UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q




(Mark
One)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended September 30, 2009.




or




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ________ to ________.




Commission
file number: 000-30152





PAYMENT
DATA SYSTEMS, INC.


(Exact
name of registrant as specified in its charter)





Nevada
                
                98-0190072(State or other jurisdiction of incorporation or organization)
                
                (I.R.S. Employer Identification No.)12500 San Pedro, Ste. 120, San Antonio, TX
                
                78216(Address of principal executive offices)
                
                (Zip Code)





(210)
249-4100


(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes  ̈ No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).                                                                                                                            ̈ Yes  ̈ No




Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).




 ̈ Yes x No




As of
November 1, 2009, 110,778,547 shares of the issuer’s common stock, $0.001 par
value, were outstanding.





PAYMENT
DATA SYSTEMS, INC.





INDEX





PagePART I – FINANCIAL INFORMATIONItem 1.
                      Financial Statements (Unaudited).Consolidated Balance Sheets as of September 30, 2009and December 31, 2008
                      1Consolidated Statements of Operations for the three and nine monthsended September 30, 2009 and 2008
                      2Consolidated Statements of Cash Flows for the nine monthsended September 30, 2009 and 2008
                      3Notes to Consolidated Financial Statements
                      4Item 2.
                      Management’s Discussion and Analysis of Financial Condition and Results of Operations.
                      8Item 3.
                      Quantitative and Qualitative Disclosures About Market Risk.
                      13Item 4T.
                      Controls and Procedures.
                      13PART II – OTHER INFORMATIONItem 1.
                      Legal Proceedings.
                      14Item 1A.
                      Risk Factors.
                      15Item 2.
                      Unregistered Sales of Equity Securities and Use of Proceeds.
                      15Item 3.
                      Defaults Upon Senior Securities.
                      15Item 4.
                      Submission of Matters to a Vote of Security Holders.
                      15Item 5.
                      Other Information.
                      15Item 6.
                      Exhibits.
                      15







PART I–FINANCIAL
INFORMATION





Item
1. FINANCIAL STATEMENTS.




PAYMENT
DATA SYSTEMS, INC.


CONSOLIDATED
BALANCE SHEETS





September 30, 2009
                
                
                December 31, 2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                349,348
                
                
                $
                103,428Accounts
      receivable, net
                
                
                143,540
                
                
                
                158,736Prepaid
      expenses and other
                
                
                16,298
                
                
                
                20,852Total
      current assets
                
                
                509,186
                
                
                
                283,016Property
      and equipment, net
                
                
                34,051
                
                
                
                62,114Other
      assets:Related
      party receivable
                
                
                210,000
                
                
                
                246,168Other
      assets
                
                
                6,693
                
                
                
                16,693Total
      other assets
                
                
                216,693
                
                
                
                262,861Total
      assets
                
                $
                759,930
                
                
                $
                607,991Liabilities
      and stockholders’ equity (deficit)Current
      liabilities:Accounts
      payable
                
                $
                149,590
                
                
                $
                108,055Accrued
      expenses
                
                
                1,168,300
                
                
                
                751,379Customer
      deposits payable
                
                
                340,786
                
                
                
                44,865Deferred
      revenue
                
                
                19,240
                
                
                
                71,537Total
      current liabilities
                
                
                1,677,916
                
                
                
                975,836Stockholders’
      equity (deficit):Common
      stock, $0.001 par value, 200,000,000 shares authorized; 115,773,691 issued
      and 110,778,547 and 112,547,215 outstanding
                
                
                115,774
                
                
                
                115,774Additional
      paid-in capital
                
                
                55,444,770
                
                
                
                55,444,770Treasury
      stock, at cost; 4,995,144 and 3,226,476 shares
                
                
                (238,155
                )
                
                
                (176,252
                )Deferred
      compensation
                
                
                (2,066,608
                )
                
                
                (2,328,184
                )Accumulated
      deficit
                
                
                (54,173,767
                )
                
                
                (53,423,953
                )Total
      stockholders’ equity (deficit)
                
                
                (917,986
                )
                
                
                (367,845
                )Total
      liabilities and stockholders’ equity (deficit)
                
                $
                759,930
                
                
                $
                607,991





See
notes to interim consolidated financial statements.





1




PAYMENT
DATA SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenues
                      
                      $
                      841,278
                      
                      
                      $
                      667,362
                      
                      
                      $
                      2,495,087
                      
                      
                      $
                      2,188,152Operating
      expenses:Cost
      of services
                      
                      
                      476,651
                      
                      
                      
                      537,204
                      
                      
                      
                      1,850,312
                      
                      
                      
                      1,790,578Selling,
      general and administrative:Stock-based
      compensation
                      
                      
                      133,650
                      
                      
                      
                      145,439
                      
                      
                      
                      400,950
                      
                      
                      
                      505,346Other
      expenses
                      
                      
                      196,721
                      
                      
                      
                      343,890
                      
                      
                      
                      956,576
                      
                      
                      
                      1,152,456Depreciation
                      
                      
                      8,691
                      
                      
                      
                      11,166
                      
                      
                      
                      28,063
                      
                      
                      
                      47,249Total
      operating expenses
                      
                      
                      815,713
                      
                      
                      
                      1,037,699
                      
                      
                      
                      3,235,901
                      
                      
                      
                      3,495,629Operating
      income (loss)
                      
                      
                      25,565
                      
                      
                      
                      (370,337
                      )
                      
                      
                      (740,814
                      )
                      
                      
                      (1,307,477
                      )Other
      income (expense):Interest
      income
                      
                      
                      -
                      
                      
                      
                      410
                      
                      
                      
                      -
                      
                      
                      
                      9,072Interest
      expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (193
                      )Other
      income (expense)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      748,840Total
      other income (expense), net
                      
                      
                      -
                      
                      
                      
                      410
                      
                      
                      
                      -
                      
                      
                      
                      757,719Income
      (loss) before income taxes
                      
                      
                      25,565
                      
                      
                      
                      (369,927
                      )
                      
                      
                      (740,814
                      )
                      
                      
                      (549,758
                      )Income
      taxes
                      
                      
                      3,000
                      
                      
                      
                      -
                      
                      
                      
                      9,000
                      
                      
                      
                      -Net
      income (loss)
                      
                      $
                      22,565
                      
                      
                      $
                      (369,927
                      )
                      
                      $
                      (749,814
                      )
                      
                      $
                      (549,758
                      )Basic
      and diluted net income (loss) per common share:
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.01
                      )Weighted
      average common sharesoutstanding
                      
                      
                      111,385,965
                      
                      
                      
                      100,822,128
                      
                      
                      
                      111,846,944
                      
                      
                      
                      93,077,167





See
notes to interim consolidated financial statements.


2


PAYMENT
DATA SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Months Ended September 30,2009
                
                
                2008Operating
      activities:Net
      loss
                
                $
                (749,814
                )
                
                $
                (549,758
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
                
                
                28,063
                
                
                
                47,249Non-cash
      issuance of common stock
                
                
                -
                
                
                
                78,255Deferred
      compensation
                
                
                261,576
                
                
                
                319,071Gain
      on sale of patents
                
                
                -
                
                
                
                (750,000
                )Bad
      debt
                
                
                2,435
                
                
                
                -Loss
      on disposition of assets
                
                
                -
                
                
                
                1,160Changes
      in current assets and current liabilities:Accounts
      receivable
                
                
                12,761
                
                
                
                (95,186
                )Prepaid
      expenses and other
                
                
                14,554
                
                
                
                (3,871
                )Accounts
      payable and accrued expenses
                
                
                432,721
                
                
                
                191,883Customer
      deposits payable
                
                
                295,921
                
                
                
                (37,797
                )Deferred
      revenue
                
                
                (52,297
                )
                
                
                105,730Net
      cash provided by (used in) operating activities
                
                
                245,920
                
                
                
                (693,264
                )Investing
      activities:Proceeds
      from sale of patents
                
                
                -
                
                
                
                750,000Purchases
      of property and equipment
                
                
                -
                
                
                
                (19,418
                )Net
      cash provided by investing activities
                
                
                -
                
                
                
                730,582Financing
      activities:Issuance
      of common stock, net of issuance costs
                
                
                -
                
                
                
                1,637Net
      cash provided by financing activities
                
                
                -
                
                
                
                1,637Change
      in cash and cash equivalents
                
                
                245,920
                
                
                
                38,955Cash
      and cash equivalents, beginning of period
                
                
                103,428
                
                
                
                115,597Cash
      and cash equivalents, end of period
                
                $
                349,348
                
                
                $
                154,552




See
notes to interim consolidated financial statements.


3


PAYMENT
DATA SYSTEMS, INC.


NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
1.  Basis of Presentation





Payment
Data Systems, Inc. and subsidiaries (the “Company”), has incurred substantial
losses since inception, which has led to a deficit in working capital. The
Company believes that its current available cash along with anticipated revenues
may be insufficient to meet its anticipated cash needs for the foreseeable
future. Consequently, the
Company’s ability to continue as a going concern is likely contingent on the
Company receiving additional funds in the form of equity or debt financing.The Company is currently aggressively pursuing strategic alternatives.
The sale of additional equity or convertible debt securities would result in
additional dilution to the Company's stockholders, and debt financing, if
available, may involve covenants which could restrict operations or finances.
There can be no assurance that financing will be available in amounts or on
terms acceptable to the Company, if at all. If the Company cannot raise funds on
acceptable terms, or achieve positive cash flow, it may not be able to continue
to exist, conduct operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which would negatively impact its business, operating results and
financial condition. The accompanying unaudited consolidated financial
statements of the Company do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.





The
accompanying unaudited consolidated financial statements of the Company have
been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with United
States generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments of a
normal recurring nature considered necessary to present fairly the Company's
financial position, results of operations and cash flows for such periods. The
accompanying interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2008. Results of operations for interim periods are not necessarily
indicative of results that may be expected for any other interim periods or the
full fiscal year.





Certain
prior period amounts have been reclassified for comparative purposes to conform
to the current period’s presentation.





The
preparation of financial statements in conformity with United States 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.





Note
2.  Accrued Expenses





Accrued
expenses consist of the following balances:





September 30, 2009
                  
                  
                  December 31, 2008Accrued
      salaries
                  
                  $
                  874,819
                  
                  
                  $
                  311,880Reserve
      for merchant losses
                  
                  
                  205,400
                  
                  
                  
                  209,220Accrued
      commissions
                  
                  
                  26,032
                  
                  
                  
                  144,202Accrued
      taxes
                  
                  
                  50,874
                  
                  
                  
                  77,469Other
      accrued expenses
                  
                  
                  11,175
                  
                  
                  
                  8,608Total
      accrued expenses
                  
                  $
                  1,168,300
                  
                  
                  $
                  751,379


4


Note
3.  Equity Line of Credit





On June
11, 2007, the Company entered into an agreement for an equity line of credit
with Dutchess Private Equities Fund, LP (“Dutchess”). Under the terms of the
agreement, the Company may elect to receive as much as $10 million from common
stock purchases by Dutchess through August 23, 2012. During the nine months
ended September 30, 2009, the Company did not sell any common stock pursuant to
the equity line of credit.





Note
4.  Stock-Based Compensation





On July
21, 2009, the Company’s Board of Directors granted a total of 100,000 shares of
unrestricted common stock valued at $1,600 to an employee under the terms of the
Company's Employee Comprehensive Stock Plan.





Note
5.  Net Income (Loss) Per Share





Basic and
diluted income (loss) per common share was calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Dilutive securities, which consist of stock options and warrants, were
excluded from the computation of the weighted average number of common shares
outstanding for purposes of calculating diluted income (loss) per common share
because their effect was anti-dilutive.





Note
6.  Related Party Transactions





As
previously disclosed, in 2002 the Company recognized a loss on margin loans it
guaranteed for Michael R. Long, then Chairman of the Board of Directors and
Chief Executive Officer; and Louis A. Hoch, then President and Chief Operating
Officer, in the amount of $535,302 and $449,371, respectively. In February 2007,
the Company signed employment agreements with Mr. Long and Mr. Hoch that require
each to repay his respective obligation to the Company in four equal annual
payments of cash or stock or any combination thereof. In December 2007, the
Company accepted common stock and stock options valued at $133,826 and $112,343
from Mr. Long and Mr. Hoch, respectively, in satisfaction of their annual
payments for 2007 as provided for under their employment
agreements.





In
December 2008, Mr. Long and Mr. Hoch did not pay the Company the second annual
installment pursuant to their respective employment agreements. They each
withheld payment of the installment due because the Company had deferred payment
of their salary increases for 2008 called for under their respective employment
agreements. At December 31, 2008, the Company owed Mr. Long and Mr. Hoch
deferred salary of $110,000 and $100,000, respectively, and Mr. Long and Mr.
Hoch owed the Company $133,825 and $112,343, respectively, for the second
installment due by December 31, 2008. On March 30, 2009, the Company accepted
680,715 shares of the Company’s common stock valued at $23,825 and 352,658
shares of the Company’s common stock valued at $12,343 from Mr. Long and Mr.
Hoch, respectively, in partial satisfaction of their annual payment due to the
Company for 2008 as provided for under their employment agreements. The common
stock accepted from Mr. Long and Mr. Hoch was valued at $0.035 per share, which
was the closing price of the common stock on March 30, 2009. The common stock
accepted from Mr. Long and Mr. Hoch was recorded as treasury stock with a total
cost of $36,168. The total amount owed to the Company for the second installment
is classified as Related Party Receivable on the Company’s balance sheet and was
$210,000 at September 30, 2009 and $246,168 at December 31, 2008.





During
the nine months ended September 30, 2009, the Company employed Herb Authier to
provide services related to network engineering and administration. The amount
paid to Mr. Authier for such services was $22,500. Mr. Authier is the
father-in-law of Louis Hoch, the Company’s President and Chief Operating
Officer.


5


Note
7.  Legal Proceeding





On August
29, 2008, Tara Patrick p/k/a Carmen Electra, commenced legal action against the
Company in the Superior Court of the State of California for the County of Los
Angeles. On October 7, 2008, the Company removed that case to the United States
District Court for the Central District of California – Los Angeles Division.
With respect to the suit, the plaintiff alleged that the Company violated her
rights of publicity and breached the terms of its license agreement with her.
The plaintiff alleged and sought resulting economic, exemplary and punitive
damages, interest, attorneys' fees and costs of court. On November 14, 2008, the
Company filed a counterclaim against Ms. Patrick in the United States District
Court for the Central District of California – Los Angeles Division alleging
that she breached the terms of the Company’s license agreement with her. The
Company alleged and sought to recover damages arising from her breach of the
agreement.





On
September 15, 2009, the Company entered into a settlement agreement with Ms.
Patrick. Under the terms of the settlement, both parties dismissed the pending
litigation, with prejudice, and released all claims against each other.
Additionally, the Company agreed to pay $6,000 to Ms. Patrick and $500 to a
charity of her choosing and she agreed to return all 735,295 shares of the
Company’s common stock received by her under the original license agreement to
the Company. The return of this common stock was recorded as an acquisition of
treasury stock with a value of $25,735, based on the closing price of the common
stock on September 15, 2009, which was $0.035 per share. The Company does not
expect to incur any additional expenses associated with this
litigation.





On
November 12, 2008, the Company commenced legal action against its former
customers Commerce Planet, Inc. and Consumer Loyalty Group, Inc., in the
285thJudicial District Court of Bexar County, Texas. The Company alleged that
they breached the terms of its services agreement with it and sought to recover
economic damages and attorneys' fees. On January 22, 2009, the Court entered a
Default Judgment awarding the Company actual damages in the amount of $140,472
and attorney’s fees in the amount of $4,000. The Company was also awarded all
costs of Court and pre-judgment and post-judgment interest as provided by law.
On or about January 1, 2009, Commerce Planet entered into an Asset Purchase
Agreement with Morlex, Inc. Pursuant to this agreement, Commerce Planet’s
liabilities were assigned to and/or assumed by Morlex, including the debt owed
to the Company. On May 27, 2009, the Company commenced legal action against
Morlex, Inc., in the 285thJudicial District Court of Bexar County, Texas. On September 2, 2009, the
Court entered a Default Judgment awarding the Company actual damages in the
amount of $140,472 and attorney’s fees in the amount of $7,500. The Company was
also awarded all costs of Court and pre-judgment and post-judgment interest as
provided by law. The Company intends to pursue any legal means available to it
in order to collect this judgment. As of the date of this report, no amounts
have been collected towards this judgment.





Note
8.  Subsequent Events





On
October 7, 2009, the Company executed a second amendment to its lease agreement
for the office space that houses its headquarters and operations. The amendment
extended the lease agreement for a period of three years and requires future
minimum lease payments of $250,138 through its expiration in October
2012.





On
November 1, 2009, Michael Long, Chief Executive Officer and Chief Financial
Officer, and Louis Hoch, President and Chief Operating Officer, were each
granted 7,200,000 shares of restricted common stock by the Company as an annual
bonus of $216,000 pursuant to the terms of their respective employment
agreements. The number of shares granted to each officer was based on the
closing price of the common stock on October 15, 2009, which was $0.03 per
share.





On
November 12, 2009, the Company executed amendments to its employment agreements
with Michael Long, Chief Executive Officer and Chief Financial Officer, and
Louis Hoch, President and Chief Operating Officer. Under the terms of their
respective amended employment agreements, Mr. Long and Mr. Hoch agreed to reduce
their annual base salaries for 2009 to $190,000 and $175,000, respectively, from
$375,000 and $350,000, respectively. The reduction in salary expense for the
Company will be recorded evenly over the last six months of
2009.


6


On
November 12, 2009, the Company commenced legal action against its customers
Access General Holdings, Inc., Access General Agency, Inc., Access General
Agency of California, Inc., Access General Agency of Pennsylvania, Inc., Access
General Agency of Florida, Inc., Access General Agency of Texas, Inc., Access
General Agency of Arizona, Inc. and Access Adjusting Services, Inc.
(collectively referred to as “Access General”), in the 285thJudicial District Court of Bexar County, Texas. The Company alleges that
Access General breached the terms of its services agreements with the Company by
violating the exclusivity provisions contained therein and seeks to recover
economic damages and attorneys' fees. As of the date of this report, there have
been no material developments in the suit. The results of legal proceedings
cannot be predicted with certainty. If the Company fails to prevail in this
legal matter, the Company’s financial position, results of operations, and cash
flows could be materially adversely affected.





The
Company evaluated subsequent events through the date of this
report.


7


Item
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





FORWARD-LOOKING
STATEMENTS DISCLAIMER





This
report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties. You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including the risks described
in our annual report on Form 10-K and other reports we file with the Securities
and Exchange Commission. Although we believe the expectations reflected in the
forward-looking statements are reasonable, they relate only to events as of the
date on which the statements are made. We do not intend to update any of the
forward-looking statements after the date of this report to conform these
statements to actual results or to changes in our expectations, except as
required by law.





This
discussion and analysis should be read in conjunction with the unaudited interim
consolidated financial statements and the notes thereto included in this report,
and our annual report on Form 10-K for the fiscal year ended December 31,
2008.





Overview





We
provide integrated electronic payment processing services to merchants and
businesses, including credit and debit card-based processing services and
transaction processing via the Automated Clearinghouse Network. We also operate
an online payment processing service for consumers under the domain name
www.billx.com through which consumers can pay anyone. Since inception, we have
incurred operating losses each quarter, and as of September 30, 2009, we
have an accumulated deficit of approximately $54.2 million. Our prospects to
continue as a going concern must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stages of
growth, particularly companies in rapidly evolving markets such as electronic
commerce. To address these risks we must, among other things, grow and maintain
our customer base, implement a successful marketing strategy, continue to
maintain and upgrade our technology and transaction-processing systems, provide
superior customer service, respond to competitive developments, attract, retain
and motivate qualified personnel, and respond to unforeseen industry
developments and other factors. We cannot assure you that we will be successful
in addressing such risks, and the failure to do so could have a material adverse
effect on our business, prospects, financial condition and results of
operations. We believe that our success will depend in large part on our ability
to (a) manage our operating expenses, (b) add quality customers to our client
base, (c) meet evolving customer requirements and (d) adapt to technological
changes in an emerging market. Accordingly, we intend to focus on customer
acquisition activities and outsource some of our processing services to third
parties to allow us to maintain an efficient operating infrastructure and expand
our operations without significantly increasing our fixed operating
expenses.





Critical
Accounting Policies





General





Management's
Discussion and Analysis of Financial Condition and Results of Operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to the reported amounts of
revenues and expenses, bad debt, investments, intangible assets, income taxes,
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from these estimates under different
assumptions or conditions. We consider the following accounting policies to be
critical because the nature of the estimates or assumptions is material due to
the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change or because the
impact of the estimates and assumptions on financial condition or operating
performance is material.


8





Revenue
Recognition





Revenue
consists primarily of fees generated through the electronic processing of
payment transactions and related services, and are recognized as revenue in the
period the transactions are processed or when the related services are
performed. Merchants may be charged for these processing services at a bundled
rate 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 per transaction, while others may also be
charged miscellaneous fees, including fees for chargebacks or returns, monthly
minimums, and other miscellaneous services. Revenues derived from electronic
processing of credit and debit card transactions that are authorized and
captured through third-party networks are reported gross of amounts paid to
sponsor banks as well as interchange and assessments paid to credit card
associations (MasterCard and Visa). Revenue also includes any up-front fees for
the work involved in implementing the basic functionality required to provide
electronic payment processing services to a customer. Revenue from such
implementation fees is recognized over the term of the related service contract.
Sales taxes billed are reported directly as a liability to the taxing authority,
and are not included in revenue.





Reserve
for Losses on Card Processing





If, due
to insolvency or bankruptcy of the merchant, or for another reason, we are not
able to collect amounts from our card processing merchant customers that have
been properly "charged back" by the cardholders, we must bear the credit risk
for the full amount of the cardholder transaction. We may require cash deposits
and other types of collateral from certain merchants to minimize any such risk.
In addition, we utilize a number of systems and procedures to manage merchant
risk. Card merchant processing loss reserves are primarily determined by
performing a historical analysis of our chargeback loss experience and
considering other factors that could affect that experience in the future, such
as the types of card transactions processed and nature of the merchant
relationship with their consumers. This reserve amount is subject to risk that
actual losses may be greater than our estimates. At September 30, 2009, our card
merchant processing loss reserve was $205,400. We have not incurred any
significant chargeback losses to date. Our estimate for chargeback losses is
likely to increase in the future as our volume of card-based transactions
processed increases.





Bad
Debts





We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability or failure of our customers to make required payments. We
determine the allowance for doubtful accounts based on an account-by-account
review, taking into consideration such factors as the age of the outstanding
balance, historical pattern of collections and financial condition of the
customer. Past losses incurred by us due to bad debts have been within our
expectations. In 2008, we did not charge any bad debt expense and recorded bad
debt write-offs of $1,749 against our allowance for doubtful accounts. In the
nine months ended September 30, 2009, we charged $2,435 of bad debt expense and
recorded bad debt write-offs of $6,734 against our allowance for doubtful
accounts. At September 30, 2009, the balance of the allowance for doubtful
accounts was approximately $26,000. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
contractual payments, additional allowances may be required. Our estimate for
bad debt losses is likely to increase in the future as our volume of
transactions processed increases.





Valuation
of Long-Lived and Intangible Assets





We assess
the impairment of long-lived and intangible assets at least annually, and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors considered important, which could trigger an
impairment review, include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner
of use of the assets or the strategy of the overall business; and significant
negative industry trends. When management determines that the carrying value of
long-lived and intangible assets may not be recoverable, impairment is measured
as the excess of the assets’ carrying value over the estimated fair value. No
impairment losses were recorded in 2008 or during the nine months ended
September 30, 2009.


9


Income
Taxes





Deferred
tax assets and liabilities are recorded based on the difference between the tax
bases of assets and liabilities and their carrying amount for financial
reporting purposes, as measured by the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets are
computed with the presumption that they will be realizable in future periods
when pre-taxable income is generated. Predicting the ability to realize these
assets in future periods requires a great deal of judgment by management. It is
our judgment that we cannot predict with reasonable certainty that the deferred
tax assets as of September 30, 2009 will be realized in future periods.
Accordingly, a valuation allowance has been provided to reduce the net deferred
tax assets to $0. At December 31, 2008, we had available net operating loss
carryforwards of approximately $41.1 million, which expire beginning in the year
2020.





We follow
FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,” now Accounting Standards
Codification (“ASC”) topic 740, which requires that only income tax benefits
that meet the “more likely than not” recognition threshold be recognized. We do
not have any unrecognized income tax benefits at September 30, 2009 or December
31, 2008.





Effect
of New Accounting Pronouncements





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), now ASC
topic 855,which establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This statement sets forth
the circumstances under which en entity should recognize events or transactions
occurring after the balance sheet date in its financial statements. SFAS 165
also requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date – that is, whether that date
represents the date the financial statements were issued or were available to be
issued. This statement is effective for interim or annual reporting periods
ending after June 15, 2009. During the quarter ended June 30, 2009, the Company
adopted SFAS 165. The Company evaluated subsequent events through the date and
time the financial statements were issued. The adoption of SFAS 165 did not have
a material impact on the Company’s consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
(the “Codification”) and the Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 168”). This statement is now ASC topic 105. SFAS 168
confirmed that the Codification will become the single official source of
authoritative U.S. Generally Accepted Accounting Principles (“GAAP”), (other
than guidance issued by the SEC), superseding existing FASB, American Institute
of Certified Public Accountants, Emerging Issues Task Force (“EITF”), and
related literature. After that date, only one level of authoritative U.S. GAAP
will exist. All other literature will be considered non-authoritative. The
Codification does not change U.S. GAAP; instead, it introduces a new structure
that is organized in an easily accessible, user-friendly online research system.
The Codification, which changes the referencing of financial standards, becomes
effective for interim and annual periods ending on or after September 15, 2009.
The Company will apply the Codification beginning in the third quarter of fiscal
2009. The adoption of SFAS 168 did not have a material impact on the Company’s
consolidated financial statements.


10


Results
of Operations





Our
revenues are principally derived from providing integrated electronic payment
services to merchants and businesses, including credit and debit card-based
processing services and transaction processing via the Automated Clearinghouse
Network. We also operate an online payment processing service for consumers
under the domain name www.billx.com and sell this service as a private-label
application to resellers. Revenues for the quarter ended September 30, 2009
increased 26% to $841,278 from $667,362 for the quarter ended September 30,
2008. Revenues for the nine months ended September 30, 2009 increased 14% to
$2,495,087 from $2,188,152 for the nine months ended September 30, 2008. The
increase from the prior year periods was primarily attributable to the increase
in revenues generated from card-based processing services due to increased
transaction volume. We anticipate revenues for the fourth quarter of 2009 to
decrease from the third quarter because our largest customer, Access General
Insurance, ceased using our processing services on an exclusive basis during
October 2009 in what we believe is a violation of its service agreements with
us. Services provided to Access General accounted for approximately 35% and 32%
of our total revenues for the quarter and nine months ended September 30, 2009,
respectively. We have commenced legal action against Access General for the
breach of its agreements with us and seek to recover the resulting economic
damages; however, the outcome of this proceeding cannot be determined at this
time.





The
monthly average number of consumers using our billx.com online payment service
decreased to 522 in the first nine months of 2009 from 764 in the first nine
months of 2008. We expect this trend to continue unless our current plan to
introduce and establish enhanced value by offering a prepaid MasterCard in
conjunction with our online payment service is successful in generating
subscriber growth.





Cost of
services includes the cost of personnel dedicated to the creation and
maintenance of connections to third-party payment processors and fees paid to
such third-party providers for electronic payment processing services. Through
our contractual relationships with our payment processors, we are able to
process Automated Clearinghouse and debit or credit card transactions on behalf
of our customers and their consumers. We pay volume-based fees for debit and
credit transactions initiated through these processors, and pay fees for other
transactions such as returns, notices of change to bank accounts and file
transmission. Cost of services was $476,651 and $537,204 for the quarters ended
September 30, 2009 and 2008, respectively and $1,850,312 and $1,790,578 for the
nine months ended September 30, 2009 and 2008, respectively. The decrease
from the prior year quarter was attributable to an adjustment in the third
quarter of 2009 for accrued fees that will not be paid to a reseller due to its
breach of our related service agreements. The increase from the prior year
period was due primarily to the increase in fees related to processing the
increased card-based transaction volume.





Stock-based
compensation expenses decreased to $133,650 for the quarter ended September 30,
2009, from $145,439 for the third quarter of 2008. Stock-based compensation
expenses decreased to $400,950 for the nine months ended September 30, 2009,
from $505,346 for the same period of 2008. The change from the prior year
quarter was principally due to approximately $9,000 of expense in the prior year
quarter related to stock grants made to advisory board members that were fully
amortized at December 31, 2008. The change from the prior year nine month period
was principally due to approximately $49,000 of expense in the prior year period
related to incentive stock grants made to employees in March 2005 that were
fully amortized at March 31, 2008.





Other
selling, general and administrative expenses decreased to $196,721 for the
quarter ended September 30, 2009, from $343,890 for the third quarter of 2008.
Other selling, general and administrative expenses for the nine months ended
September 30, 2009 decreased to $956,576 from $1,152,456 for the nine
months ended September 30, 2008. The decreases from the prior year periods were
principally due to lower salary expenses of $180,000 for the third quarter of
2009 pursuant to amended executive employment agreements. On November 12, 2009,
Michael Long, Chief Executive Officer and Chief Financial Officer, and Louis
Hoch, President and Chief Operating Officer, agreed to reduce their annual base
salaries for 2009 to $190,000 from $375,000 and $175,000 from $350,000,
respectively.





Depreciation
and amortization was $8,691 and $11,166 for the quarter ended September 30, 2009
and 2008, respectively. Depreciation for the nine months ended September 30,
2009 decreased to $28,063 from $47,249 for the nine months ended September 30,
2008. The decreases from the prior periods were primarily due to lower
depreciation expense related to certain assets that became fully depreciated
during 2008. We did not make any capital expenditures during the nine months
ended September 30, 2009.


11





There was
no net other income for the third quarter of 2009 as compared to net other
income of $410 for the quarter ended September 30, 2008. There was no net other
income for the first nine months of 2009 as compared to net other income of
$757,719 for the nine months ended September 30, 2008. The decrease from the
prior year period was primarily attributable to a $750,000 gain on the sale of
certain patents in January 2008.





We
reported net income of $22,565 for the quarter ended September 30, 2009 compared
to a net loss of $369,927 for the third quarter of 2008 and net loss increased
to $749,814 for the nine months ended September 30, 2009 from $549,758 for the
prior year comparable period, as a result of the items discussed above. We do
not expect to report net income for the fourth quarter of 2009.





Liquidity
and Capital Resources





At
September 30, 2009, we had $349,348 of cash and cash equivalents, compared to
$103,428 of cash and cash equivalents at December 31, 2008. We have incurred
substantial losses since inception and have a deficit in net working capital. We
believe that our current available cash and cash equivalents along with
anticipated revenues may be insufficient to meet our anticipated cash needs for
the foreseeable future. Consequently, our ability to continue as a going concern
may be contingent on us receiving additional funds in the form of equity or debt
financing. We are currently aggressively pursuing strategic financing
alternatives.





On June
11, 2007, we entered into an agreement for an equity line of credit with
Dutchess Private Equities Fund, LP. Under the terms of the agreement, we may
elect to receive as much as $10 million from common stock purchases by Dutchess
through August 23, 2012. Through September 30, 2009, we sold 1,535,263 shares of
our common stock pursuant to the new equity line of credit and received total
proceeds, net of issuance costs, of $75,064.





The
satisfactory completion of additional sales of common stock to private investors
or under our equity line of credit, borrowing funds, or growth of cash flow from
operations is essential to provide sufficient cash flows to meet our current
operating requirements. The sale of additional equity or convertible debt
securities would result in additional dilution to our stockholders, and debt
financing, if available, may involve restrictive covenants which could restrict
our operations or finances. Financing may not be available in amounts or on
terms acceptable to us, if at all. If we cannot raise funds on acceptable terms
or achieve positive cash flow, we may not be able to continue to exist, conduct
operations, grow market share, take advantage of future opportunities or respond
to competitive pressures or unanticipated requirements, any of which would
negatively impact our business, operating results and financial
condition.





Net cash
provided by operating activities was $245,920 for the nine months ended
September 30, 2009 and cash used in operating activities was $693,264 for the
nine months ended September 30, 2008. Net cash provided by operating activities
in 2009 was primarily attributable to the increase in customer deposit payables,
which consist of cash held in transit that we collected on behalf of our
merchants via the ACH system. Net cash used in operating activities in 2008 was
primarily attributable to operating losses generated by growth stage activities
and overhead costs. We plan to focus on expending our resources prudently given
our current state of liquidity.





There
were no cash flows generated by investing activities for the nine months ended
September 30, 2009. Net cash provided by investing activities of $730,582 for
the nine months ended September 30, 2008 resulted from receiving $750,000 in
proceeds from the sale of our patents and making capital expenditures for
computer hardware and software of $19,418.





There
were no cash flows generated by financing activities for the nine months ended
September 30, 2009. Net cash provided by financing activities of $1,637 for the
nine months ended September 30, 2008 represented the net proceeds from the
issuance of common stock under our equity line of credit.


12


Off-balance
Sheet Arrangements





We
currently have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.





Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.





Item
4T. CONTROLS AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





Our
management evaluated, with the participation of our Chief Executive Officer /
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the
period covered by this quarterly report on Form 10-Q. Based on that
evaluation, our Chief Executive Officer / Chief Financial Officer concluded that
our disclosure controls and procedures as of September 30, 2009 are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act (i) is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and (ii)
is accumulated and communicated to our management, including our Chief Executive
Officer / Chief Financial Officer, as appropriate, to allow timely decisions
regarding required reasonable assurance that such information is accumulated and
communicated to our management. Our disclosure controls and procedures are
designed to provide reasonable assurance that such information is accumulated
and communicated to our management. Our disclosure controls and procedures
include components of our internal control over financial reporting.
Management's assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance that the
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system's objectives
will be met.





Changes
in Internal Control Over Financial Reporting





There was
no change in our internal control over financial reporting that occurred during
the quarter ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


13


PART
II – OTHER INFORMATION




Item
1.  LEGAL PROCEEDINGS.





As
previously disclosed, in 2002 the Company recognized a loss on margin loans it
guaranteed for Michael R. Long, then Chairman of the Board of Directors and
Chief Executive Officer; and Louis A. Hoch, then President and Chief Operating
Officer, in the amount of $535,302 and $449,371, respectively. In February 2007,
we signed employment agreements with Mr. Long and Mr. Hoch that require each to
repay his respective obligation to us in four equal annual payments of cash or
stock or any combination thereof. In December 2007, we accepted common
stock and stock options valued at $133,826 and $112,343 from Mr. Long and Mr.
Hoch, respectively, in satisfaction of their annual payments for 2007 as
provided for under their employment agreements.





In
December 2008, Mr. Long and Mr. Hoch did not pay us the second annual
installment pursuant to their respective employment agreements. They each
withheld payment of the installment due because we had deferred payment of their
salary increases for 2008 called for under their respective employment
agreements. At December 31, 2008, we owed Mr. Long and Mr. Hoch deferred salary
of $110,000 and $100,000, respectively, and Mr. Long and Mr. Hoch owed us
$133,825 and $112,343, respectively, for the second installment due by December
31, 2008. On March 30, 2009, we accepted 680,715 shares of our common stock
valued at $23,825 and 352,658 shares of our common stock valued at $12,343 from
Mr. Long and Mr. Hoch, respectively, in partial satisfaction of their annual
payment due to us for 2008 as provided for under their employment agreements.
The common stock accepted from Mr. Long and Mr. Hoch was valued at $0.035 per
share, which was the closing price of our common stock on March 30, 2009. The
common stock accepted from Mr. Long and Mr. Hoch was recorded as treasury stock
with a total cost of $36,168. The total amount owed to us for the second
installment is classified as Related Party Receivable on our balance sheet and
was $210,000 at September 30, 2009 and $246,168 at December 31,
2008.





On August
29, 2008, Tara Patrick p/k/a Carmen Electra, commenced legal action against us
in the Superior Court of the State of California for the County of Los Angeles.
On October 7, 2008, we removed that case to the United States District Court for
the Central District of California – Los Angeles Division. With respect to the
suit, the plaintiff alleged that we violated her rights of publicity and
breached the terms of our license agreement with her. The plaintiff alleged and
sought resulting economic, exemplary and punitive damages, interest, attorneys'
fees and costs of court. On November 14, 2008, we filed a counterclaim against
Ms. Patrick in the United States District Court for the Central District of
California – Los Angeles Division alleging that she breached the terms of our
license agreement with her. We alleged and sought to recover damages arising
from her breach of the agreement.





On
September 15, 2009, we entered into a settlement agreement with Ms. Patrick.
Under the terms of the settlement, both parties dismissed the pending
litigation, with prejudice, and released all claims against each other.
Additionally, we agreed to pay $6,000 to Ms. Patrick and $500 to a charity of
her choosing and she agreed to return all 735,295 shares of our common stock
received by her under the original license agreement to us. We do not
expect to incur any additional expenses associated with this
litigation.





On
November 12, 2008, we commenced legal action against our former customers
Commerce Planet, Inc. and Consumer Loyalty Group, Inc., in the 285thJudicial District Court of Bexar County, Texas. We alleged that they
breached the terms of our services agreement with them and sought to recover
economic damages and attorneys' fees. On January 22, 2009, the Court entered a
Default Judgment awarding us actual damages in the amount of $140,472 and
attorney’s fees in the amount of $4,000. We were also awarded all costs of Court
and pre-judgment and post-judgment interest as provided by law. On or about
January 1, 2009, Commerce Planet entered into an Asset Purchase Agreement with
Morlex, Inc. Pursuant to this agreement, Commerce Planet’s liabilities were
assigned to and/or assumed by Morlex, including the debt owed to us. On May 27,
2009, we commenced legal action against Morlex, Inc., in the 285thJudicial District Court of Bexar County, Texas. On September 2, 2009, the
Court entered a Default Judgment awarding us actual damages in the amount of
$140,472 and attorney’s fees in the amount of $7,500. We were also awarded all
costs of Court and pre-judgment and post-judgment interest as provided by law.
We intend to pursue any legal means available to us in order to collect this
judgment. As of the date of this report, we have not collected any amounts
towards this judgment.


14


On
November 12, 2009, we commenced legal action against our customers Access
General Holdings, Inc., Access General Agency, Inc., Access General Agency of
California, Inc., Access General Agency of Pennsylvania, Inc., Access General
Agency of Florida, Inc., Access General Agency of Texas, Inc., Access General
Agency of Arizona, Inc. and Access Adjusting Services, Inc. (collectively,
“Access General”), in the 285thJudicial District Court of Bexar County, Texas. We allege that Access
General breached the terms of their services agreements with us by violating the
exclusivity provisions contained therein and seek to recover economic damages
and attorneys' fees. As of the date of this report, there have been no material
developments in the suit. The results of legal proceedings cannot be predicted
with certainty. If we fail to prevail in this legal matter, our financial
position, results of operations, and cash flows could be materially adversely
affected.





Item
1A.  RISK FACTORS.





There
have been no material changes from risk factors previously disclosed in our
annual report on Form 10-K for the fiscal year ended December 31,
2008.





Item
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.





During
the quarter ended September 30, 2009, we did not sell any unregistered
securities.





On
November 1, 2009, Michael Long, Chief Executive Officer and Chief Financial
Officer, and Louis Hoch, President and Chief Operating Officer, were each
granted 7,200,000 shares of restricted common stock by the Company as an annual
bonus of $216,000 pursuant to the terms of their respective employment
agreements. The number of shares granted to each officer was based on the
closing price of the common stock on October 15, 2009, which was $0.03 per
share.





With
respect to the sale of our common stock described above, we relied on the
Section 4(2) exemption from securities registration under the federal
securities laws for transactions not involving any public offering. No
advertising or general solicitation was employed in offering the shares. The
shares were issued to accredited investors. The shares were issued for
investment purposes only and not for the purpose of resale or distribution, and
the transfer thereof was appropriately restricted by us.





Item
3. DEFAULTS UPON SENIOR SECURITIES.





During
the quarter ended September 30, 2009, we did not default on any senior
securities.





Item
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





There
were no matters submitted to a vote of our stockholders during the third quarter
of fiscal year 2009.





Item
5.  OTHER INFORMATION.





Not
applicable.





Item
6.  EXHIBITS.





ExhibitNumber
                
                Description3.1
                
                Amended
      and Restated Articles of Incorporation (included as exhibit 3.1 to the
      Form 10-KSB filed March 31, 2006, and incorporated herein by
      reference).3.2
                
                Amended
      and Restated By-laws (included as exhibit 3.2 to the Form 10-KSB filed
      March 31, 2006, and incorporated herein by
  reference).




15





4.1
              
              Amended
      and Restated 1999 Employee Comprehensive Stock Plan (included as exhibit
      10.1 to the Form 8-K filed January 3, 2006, and incorporated herein by
      reference).4.2
              
              Amended
      and Restated 1999 Non-Employee Director Plan (included as exhibit 10.2 to
      the Form 8-K filed January 3, 2006, and incorporated herein by
      reference).4.3
              
              Employee
      Stock Purchase Plan (included as exhibit 4.3 to the Form S-8 filed
      February 23, 2000, and incorporated herein by
  reference).4.4
              
              Amended
      Registration Rights Agreement between the Company and Dutchess Private
      Equities Fund, Ltd., dated August 21, 2007 (included as exhibit 10.2 to
      the Form 8-K filed August 23, 2007, and incorporated herein by
      reference).4.5
              
              Rights
      Agreement between the Company and American Stock Transfer & Trust
      Company, dated February 28, 2007 (included as exhibit 4.1 to the Form 8-K
      filed March 5, 2007, and incorporated herein by
  reference).10.1
              
              Lease
      Agreement between the Company and Frost National Bank, Trustee for a
      Designated Trust, dated August 2003 (included as exhibit 10.3 to the Form
      10-Q filed November 14, 2003, and incorporated herein by
      reference).10.2
              
              Employment
      Agreement between the Company and Michael R. Long, dated February 27, 2007
      (included as exhibit 10.1 to the Form 8-K filed March 2, 2007, and
      incorporated herein by reference).10.3
              
              Employment
      Agreement between the Company and Louis A. Hoch, dated February 27, 2007
      (included as exhibit 10.2 to the Form 8-K filed March 2, 2007, and
      incorporated herein by reference).10.4
              
              Investment
      Agreement between the Company and Dutchess Private Equities Fund, LP,
      dated June 4, 2004 (included as exhibit 10.8 to the Form SB-2 filed June
      18, 2004, and incorporated herein by reference).10.5
              
              Placement
      Agent Agreement between the Company, Charleston Capital Corporation, and
      Dutchess Private Equities Fund, LP, dated June 4, 2004 (included as
      exhibit 10.10 to the Form SB-2 filed June 18, 2004, and incorporated
      herein by reference).10.6
              
              Affiliate
      Office Agreement between the Company and Network 1 Financial, Inc.
      (included as exhibit 10.11 to the Form SB-2 filed April 28, 2004, and
      incorporated herein by reference).10.7
              
              Warrant
      Agreement between the Company and Kubra Data Transfer LTD, dated as of
      September 30, 2004 (included as exhibit 10.1 to the Form 8-K filed October
      6, 2004, and incorporated herein by reference).10.8
              
              Promissory
      Note between the Company and Dutchess Private Equities Fund, II, LP, dated
      August 21, 2006 (included as exhibit 10.1 to the Form 8-K filed August 25,
      2006, and incorporated herein by reference).10.9
              
              Stock
      Purchase Agreement between the Company and Robert D. Evans, dated January
      18, 2007 (included as exhibit 10.1 to the Form 8-K filed January 23, 2007,
      and incorporated herein by reference).10.10
              
              Stock
      Purchase Agreement between the Company and Robert D. Evans, dated March 1,
      2007 (included as exhibit 10.1 to the Form 8-K filed March 5, 2007, and
      incorporated herein by reference).10.11
              
              Amended
      Investment Agreement between the Company and Dutchess Private Equities
      Fund, Ltd., dated August 21, 2007 (included as exhibit 10.16 to the Form
      8-K filed August 23, 2007, and incorporated herein by
      reference).




16





10.12
              
              Amended
      Registration Rights Agreement between the Company and Dutchess Private
      Equities Fund, Ltd., dated August 21, 2007 (included as exhibit 10.2 to
      the Form 8-K filed August 23, 2007, and incorporated herein by
      reference).10.13
              
              Trademark
      and Domain Name Purchase Agreement between the Company and Alivio
      Holdings, LLC, dated November 14, 2005 (included as exhibit 10.1 to the
      Form 8-K filed November 17, 2005, and incorporated herein by
      reference).10.14
              
              Patent
      Purchase Agreement between the Company and PCT Software Data, LLC, dated
      January 11, 2008 (included as exhibit 10.14 to the Form 10-K filed March
      27, 2008, and incorporated herein by reference).10.15
              
              First
      Amendment to Employment Agreement between the Company and Michael R. Long,
      dated November 12, 2009 (filed herewith).10.16
              
              First
      Amendment to Employment Agreement between the Company and Louis A. Hoch,
      dated November 12, 2009 (filed herewith).31.1
              
              Certification
      of the Chief Executive Officer/Chief Financial Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1
              
              Certification
      of the Chief Executive Officer/Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (filed
herewith).




17


SIGNATURE





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.





PAYMENT
      DATA SYSTEMS, INC.Date: November 16, 2009
            
            By:
            /s/ Michael R. LongMichael
      R. LongChairman
      of the Board,Chief
      Executive Officer andChief
      Financial Officer(principal executive officer andprincipal financial and accounting officer)


18