December 12, 2007

Dear Shareholders:

We are nearing completion of our fiscal year 2007. Therefore, we thought it would be a good time to review the year to date.

We have previously projected that quarter over quarter processing growth would continue and it appears that Q4 will likely follow that trend. Throughout the fiscal year, we have achieved consistent growth from the prior year periods on a quarterly basis.

(Click on any chart to englarge)

The charts above are relatively self-explanatory and demonstrate strong growth in our key metrics.  In particular, it should be noted that the chart named “Dollars Processed – Credit Cards” shows dollars processed for the first three quarters of 2007 to be more than the total for all of 2006.

During 2007 we issued twenty-four press releases outlining the progress of your company.  If you haven’t had a chance to review them, I would encourage you to do so as it will provide a great review of the exciting highlights of the year which included the implementation of the Natalie Gulbis Gift MasterCard^Ò Card and the awarding of our Level 1 PCI Compliance for Service Providers.  You can view all the releases at www.paymentdata.com/pressrelease.htm. 

Our long-term strategic initiatives began in 2005, continued their development in 2006, and we are seeing the results of their implementation in this year. 

• Until recently, acquisitions have understandably been a latent part of our growth strategy.  We believe the time is right to implement this very important initiative.  As previously announced we have engaged The Strawhecker Group (TSG) to assist in the identification of portfolios and companies that would be accretive to our company financials and/or business development.  This process is fully underway at this time.  In addition to engaging candidate acquisitions, we are also in discussions with a number of funding sources.  The goal is straightforward.  Utilize leverage to acquire cash flow and ensure that the associated debt service is less than the cash flow acquired. The acquisitions we have been looking at could significantly change our financial metrics in a positive manner.
  
  We believe this strategy will give us a stronger company financially in terms of cash flow and profitability, eliminate or significantly reduce the reliance on outside funding to support operational activities, and provide a potentially stronger share price and therefore increased shareholder value.
   
• Regarding other strategic initiatives, one of our goals was to complete in early 2007 our PCI Level One certification as a Third Party Processor.  This certification validates our ability to properly process and store credit card transactions within published compliance standards.  It is important to us because it signifies a level of competence and security that was required for us to earn the business of larger companies and perform processing for banks.

I also invite you to view the list of prestigious companies that have also received the highest level of PCI certification at www.visa.com/cisp and click on the link “List of Compliant Service Providers” under the Quick Links heading on the lower left of the page. The certification positions our company among the elite service providers in the industry and is a must for any large organization to consider us as a potential partner or an acquisition candidate.

• We planned to create a Billx Prepaid MasterCard for both adults and teens and integrate both card programs into the Billx bill payment processing system.  These are now complete; however, we have not chosen the exact timing in which these offerings will be introduced to the market, but we would anticipate it to be in early 2008.  This new offering will allow us to operate much like a bank for unbanked consumers.  It will also have a strong value proposition for the banked community by allowing a new level of financial flexibility.  Through the use of the Billx platform, consumers will be able to load and unload in real-time their Billx Prepaid MasterCards for both their personal use and their children’s use.  We believe this offering will be among the first of its kind in the industry and provide us with a competitive advantage.  Furthermore, it is an excellent use of our intellectual property covered under our bill payment patent.  Finally, since the program will be integrated into the Billx platform, it allows us to offer the same program to our new and existing private label bill payment companies and could generate new revenues for both our issuing and bill payment processing business lines.
   
• I would classify our sales pipeline as strong in all three of our product offerings.  We continue to attract large businesses to our merchant services, and our debit card programs are expanding with new opportunities to be opened up in early 2008.  We have continued our strong commitment to our stored value card programs and additional contract signings as evidenced by the signing of Natalie Gulbis to her signature gift card.  Meanwhile, our private bill payment labeling opportunities continue to be significant.  However, as you might imagine, the sales cycles in all three of these areas are somewhat more protracted than we would experience in the smaller retail market.  However the upside is generally more productive in terms of revenue opportunity.  This year we stepped up our sales process and continue to add new merchants at an average rate of over 60 new accounts per quarter.
   
• We will continue to execute and report with a vision toward a move of our stock to a national market listing – NASDAQ or AMEX.   However, as you know, a great many things must be accomplished before that becomes reality.  However a strong and successful implementation of our acquisition strategy should go a long way to completing the market listing requirements.

We continue to evolve and mature our product offerings to meet the needs of the marketplace.  For those of you that may be new to Payment Data Systems, it might be helpful to understand our business model.

Payment Data Systems’ services are provided via three distinct but highly complementary product groups.  The first group is the Acquiring group, or merchant services, that provide credit card and ACH processing for merchants and billers.  The second group is the Issuing business, which is the group that provides for our stored-value debit cards (personal spending and gift cards).  The third component is the Bill Payment Processing group where we offer managed private labeled bill payment portals for banks, credit unions and card processors.  We also operate our own bank-independent retail bill payment portal, www.billx.com.  These service components are graphically displayed in the following chart.

This business model provides benefits to us in several ways.  Perhaps the most obvious is that each product group when fully mature could support itself without assistance from the other lines and could provide us with an opportunity to create separate operating companies to take advantage of higher market valuations that may be available to a specific payment process market segment as a “Pure Play”.  Today however, the combination of the three groups allows us to truly leverage the capabilities of the others; creating a true opportunity for synergy.  For example, if we contract with a biller for credit card processing within the Acquiring line, we have opportunity to cross-sell into the Issuing side for payroll cards and/or personal spending/gift cards for their employees and consumers.  These employees and consumers can then be led into the Bill Payment line as an additional service either as a billx.com customer or into the billers’ private labeled bill payment portal that we have licensed to them and are operating and supporting.

The business model also provides us a significant competitive advantage, in particular, with those companies that are looking for single vendor solutions across the full spectrum of their payment processing needs.

Another benefit of our business model is that each contract for any line of business generates recurring revenue and is supported for the most part by multi-year contracts.  Additionally, these diversified revenue streams enable increased visibility and sustainable blended margins.

As you know, our prepaid card processing platform is essentially the same for a number of variations on the cards such as celebrity, corporate incentives, rebates, payroll, per diem, travel, etc.  And certainly these products are adaptable to virtually any industry or market segment without changes to our technology or a significant outlay of capital investment. You can expect that more celebrity and non-celebrity card announcements will be made in 2008. 

More specifically, we do believe that we are well positioned to take advantage of the market opportunity, supported by research firms, that exists today and into the future. This research provided by the well-recognized companies of the Pelorus and The Tower Group suggest that the prepaid market will grow from today’s levels of some 22 million cards to more than 540 million cards in circulation by the end of 2008.  Furthermore, Pelorus suggests that the market value will be at over $70 billion by the end of this year and The Tower Group suggests a market of $3 trillion by the end of 2010. 

We do intend to push forward with our strategies to tap into the estimated 109 million under-banked consumer market of which over 50 million are unbanked.  As part of this strategy, we will continue to work toward delivering products to fully participate in the very large Latino and Asian markets.  As you know, there is a great deal of money that is moving into Mexico and Latin America.  The value is estimated to be in excess of $60 billion in 2006, of which an estimated $20 billion is going to Mexico alone.  Some research suggests the Asian market is even larger.  We believe that both markets are looking for a quality, reliable, trust-worthy solution that competes effectively and efficiently with Western Union.  Our card program clearly meets those requirements by allowing immediate access to cash from any ATM and conversion rates that are better than a bank, exchange office, or those arbitrarily set by the money transfer agencies.  Therefore, the cardholder has access to money sooner, gets only what is needed at that time, and pays less to receive money in the transaction.

The biggest challenge we see in being successful in the market is to overcome today’s behavior among these consumers.  We need to move them away from money orders and wire transfers into the use of plastic.  We believe that by working with the companies that have strong ties through affinity or benevolent societies in the Latino and Asian communities, these barriers can be overcome through education and the inherent trust the consumers have in those companies.  It is worth noting that we are already working with several market leaders that have these profiles. 

As we have from the beginning, we continue to maintain a low expense structure and a steady count of eight employees.  If we add personnel, based on business needs, they will most likely be in the area of customer service or clerical positions.  As you know, these positions do not have, on a comparative basis, high salary requirements.

In April 2006, we were awarded Patent # 7,021,530 for the company’s technology and method for managing and processing bill payment via a stored-value debit card, check card, signature debit card, PIN based card or automatic teller machine (ATM) card from a variety of access points.  This patent has already provided us business opportunities that would not have been there for us otherwise.  We continue to examine our options related to maximizing the patent in terms of opportunity and revenue or other income.  These opportunities range from selling the IP while retaining our rights to use and extend the rights to our customers or continue to hold the patent and begin our own enforcement.  Enforcement however is not without risks that suggest the potential of significant legal fees, protracted legal wrangling and can create distractions not conducive to building the business.  While no final decision has been made, we believe the opportunities are several and all are positive in terms of their potential effect on the company.

In closing, we believe that 2007 has been a year of capturing the benefits from the plans and building that we have been carrying out since our rebirth some four years ago.  Clearly we will continue to strengthen our transaction growth and delivery of prepaid debit and gift cards, traditional merchant services, and all forms of payment processing. 

Additionally, I believe you will see that Payment Data Systems will continue to deliver innovative products and services to the marketplace thus bringing some significant revenue-producing opportunities to our company.

We also believe that we are well positioned, provided our strategic initiatives and forecasts are realized, to cross into the area of profitability during the 2008 fiscal year.  We believe 2008 could very well be the start of the creation of significant value for shareholders.

We are very enthusiastic about our future and the possibilities that are in the pipeline of prospective customers and products and in particular the strategic vision that is providing guidance for our direction and growth.  I hope that you agree with our outlook and find it as exciting and positive as we do. 

Sincerely,

Michael R. Long
Chairman and CEO

Email: michael.long@paymentdata.com
Phone: 210.249.4040

FORWARD-LOOKING STATEMENTS DISCLAIMER

Except for the historical information contained herein, the matters discussed in this release include certain forward-looking statements, which are intended to be covered by safe harbors. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief and expectations, such as statements concerning our future and our operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors detailed from time to time in our filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect, our businesses and financial results in the future and could cause actual results to differ materially from plans and projections. We believe that the assumptions underlying the forward-looking statements included in this release will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. All forward-looking statements made in this release are based on information presently available to our management. We assume no obligation to update any forward-looking statements, except as required by law.