EXHIBIT  10.11                                PROMISSORY NOTE

FACE  AMOUNT                                     $720,000
PRICE                                            $600,000
INTEREST  RATE                                   0%  per  month
NOTE  NUMBER                                     May-2005-101
ISSUANCE  DATE                                   May  12,  2005
MATURITY  DATE                                   December  22,  2005




     FOR  VALUE  RECEIVED, Payment Data Systems, Inc., a Nevada corporation (the
"Company"),  (OTC  BB:  PYDS)  hereby  promises  to pay to the order of DUTCHESS
PRIVATE  EQUITIES  FUND,  II,  L.P.  (the "Holder") within the Maturity Date, or
earlier,  the  Amount  of  Seven  Hundred and Twenty Thousand Dollars ($720,000)
U.S.,  in  such  amounts,  at such times and on such terms and conditions as are
specified  herein  (this  "Note").

     Any capitalized term not defined in this Note are defined in the Investment
Agreement  for the Equity Line of Credit between Dutchess Private Equities Fund,
LP  (the  "Investor")  and  the  Company  (the  "Investment  Agreement").

ARTICLE  1          METHOD  OF  PAYMENT

     Payments  made  by  the  Company  in  satisfaction  of  this  Note  (each a
"Payment,"  and  collectively,  the "Payments") shall be made from each Put from
the  Equity  Line  of  Credit  with  the  Investor  given  by the Company to the
Investor.   The  Company  shall make payments to the Holder in the amount of the
fifty  percent (50%) of each Put to  the Investor from the Company (the "Payment
Amount")  until  the  Face  Amount  is paid in full, minus any fees due.   First
payment  will  be due at the successful Closing of the first Put ("Payment Date"
or  "Payment  Dates") and all subsequent payments will be made at the Closing of
every  Put  to  the  Investor  thereafter  until  this  Note  is  paid  in full.
Notwithstanding  any provision to the contrary in this Note, the Company may pay
in  full  to  the  Holder  the Face Amount, or any balance remaining thereof, in
readily  available  funds  at  any  time  and from time to time without penalty.

Section  1.1  Payment  Increase
     The Holder shall have the option to increase the Payments due from each Put
based  on the aggregate amount of funds raised by the Company.  Upon the Company
receiving  an  aggregate amount of $250,000 in financing from the Holder, or any
other  financial  institution  or person, the Company shall increase the Payment
Amount.  based  on  the  following  schedule:




Total  Aggregate  Dollars  Raised:               Payment  Amount
                                        (as  a  percentage  of  a  Put)
--------------------------------------
---------------------------------
Up  to  $250,000                                     50%
Over  $250,000  to  $600,000                         75%
Over  $600,000  to  $700,000                         80%
Over  $700,000                                       100%

In  the  event the Company raises funds directly related to the endorsement of a
celebrity  credit  card  program  ("Celebrity  Card") the Payment Amount will be
increased  subject  to  mutually  agreeable  terms  between  the Company and the
Holder.

     Payments  pursuant  to this Note shall be made directly from the Closing of
each  Put  ("Put  Closing")  and  shall  be  wired directly to the Holder on the
Closing  Date  and shall be included in the Total Aggregate Dollars Raised.  The
Holder  shall retain the sole right and from time to time may elect to lower the
amount  of  a payment ("Lowered Payment Amount") if so requested by the Company.
In  the event of a Lowered Payment Amount, the next payment under this Note will
be  increased  by  the  greater of 1) the percentage difference between the next
Payment and the Lowered Payment Amount (Example: If the Company places a Put for
$100,000  ($50,000  of  which would go toward payment of the Face Amount of this
Note)  and  the  Company  requests  a  Lowered Payment such that $30,000 will go
toward  payment  of  the Face Amount of this Note (thus, the Company owes Holder
$20,000,  which  is  40% of the total amount owed to the Holder under such Put),
and  the  next  Put is for $500,000 ($250,000 of which will go toward payment of
the  Face  Amount  of this Note), then the total amount owed to the Holder under
this  Put  will  be  $250,000 multiplied by 1.40) or 2) the actual dollar amount
difference  between  the  next  payment  and  the  Lowered  Payment  Amount.

     The  Company  hereby  authorizes  Dutchess  Private  Equities  Fund  LP, to
transfer  funds  directly  to  the  Holder  for  the  full amount of each Put in
connection  with  the  Company's execution of the Collateral (as defined below).
The  Puts  shall  be  deemed  closed  for  the amounts transferred to the Holder
immediately  upon  the  Put  Closing.

ARTICLE  2             COLLATERAL

     The  Company  does  hereby agree to issue 25 Put Notices ("Collateral")  to
the  Investor  for  the full amount applicable under the terms of the Investment
Agreement  and shall do so at the maximum frequency allowed under the Investment
Agreement,  until  such  time  as  the  Note  is paid in full. The Company shall
deliver  25  Put Notices upon execution of this Note (hereto attached as Exhibit
A).  Upon  the  completion of the Company's obligation to the Holder of the Face
Amount  of  this  Note,  the  Company  will  not  be under further obligation to
complete  any more Puts.  All remaining Put sheets shall be marked "VOID" by the
Investor  and  sent  back  to  the  Company  at  the  Company's  request.


ARTICLE  3             UNPAID  AMOUNTS

     In  the  event  that  on  the  Maturity  Date the Company has any remaining
amounts unpaid on this Note (the "Residual Amount"), the Holder can exercise its
right to increase the Face Amount by ten percent (10%) as an initial penalty and
two  and one-half percent (2.5%) per month paid as liquated damages ("Liquidated
Damages").  The Liquated Damages will be compounded daily. If the aforementioned
occurs,  the Company will be in Default and the remedies as described in Article
4  may  be  taken  at  the  Holder's  discretion.  It  is  the  intention  and
acknowledgement  of  both  parties  that the Liquidated Damages not be deemed as
interest.


ARTICLE  4          DEFAULTS  AND  REMEDIES

Section 4.1     Events of Default.  An "Event of Default" or "Default" occurs if
     (a)  the  Company does not make the payment of the Face Amount of this Note
within two (2) business days of the applicable Closing of a Put, a Payment Date,
or  the  Maturity  Date,  as  applicable,  upon redemption or otherwise, (b) the
Company, pursuant to or within the meaning of any Bankruptcy Law (as hereinafter
defined):  (i)  commences  a  voluntary  case;  (ii) consents to the entry of an
order  for  relief  against  it  in  an  involuntary case; (iii) consents to the
appointment  of  a  Custodian  (as  hereinafter  defined)  of  it  or for all or
substantially  all  of  its  property;  (iv)  makes a general assignment for the
benefit  of  its  creditors;  or (v) a court of competent jurisdiction enters an
order  or  decree  under any Bankruptcy Law that:  (A) is for relief against the
Company  in  an involuntary case; (B) appoints a Custodian of the Company or for
all  or  substantially all of its property; or (C) orders the liquidation of the
Company,  and  the order or decree remains unstayed and in effect for sixty (60)
calendar  days;  (c)  the  Company's  $0.001 par value common stock (the "Common
Stock")  is  suspended  or  is  no  longer  listed  on  any recognized exchange,
including  an  electronic  over-the-counter bulletin board, for in excess of two
(2)  consecutive  trading  days;  or  (d)  the  registration  statement  for the
underlying  shares in the Investment Agreement does not remain effective for any
reason or (e) the Company fails to comply with the Articles of this Agreement as
outlined.  As used in this Section 4.1, the term "Bankruptcy Law" means Title 11
of  the United States Code or any similar federal or state law for the relief of
debtors.  The term "Custodian" means any receiver, trustee, assignee, liquidator
or  similar  official  under  any  Bankruptcy  Law.

     In  the  Event  of Default, the Holder may elect to secure a portion of the
Company's  assets  not to exceed 200% of the Face Amount of the Note, including,
but not limited to: accounts receivable, cash, marketable securities, equipment,
building,  land  or  inventory.  The  Holder may also elect to garnishee Revenue
from  the  Company  in  an  amount  that  will repay the Holder on the schedules
outlined  in  this  Agreement.

     For  EACH  Event  of Default, as outlined in this Agreement, the Holder can
          ----
exercise  its  right to increase the Face Amount of the Debenture by ten percent
(10%)  as an initial penalty.  In addition, the Holder may elect to increase the
Face  Amount  by two and one-half percent (2.5%) per month paid as a penalty for
Liquidated  Damages.  The  Liquated Damages will be compounded daily.  It is the
intention and acknowledgement of both parties that the Liquidated Damages not be
deemed  as  interest.

     In  the  event of a Default hereunder, the Holder shall have the right, but
not  the  obligation,  to  1)  switch  the  Residual  Amount  to  a  Five-year
("Convertible Maturity Date"), 10% interest bearing convertible debenture at the
terms  described  in  Section 4.2 (the "Convertible Debenture"). At such time of
Default,  the  Convertible  Debenture  shall  be considered closed ("Convertible
Closing  Date").  If the Holder chooses to convert the unpaid amounts ("Residual
Amount") to a Convertible Debenture, the Company shall have twenty (20) business
days  after notice of the same (the "Notice of Convertible Debenture") to file a
registration  statement  covering  an  amount  of  shares  equal  to 300% of the
Residual  Amount.  Such registration statement shall be declared effective under
the Securities Act of 1933, as amended (the "Securities Act"), by the Securities
and  Exchange  Commission (the "Commission") within 40 business days of the date
the  Company  files such Registration Statement.   In the event the Company does
not  file  such  registration statement within twenty (20)  business days of the
Holder's  request,  or  such  registration  statement  is  not  declared  by the
Commission  to  be  effective  under  the  Securities Act within the time period
described  above , the Residual Amount shall increase by $1,000 per day.  In the
event  the  Company  is  given  the  option for accelerated effectiveness of the
registration  statement,  it  agrees  that  it  shall  cause  such  registration
statement  to  be  declared effective as soon as reasonably practicable.  In the
event  that the Company is given the option for accelerated effectiveness of the
registration  statement, but chooses not to cause such registration statement to
be  declared  effective  on  such  accelerated  basis, the Residual Amount shall
increase  by  $1,000  per  day  commencing on the earliest date as of which such
registration  statement  would  have been declared to be effective if subject to
accelerated  effectiveness;  or  2)  the  Holder may increase the Payment Amount
described  under Article 1 to fulfill the repayment of the Residual Amount.  The
Company  shall provide full cooperation to the Holder in directing funds owed to
the Holder on any Put to the Investor.    The Company agrees to diligently carry
out  the  terms  outlined  in  the Investment Agreement for delivery of any such
shares.  In the event the Company is not diligently fulfilling its obligation to
direct  funds  owed  to  the  Holder  from  Puts  to the Investor, as reasonably
determined  by  the  Holder,  the  Holder  may, after giving the Company two (2)
business  days'  advance notice to cure the same, elect to increase the Residual
Amount  of  the  Note  by  2.5%  each  day,  compounded  daily.

     Section  4.2  Conversion  Privilege

(a)     The  Holder  shall  have  the right to convert the Convertible Debenture
into  shares  of Common Stock at any time following the Convertible Closing Date
and which is before the close of business on the Convertible Maturity Date.  The
     number  of  shares  of  Common  Stock  issuable  upon the conversion of the
Convertible  Debenture  shall  be  determined  pursuant  to Section 4.3, but the
number  of  shares  issuable shall be rounded up or down, as the case may be, to
the  nearest  whole  share.

(b)     The Convertible Debenture may be converted, whether in whole or in part,
     at  any  time  and  from  time  to  time.

(c)     In  the  event  all  or any portion of the Convertible Debenture remains
outstanding  on the Convertible Maturity Date (the "Debenture Residual Amount"),
the  unconverted  portion  of  such  Convertible Debenture will automatically be
converted  into  shares  of Common Stock on such date in the manner set forth in
Section  4.3.

     Section  4.3  Conversion  Procedure.

     The Residual Amount may be converted, in whole or in part any time and from
time  to time, following the Convertible Closing Date.  Such conversion shall be
effectuated  by  surrendering  to  the Company, or its attorney, the Convertible
Debenture  to  be  converted together with a facsimile or original of the signed
notice  of  conversion  (the  "Notice  of  Conversion").   The date on which the
Notice  of Conversion is effective ("Conversion Date") shall be deemed to be the
date on which the Holder has delivered to the Company a facsimile or original of
the  signed  Notice  of  Conversion,  as  long  as  the  original  Convertible
Debenture(s)  to  be  converted  are  received  by  the  Company within five (5)
business  days thereafter.  At such time that the original Convertible Debenture
has  been  received by the Company, the Holder can elect to whether a reissuance
of the Convertible Debenture is warranted, or whether the Company can retain the
Convertible  Debenture  as  to  a  continual  conversion  by  the  Holder.
Notwithstanding  the  above,  any Notice of Conversion received by 4:00 P.M. EST
shall  be deemed to have been received the following business day (receipt being
via  a  confirmation  of  the  time  such facsimile to the Company is received).

(a)     Common  Stock  to  be Issued.     Upon the conversion of any Convertible
Debentures  and  upon  receipt  by the Company or its attorney of a facsimile or
original of the Holder's signed Notice of Conversion, the Company shall instruct
     its  transfer agent to issue stock certificates without restrictive legends
or  stop  transfer instructions, if at that time the aforementioned registration
statement  described  in Section 4.1 has been declared effective (or with proper
restrictive  legends  if the registration statement has not as yet been declared
effective), in such denominations to be specified at conversion representing the
number  of  shares of Common Stock issuable upon such conversion, as applicable.
In  the event that the Debenture is aged one year and deemed sellable under Rule
144, the Company shall, upon a Notice of Conversion, instruct the transfer agent
to issue free trading certificates without restrictive legends, subject to other
applicable  securities  laws.  The  Company  is responsible to provide all costs
associated  with  the  issuance  of the shares, including but not limited to the
opinion  letter,  FedEx  of the certificates and any other costs that arise. The
Company  shall  act  as  registrar  and  shall  maintain  an  appropriate ledger
containing the necessary information with respect to each Convertible Debenture.
The  Company  warrants that no instructions, other than these instructions, have
been  given  or  will  be  given to the transfer agent and that the Common Stock
shall  otherwise  be freely resold, except as may be set forth herein or subject
to  applicable  law.

(b)     Conversion  Rate.  Holder  is entitled to convert the Debenture Residual
Amount , plus accrued interest, anytime following the Convertible Maturity Date,
     at the lesser of (i) 75% of the lowest closing bid price during the fifteen
(15)  trading  immediately  preceding the Convertible Maturity Date or (ii) 100%
of  the  lowest bid price for the twenty (20) trading days immediately preceding
the  Convertible  Maturity  Date  ("Fixed  Conversion  Price").   No  fractional
shares  or  scrip representing fractions of shares will be issued on conversion,
but  the  number of shares issuable shall be rounded up or down, as the case may
be,  to  the  nearest  whole  share.

(c)     Nothing  contained  in  the  Convertible  Debenture  shall  be deemed to
establish  or  require the payment of interest to the Holder at a rate in excess
of  the  maximum rate permitted by governing law.  In the event that the rate of
interest  required  to  be  paid exceeds the maximum rate permitted by governing
law,  the rate of interest required to be paid thereunder shall be automatically
reduced  to  the  maximum rate permitted under the governing law and such excess
shall  be  returned  with  reasonable  promptness  by the Holder to the Company.

(d)     It  shall  be the Company's responsibility to take all necessary actions
and  to  bear  all  such  costs  to  issue  the Common Stock as provided herein,
including  the  responsibility and cost for delivery of an opinion letter to the
transfer  agent,  if  so  required.  Holder shall be treated as a shareholder of
record  on  the  date  Common Stock is issued to the Holder. If the Holder shall
designate  another  person  as  the  entity  in  the  name  of  which  the stock
certificates  issuable  upon  conversion  of the Convertible Debenture are to be
issued  prior  to the issuance of such certificates, the Holder shall provide to
the  Company evidence that either no tax shall be due and payable as a result of
such  transfer  or  that  the applicable tax has been paid by the Holder or such
person. Upon surrender of any Convertible Debentures that are to be converted in
     part,  the  Company  shall  issue to the Holder a new Convertible Debenture
equal  to  the  unconverted  amount,  if  so requested in writing by the Holder.

(e)     Within  five  (5)  business  days  after  receipt  of  the documentation
referred  to  above in Section 4.2, the Company shall deliver a certificate, for
the number of shares of Common Stock issuable upon the conversion.  In the event
     the  Company  does  not  make delivery of the Common Stock as instructed by
Holder  within  five  (5)  business days after the Conversion Date, then in such
event the Company shall pay to the Holder one percent (1%) in cash of the dollar
value  of  the  Debenture  Residual  Amount  remaining  after  said  conversion,
compounded  daily, per each day after the fifth (5th) business day following the
Conversion  Date  that  the  Common  Stock  is  not  delivered to the Purchaser.

           The Company acknowledges that its failure to deliver the Common Stock
within five (5) business days after the Conversion Date will cause the Holder to
suffer  damages  in an amount that will be difficult to ascertain.  Accordingly,
the  parties  agree  that it is appropriate to include in this  Note a provision
for  liquidated  damages  The  parties acknowledge and agree that the liquidated
damages  provision  set forth in this section represents the parties' good faith
effort  to quantify such damages and, as such, agree that the form and amount of
such  liquidated  damages are reasonable and will not constitute a penalty.  The
payment of liquidated damages shall not relieve the Company from its obligations
to deliver the Common Stock pursuant to the terms of this Convertible Debenture.


(f)     The  Company  shall  at  all  times reserve (or make alternative written
arrangements  for  reservation or contribution of shares) and have available all
Common  Stock necessary to meet conversion of the Convertible Debentures  by the
Holder  of  the entire amount of Convertible Debentures then outstanding. If, at
any time the Holder submits a Notice of Conversion and the Company does not have
     sufficient  authorized  but unissued shares of Common Stock (or alternative
shares  of  Common  Stock  as may be contributed by stockholders of the Company)
available  to  effect,  in  full,  a conversion of the Convertible Debentures (a
"Conversion  Default,"  the date of such default being referred to herein as the
"Conversion  Default  Date"),  the  Company shall issue to the Holder all of the
shares  of  Common Stock which are available, and the Notice of Conversion as to
any  Convertible  Debentures  requested  to  be converted but not converted (the
"Unconverted  Convertible Debentures"), may be deemed null and void upon written
notice  sent  by the Holder to the Company.  The Company shall provide notice of
such  Conversion  Default  ("Notice  of  Conversion  Default") to the Holder, by
facsimile  within  three  (3)  business  days of such default (with the original
delivered  by  overnight  mail  or  two  day courier), and the Holder shall give
notice  to  the Company by facsimile within five (5) business days of receipt of
the  original  Notice  of  Conversion  Default  (with  the original delivered by
overnight  mail or two day courier) of its election to either nullify or confirm
the  Notice  of  Conversion.

     The  Company  agrees  to  pay  the Holder payments for a Conversion Default
("Conversion  Default  Payments")  in  the  amount  of (N/365) multiplied by .24
multiplied  by the initial issuance price of the outstanding or tendered but not
converted Convertible Debentures held by the Holder where N = the number of days
from the Conversion Default Date to the date (the "Authorization Date") that the
Company  authorizes  a  sufficient  number  of  shares of Common Stock to effect
conversion  of  all  remaining  Convertible  Debentures.  The Company shall send
notice  ("Authorization  Notice") to the Holder that additional shares of Common
Stock  have  been authorized, the Authorization Date, and the amount of Holder's
accrued  Conversion  Default  Payments.  The accrued Conversion Default shall be
paid  in  cash  or shall be convertible into Common Stock at the conversion rate
set  forth  in the first sentence of this paragraph, upon written notice sent by
the Holder to the Company, which Conversion Default shall be payable as follows:
(i)  in  the event the Holder elects to take such payment in cash, cash payments
shall  be  made  to the Holder  by the fifth (5th) day of the following calendar
month,  or  (ii)  in  the event Holder elects to take such payment in stock, the
Holder may convert such payment amount into Common Stock at  the conversion rate
set  forth  in  the first sentence of this paragraph at any time after the fifth
(5th)  day  of the calendar month following the month in which the Authorization
Notice  was  received,  until  the  expiration  of  the  mandatory Five (5) year
conversion  period.

     The  Company  acknowledges that its failure to maintain a sufficient number
of authorized but unissued shares of Common Stock to effect in full a conversion
of  the  Convertible  Debentures  will  cause the Holder to suffer damages in an
amount that will be difficult to ascertain.  Accordingly, the parties agree that
it  is  appropriate  to  include  in  this  Agreement a provision for liquidated
damages.  The  parties  acknowledge  and  agree  that  the  liquidated  damages
provision set forth in this section represents the parties' good faith effort to
quantify  such  damages  and,  as  such,  agree that the form and amount of such
liquidated  damages  are  reasonable  and  will  not  constitute a penalty.  The
payment of liquidated damages shall not relieve the Company from its obligations
to deliver the Common Stock pursuant to the terms of this Convertible Debenture.

(g)     If,  by  the  fifth  (5th) business day after the Conversion Date of any
portion of the Convertible Debentures to be converted (the "Delivery Date"), the
     transfer  agent  fails  for  any  reason  to  deliver the Common Stock upon
conversion  by the Holder and after such Delivery Date, the Holder purchases, in
an  open  market transaction or otherwise, shares of Common Stock (the "Covering
Shares")  solely  in  order to make delivery in satisfaction of a sale of Common
Stock  by the Holder (the "Sold Shares"), which delivery such Holder anticipated
to  make  using  the  Common  Stock  issuable  upon conversion (a "Buy-In"), the
Company  shall pay to the Holder, in addition to any other amounts due to Holder
pursuant  to  this  Convertible  Debenture,  and not in lieu thereof, the Buy-In
Adjustment  Amount  (as  defined  below).  The "Buy In Adjustment Amount" is the
amount  equal  to  the  excess, if any, of (x) the Holder's total purchase price
(including  brokerage  commissions, if any) for the Covering Shares over (y) the
net  proceeds  (after brokerage commissions, if any) received by the Holder from
the sale of the Sold Shares.  The Company shall pay the Buy-In Adjustment Amount
to  the  Holder  in immediately available funds within five (5) business days of
written  demand  by the Holder.  By way of illustration and not in limitation of
the  foregoing,  if  the  Holder purchases shares of Common Stock having a total
purchase  price  (including  brokerage commissions) of $11,000 to cover a Buy-In
with  respect to shares of Common Stock it sold for net proceeds of $10,000, the
Buy-In Adjustment Amount which the Company will be required to pay to the Holder
will  be  $1,000.


     (h)     The  Company shall defend, protect, indemnify and hold harmless the
Holder  and  all  of  its shareholders, officers, directors, employees, counsel,
and  direct  or  indirect  investors and any of the foregoing person's agents or
other  representatives  (including,  without  limitation,  those  retained  in
connection  with the transactions contemplated by this Agreement) (collectively,
the  "Section  4.3(h) Indemnitees") from and against any and all actions, causes
of  action,  suits,  claims,  losses,  costs,  penalties,  fees, liabilities and
damages,  and expenses in connection therewith (irrespective of whether any such
Section  4.3(h)  Indemnitee  is  a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the  "Section  4.3(h) Indemnified Liabilities"), incurred by any Section 4.3(h)
Indemnitee  as  a  result  of,  or  arising  out  of,  or  relating  to  (i) any
misrepresentation  or  breach  of  any  representation  or  warranty made by the
Company  in  the  Transaction  Documents or any other certificate, instrument or
document  contemplated  hereby  or  thereby,  (ii)  any  breach of any covenant,
agreement,  or  obligation of the Company contained in the Transaction Documents
or  any  other  certificate,  instrument,  or  document  contemplated  hereby or
thereby,  (iii) any cause of action, suit, or claim brought or made against such
Section  4.3(h) Indemnitee by a third party and arising out of or resulting from
the  execution,  delivery,  performance,  or  enforcement  of  the  Transaction
Documents  or any other certificate, instrument, or document contemplated hereby
or thereby, (iv) any transaction financed or to be financed in whole or in part,
directly  or  indirectly,  with the proceeds of the issuance of the Common Stock
underlying  the  Convertible  Debenture ("Securities"), or (v) the status of the
Holder or holder of the Securities as an investor in the Company, except insofar
as  any  such  misrepresentation, breach or any untrue statement, alleged untrue
statement,  omission,  or  alleged  omission  is  made  in  reliance upon and in
conformity  with  written  information furnished to the Company by the Holder or
the  Investor which is specifically intended by the Holder or the Investor to be
relied  upon  by  the  Company, including for use in the preparation of any such
registration  statement,  preliminary  prospectus, or prospectus, or is based on
illegal trading of the Common Stock by the Holder or the Investor. To the extent
that  the  foregoing  undertaking  by  the  Company may be unenforceable for any
reason,  the  Company  shall  make  the  maximum contribution to the payment and
satisfaction  of  each  of the Indemnified Liabilities that is permissible under
applicable  law.  The indemnity provisions contained herein shall be in addition
to  any  cause  of  action  or  similar  rights  the  Holder  may  have, and any
liabilities  the  Holder  may  be  subject  to.

ARTICLE  5  ADDITIONAL  FINANCING

          The  Company  will not enter into any additional financing agreements,
with  less  favorable  terms,  without  prior expressed written consent from the
Holder,  which shall not be unreasonably withheld.  Failure to do so will result
in  an  Event of Default and the Holder may elect to take the action outlined in
Article  4.


ARTICLE  6     NOTICE.

     Any  notices,  consents,  waivers  or  other  communications  required  or
permitted  to  be given under the terms of this Note must be in writing and will
be  deemed  to  have been delivered (i) upon receipt, when delivered personally;
(ii)  upon  receipt,  when  sent  by  facsimile  (provided  a  confirmation  of
transmission is mechanically or electronically generated and kept on file by the
sending  party); or (iii) one (1) day after deposit with a nationally recognized
overnight  delivery  service,  in  each  case properly addressed to the party to
receive  the  same.  The addresses and facsimile numbers for such communications
shall  be:

If  to  the  Company:

     Payment  Data  Systems,  Inc,  Inc.  Attn:  Michael  Long
     12500  San  Pedro,  Suite  120
     San  Antonio,  TX  78216
Tel:  210.249.4100
Fax:  210.249.4130

If  to  the  Holder:

     Dutchess  Private  Equities  Fund,  II,  LP
     Douglas  Leighton
     312  Stuart  Street,  Third  Floor
     Boston,  MA  02116
     (617)  960-3570

     Each  party  shall provide five (5) business days prior notice to the other
party  of  any  change  in  address,  phone  number  or  facsimile  number.

ARTICLE  7     TIME
     Where  this  Note  authorizes  or  requires  the  payment  of  money or the
performance of a condition or obligation on a Saturday or Sunday or a holiday in
which  the United States Stock Markets ("US Markets") are closed ("Holiday"), or
authorizes or requires the payment of money or the performance of a condition or
obligation  within,  before  or  after  a period of time computed from a certain
date,  and such period of time ends on a Saturday or a Sunday or a Holiday, such
payment  may be made or condition or obligation performed on the next succeeding
business  day,  and  if the period ends at a specified hour, such payment may be
made  or condition performed, at or before the same hour of such next succeeding
business  day,  with  the  same  force  and  effect  as  if made or performed in
accordance  with  the  terms of this Note.  A "business day" shall mean a day on
which  the  US  Markets  are  open  for  a  full  day  or  half  day of trading.

ARTICLE  8     NO  ASSIGNMENT
     This  Note  shall  not  be  assigned.

ARTICLE  9     RULES  OF  CONSTRUCTION.
     In  this Note, unless the context otherwise requires, words in the singular
number  include the plural, and in the plural include the singular, and words of
the  masculine gender include the feminine and the neuter, and when the tense so
indicates,  words of the neuter gender may refer to any gender.  The numbers and
titles  of  sections  contained  in  the  Note  are  inserted for convenience of
reference  only,  and  they  neither form a part of this Note nor are they to be
used  in  the  construction or interpretation hereof.  Wherever, in this Note, a
determination of the Company is required or allowed, such determination shall be
made  by  a majority of the Board of Directors of the Company and, if it is made
in  good  faith,  it  shall  be  conclusive and binding upon the Company and the
Holder.

ARTICLE  10     GOVERNING  LAW
     The  validity,  terms,  performance  and  enforcement of this Note shall be
governed  and construed by the provisions hereof and in accordance with the laws
of  the  Commonwealth  of  Massachusetts  applicable  to  agreements  that  are
negotiated,  executed,  delivered  and  performed  solely in the Commonwealth of
Massachusetts.

ARTICLE  11     LITIGATION

     The  parties  to this agreement will submit all disputes arising under this
agreement  to arbitration in Boston, Massachusetts before a single arbitrator of
the  American Arbitration Association ("AAA").  The arbitrator shall be selected
by  application  of the rules of the AAA, or by mutual agreement of the parties,
except that such arbitrator shall be an attorney admitted to practice law in the
Commonwealth  of  Massachusetts.  No  party to this agreement will challenge the
jurisdiction  or  venue  provisions  as  provided  in  this  section.


ARTICLE  12      CONDITIONS  TO  CLOSING

     The Company shall have delivered the proper Collateral to the Holder before
Closing  of  this  Note


ARTICLE  13     STRUCTURING  FEE

     The Company shall pay fees associated with the transaction in the amount of
$20,000  directly  from  the  Closing  of  this  Note.

ARTICLE  14        INDEMNIFICATION

     In  consideration  of the Holder's execution and delivery of this Agreement
and  the  acquisition  and  funding  by  the Holder of the Note hereunder and in
addition  to  all  of  the  Company's  other  obligations  under  the  documents
contemplated  hereby,  the  Company  shall  defend,  protect, indemnify and hold
harmless the Holder and all of its shareholders, officers, directors, employees,
counsel,  and  direct  or  indirect  investors and any of the foregoing person's
agents  or  other representatives (including, without limitation, those retained
in  connection  with  the  transactions  contemplated  by  this  Agreement)
(collectively,  the  "Indemnities") from and against any and all actions, causes
of  action,  suits,  claims,  losses,  costs,  penalties,  fees, liabilities and
damages,  and expenses in connection therewith (irrespective of whether any such
Indemnitee  is  a  party  to  the  action for which indemnification hereunder is
sought),  and  including  reasonable  attorneys'  fees  and  disbursements  (the
"Indemnified  Liabilities"  ),  incurred  by  any  Indemnitee as a result of, or
arising  out  of,  or  relating  to  (i)  any misrepresentation or breach of any
representation  or  warranty  made  by  the  Company  in  the Note, or any other
certificate,  instrument  or  document  contemplated  hereby or thereby (ii) any
breach  of any covenant, agreement or obligation of the Company contained in the
Note  or  any  other certificate, instrument or document  contemplated hereby or
thereby,  except  insofar  as  any  such misrepresentation, breach or any untrue
statement,  alleged  untrue  statement,  omission or alleged omission is made in
reliance  upon  and  in  conformity  with  written  information furnished to the
Company  by,  or  on behalf of, the Holder or is based on illegal trading of the
Common  Stock by the Holder. To the extent that the foregoing undertaking by the
Company  may be unenforceable for any reason, the Company shall make the maximum
contribution  to  the  payment  and  satisfaction  of  each  of  the Indemnified
Liabilities  that  is permissible under applicable law. The indemnity provisions
contained  herein  shall be in addition to any cause of action or similar rights
the  Holder  may  have,  and  any  liabilities  the  Holder  may  be subject to.


ARTICLE  15  INVESTOR  SHARES

     The  Company  shall  issue  five  hundred  thousand  (500,000)  shares  of
unregistered,  restricted  Common  Stock  to  the Holder as an incentive for the
investment  ("Shares").  The Shares shall be issued and delivered immediately to
the Holder and shall carry piggyback registration rights.  The Investor's Shares
shall be deemed fully earned as of the date hereof.  In the event the Shares are
not  registered in the next registration statement, the Company shall pay to the
Holder,  as  a penalty, 75,000 additional shares of common stock for each time a
registration  statement  is  filed  and the Shares are not included.  The Holder
retains  the  right to waive such penalty, in the event Holder chooses to do so.
Failure  to do so will result in an Event of Default and the Holder may elect to
take  the action outlined in Article 4.  This Event of Default will survive this
Agreement  until  such time as the Shares are no longer under the control of the
Holder.

ARTICLE  16  USE  OF  PROCEEDS

General  corporate  working  capital  purposes. This shall not to be used to pay
down long-term debt to any financial institution.  The Company shall immediately
pay off the outstanding balance on the Note to Holder, Note Number December 2004
101  directly  from  Closing.

     Any misrepresentations shall be considered a breach of contract and Default
under  this Agreement and the Holder may seek to take actions as described under
Article  4  of  this  Agreement.

     IN  WITNESS WHEREOF, the Company has duly executed this Note as of the date
first  written  above.

                              PAYMENT  DATA  SYSTEMS,  INC.

                         By:  /s/ Michael Long
                       Name:  Michael  Long
                      Title:  Chief  Executive  Officer

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

                         By:  /s/ Douglas H. Leighton
                       Name:  Douglas  H.  Leighton
                      Title:  A  Managing  Member