Document:

EXHIBIT 10.1

                                 PROMISSORY NOTE

FACE  AMOUNT                                        $625,000
PRICE                                               $500,000
INTEREST  RATE                                      0%  per  month
NOTE  NUMBER                                        August-2006-101
ISSUANCE  DATE                                      August  21,  2006
MATURITY  DATE                                      August  21,  2007

FOR VALUE RECEIVED, Payment Data Systems, Inc., a Nevada corporation, and all of
its  subsidiaries  (the  "Company") (OTC BB: PYDS) hereby promises to pay to the
order  of DUTCHESS PRIVATE EQUITIES FUND, II, LP (collectively, the "Holder") by
the  Maturity  Date,  or earlier, the Face Amount of Six Hundred and Twenty-Five
Thousand  Dollars  ($625,000) U.S., (this "Note") in such amounts, at such times
and  on such terms and conditions as are specified herein (sometimes hereinafter
the  Company  and  the  Holder  are  referred to collectively as "the Parties").

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 "Equity Line"), which definitions the
Company  and  the  Holder  incorporate  herein  by  reference.

ARTICLE  1     Method  of  Payment

     Section  1.1     Payments made to the Holder by the Company in satisfaction
of  this  Note  (referred  to as a "Payment," or "Payments") shall be drawn from
each  Put  under  the  Equity  Line  of  Credit  provided by the Investor to the
Company.   The  Company  shall  make  payments to the Holder in the amount of a)
one-hundred  percent  100%  of  each Put (as defined in the Investment Agreement
between  the  Company  and the Investor dated February 6, 2004) until  fifty-two
thousand  and eighty-three dollars ($52,083) ("Minimum Payment Amount") has been
received  by  the  Holder during a given calendar month, subsequent to which, b)
fifty  percent  (50%) of  the Put Amounts drawn by the Company for that calendar
month in excess of the Minimum Payment Amount shall be paid to the Holder by the
Company  (both  a)  and  b)  collectively  shall  be referred to as the "Payment
Amount") until the Face Amount is paid in full, minus any fees due. For example,
if  the proceeds from the first Put in a given calendar month were $102,083, the
Company  would receive $25,000 from that Put, minus any fees due, and 50% of all
succeeding  Puts  that  close  during  that  month.  The  First Payment and each
subsequent  Payment  will  be made at the Closing of each Put ("Payment Date" or
"Payment  Dates")  until  this  Note  is  paid in full, with a minimum amount of
fifty-two  thousand  and  eighty-three  dollars  ($52,083) due to the Holder per
month  by  the  last  business day of the calendar month notwithstanding the Put
Amounts  drawn  by  the  Company  for  each calendar month.  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 thereon, in readily available
funds  at  any  time  and  from  time  to  time  without  penalty.

     Section 1.2     Payments pursuant to this Note shall be drawn directly from
the Closing of each Put and shall be wired directly to the Holder on the Closing
Date  up  to  the  Minimum  Payment Amount.  After the Minimum Payment Amount is
received  by  the Holder, fifty percent (50%) of the proceeds from each Put will
be  wired  directly to the Holder and the remaining fifty percent (50%) shall be
wired  directly  to  the Company.  The total Put Amount shall be included in the
calculation  of  the  Threshold  Amount (as defined in Section 1.4, below).  The
Company  agrees  to fully execute and diligently carry out Puts to the Investor,
on the terms set forth in the Investment Agreement.  The Company agrees that the
Put  Amount  shall  be  for  the  maximum  amount  allowed  under the Investment
Agreement.  Further,  the  Company  agrees to issue Puts to the Investor for the
maximum  frequency  allowed  under  the Investment Agreement.  Failure to comply
with  the terms of the Investment Agreement with respect to the Puts will result
in  an  Event  of  Default  as  defined  in  this  Agreement  in  Article  4.

     Section  1.3     In  order to assist the Company in meeting its obligations
under  this  note,  the Company hereby authorizes the Investor to transfer funds
from each Put directly to the Holder as described herein.  A Put shall be deemed
closed  after  the  funds  are  transferred  to  the  Holder  or  the  Company.

     Section  1.4     After  Closing,  the Company must make a Prepayment to the
Holder  when  the  aggregate  amount  of financing ("Financing") received by the
Company  is  in  excess  of five hundred thousand dollars ($500,000) ("Threshold
Amount").  The Company agrees to pay one hundred percent (100%) of any Financing
proceeds  raised  by the Company over the Threshold Amount toward the Prepayment
of  the  Note  and  any  penalties  until  the Face Amount is paid in full.  The
Prepayments  shall  be  made  to  the  Holder within one (1) business day of the
Company's  receipt of the Financing. Failure to do so will result in an Event of
Default.  The  Threshold  Amount  shall  also  pertain  to  any  assets  sold,
transferred  or  disposed  of  by  the  Company,  except in the normal course of
business,  exceeding  five  thousand  dollars  ($5,000)  per  year.

ARTICLE  2        Collateral

     Section  2.1     The  Company  does hereby agree to issue to the Holder for
use as Collateral thirty (30) signed Put Notices.  In the event, the Holder uses
the  Collateral  in  full,  the  Company shall immediately deliver to the Holder
additional  Put  Sheets  as  requested  by  the  Holder.

     Section  2.2     Upon  the  completion  of  the Company's obligation to the
Holder  of  the  Face  Amount  of  this  Note, the Company will not be under any
further  obligation to complete additional Puts.  All remaining Put sheets shall
be  marked  "VOID"  by  the  Holder and returned to the Company at the Company's
request.

ARTICLE  3        Unpaid  Amounts

     Section  3.1     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  an  additional  two and one-half percent (2.5%) per month
                  ---
paid,  pro  rata  for  partial  periods, compounded daily, as liquidated damages
("Liquidated Damages").  If a Residual Amount remains, the Company is in Default
and the Holder may elect remedies as set forth in Article 4, below.  The Parties
acknowledge that Liquidated Damages are not interest and should not constitute a
penalty.

ARTICLE  4     Defaults  and  Remedies

     Section  4.1     Events of Default. An "Event of Default" occurs if any one
of  the  following  occur:

     (a) The Company does not make a Payment within two (2) business days of (i)
the Closing of a Put; or (ii) a Payment Date; or, (iii) a Residual Amount on the
Note  exists  on  the  Maturity  Date;  or

     (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 the Company or for
its  property; (iv) makes an 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 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;  or

     (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 Equity Line
is  not  effective  for  any  reason  and is not cured within five (5) days; or,

     (e)  Any  of  the Company's representations or warranties contained in this
Agreement  were  false  when  made;  or,

     (f)  The  Company  breaches this Agreement, and such breach, if and only if
such  breach  is  subject  to  cure, continues for a period of five (5) business
days.

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.

     Section 4.2     Remedies.  In the Event of Default, the Holder may elect to
garnish  Revenue from the Company in an amount that will repay the Holder on the
schedules  outlined  in  this  Agreement.

     In  the  Event  of  Default,  as outlined in this Agreement, the Holder can
exercise  its right to increase the Face Amount of the Note by ten percent (10%)
as  an  initial penalty.  In addition, the Holder may elect to increase the Face
Amount  of  the  Note  by two and one-half percent (2.5%) as Liquidated Damages,
compounded  daily.  The  Parties  acknowledge  that  Liquidated  Damages are not
interest  under the terms of this Agreement, and shall not constitute a penalty.

     In  the  event  of  a  Default hereunder, the Holder, at its sole election,
shall  have  the  right,  but  not  the  obligation,  to  either:

          a)  Switch  the  Residual Amount to a five-year ("Convertible Maturity
Date"),  fourteen  percent  (14%)  interest bearing convertible debenture at the
terms  described  hereinafter  (the  "Convertible  Debenture").  In the Event of
Default,  the  Convertible  Debenture  shall  be considered closed ("Convertible
Closing  Date"),  as of the date of the Event of Default.  If the Holder chooses
to  convert  the  Residual  Amount to a Convertible Debenture, the Company shall
have  twenty  (20)  business  days  after notice of default from the Holder (the
"Notice  of Convertible Debenture") to file a registration statement covering an
amount  of  shares equal to three hundred percent (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 sixty (60) business days of the Convertible
Closing  Date.   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  one  thousand  dollars  ($1,000) per day.  In the event the
Company  is  given  the option for accelerated effectiveness of the registration
statement,  the  Company  will  cause such registration statement to be declared
effective  as  soon  as  reasonably  practicable and will not take any action to
delay  the  registration  to become effective.  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 one thousand
dollars  ($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

           b) 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
made  by  the Company to the Investor.    The Company agrees to diligently carry
out  the  terms outlined in the Equity Line 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 Face Amount of the Note
by  2.5%  each  day, compounded daily, in additional to and on top of additional
remedies  available  to  the  Holder  under  this  Note.

     Section  4.3     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 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 4.4, but the
number  of  shares  issuable  shall  be  rounded  up to the nearest whole share.

     (b)     The  Holder  may  convert  the Convertible Debenture 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  4.4.

     Section  4.4     Conversion  Procedure.

     (a)     The  Holder may elect to convert the Residual Amount in whole or in
part  any  time  and  from  time to time following the Convertible Closing Date.
Such  conversion shall be effectuated by providing the Company, or its attorney,
with  that  portion of the Convertible Debenture to be converted together with a
facsimile  or electronic mail 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 electronically mailed the Notice of
Conversion.  The  Holder  can elect to either reissue the Convertible Debenture,
or  continually  convert the existing Debenture.  Any Notice of Conversion faxed
or  electronically mailed by the Holder to the Company on a particular day shall
be  deemed  to  have  been  received  no  later  than the following business day
(receipt  being via a confirmation of the time such facsimile or electronic mail
to  the  Company  is  received).

     (b)     Common  Stock  to  be  Issued.     Upon  the  conversion  of  any
Convertible  Debentures  by  the Holder, 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 4.2 has been declared effective (or with proper restrictive
legends  if  the registration statement has not as yet been declared effective),
in  specified  denominations  representing  the number of shares of Common Stock
issuable  upon  such  conversion.   In  the  event  that the Debenture is deemed
saleable  under  Rule  144  of  the Securities Exchange Act of 1933, 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 for all costs associated with
the  issuance  of  the  shares upon conversion, including but not limited to the
opinion  letter,  FedEx  of the certificates and any other costs that arise. The
Company  shall  act  as registrar of the Shares of Common Stock to be issued and
shall  maintain  an appropriate ledger containing the necessary information with
respect to each Convertible Debenture. The Company warrants that no instructions
have been given or will be given to the transfer agent which limit, or otherwise
prevent  resale  and  that  the  Common  Stock shall otherwise be freely resold,
except  as  may  be  set  forth  herein  or  subject  to  applicable  law.

     (c)     Conversion  Rate.  The  Holder is entitled to convert the Debenture
Residual  Amount,  plus  accrued  interest  and penalties, anytime following the
Convertible Closing Date, at the lesser of either (i) seventy-five percent (75%)
of the lowest closing bid price during the fifteen (15) trading days immediately
preceding the Notice of Conversion, or (ii) 100% of the lowest bid price for the
twenty  (20)  trading  days  immediately  preceding the Convertible Closing 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  to  the  nearest  whole  share.

     (d)     Nothing  contained  in the Convertible Debenture shall be deemed to
establish  or  require  the  Company  to pay interest to the Holder at a rate in
excess  of  the maximum rate permitted by applicable 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.  In  the  event this Section 4.4(d) applies, the Parties agree that the
terms  of this Note shall remain in full force and effect except as is necessary
to  make  the  interest  rate  comply  with  applicable  law.

     (e)     The  Holder shall be treated as a shareholder of record on the date
the Company is required to issue the Common Stock to the Holder. If prior to the
issuance  of  stock  certificates,  the  Holder designates another person as the
entity  in  the  name of which the stock certificates requesting the Convertible
Debenture  are  to  be  issued, 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. If the Holder
converts  any  part of the Convertible Debentures, or will be, the Company shall
issue to the Holder a new Convertible Debenture equal to the unconverted amount,
immediately  upon  request  by  the  Holder.

     (f)     Within  five  (5)  business days after receipt of the documentation
referred  to  in  this Section, 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, the Company shall pay
to  the Holder an additional one percent (1%) per day in cash of the full dollar
value  of  the  Debenture  Residual  Amount  then  remaining  after  conversion,
compounded  daily.

     (g)     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.  Any Convertible Debentures, or any
portion  thereof,  which  cannot  be  converted  due  to  the  Company's lack of
sufficient authorized common stock (the "Unconverted 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,  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
of  its  election  to  either  nullify  or  confirm  the  Notice  of Conversion.

     (h)     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  payment shall be made to the Holder  within five (5) business days,
or (ii) in the event Holder elects to take such payment in stock, the Holder may
convert  at  the  conversion  rate  set  forth  in  the  first  sentence of this
paragraph  until  the  expiration  of  the  conversion  period.

     (i)     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 in full will cause the Holder to suffer
irreparable harm, and that the actual damages to the Holder 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 under the
circumstances,  do  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.

     (j)     If,  by the fifth (5th) business day after the Conversion Date, any
portion  of  the shares of the Convertible Debentures have not been delivered to
the Holder and the Holder purchases, in an open market transaction or otherwise,
shares  of  Common  Stock  (the "Covering Shares") necessary to make delivery of
shares  which  would  had  been delivered if the full amount of the shares to be
converted  had  been  delivered to the Holder, then 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 minus (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.

ARTICLE  5     Additional  Financing  and  Registration  Statements

     Section  5.1     The  Company  will not enter into any additional financing
agreements  whether  for debt or equity, without prior expressed written consent
from  the  Holder,  unless  (A)  the Company delivers to Holder a written notice
(the " Financing  Notice")  of  its  intention  to  effect such Financing, which
Financing  Notice shall describe in reasonable detail the proposed terms of such
Financing,  the  amount of proceeds intended to be raised thereunder, the person
with whom such Financing shall be effected,  and  attached  to  which  shall  be
a  term  sheet  or  similar  document relating thereto; and (B) Holder shall not
have  notified  the  Company  by  5:00  p.m.  EST on the fifth Trading Day after
its receipt  of  the  Financing  Notice  of  its willingness to provide, subject
to  completion  of  mutually  acceptable documentation, financing to the Company
on  substantially  the  terms  set  forth  in  the  Financing  Notice.

     Section  5.2     The Company agrees that it shall not file any registration
statement  which includes any of its Common Stock, except for those on Form S-8,
not  to  exceed  one hundred thousand dollars ($100,000) per quarter, until such
time  as  the  Note  is paid off in full ("Lock-Up Period") or without the prior
written  consent  of  the  Holder.

     Section  5.3     If,  at  any  time,  while  this  Note is outstanding, the
Company  issues  or  agrees to issue to any entity or person ("Third Party") for
any  reason  whatsoever,  any  common  stock  or  securities convertible into or
exercisable for shares of common stock (or modify any such terms in effect prior
to  the  execution of this Note) (a "Third Party Financing"), at terms deemed by
the  Holder  to be more favorable to the Third Party, then the Company grants to
the Holder the right, at the Holder's election, to modify the terms of this Note
to  match  or  conform  to  the  more favorable term or terms of the Third Party
Financing.  The  rights of the Holder in this Section 5.3 are in addition to all
other  rights  the  Holder  has  pursuant  to  this  Note.

Violation of any Section under this Article 5 will result in an Event of Default
and  the  Holder  may elect to take the action or actions outlined in Article 4.

ARTICLE  6     Notice.

     Section  6.1     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 delivery, 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,  so long as it is properly
addressed.  The  addresses  and  facsimile numbers for such communications shall
be:

If  to  the  Company:

Michael  Long
12500  San  Pedro,  Suite  120
San  Antonio,  TX  78216
Phone:  (210)  249-4100
Facsimile:  (210)  249-4130

If  to  the  Holder:

Dutchess  Capital  Management,  LLC
Douglas  Leighton
50  Commonwealth  Ave,  Suite  2
Boston,  MA  02116
(617)  301-4700
(617)  249-0947

     Section  6.2     The  Parties  are required to provide each other with 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 on
which  the  United  States  Stock Markets ("US Markets") are closed ("Holiday"),
such  payment  shall  be  made  or condition or obligation performed on the last
business day preceding such Saturday, Sunday or Holiday.  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  and the obligations hereunder shall not be assigned, except as
otherwise  provided  herein.

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.

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     Disputes  Subject  to  Arbitration

     The  parties  to  this  Note  will  submit all disputes arising under it 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.  Nothing in this
section  shall  limit the Holder's right to obtain an injunction for a breach of
this  Agreement  from  a  court  of  law.

ARTICLE  12     Conditions  to  Closing

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

ARTICLE  13     Structuring  and  Administration  Expense

     The Company agrees to pay for related expenses associated with the proposed
transaction  of  $50,000.  This  amount  shall cover, but is not limited to, the
following:  due  diligence  expenses, document creation expenses, closing costs,
and transaction administration expenses. All such structuring and administration
expenses  shall  be  deducted  from  the  first  closing.

ARTICLE  14     Indemnification

     In  consideration  of the Holder's execution and delivery of this Agreement
and  the  acquisition  and funding by the Holder of this Note 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,
without  limitation,  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     Incentive  Shares

     The  Company  shall  issue  one  million and forty-two thousand (1,042,000)
shares  of  unregistered,  restricted Common Stock to the Holder as an incentive
for  the  investment ("Incentive Shares").  The Incentive Shares shall be issued
and  delivered  immediately to the Holder and shall carry piggyback registration
rights.   In  the  event  the  Incentive  Shares  are not registered in the next
registration  statement,  the Company shall pay to the Holder, as a penalty, one
hundred fifty thousand (150,000) additional shares of common stock for each time
a  registration  statement  is  filed and the Incentive Shares are not included,
unless the registration statement is for the registration of shares as set forth
in  a new Equity Line with the Holder or an affiliate of the Holder.  The Holder
at  its  sole discretion may waive such penalty.  The Company's failure to issue
the Incentive Shares constitutes an Event of Default and the Holder may elect to
enforce the remedies outlined in Article 4.  The Company's obligation to provide
the  Holder  with  the  Incentive Shares, as set forth herein, shall survive the
operation  of the Agreement and any default on this obligation shall provide the
Holder  with all rights, remedies and default provisions set forth in this Note,
or  otherwise  available  by  law.  The  Company  is  responsible  for all costs
associated  with the removal of the restrictive legends of the Incentive Shares,
including  but  not limited to the opinion letter, FedEx of the certificates and
any  other  costs  that  arise.

ARTICLE  16     Use  of  Proceeds

     The  Company  shall  use  the  funds  for  general  corporate  purposes.

ARTICLE  17     Waiver

     The  Holder's  delay  or  failure at any time or times hereafter to require
strict  performance  by  Company of any obligations, undertakings, agreements or
covenants  shall  not  waive,  affect, or diminish any right of the Holder under
this  Note  to  demand strict compliance and performance herewith. Any waiver by
the  Holder of any Event of Default shall not waive or affect any other Event of
Default,  whether  such  Event  of  Default  is  prior or subsequent thereto and
whether  of  the  same or a different type. None of the undertakings, agreements
and  covenants  of  the Company contained in this Note, and no Event of Default,
shall be deemed to have been waived by the Holder, nor may this Note be amended,
changed  or  modified,  unless such waiver, amendment, change or modification is
evidenced by a separate instrument in writing specifying such waiver, amendment,
change  or  modification  and  signed  by  the  Holder.

ARTICLE  18     Senior  Obligation

     The  Company  shall cause this Note to be senior in right of payment to all
other  current  or future debt of the Company.  The Company warrants that it has
taken  all necessary steps to subordinate its other obligations to the rights of
the  Holder  in  this  Note.

ARTICLE  19     Transactions  With  Affiliates

     The  Company  shall  not,  and  shall cause each of its Subsidiaries to not
enter into, amend, modify or supplement, or permit any Subsidiary to enter into,
amend,  modify  or  supplement,  any  agreement,  transaction,  commitment  or
arrangement with any of its or any Subsidiary's officers, directors, persons who
were  officers  or directors at any time during the previous two years excluding
employment  agreements  done  in the normal course of business, shareholders who
beneficially own five percent (5%) or more of the Common Stock, or affiliates or
with  any  individual  related  by  blood,  marriage  or  adoption  to  any such
individual or with any entity in which any such entity or individual owns a five
percent  (5%)  or  more  beneficial interest (each a "Related Party") during the
Lock  Up  Period.

ARTICLE  20     Equity  Line  Obligations

          At  the request of the Holder, at any time after the Company's current
effective  registration  statement  for  the Equity Line of Credit with Dutchess
Private  Equities,  LP  (File  No:  333-116654),  has  seven million (7,000,000)
shares  or  less remaining for issuance, the Company shall immediately execute a
new  Investment  Agreement for an Equity Line of Credit under the same terms and
conditions  as  the  previous  Equity  Line,  if so required.  The Company shall
immediately  prepare  a registration statement for the registration of shares as
set  forth  in  the  new Investment Agreement.  The Holder shall also retain the
right to determine the date of the filing of such registration statement, but in
no  event  sooner than thirty (30) days after notice being given to the Company.
The Company shall respond to any and all SEC comments or correspondence, whether
written  or  oral,  direct  or indirect, formal or informal ("Comments"), within
seven  (7)  business days of receipt by the Company of such Comments.  The seven
(7)  business day period provided herein shall be extended as may be required by
delays  caused  by Investor; and, provided further, that such seven (7) business
day  period  shall  be extended two (2) business days for responses to SEC staff
accounting  comments.  The  Company  shall  cause  the  Registration  Statement
relating to the Registrable Securities to become effective no later than two (2)
business days after notice from the SEC that the Registration Statement has been
cleared  of all comments. Failure to do any action outlined in this Article will
result  in  an  Event  of  Default  and  the  Holder may seek to take actions as
outlined  in  Article  4.

ARTICLE  21     Intentionally  Omitted

ARTICLE  22     Miscellaneous

     Section 22.1     This Note may be executed in two or more counterparts, all
of which taken together shall constitute one instrument.  Execution and delivery
of  this Note by exchange of facsimile copies bearing the facsimile signature of
a party shall constitute a valid and binding execution and delivery of this Note
by  such  party.  Such  facsimile  copies  shall constitute enforceable original
documents.

     Section  22.2     The  Company  warrants  that  the execution, delivery and
performance  of  this Note by the Company and the consummation by the Company of
the  transactions  contemplated  hereby  and  thereby  will  not (i) result in a
violation  of  the  Articles  of Incorporation, any Certificate of Designations,
Preferences  and  Rights  of  any  outstanding  series of preferred stock of the
Company  or  the By-laws or (ii) conflict with, or constitute a material default
(or  an event which with notice or lapse of time or both would become a material
default)  under,  or  give  to  others  any  rights  of  termination, amendment,
acceleration  or  cancellation  of,  any material agreement, contract, indenture
mortgage,  indebtedness  or  instrument  to  which  the  Company  or  any of its
Subsidiaries  is a party, or result in a violation of any law, rule, regulation,
order,  judgment or decree, including United States federal and state securities
laws  and  regulations and the rules and regulations of the principal securities
exchange  or  trading  market on which the Common Stock is traded or listed (the
"Principal  Market"), applicable to the Company or any of its Subsidiaries or by
which  any  property or asset of the Company or any of its Subsidiaries is bound
or  affected.  Neither  the  Company nor its Subsidiaries is in violation of any
term  of, or in default under, the Articles of Incorporation, any Certificate of
Designations,  Preferences  and  Rights  of  any outstanding series of preferred
stock  of the Company or the By-laws or their organizational charter or by-laws,
respectively,  or  any  contract,  agreement, mortgage, indebtedness, indenture,
instrument,  judgment,  decree  or  order  or  any  statute,  rule or regulation
applicable  to  the  Company or its Subsidiaries, except for possible conflicts,
defaults,  terminations, amendments, accelerations, cancellations and violations
that  would  not individually or in the aggregate have a Material Adverse Effect
as  defined below. The business of the Company and its Subsidiaries is not being
conducted,  and  shall  not  be  conducted,  in  violation  of any law, statute,
ordinance,  rule,  order  or regulation of any governmental authority or agency,
regulatory  or  self-regulatory agency, or court, except for possible violations
the sanctions for which either individually or in the aggregate would not have a
Material  Adverse  Effect.  The  Company  is not required to obtain any consent,
authorization,  permit  or  order of, or make any filing or registration (except
the filing of a registration statement)  with, any court, governmental authority
or  agency,  regulatory  or self-regulatory agency or other third party in order
for  it  to  execute,  deliver  or  perform  any  of  its  obligations under, or
contemplated  by,  this Note in accordance with the terms hereof or thereof. All
consents,  authorizations,  permits, orders, filings and registrations which the
Company  is  required  to  obtain  pursuant  to the preceding sentence have been
obtained  or  effected  on or prior to the date hereof and are in full force and
effect  as  of  the date hereof. The Company and its Subsidiaries are unaware of
any  facts  or  circumstances which might give rise to any of the foregoing. The
Company is not, and will not be, in violation of the listing requirements of the
Principal  Market  as  in  effect  on the date hereof and on each of the Closing
Dates  and is not aware of any facts which would lead to delisting of the Common
Stock  by  the  Principal  Market.

     Section  22.3     The Company and its "Subsidiaries" (which for purposes of
this  Note  means  any entity in which the Company, directly or indirectly, owns
capital  stock  or  holds  an  equity or similar interest) are corporations duly
organized and validly existing in good standing under the laws of the respective
jurisdictions of their incorporation, and have the requisite corporate power and
authorization  to  own  their  properties  and to carry on their business as now
being  conducted. Both the Company and its Subsidiaries are duly qualified to do
business and are in good standing in every jurisdiction in which their ownership
of  property  or  the  nature  of  the  business  conducted  by  them makes such
qualification  necessary,  except  to  the  extent  that  the  failure  to be so
qualified  or  be  in good standing would not have a Material Adverse Effect. As
used  in  this Note, "Material Adverse Effect" means any material adverse effect
on  the  business,  properties,  assets,  operations,  results  of  operations,
financial  condition  or  prospects of the Company and its Subsidiaries, if any,
taken  as  a  whole,  or  on  the  transactions  contemplated  hereby  or by the
agreements  and instruments to be entered into in connection herewith, or on the
authority  or  ability of the Company to perform its obligations under the Note.

     Section  22.4     Authorization;  Enforcement;  Compliance  with  Other
Instruments.  (i) The Company has the requisite corporate power and authority to
enter  into  and perform its obligations under this Note, and to issue this Note
and  Incentive  Shares in accordance with the terms hereof and thereof, (ii) the
execution and delivery of this Note by the Company and the consummation by it of
the  transactions  contemplated hereby and thereby, including without limitation
the  reservation  for issuance and the issuance of the Incentive Shares pursuant
to  this  Note,  have been duly and validly authorized by the Company's Board of
Directors  and  no  further consent or authorization is required by the Company,
its  Board  of Directors, or its shareholders, (iii) this Note has been duly and
validly executed and delivered by the Company, and (iv) the Note constitutes the
valid  and binding obligations of the Company enforceable against the Company in
accordance  with  their  terms,  except as such enforceability may be limited by
general  principles  of  equity  or  applicable  bankruptcy,  insolvency,
reorganization,  moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement  of  creditors'  rights  and  remedies.

     Section  22.5     The  execution  and delivery of this Note shall not alter
the  prior  written agreements between the Company and the Holder, consisting of
the  transaction documents, associated with Equity Line.  This Note is the FINAL
AGREEMENT  between  the  Company  and  the  Holder with respect to the terms and
conditions set forth herein, and, the terms of this Note may not be contradicted
by  evidence  of  prior,  contemporaneous,  or subsequent oral agreements of the
Parties

     Section 22.6     There are no disagreements of any kind presently existing,
or  reasonably  anticipated by the Company to arise, between the Company and the
accountants,  auditors  and  lawyers  formerly or presently used by the Company,
including  but  not  limited  to disputes or conflicts over payment owed to such
accountants,  auditors  or  lawyers.

     Section  22.7     All representations made by or relating to the Company of
a historical nature and all undertakings described herein shall relate and refer
to  the  Company,  its  predecessors,  and  the  Subsidiaries.

     Section  22.8     The only officer, director, employee and consultant stock
option  or  stock  incentive  plan  currently  in  effect or contemplated by the
Company  has been submitted to the Holder or is described or within past filings
with  the  United  States  Securities  and  Exchange  Commission.

     Section  22.9     The  Company acknowledges that its failure to timely meet
any  of  its  obligations  hereunder,  including,  but  without  limitation, its
obligations  to make Payments, deliver shares and, as necessary, to register and
maintain  sufficient  number  of  Shares,  will  cause  the  Holder  to  suffer
irreparable  harm  and that the actual damage to the Holder 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 do 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 Note.

     Section  22.10          In  the  event  that  any  rules,  regulations,
interpretations  or  comments,  whether  formal, informal, directly or indirect,
written  or  oral  ("Comment"), from the SEC or other governing body, hinder any
operation  of  this  Agreement  or  the underlying transaction documents for the
Equity  Line,  the Parties hereby agree that those specific terms and conditions
shall  be  negotiated  on similar terms within five (5) business days, and shall
not alter, diminish or affect any other rights, duties or covenants in this Note
and that all terms and conditions will remain in full force and effect except as
is  necessary to make those specific terms and conditions comply with applicable
rule,  regulation,  interpretation or Comment.  Failure for the Company to agree
to  such new terms, shall constitute and Event of Default herein, as outlined in
Article  4,  and  the  Holder may elect to take actions as outlined in the Note.
Any  misrepresentations shall be considered a breach of contract and an Event of
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

   By:  /s/  Louis  Hoch
        ----------------
 Name:  Louis  Hoch
Title:  Chief  Operating  Officer

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

   By:  /s/  Douglas  H.  Leighton
        --------------------------
 Name:  Douglas  H.  Leighton
Title:  A  Managing  Memberex101

    FIRST
      AMENDMENT TO STOCK PURCHASE AGREEMENT

    

    

    This
      First Amendment to Stock Purchase Agreement (this "First Amendment ") is dated
      August 22, 2006 and is by and among Colombia Goldfields, Ltd., a Nevada
      corporation ("Buyer"), RNC (Colombia) Limited, a Belize corporation and its
      wholly owned subsidiary, Compania Minera de Caldas, a Colombian corporation
      ("Caldas"), (together referred to herein as the "Company") and, Investcol
      Limited, a Belize corporation ("Seller"). Certain other capitalized terms used
      herein are defined in the Agreement (defined below).

    

    RECITALS

    

    WHEREAS,
      Buyer, Seller and Company entered into that certain Stock Purchase Agreement
      dated as of January 13, 2006 ("Agreement");

    and
      

    

    WHEREAS,
      the parties desire to amend the capital stock purchase option provisions
      pursuant to Section 2.3.2 and .3 of the Agreement.

    

    TERMS

    

    NOW
      therefore, for $10.00 and other good and valuable consideration, the receipt
      and
      sufficiency of which is hereby conclusively acknowledged, the parties, agree
      as
      follows:

    

    1. Amendment
      to Section 2.3.2 of the Agreement.
      Section
      2.3.2 of the Agreement is hereby amended and restated in its entirety as
      follows:

    

    2.3.2 Buyer
      shall have the option until December 31, 2006 to acquire from Seller 250 Shares
      (constituting 25% of the then issued and outstanding capital stock of Company),
      free and clear of all Encumbrances in exchange for (i) 4,200,000 shares of
      Buyer
      Common Stock issued to Seller, (ii) a $5,000,000 non-interest bearing loan
      to
      the Company to be fully paid no later than December 31, 2006; provided, however,
      such funds are subject to call on a monthly basis by Company (iii) $200,000
      to
      Seller, and (iv) provide sufficient funds to the Company upon terms satisfactory
      to Buyer to complete feasibility study.

    

    2. Amendment
      to Section 2.3.3 of the Agreement.
      Section
      2.3.3 of the Agreement is hereby amended and restated in its entirety as
      follows:

    

    "2.3.3  Buyer
      shall have the option until May 1, 2009 to acquire from Seller 250 Shares
      (constituting 25% of the then issued and outstanding capital stock of Company),
      free and clear of all Encumbrances for a purchase price equal to 25% of the
      value of Caldas determined by a bankable feasibility study certified by
      Chlumsky, Armbrust and Meyer, Ltd., or other acceptable third party. The maximum
      purchase price to be paid shall not exceed $15,000,000 plus 4,000,000 shares
      of
      Buyer Common Stock. 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Payment
      of the purchase price can be made by Buyer in either cash or Buyer Common Stock,
      or any combination thereof. A share of Buyer Common Stock shall be valued at
      90%
      of the average closing price of Buyer Common Stock as reported on a national
      securities exchange or national market or quotation system, over the 30 day
      period immediately preceding the delivery to the Seller of notice of intent
      to
      exercise the option by Buyer in conformity with the terms of the Escrow
      Agreement annexed hereto as Exhibit "1". 

     

    3. Exercise
      of Capital Stock Purchase Option.
      Buyer
      hereby elects to exercise the capital stock purchase option pursuant to Section
      2.3.2 of the Agreement. Upon signing of this First Amendment, Buyer shall
      deliver to Seller 4,200,000 shares of Buyer Common Stock and pay $200,000 to
      Seller. 

     

    4. Ratification;
      Entire Agreement; Recitals.
      Except
      as
      modified above, all other terms and conditions of the Agreement are ratified
      and
      reaffirmed in their entirety, and shall remain in full force and effect. This
      First Amendment and the Agreement (including the Schedules attached to the
      Agreement and the Recitals set forth above and in the Agreement) and other
      documents delivered concurrently with the Agreement, contain the entire
      understanding of the parties in respect of its subject matter and supersedes
      all
      prior agreements and understandings (oral or written) between or among the
      parties with respect to such subject matter. 

     

    5. Amendment;
      Waiver.
      This
      First Amendment may not be modified, amended, supplemented, canceled or
      discharged, except by written instrument executed by all parties. 

     

    6. Counterparts;
      Execution by Facsimile.
      This
      First Amendment may be executed in any number of counterparts and by different
      parties hereto in separate counterparts, each of which when so executed shall
      be
      deemed to be an original and all of which taken together shall constitute one
      and the same Agreement. Delivery of an executed counterpart hereof by facsimile
      shall be effective as manual delivery of an executed counterpart
      hereof.

     

    [Signatures
      Begin on Following Page]

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF,
      the
      parties hereto have caused this First Amendment and Exercise to be executed
      the
      day and year first above written.

     

    
      

    

     

    COLOMBIA
      GOLDFIELDS, LTD.

     

     

    /s/
      J.
      Randy Martin

    By:
      J. R.
      Martin

    Title:
      Chief Executive Officer

     

    INVESTCOL
      LTD. 

     

     

    /s/
      Thomas W. Lough

    By:
      Thomas W. Lough

    Title:
      President

     

    RNC
      (COLOMBIA) LIMITED

     

     

    /s/
      Ian Park

    By:
      Ian
      Park

    Title:
      President

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