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Registration No. 333-101705

Amendment No. 8

iPAYMENT, INC.

40 Burton Hills Boulevard, Suite 415

Gregory S. Daily

Copies to:

     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, Dated May 6, 2003

4,500,000 shares

Common Stock

         This is the initial public offering of iPayment, Inc. No public market currently exists for our common stock.

We currently anticipate the initial public offering price of our common stock to be between $14.00 and $16.00 per share. We have applied to have the shares approved for quotation on the Nasdaq National Market under the symbol “IPMT”, subject to notice of issuance.

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 8 of this prospectus.

      We have granted the underwriters a 30-day option to purchase up to 675,000 additional shares to cover any over-allotments.

Delivery of shares will be made on or about                          , 2003.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Bear, Stearns & Co. Inc.

	Thomas Weisel Partners LLC

	Wachovia Securities

The date of this prospectus is                     , 2003.

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ABOUT THIS PROSPECTUS

      You should rely only on the information contained in this document or to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

DEALER PROSPECTUS DELIVERY OBLIGATION

Until                               (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

      This summary highlights information contained elsewhere in this prospectus, but does not contain all the information that is important to you. You should read this entire prospectus carefully, including the section entitled “Risk Factors,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. In this prospectus, we define a merchant as “active” if the merchant processes at least one credit or debit transaction in a given month. Unless otherwise specified or the context otherwise requires, references in this prospectus to “we,” “our” and “us” refer to iPayment, Inc. and its direct and indirect subsidiaries on a consolidated basis.

Our Business

      We are one of the fastest growing providers of credit and debit card-based payment processing services to small merchants. As of December 31, 2002, we provided our services to approximately 56,000 active small merchants located across the United States. The small merchants we serve typically generate less than $250,000 of charge volume per year and have an average transaction value of approximately $75. These merchants have traditionally been underserved by larger payment processors due to the difficulty in identifying, servicing and managing the risks associated with these merchants. As a result, these merchants have historically paid higher transaction fees than larger merchants.

      Our payment processing services enable merchants to process both traditional card-present, or “swipe,” transactions, as well as card-not-present transactions. A card-not-present transaction occurs whenever a customer does not physically present a payment card at the point-of-sale and may occur over the Internet or by mail, fax or telephone. Our processing services include evaluation and acceptance of card numbers, detection of fraudulent transactions, receipt and settlement of funds and service and support. By outsourcing some of these services to third parties, including the evaluation and acceptance of card numbers and receipt and settlement of funds, we maintain an efficient operating structure, which allows us to easily expand our operations without significantly increasing our fixed costs. We derive the majority of our revenues from fee income related to transaction processing, which is primarily comprised of a percentage of the dollar amount of each transaction we process, as well as a flat fee per transaction. In the event we have outsourced any of the services provided in the transaction, we remit a portion of the fee income to the third parties that have provided these services.

      We believe our experience and knowledge in providing payment processing services to small merchants gives us the ability to effectively identify, evaluate and manage the payment processing needs and risks that are unique to small businesses.

      We market and sell our services primarily through our relationships with over 500 independent sales organizations, or ISOs, which we define as any non-bank party that sells card-based payment processing services to merchants. ISOs act as a non-employee, external sales force in communities throughout the United States. By providing the same high level of service and support to our ISOs as we do to our merchant customers, we maintain our access to an experienced sales force of approximately 2,000 sales professionals who market our services, with minimal direct investment in sales infrastructure and management. After an ISO refers a merchant to us and we execute a processing agreement with that merchant, we pay the referring ISO a percentage of the revenues generated by that merchant. Although our relationships with ISOs are mutually non-exclusive, we believe that our understanding of the unique payment processing needs of small merchants enables us to develop compelling incentives for ISOs to continue to refer newly identified merchants to us. We also maintain an open dialogue with our ISOs, allowing us to quickly address their concerns and any problems facing the merchants they refer to us.

      The Nilson Report, a publication specializing in consumer payment systems worldwide, listed us in its 2001 ranking of the top bank card acquirers, or owners of merchant card processing contracts, as one of the fastest growing providers of card-based payment processing services in the United States. In 2002, we continued to grow as our merchant processing volume increased by 257.6% from $802 million for the year ended December 31, 2001 to $2,868 million for the year ended December 31, 2002. During the same period, our revenues increased by 197.8% from $38.9 million for 2001 to $115.8 million for 2002. This increase was primarily attributable to our acquisitions since January 2001 of six businesses and four large portfolios and

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Our Market Opportunity

      According to The Nilson Report, total expenditures of transactions using card-based payment systems by U.S. consumers grew from $0.5 trillion in 1991, or 19% of all consumer payments, to $1.8 trillion in 2001, or 32% of total payments, and is expected to grow to $4.2 trillion by 2011, or 48% of total payments, which would represent a compound annual growth rate of 9% from 2001 levels. We believe that these increases are due to the benefits of card-based payment systems to both merchants and consumers. By accepting card-based payments, merchants can access a broader universe of consumers, enjoy faster settlement times and reduce transaction errors. By using credit or debit cards, consumers are able to make purchases more conveniently, whether in person, over the Internet, or by mail, fax or telephone, while gaining the benefit of loyalty programs, such as frequent flier miles or cash back, which are increasingly being offered by credit or debit card issuers. Consumers are also beginning to use card-based and other electronic payment methods for purchases at an earlier age. Given these advantages of card-based payment systems to both merchants and consumers, favorable demographic trends and the resulting proliferation of credit and debit card usage, we believe businesses will increasingly seek to accept card-based payment systems in order to remain competitive.

      We expect the small merchants we target to increasingly accept and benefit from the increased usage of card-based payment systems. In 1997, the U.S. Census Bureau estimated that 20 million businesses in the United States with on average less than $1.0 million in annual sales or no payroll generated an aggregate of $1.7 trillion in annual sales. Many of these small businesses are seeking, and we expect many new small businesses to seek, to provide customers with the ability to pay for merchandise and services using credit or debit cards, including those in industries that have historically accepted cash and checks as the only forms of payment. For example, the prevalence of consumers making purchases on the Internet incentivizes small businesses to have an on-line presence and, we believe, increases their need to accept credit and debit cards as payment.

Our Competitive Position

      We believe our competitive strengths include the following:

	•	Strong Position and Substantial Experience in Our Target Market. As of December 31, 2002, we provided card-based payment processing to approximately 56,000 active small merchants. We believe that while we have a competitive advantage over larger service providers because of our understanding of the unique payment processing needs and risks of small merchants, we also have a competitive advantage over service providers of a similar or smaller size that may lack our experience and resources.
	•	Large, Experienced, Efficient Sales Force. Our relationships with over 500 ISOs provide us with an experienced sales force of approximately 2,000 sales professionals who market our services in local communities throughout the United States, with minimum investment in sales infrastructure and management on our part. We continually strive to strengthen these relationships by delivering superior service and support to the ISOs that refer merchants to us.
	•	Scalable, Efficient Operating Structure. Our operating structure is efficient and scalable, meaning we can easily expand our operations without significantly increasing our fixed costs. We conduct our customer service and risk management operations in-house, where we believe we can add the most value due to our management’s experience and expertise in these areas. We consider customer service and risk management highly important to our operations and overall success. We outsource our remaining processing services to third parties, including the evaluation and acceptance of card numbers and receipt and settlement of funds. By outsourcing these non-core services, we believe we can achieve lower costs per transaction through higher volume purchasing.
	•	Proven Acquisition and Integration Strategy. We have significant experience acquiring providers of payment processing services, as well as portfolios of merchant accounts, having acquired six providers of payment processing services and four large portfolios and several smaller portfolios of merchant accounts since January 2001. We have enhanced revenues and improved operating efficiencies of our acquired

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		entities by improving the services, support and benefits we offer to the ISOs that serve the entities and merchant accounts we acquire. In addition, we have increased the operating efficiencies of many of the businesses we have acquired by conducting profitability analyses of acquired merchant accounts and reducing processing fees and overhead.
	•	Comprehensive Underwriting and Risk Management System. Through our experience assessing risks associated with providing payment processing services to small merchants, we have developed business procedures and systems that provide effective risk management and fraud prevention solutions.

      Although we believe that we exhibit the competitive strengths described above, many of our competitors have substantially greater capital resources than we have and operate as subsidiaries of financial institutions or bank holding companies, which may allow them to integrate their services to a greater extent than we can. In addition, we are subject to a number of risks discussed in “Risk Factors” and elsewhere in this prospectus. The principal risks include the risk of liability for chargebacks in the event that a billing dispute between a merchant and cardholder is not ultimately resolved in favor of the merchant and the merchant is unable or unwilling to pay the disputed amount, and the risk that we may be liable for undisclosed liabilities associated with companies that we have acquired or will acquire in the future.

Our Strategy

      Our objective is to take advantage of the proliferation of small merchants and their increasing acceptance of card-based payment systems. We plan to build on our existing competitive strengths and further enhance our position as a provider of card-based payment processing services to small merchants. The principal elements of our strategy include the following:

	•	Expand our portfolio of small merchants who use our processing services;
	•	Enhance our relationships with those ISOs who currently refer small merchants to us and establish relationships with new ISOs;
	•	Maintain a stable and recurring revenue base; and
	•	Continue to pursue strategic acquisitions of other payment processing businesses, as well as individual portfolios of merchant accounts.

Our History

      Our subsidiary, iPayment Technologies, Inc., was formed in 1992 as a California corporation. In July 2000, iPayment Technologies purchased assets from two former affiliates in exchange for the assumption of debt, cash, a note and the issuance of shares of common stock of iPayment Technologies. In December 2000, iPayment Technologies implemented a restructuring plan, which resulted in a reduction in overhead costs and personnel. In February 2001, Gregory Daily joined iPayment Technologies as its Chief Executive Officer and Chairman of the Board.

      In February 2001, we were formed by the majority stockholders of iPayment Technologies, as a Tennessee corporation, under the name iPayment Holdings, Inc. as a holding company for iPayment Technologies and other card processing businesses. We then appointed Gregory Daily as our Chief Executive Officer and Chairman of the Board. In April 2001, we acquired a 94.63% interest in iPayment Technologies, and in July 2002, we acquired the remaining outstanding shares of iPayment Technologies, which then became our wholly owned subsidiary, in each case by issuing our shares to iPayment Technologies stockholders in exchange for iPayment Technologies shares.

      In August 2002, we were reincorporated in Delaware under the name iPayment, Inc.

Recent Developments

      Based on our review of our results of operations for the three months ended March 31, 2003, our merchant processing volume increased to $1,338 million for the three months ended March 31, 2003 from $356 million for the three months ended March 31, 2002. Our revenues increased to $46.7 million for the three months ended March 31, 2003 from $16.5 million for the three months ended March 31, 2002. Our operating expenses increased to $42.1 million for the three months ended March 31, 2003 from $15.8 million for the three months ended March 31, 2002. This increase for the three months ended

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      The financial information discussed above includes all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the interim financial information. The operating results for the three months ended March 31, 2003, or any other quarter, are not necessarily indicative of the operating results for the full year or for any future period.

      Our principal executive offices are located at 40 Burton Hills Boulevard, Suite 415, Nashville, Tennessee 37215. Our telephone number at that address is (615) 665-1858.

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THE OFFERING

      The total number of outstanding shares of common stock above excludes:

	•	881,960 shares of common stock issuable upon exercise of outstanding stock options as of April 22, 2003 at a weighted average exercise price of $6.01 per share;
	•	1,431,540 shares of common stock reserved for issuance under our Stock Incentive Plan and Non-Employee Directors Stock Option Plan, including an aggregate of 569,121 shares issuable upon exercise of stock options to be granted to our directors, employees and ISOs immediately following the closing of this offering at an exercise price equal to an assumed initial public offering price of $15.00 per share (consisting of 83,286 shares to non-employee directors, 462,700 shares to officers and other selected employees, and 23,135 shares to ISOs);
	•	890,491 shares of common stock issuable upon exercise of outstanding warrants as of April 22, 2003 at a weighted average exercise price of $0.02 per share; and
	•	the conversion of $16.9 million of our outstanding convertible subordinated promissory notes and $0.4 million of accrued interest into 734,241 shares of common stock assuming conversion on April 22, 2003.

      Except as otherwise indicated, information in this prospectus:

	•	assumes the underwriters have not exercised their option to purchase 675,000 shares to cover over-allotments;
	•	gives effect to a split of our outstanding common stock prior to this offering of 0.4627 shares for each one share of outstanding common stock;
	•	reflects the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of common stock; and
	•	reflects the issuance of 600,000 shares of common stock upon the conversion of $9.0 million of subordinated promissory notes upon the closing of the offering (which had a carrying value of $8.0 million as of December 31, 2002) held by Gregory S. Daily, our Chairman of the Board and Chief Executive Officer, Clay M. Whitson, our Chief Financial Officer and Treasurer, and entities not affiliated with us, at a conversion price equal to an assumed initial public offering price of $15.00 per share.

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL

      The following summary historical consolidated financial information and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. In our discussion throughout this prospectus references to the year ended December 31, 2000 refer to the period January 1, 2000 through July 19, 2000 for iPayment Technologies, Inc., our predecessor, and July 20, 2000 (inception) through December 31, 2000 for us. The selected statements of operations data set forth below for our predecessor company for the period from January 1, 2000 through July 19, 2000, and for us for the period from July 20, 2000 through December 31, 2000, and for the years ended December 31, 2001 and 2002, are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of the results to be expected for any future period.

      The unaudited pro forma as adjusted balance sheet gives effect to the automatic conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of our common stock upon completion of this offering, the receipt of approximately $59.3 million in net proceeds from the sale of 4,500,000 shares of our common stock in the offering at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds from this offering to repay $46.1 million of outstanding indebtedness (which had a carrying value of $40.7 million as of December 31, 2002), and the conversion of $9.0 million of subordinated promissory notes upon the closing of the offering (which had a carrying value of $8.0 million as of December 31, 2002) into 600,000 shares of our common stock at an assumed initial public offering price of $15.00 per share. The repayment of the indebtedness and conversion of notes will result in the recognition of a loss equal to the unamortized discount balances at repayment or conversion. These balances totaled $6.4 million as of December 31, 2002. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position at those dates and our results of operations for the periods ended.

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(1)	Represents the total dollar volume of all Visa and MasterCard transactions processed by our merchants, which is provided to us by our third party processing vendors.
(2)	Represents the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of common stock.

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RISK FACTORS

      An investment in our common stock involves a high degree of risk. You should consider carefully the following risks and other information contained in this prospectus before you decide whether to buy our common stock. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations and financial condition could suffer significantly. As a result, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

Risks Relating to our Business

We have a history of operating losses and will need to generate significant revenues to achieve or maintain our profitability.

      Since inception, we have been engaged in start-up activities and have acquired payment processing businesses and portfolios of merchant accounts to grow our business, both of which require substantial capital and other expenditures. As a result, we have not sustained profitability, and may continue to incur losses in the future. We had a net loss of $4.9 million for the year ended December 31, 2001 and a net loss of $493,000 for the year ended December 31, 2002. In addition, a substantial portion of our historical revenue growth has resulted from acquisitions. For the year ended December 31, 2002, revenues attributable to the acquisitions we completed in 2001 and 2002 were $65.7 million, or 85.3% of our total growth in revenues over the prior period. We expect our cash needs to increase significantly for the next several years as we:

	•	acquire additional payment processing businesses and portfolios of merchant accounts;
	•	increase awareness of our services;
	•	expand our customer support and service operations;
	•	hire additional marketing, customer support and administrative personnel; and
	•	implement new and upgraded operational and financial systems, procedures and controls.

      As a result of these continuing expenses, we need to generate significant revenues to achieve and maintain profitability. To date, our operations have been supported by financings. We currently intend to use $46.1 million of the estimated net proceeds from this offering to repay these financings and the remainder for general corporate purposes, including up to $5.0 million for working capital. If we do not continue to increase our revenues, our business, results of operations and financial condition could be materially and adversely affected.

The full impact of our recent acquisitions on our operating results is not fully reflected in our historical financial results, which as a result, are not necessarily indicative of our future results of operations.

      Since January 2001, we have expanded our card-based payment processing services through the acquisition of six businesses and four large portfolios and several smaller portfolios of merchant accounts. These acquisitions have contributed to a substantial portion of our total revenues. The full impact of these acquisitions on our operating results are not fully reflected in our historical results of operations due to the recent nature of these acquisitions and their varying stages of integration. As a result of these acquisitions, our historical results may not be indicative of results to be expected in future periods.

We have faced, and may in the future face, significant chargeback liability if our merchants refuse or cannot reimburse chargebacks resolved in favor of their customers, and we face potential liability for merchant or customer fraud; we may not accurately anticipate these liabilities.

      We have potential liability for chargebacks associated with the transactions we process. If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is “charged back” to the merchant’s bank and credited to the account of the cardholder.

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      We also have potential liability for losses caused by fraudulent credit card transactions. Card fraud occurs when a merchant’s customer uses a stolen card (or a stolen card number in a card-not-present transaction) to purchase merchandise or services. In a traditional card-present transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a fraudulent card-not-present transaction, even if the merchant receives authorization for the transaction, the merchant is liable for any loss arising from the transaction. Many of the small merchants that we serve are small businesses that transact a substantial percentage of their sales over the Internet or in response to telephone or mail orders. Because their sales are card-not-present transactions, these merchants are more vulnerable to customer fraud than larger merchants. Because we target these merchants, we experience chargebacks arising from cardholder fraud more frequently than providers of payment processing services that service larger merchants.

      Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or counterfeit card or card number to record a false sales transaction, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Anytime a merchant is unable to satisfy a chargeback, we are responsible for that chargeback. We have established systems and procedures to detect and reduce the impact of merchant fraud, but we cannot assure you that these measures are or will be effective. It is possible that incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud could increase our chargeback liability. Please see “Business — Risk Management” for a discussion of our procedures for detecting merchant fraud.

      Charges incurred by us relating to chargebacks were $0.8 million, or 3.9% of revenues, $4.5 million, or 11.6% of revenues, and $6.4 million, or 5.6% of revenues, for the years ended December 31, 2000, 2001 and 2002, respectively.

We have incurred substantial debt, which can impair our financial and operating flexibility.

      We have incurred substantial debt in connection with the financing of our operations and acquisitions. As of December 31, 2002, we had total debt of $78.1 million, net of unamortized warrant discount of $6.4 million, and a net working capital deficit of $14.2 million. On a pro forma basis giving effect to this issuance, the offering and the application of the estimated net proceeds of this offering to repay $40.7 million of this debt (which had an unamortized debt warrant discount of $5.4 million at December 31, 2002), we would have had $29.4 million of indebtedness outstanding (which had no unamortized debt warrant discount at December 31, 2002). We may incur additional debt in the future in order to pursue our acquisition strategy or for other purposes. Substantial indebtedness could impair our ability to obtain additional financing for working capital, capital expenditures or further acquisitions. Covenants governing any indebtedness we incur would likely restrict our ability to take specific actions, including our ability to pay dividends or distributions on, or redeem or repurchase, our capital stock, issue, sell or allow distributions on capital stock of our subsidiaries, enter into transactions with affiliates, merge, consolidate or sell our assets or make capital expenditure investments. In addition, the use of a substantial portion of the cash generated by our operations to cover debt service obligations and any security interests we grant on our assets could limit our financial and business flexibility.

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We rely on bank sponsors, which have substantial discretion with respect to certain elements of our business practices, in order to process bankcard transactions; if these sponsorships are terminated and we are not able to secure or successfully migrate merchant portfolios to new bank sponsors, we will not be able to conduct our business.

      Because we are not a bank, we are unable to belong to and directly access the Visa and MasterCard bankcard associations. Visa and MasterCard operating regulations require us to be sponsored by a bank in order to process bankcard transactions. We are currently registered with Visa and MasterCard through the sponsorship of banks that are members of the card associations. If these sponsorships are terminated and we are unable to secure a bank sponsor, we will not be able to process bankcard transactions. Furthermore, our agreements with our sponsoring banks give the sponsoring banks substantial discretion in approving certain elements of our business practices, including our solicitation, application and qualification procedures for merchants, the terms of our agreements with merchants, the processing fees that we charge, our customer service levels and our use of independent sales organizations. We cannot guarantee that our sponsoring banks’ actions under these agreements will not be detrimental to us.

      One of our principal bank sponsors, Humboldt Bank, Inc., is leaving the payment processing business. We entered into an agreement with JPMorgan Chase Bank on January 31, 2003, and are in the process of migrating our Humboldt merchant portfolios and other smaller merchant portfolios. We cannot guarantee that the transition of our services to JPMorgan Chase Bank will be seamless, and we may encounter difficulties migrating merchant portfolios to new sponsor banks in the future. Any unanticipated problems or delays with this transition could disrupt our business and may cause us to lose merchants. We cannot guarantee that any of our other current sponsor banks will not terminate their sponsorship of us in the future.

If we or our bank sponsors fail to adhere to the standards of the Visa and MasterCard credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.

      Substantially all of the transactions we process involve Visa or MasterCard. If we or our bank sponsors fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, Visa or MasterCard could suspend or terminate our registration. The termination of our registration or any changes in the Visa or MasterCard rules that would impair our registration could require us to stop providing payment processing services.

We rely on other card payment processors and service providers; if they fail or no longer agree to provide their services, our merchant relationships could be adversely affected and we could lose business.

      We rely on agreements with several other large payment processing organizations to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the merchants we serve. We also rely on third parties to whom we outsource specific services, such as reorganizing and accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the accumulated data to the relevant bankcard associations. Many of these organizations and service providers are our competitors and we do not have long-term contracts with most of them. Typically, our contracts with these third parties are for one-year terms and are subject to cancellation upon limited notice by either party.

      The termination by our service providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with the merchants whose accounts we serve and may cause those merchants to terminate their processing agreements with us.

To acquire and retain merchant accounts, we depend on ISOs that do not serve us exclusively.

      We rely primarily on the efforts of ISOs to market our services to merchants seeking to establish an account with a payment processor. ISOs are companies that seek to introduce both newly-established and existing small merchants, including retailers, restaurants and service providers, such as physicians, to

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We may incur losses if our loans to ISOs are not repaid.

      We periodically support our ISOs through loans to help them expand their businesses. As of December 31, 2002, we had outstanding loans to ISOs in the aggregate amount of $1.9 million, and we may decide to loan additional amounts in the future. These notes bear interest in amounts ranging from 6% to 12%. The notes have maturity dates ranging from 2003 through 2005, and payments generally begin on each note one year prior to its maturity date. We have not set a limit on the amount of loans we may make to ISOs. If the business activities of these ISOs do not expand as we expect or they do not use the loans effectively, they may be unable to repay the loans and we may lose the principal amount of the loans and any interest accrued on the loans.

On occasion, we experience increases in interchange and sponsorship fees; if we cannot pass these increases along to our merchants, our profit margins will be reduced.

      We pay interchange fees or assessments to card associations for each transaction we process using their credit and debit cards. From time to time, the card associations increase the interchange fees that they charge processors and the sponsoring banks. For example, Visa last increased its interchange fees for retail transactions by an average of 2.8% in October 2002. At their sole discretion, our sponsoring banks have the right to pass any increases in interchange fees on to us. In addition, our sponsoring banks may seek to increase their Visa and MasterCard sponsorship fees to us, all of which are based upon the dollar amount of the payment transactions we process. If we are not able to pass these fee increases along to merchants through corresponding increases in our processing fees, our profit margins will be reduced.

Unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation.

      We collect and store sensitive data about merchants and cardholders, including names, addresses, social security numbers, drivers license numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. In addition, we maintain a database of cardholder data relating to specific transactions, including payment card numbers and cardholder addresses, in order to process the transactions and for fraud prevention and other internal processes. If a person penetrates our network security or otherwise misappropriates sensitive merchant or cardholder data, we could be subject to liability or business interruption.

      There have been a number of instances reported in the press of hackers penetrating computer systems of payment processors. In 2000, a computer hacker penetrated our computer systems, gained access to several thousand payment card account numbers and demanded a significant sum to keep the stolen numbers secret. When we did not pay the demanded sum, the person posted some of the stolen information on the Internet. We reported the breach to the sponsoring bank, Visa, MasterCard and appropriate governmental criminal authorities, and assisted in the criminal investigation of the individuals involved. Immediately thereafter and since that time, we have retained the services of an outside computer systems security provider and enhanced the security of our computer systems. However, we cannot guarantee that our systems will not be penetrated in the future. If another breach of our system occurs, we may be subject to liability, including claims for unauthorized purchases with misappropriated card information, impersonation or other similar fraud claims. We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes. These claims also could result in protracted and costly litigation.

      Although we generally require that our agreements with our ISOs and service providers who have access to merchant and customer data include confidentiality obligations that restrict these parties from using or

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The loss of key personnel or damage to their reputations could adversely affect our relationships with ISOs, card associations, bank sponsors and our other service providers, which would adversely affect our business.

      Our success depends upon the continued services of our senior management and other key employees, in particular Gregory S. Daily, our Chairman and Chief Executive Officer, all of whom have substantial experience in the payment processing industry and the small merchant markets in which we offer our services. In addition, our success depends in large part upon the reputation and influence within the industry of Mr. Daily, who has, along with our other senior managers, over their years in the industry, developed long standing and highly favorable relationships with ISOs, card associations, bank sponsors and other payment processing and service providers. We would expect that the loss of the services of one or more of our key employees, particularly Mr. Daily, would have an adverse effect on our operations. We would also expect that any damage to the reputation of our senior managers, including Mr. Daily, would adversely affect our business. We do not maintain any “key person” life insurance on any of our employees other than Mr. Daily.

After November 1, 2003, state and local governments will be permitted to levy additional taxes on Internet access and electronic commerce transactions, which could adversely affect our business.

      In 1998, the federal government imposed a three-year moratorium on state and local governments from imposing new taxes on Internet access or electronic commerce transactions. This moratorium has been extended until November 1, 2003. After that date, unless the moratorium is renewed, state and local governments may levy additional taxes on Internet access and electronic commerce transactions. An increase in applicable taxes may make electronic commerce transactions less attractive for merchants and businesses, which could result in a decrease in the volume of transactions we process and reduce our revenues. Additionally, if a tax is levied against the merchants or service providers we serve, they may attempt to pass this additional cost along to us, thereby decreasing our revenues.

The payment processing industry is highly competitive and such competition is likely to increase, which may further adversely influence our prices to merchants, and as a result, our profit margins.

      The market for card processing services is highly competitive. The level of competition has increased in recent years, and other providers of processing services have established a sizable market share in the small merchant processing sector. Some of our competitors are financial institutions, subsidiaries of financial institutions or well-established payment processing companies that have substantially greater capital and technological, management and marketing resources than we have. There are also a large number of small providers of processing services that provide various ranges of services to small and medium sized merchants. This competition may influence the prices we can charge and requires us to control costs aggressively in order to maintain acceptable profit margins. In addition, our competitors continue to consolidate as large banks merge and combine their networks. This consolidation may also require that we increase the consideration we pay for future acquisitions and could adversely affect the number of attractive acquisition opportunities presented to us.

Increased attrition in merchant charge volume due to an increase in closed merchant accounts that we cannot anticipate or offset with new accounts may reduce our revenues.

      We experience attrition in merchant charge volume in the ordinary course of business resulting from several factors, including business closures, transfers of merchants’ accounts to our competitors and account “closures” that we initiate due to heightened credit risks relating to, and contract breaches by, a merchant. During 2002, we experienced average volume attrition of 1% per month. In addition, substantially all of our

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Our operating results are subject to seasonality, and if our revenues are below our seasonal norms during our historically stronger third and fourth quarters, our net income could be lower than expected.

      We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues as a result of consumer spending patterns. Historically, revenues have been weaker during the first two quarters of the calendar year and stronger during the third and fourth quarters. If, for any reason, our revenues are below seasonal norms during the third or fourth quarter, our net income could be lower than expected.

Our systems may fail due to factors beyond our control, which could interrupt our business or cause us to lose business and would likely increase our costs.

      We depend on the efficient and uninterrupted operations of our computer network systems, software and data centers. We do not presently have fully redundant systems. Our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. Our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur. Defects in our systems, errors or delays in the processing of payment transactions or other difficulties could result in:

	•	additional development costs;
	•	diversion of technical and other resources;
	•	loss of merchants;
	•	loss of merchant and cardholder data;
	•	negative publicity;
	•	harm to our business or reputation; or
	•	exposure to fraud losses or other liabilities.

We face uncertainty about additional financing for our future capital needs, which may prevent us from growing our business.

      If we are unable to increase our revenues, we will need to raise additional funds to finance our future capital needs. We may need additional financing earlier than we anticipate if we:

	•	decide to expand faster than planned;
	•	need to respond to competitive pressures; or
	•	need to acquire complementary products, businesses or technologies.

      If we raise additional funds through the sale of equity or convertible debt securities, these transactions may dilute the value of our outstanding common stock. We may also decide to issue securities, including debt securities, that have rights, preferences and privileges senior to our common stock. We cannot assure you that we will be able to raise additional funds on terms favorable to us or at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs. This may

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With the exception of one registered mark, we currently rely solely on common law to protect our intellectual property; should we seek additional protection in the future, we may fail to successfully register our trademarks, causing us to potentially lose our rights to use these marks.

      Currently, we do not have any patents or copyrights and, other than one registered mark, we rely on common law rights to protect our marks and logos. We do not rely heavily on the recognition of our marks to obtain and maintain business. We have recently applied for trademark registration for certain of our marks. However, we cannot assure you that any such applications will be approved. Even if they are approved, these trademarks may be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own these trademarks, our use of these trademarks will be restricted or completely prohibited unless we enter into agreements with these parties which may not be available on commercially reasonable terms, or at all.

If our merchants experience adverse business conditions, they may generate fewer transactions for us to process or become insolvent, increasing our exposure to chargeback liabilities.

      General economic conditions have caused some of the merchants we serve to experience difficulty in supporting their current operations and implementing their business plans. If these merchants make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenues.

      In addition, in a recessionary environment, the merchants we serve could be subject to a higher rate of insolvency which could adversely affect us financially. We bear credit risk for chargebacks related to billing disputes between credit card holders and bankrupt merchants. If a merchant seeks relief under bankruptcy laws or is otherwise unable or unwilling to pay, we may be liable for the full transaction amount of a chargeback.

New and potential governmental regulations designed to protect or limit access to consumer information could adversely affect our ability to provide the services we provide our merchants.

      Due to the increasing public concern over consumer privacy rights, governmental bodies in the United States and abroad have adopted, and are considering adopting additional laws and regulations restricting the purchase, sale and sharing of personal information about customers. For example, the Gramm-Leach-Bliley Act requires non-affiliated third party service providers to financial institutions to take certain steps to ensure the privacy and security of consumer financial information. We believe our present activities fall under exceptions to the consumer notice and opt-out requirements contained in this law for third party service providers to financial institutions. The law, however, is new and there have been very few rulings on its interpretation. We believe that current legislation permits us to access and use this information as we do now. The laws governing privacy generally remain unsettled, however, even in areas where there has been some legislative action, such as the Gramm-Leach-Bliley Act and other consumer statutes, it is difficult to determine whether and how existing and proposed privacy laws will apply to our business. Limitations on our ability to access and use customer information could adversely affect our ability to provide the services we offer to our merchants or could impair the value of these services.

      Several states have proposed legislation that would limit the uses of personal information gathered using the Internet. Some proposals would require proprietary online service providers and website owners to establish privacy policies. Congress has also considered privacy legislation that could further regulate use of consumer information obtained over the Internet or in other ways. The Federal Trade Commission has also recently settled a proceeding with one on-line service regarding the manner in which personal information is collected from users and provided to third parties. Our compliance with these privacy laws and related regulations could materially affect our operations.

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

	•	create uncertainty in the marketplace that could reduce demand for our services;
	•	limit our ability to collect and to use merchant and cardholder data;
	•