on February 7, 2006, CAMOFI Master LDC currently holds an aggregate of 315,332 shares underlying Convertible Notes and warrants. Richard Smithline is a Director of CAMOFI Master LDC and his address is 350 Madison Avenue, 8th Floor, New York, New York  10017. Centrecourt Asset Management LLC is the investment manager of CAMOFI Master LDC and its address is 350 Madison Avenue, 8th Floor, New York, New York  10017. The amount reflected above does not include any shares that may be issued pursuant certain anti-dilution provisions of the Convertible Notes and the warrants. In addition, the terms of the Convertible Notes and warrants provide that CAMOFI Master LDC is not entitled to receive shares upon
exercise of the warrants, upon payment of principal and interest on the notes, or upon conversion of the notes if such receipt would cause CAMOFI Master LDC to be deemed to beneficially own in excess of 9.99% of the outstanding shares of our common stock on the date of issuance of such shares.(10)
        Fali Rubinstein, Mr. Rubinsteins wife, beneficially owns 201,500 shares of common stock, which such amount has been attributed to Mr. Rubinstein and included in this table.(11)
        Lisa Gordon, Mr. Gordons wife, beneficially owns 11,500 shares of common stock, which such amount has been attributed to Mr. Gordon and included in this table.(12)
        On July 5, 2005, the board of directors approved the issuance to Mr. K. Smith or to a trust as he directs 80,000 shares of our
restricted common stock as compensation for his services associated with successful acquisitions.  The issuance of these
additional shares was triggered upon the closing of the Charge.com merger.  While these shares have not yet been issued, they have
been included in this table.  In addition, Mr. K. Smith is entitled to receive 200,000 shares of our common stock, pursuant to his
employment agreement, 94,436 of which already have been issued.  Although the remaining 105,564 shares have not been issued yet,
such issuance has been authorized and, thus, has been included in this table.

63


(13)

      Mr. Plapperts employment contract provided for the issuance to Mr.
Plappert or to a trust of his choice of 250,000 shares of our restricted common
stock as compensation for their services associated with successful
acquisitions. The issuance of these additional shares was triggered upon the
closing of the Charge.com merger but have not yet been issued.(14)
        On July 5, 2005, the board of directors approved the issuance to Mr. Tesmer or to a trust as
he directs 55,000 shares of our restricted common stock as compensation for his services
associated with successful acquisitions. The issuance of these additional shares was
triggered upon the closing of the Charge.com merger. While these shares have not yet been
issued, they have been included in this table. In addition, Mr. Tesmer is entitled to
receive 150,000 shares of our common stock, pursuant to his employment agreement, 62,493
of which already have been issued. Although the remaining 87,507 shares have not been
issued yet, such issuance has been authorized and, thus, has been included in this table.(15)
        Tracy Chait, Mr. Chaits wife,
beneficially owns 134,286 shares of common stock, which such amount has been attributed to
Mr. Chait and included in this table. Juliette Chait, Mr. Chaits minor daughter,
beneficially owns 18,300 shares of common stock, which such amount has been attributed to
Mr. Chait and included in this table.

64


Item 12. Certain Relationships and Related Transactions.



We lease our Brasher Falls, NY offices from Kevin Weller, our director and president of our subsidiary NMSI, and Nancy Weller, vice president of our subsidiary NMSI. Our original lease, effective September 1, 2002, had a term of 1 year and automatically renewed unless canceled due to just cause. The lease provided for monthly rental payments of $1,000, with the ability to raise the monthly rental upon thirty days written notice based on the state of the economy. This lease was terminated in January 2006 when our Companys offices were relocated to 3 West Main Street in Brasher Falls, N.Y. On January 1, 2006 we entered into a lease agreement with Weller Enterprises, owned by our director Kevin Weller and the vice president of our NMSI subsidiary, Nancy Weller, for the lease of  5,578 square feet at 3 West Main Street, Brasher Falls, New York. The lease has a term
of 5 years and renews annually upon 60 days written notice unless canceled due to just cause. The lease provides for monthly rental payments of $3,000.

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 $2.80 per share. Upon conversion, Mr. Rubinstein shall receive warrants equal to 100% of the number of shares converted with minimum warrant issuance of 1,000,000 shares. On March 8, 2003, the note was renegotiated and the term was extended to March 8, 2005. On December 31, 2004 the note plus accrued interest of $22,088.95 was converted to 348,824 shares of our common stock and the expiration date of the warrants was extended to March 8, 2008.

Chasm Holdings, a stockholder holding approximately 17.5% of outstanding common stock prior to this offering, is 50% owned by Catherine Brannon, who is the sister of MacAllister Smith, our chief executive officer. The other 50% owner is Barbara Klein, who is the sister of Philip Chait, our secretary. MacAllister Smith is the president of Chasm Holdings.

As of December 31, 2005, our company had issued $1,117,423 in 8% convertible notes. Of that amount, $322,734 is outstanding as of December 31, 2005. Related parties who purchased our notes are as follows:




Date
        
        Name
        
        Amount12.31.02
        
        Chasm Holdings
        
        20,524
        (2)3.31.03
        
        Chasm Holdings
        
        26,120
        (3)6.26.03
        
        Lane Gordon
        
        50,000
        (5)5.6.03
        
        Chasm Holdings
        
        2,000
        (4)8.8.03
        
        Tracy Bertolino
        
        46,873
        (1)9.25.03
        
        Chasm Holdings
        
        5,000
        (6)9.25.03
        
        Chasm Holdings
        
        15,000
        (6)10.21.03
        
        Chasm Holdings
        
        15,000
        (7)10.27.03
        
        Chasm Holdings
        
        8,950
        (8)10.31.03
        
        Lane Gordon
        
        50,000
        (9)



65


11.13.03
        
        Lane Gordon
        
        50,000
        (10)11.25.03
        
        Chasm Holdings
        
        5,000
        (11)12.18.03
        
        Tracy Bertolino
        
        1,400
        (12)1.8.04
        
        Chasm Holdings
        
        10,0001.14.04
        
        Chasm Holdings
        
        4,0001.28.04
        
        Barbara Klein
        
        15,0002.27.04
        
        Lane Gordon
        
        50,400

  


(1)
    Note
        and accrued interest converted into Pipeline Data stock on 8/8/2003.(2)
    Note and accrued
      interest converted into Pipeline Data stock on 12/31/04(3)
    Note and accrued
      interest converted into Pipeline Data stock on 3/31/05(4)
    Note and accrued
      interest converted into Pipeline Data stock on 5/6/05(5)
        Note and accrued interest converted into Pipeline Data stock on 6/26/2005.(6)
    Note
        and accrued interest converted into Pipeline Data stock on 10/01/05.(7)
    Note
        and accrued interest converted into Pipeline Data stock on 10/21/05(8)
    Note
        and accrued interest converted into Pipeline Data stock on 10/27/05.(9)
    Note
        and accrued interest converted into Pipeline Data stock on 10/31/05.(10)
    Note
        and accrued interest converted into Pipeline Data stock on 11/13/05.(11)
    
    Note and accrued interest converted into Pipeline
      Data stock on 11/25/05(12)
        Note and accrued interest converted into Pipeline Data stock on 12/18/05.Certain of the transactions described above were approved at a time in which we did not have a majority of the independent directors as required by NASD rules. Due to the lack of independent directors, certain of such transactions may have presented a conflict of interest for some of the directors who approved the transactions. We believe, however, that the transactions were fair and comply with Section 144 of the Delaware General Corporation Law and that they were in our best interests. It is our current policy that all transactions between us and any of our officers, directors, 5% stockholders and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested independent directors, are on terms no less favorable to us than could be obtained from unaffiliated parties and are reasonably expected to benefit us.



66


Item 13. Exhibits.



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



EXHIBIT

NUMBER DESCRIPTION LOCATION



Exhibit No
        Description3.1*
        Certificate of Incorporation3.2*
        Amended and Restated Certificate of Incorporation3.3*
        By-laws of registrant3.4*
        Form of class A Redeemable Warrant3.5*
        Form of class B Redeemable Warrant3.6*
        Form of class A Warrant Agreement3.7*
        Form of class B Warrant Agreement3.8*
        Form of Lock-up Agreement10.1*
        Web site development and servicing agreement10.2*
        Consulting Agreement with Unifund America, Inc.10.3*
        Agreement with Rainbow Media10.4*
        Promissory Note dated November 1,2000 issued by Accu-Search, Inc. as Debtor to Pipeline Date Inc. as Payee10.5*
        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 Payee10.7*
        Acquisition Agreement dated March 19, 2002 between the Registrant and SecurePay.Com,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.



67


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.10.14**
        Asset Purchase Agreement dated May 18, 2004, between Millennium Merchant Services, Inc. and Pipeline Data Processing Inc.10.15**
        Secured Term Note dated May 18, 2004 between Millennium Merchant Services, Inc. and Pipeline Data Processing Inc.10.16**
        Pledge Agreement dated May 18, 2004 Millennium Merchant Services, Inc. and Pipeline Data Processing Inc.10.17**
        Asset Purchase Agreement dated May 24, 2004 United Processing Corp and Pipeline Data Processing Inc.10.18***
        Convertible Term Note dated June 16, 2004, made by Pipeline Data Inc.in favor of Laurus Master Fund, Ltd.10.19***
        Security Agreement dated June 16, 2004 by and between Pipeline Data Inc. and Laurus Master Fund, Ltd.10.20***
        Security Agreement dated June 16, 2004 by and between SecurePay.com, Inc. and Laurus Master Fund, Ltd.10.21***
        Security Agreement dated June 16, 2004 by and between NMSI and Laurus Master Fund, Ltd.10.22***
        Stock Pledge Agreement dated June 16, 2004 by and between Pipeline Data
Inc. and Laurus Master Fund, Ltd.10.23***
        Registration Rights Agreement dated June 16, 2004 by and between Pipeline Data Inc. and Laurus Master Fund, Ltd.10.24***
        Common Stock Purchase Warrant dated June 16, 2004 issued by Pipeline Data Inc, in favor of Laurus Master Fund, Ltd.10.25****
        Convertible Term Note dated August 31, 2004, made by Pipeline Data Inc. in favor of Laurus Master Fund, Ltd.10.26***
        Security Agreement dated August 31, 2004 by and between Pipeline Data Inc. and Laurus Master Fund, Ltd.10.27***
        Security Agreement dated August 31, 2004 by and between SecurePay.com, Inc. and Laurus Master Fund, Ltd.10.28***
        Security Agreement dated August 31, 2004 by and between NMSI and Laurus Master Fund, Ltd.



68


10.29***
        Security Agreement dated August 31, 2004 by and between Pipeline Data Processing, Inc. and Laurus Master Fund, Ltd.10.30***
        Stock Pledge Agreement dated August 31, 2004 by and between Pipeline Data Inc. and Laurus Master Fund, Ltd.10.31***
        Stock Pledge Agreement dated August 31, 2004 by and between Pipeline Data Processing, Inc. and Laurus Master Fund, Ltd.10.32***
        Registration Rights Agreement dated August 31, 2004 by and between Pipeline Data Inc. and Laurus Master Fund, Ltd.10.33***
        Common Stock Purchase Warrant dated August 31, 2004 issued by Pipeline Data Inc, in favor of Laurus Master Fund, Ltd.10.34***
        Guaranties dated August 31, 2004 issued in favor of Laurus Master Fund, Ltd.10.35***
        Restricted Account Agreement dated August 31, 2004 by and among North Fork Bank, Pipeline Data Inc. and Laurus Master Fund, Ltd.10.36****
        Common Stock Purchase Warrant dated March 11, 2005 issued by Pipeline Data Inc, in favor of Laurus Master Fund, Ltd.10.37****
        Letter Agreement regarding release of funds from the Restricted Account.10.38*****
        Certification of Chief Executive Officer of Pipeline Data Inc. to Laurus Master Fund, Ltd.10.39******
        Securities Purchase Agreement dated September 30, 2005 between Pipeline Data Inc. and CAMOFI Master LDC10.40******
        Security Agreement dated September 30, 2005 by and between Pipeline Data Processing, Inc. and CAMOFI Master LDC10.41******
        Subsidiary Guarantee dated September 30, 2005 in favor of CAMOFI Master LDC10.42******
        Registration Rights Agreement dated September 30, 2005 by and between Pipeline Data Inc. and CAMOFI Master LDC10.43******
        $2,000,000 Senior Subordinated Secured Note dated September 30, 2005 in favor of CAMOFI Master LDC10.44******
        Common Stock Purchase Warrant to Purchase 700,000 shares of common stock of Pipeline Data Inc. dated September 30, 2005 in favor of CAMOFI Master LDC10.45******
        Agreement and Plan of Merger by and among Pipeline Data Inc., Charge.Com Acquisition, Inc., Charge.Com, Inc. and the shareholders of Charge.Com, Inc. dated July 15, 200510.46******
        Agreement and Plan of Merger by and among Pipeline Data Inc., Aircharge, Inc. and World Products, Inc. d/b/a Aircharge dated August 15, 200510.47
        Employment Agreement between Pipeline Data Inc. and James Plappert.10.48******
        Employment Agreement between Pipeline Data Inc. and Thomas Tesmer.10.49******
        Employment Agreement between Pipeline Data Inc. and Kevin Smith.10.50******
        Employment Agreement between Pipeline Data Inc. and Kevin Weller.10.51******
        Employment Agreement between Pipeline Data Inc. and Nancy Weller.10.52******
        2005 Stock Option Plan.



69


10.53
        Loan Agreement dated as of December 20, 2005 between Pipeline Data Inc.and Sheridan Asset Management, LLC10.54
        Security Agreement dated as of December 20, 2005 between Pipeline Data Inc.and Sheridan Asset Management, LLC10.55
        Pledge Agreement dated as of December 20, 2005 between Pipeline Data Inc.and Sheridan Asset Management, LLC10.56
        Subsidiary Guarantee dated as of December 20, 2005 between each subsidiary of Pipeline Data Inc.and Sheridan Asset Management, LLC10.57
        Senior Secured Note dated December 20, 2005 made by Pipeline Data Inc.23.2
        Consent of Drakeford & Drakeford, Certified Public Accountant31.1
        Rule 13a-14(a)/15d-14(a) Certifications31.2
        Rule 13a-14(a)/15d-14(a) Certifications32
        Section 1350 Certifications______________


*
        Previously filed as an exhibit to Registration Statement on Form SB-2, file number 333-79831


**
        Previously filed as an exhibit to Registration Statement on Form SB-2, file number 333-114590


***
        Previously filed as an exhibit to Amendment No. 1 to Registration Statement on Form SB-2, file number 333-121840


****
        Previously filed as an exhibit to Amendment No. 2 to Registration Statement on Form SB-2, file number 333-12840


*****
        Previously filed as an exhibit to Amendment No. 3 to Registration Statement on Form SB-2, file number 333-12840


******
        Previously filed as an exhibit to Registration Statement on Form SB-2, file number 333-129612





70


Item 14. Principal Accountant Fees and Services.



Drakeford & Drakeford, LLC  was  the Companys auditor or the year 2004 and 2005 billed for professional services as follows:



(a) Audit Fees



For the year ended  December 31, 2005 billed audit fees were  $52,926. For the year ended December 31, 2004 billed audit fees were $57,656.



(b) Tax Fees



For the year ended  December 31, 2005 billed tax fees were $5,800. For the year ended December 31, 2004 tax fees of  $3,500were billed.




(c)
        All other fees

For the year ended December 31, 2005 fees in the amount of $49,500 were billed for audits and due diligence work related to the acquisition of  World Products, Inc and Charge.com, Inc.





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71


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: April 3, 2006






Pipeline Data Inc..(Registrant)/s/ MacAllister SmithMacAllister SmithPresident/s/ Donald GruneisenDonald GruneisenChief Financial Officer(Principal Financial andAccounting Officer)



In accordance with the requirements of the Securities Act of 1933, as amended, this registration statement was signed by the following persons in the capacities and on the dates stated.




/s/ Jack Rubinstein
        Chairman of the Board,Jack Rubinstein
        April 3, 2006/s/ MacAllister Smith
        Chief Executive Officer,MacAllister Smith
        President, DirectorApril 3, 2006/s/ Kevin Weller
        DirectorKevin Weller
        April
          3, 2006



72


/s/ Harold Denton
        DirectorHarold Denton
        April 3, 2006/s/ Larry Goldstein
        DirectorLarry Goldstein
        April 3, 2006/s/ Michael Greenburg
        DirectorMichael Greenburg
        April 3, 2006/s/ John Reeder
        DirectorJohn Reeder
        April 3, 2006





73