10-Q

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

OR

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-15245

ELECTRONIC CLEARING HOUSE, INC.

(Exact name of registrant as specified in its charter)

Nevada	93-0946274
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

730 Paseo Camarillo

Camarillo, California 93010

(Address of principal executive offices)

Telephone Number (805) 419-8700, Fax Number (805) 419-8682

www.echo-inc.com

(Registrant's telephone number, including area code; fax number; web site address)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer £ Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes   £  No   þ

As of July 31, 2006, there were 6,776,964 shares of the Registrant's Common Stock outstanding.

ELECTRONIC CLEARING HOUSE, INC.

INDEX

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	CondensedConsolidated Financial Statements (unaudited)
	Consolidated Balance Sheets June 30, 2006 and September 30, 2005	3
	Consolidated Statements of Operations Three months and nine months ended June 30, 2006 and 2005	4
		5
	Consolidated Statements of Cash Flows Nine months ended June 30, 2006 and 2005
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
	PART II. OTHER INFORMATION
Item 1a.	Risk Factors	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
	Signatures	31

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ELECTRONIC CLEARING HOUSE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS

	June 30,			September 30,
	2006			2005
Current assets:
Cash and cash equivalents	$	10,250,000		$	7,009,000
Restricted cash		2,322,000			1,448,000
Settlement deposits		17,050,000			16,817,000
Settlement receivables, less allowance of $25,000 and $25,000		1,551,000			981,000
Accounts receivable, less allowance of $528,000 and $92,000		3,136,000			2,421,000
Prepaid expenses and other assets		526,000			385,000
Deferred tax asset		441,000			249,000
Total current assets		35,276,000			29,310,000
Noncurrent assets:
Property and equipment, net		2,420,000			2,337,000
Software, net		9,976,000			8,876,000
Other assets, net		263,000			294,000
Total assets	$	47,935,000		$	40,817,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	305,000		$	426,000
Accounts payable		663,000			305,000
Settlement payable		18,601,000			17,798,000
Trust payable		834,000			277,000
Accrued expenses		3,133,000			2,467,000
Total current liabilities		23,536,000			21,273,000
Noncurrent liabilities:
Long-term debt, net of current portion		521,000			705,000
Deferred tax liability		2,626,000			1,067,000
Total liabilities		26,683,000			23,045,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 36,000,000 shares authorized; 6,801,304 and 6,620,531 shares issued; 6,763,035 and 6,582,262 shares outstanding, respectively		68,000			66,000
Additional paid-in capital		26,607,000			25,574,000
Accumulated deficit		(4,957,000	)		(6,983,000	)
Less treasury stock at cost, 38,269 and 38,269 common shares		(466,000	)		(466,000	)
Less unearned stock compensation		-0-			(419,000	)
Total stockholders' equity		21,252,000			17,772,000
Total liabilities and stockholders' equity	$	47,935,000		$	40,817,000

See accompanying notes to consolidated financial statements

3

ELECTRONIC CLEARING HOUSE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
REVENUES:	$	19,869,000		$	14,281,000		$	56,023,000		$	40,362,000
COSTS AND EXPENSES:
Processing and transaction expense		13,299,000			9,051,000			37,357,000			25,783,000
Other operating costs		1,438,000			1,493,000			4,266,000			4,236,000
Research and development expense		316,000			354,000			1,189,000			1,271,000
Selling, general and administrative expenses		3,031,000			2,680,000			9,584,000			8,044,000
		18,084,000			13,578,000			52,396,000			39,334,000
Income from operations		1,785,000			703,000			3,627,000			1,028,000
Interest income		73,000			37,000			173,000			95,000
Interest expense		(21,000	)		(29,000	)		(68,000	)		(87,000	)
Income before provision for income taxes		1,837,000			711,000			3,732,000			1,036,000
Provision for income taxes		(827,000	)		(278,000	)		(1,706,000	)		(407,000	)
Net income	$	1,010,000		$	433,000		$	2,026,000		$	629,000
Basic net earnings per share	$	0.15		$	0.07		$	0.31		$	0.10
Diluted net earnings per share	$	0.14		$	0.06		$	0.29		$	0.09
Weighted average shares outstanding
Basic		6,630,055			6,512,411			6,596,737			6,469,632
Diluted		7,156,204			6,942,122			7,016,342			6,956,111

See accompanying notes to consolidated financial statements.

4

ELECTRONIC CLEARING HOUSE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	2,026,000		$	629,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		581,000			558,000
Amortization of software		1,939,000			1,258,000
Provisions for losses on accounts and notes receivable		443,000			31,000
Deferred income taxes		1,367,000			280,000
Stock expense compensation		698,000			8,000
Restricted stock issued to director		38,000			-0-
Tax benefit from exercise of stock option		-0-			82,000
Changes in assets and liabilities:
Restricted cash		(874,000	)		(201,000	)
Settlement deposits		(233,000	)		(86,000	)
Accounts receivable		(1,158,000	)		(177,000	)
Settlement receivable		(570,000	)		(387,000	)
Accounts payable		358,000			53,000
Settlement payable		803,000			682,000
Trust payable		557,000			104,000
Accrued expenses		666,000			(24,000	)
Prepaid expenses		(141,000	)		(25,000	)
Net cash provided by operating activities		6,500,000			2,785,000
Cash flows from investing activities:
Other assets		3,000			36,000
Purchase of equipment		(662,000	)		(623,000	)
Purchased and capitalized software		(3,011,000	)		(2,896,000	)
Net cash used in investing activities		(3,670,000	)		(3,483,000	)
Cash flows from financing activities:
Proceeds from issuance of notes payable		-0-			400,000
Repayment of notes payable		(209,000	)		(330,000	)
Repayment of capitalized leases		(98,000	)		(373,000	)
Proceeds from exercise of stock options		482,000			329,000
Excess tax benefit from exercise of stock options		236,000			-0-
Net cash provided by financing activities		411,000			26,000
Net increase (decrease) in cash		3,241,000			(672,000	)
Cash and cash equivalents at beginning of period		7,009,000			7,680,000
Cash and cash equivalents at end of period	$	10,250,000		$	7,008,000

See accompanying notes to consolidated financial statements.

5

ELECTRONIC CLEARING HOUSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - Basis of Presentation:

The accompanying consolidated financial statements as of the nine-month period ended June 30, 2006, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations for the interim periods. The consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2005. The results of operations for the nine months ended June 30, 2006 are not necessarily indicative of the likely results for the entire fiscal year ending September 30, 2006. Certain prior year reported amounts have been reclassified to conform to the 2006 presentation.

New Accounting Standards:

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings.

FIN 48 requires that subsequent to initial adoption a change in judgment that results in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the period in which the change occurs. Currently, we record such changes in judgment, including audit settlements, as a component of our income tax provision. Thus, our reported quarterly income tax rate may become more volatile upon adoption of FIN 48. This change will not impact the manner in which we record income tax expense on an annual basis.

FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdictions, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

NOTE 2 - Stock-Based Compensation:

Effective October 1, 2005, the Company began recording compensation expense associated with stock options in accordance with SFAS No.123R, Share-Based Payment. Prior to October 1, 2005, the Company accounted for stock-based compensation related to stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25; therefore, the Company measured compensation expense for its stock option plan using the intrinsic value method, that is, as the excess, if any, of the fair market value of the Company’s stock at the grant date over the amount required to be paid to acquire the stock, and provided the disclosures required by FAS Nos. 123 and 148. The Company has adopted the modified prospective transition method provided under SFAS No. 123R, and as a result, has not retroactively adjusted results from prior periods. Under this transition method, compensation expense associated with stock options recognized in the first nine months of fiscal year 2006 includes expense related to the remaining unvested portion of all stock option awards granted prior to October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123. The Company has not issued any stock options since the adoption of SFAS No. 123R.

6

NOTE 2: Continued

The adoption of SFAS No. 123R also resulted in certain changes to the Company’s accounting for its restricted stock awards, which is discussed below in more detail.

As a result of the adoption of SFAS No. 123R, the Company’s net income for the three and nine months ended June 30, 2006 includes $269,000 and $704,000 of compensation expense, respectively, and includes $3,000 of income tax benefits related to the Company’s stock options for the three and nine months ended June 30, 2006. The effect of adopting SFAS No. 123R had a negative effect to the basic and diluted earnings per common share for the three-month period ended June 30, 2006 of $0.02 and for the nine-month period ended June 30, 2006 of $0.06. The compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of selling, general and administrative expenses. Prior to the Company’s adoption of SFAS No. 123R, the Company presented tax benefits resulting from the disqualified dispositions of stock options as cash flows from operating activities on the Company’s consolidated statements of cash flows. SFAS No. 123R requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities.

The Company issues new shares upon the exercise of stock options and the issuance of restricted stock.

Stock Options:

At June 30, 2006, the Company had one stock option plan. Under the Company’s current stock option plan, the Board of Directors may grant options to purchase up to 1,150,000 shares of the Company’s common stock to officers, key employees and non-employee directors of the Company. At June 30, 2006, options for 248,012 shares remained available for future grant under the plan. Options cancelled due to forfeiture or expiration return to the pool available for grant. The plan is administered by the Board of Directors or its designees and provides that options granted under the plan will be exercisable at such times and under such conditions as may be determined by the Board of Directors at the time of grant of such options; however, options may not be granted for terms in excess of ten years. Compensation expense related to stock options granted is recognized ratably over the service vesting period for the entire option award. The total number of stock option awards expected to vest is adjusted by estimated forfeiture rates. The terms of the plan provide for the granting of options at an exercise price not less than 100% of the fair market value of the stock at the date of grant, as determined by the closing market value stock price on the grant date. All options outstanding at June 30, 2006 were issued at 100% of the fair market value of the stock at the date of grant and have five-year vesting terms.

The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for option grants during the nine months ended June 30, 2005. There were no options granted during the nine months ended June 30, 2006.

	Nine Months Ended June 30, 2005
Risk-free interest rate	3%
Expected volatility of common stock	76.6%
Dividend yield	-0-
Expected option term	7 year

The computation of the expected term is based on a weighted average calculation combining the average life of options that have already been exercised or cancelled with the estimated life of all unexercised options. The expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield on U.S. Treasury constant maturities with a remaining term equal to the expected term of the option. The dividend yield is projected to be zero.

A summary of the status of the Company’s stock option plan as of June 30, 2006 and of changes in options outstanding under the plan during the nine months ended June 30, 2006 is as follows:

7

NOTE 2: Continued

	Number of Shares			Weighted-Average Exercise Price per Share		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at September 30, 2005		1,116,125		$	5.51
Options granted		-0-
Options exercised		(114,600	)	$	4.20
Options forfeited or expired		(9,500	)	$	10.66
Options outstanding at June 30, 2006		992,025		$	5.61		6.6	$	4,017,000
Options vested and exercisable at June 30, 2006		493,625		$	5.00		5.9	$	1,776,000

Nonvested share activity under our Stock Option Plan for the nine-month period ended June 30, 2006 is summarized as follows:

	Nonvested Number Of Shares			Weighted Average Grant-Date Fair Value
Nonvested balance at October 1, 2005		684,625		$	4.28
Vested		(186,225	)	$	3.70
Nonvested balance at June 30, 2006		498,400		$	4.50

The weighted-average fair value of each option granted during the first nine months of fiscal year 2005, estimated as of the grant date using the Black-Scholes option valuation model, was $5.20 per option. The total intrinsic value of options exercised was $237,000 during the first nine months of fiscal year 2005.

As of June 30, 2006, there was $2,241,000 of unamortized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 7.5 years.

Cash received from stock option exercises for the nine months ended June 30, 2006 and 2005 was $482,000 and $329,000, respectively. The income tax benefits from stock option exercises totaled $236,000 and $82,000 for the nine months ended June 30, 2006 and 2005, respectively.

For stock options granted prior to the adoption of SFAS No. 123R, the following table illustrates the pro forma effect on net income and earnings per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123 in determining stock-based compensation for awards under the plan:

8

NOTE 2: Continued

	Three Months Ended			Nine Months Ended
	June 30, 2005			June 30, 2005
Net income, as reported	$	433,000		$	629,000
Add: Stock-based compensation expense included in reported net income, net of related tax effects		-0-			5,000
Deduct: Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects		(133,000	)		(399,000	)
Pro forma net income	$	300,000		$	235,000
Earnings per common share:
Basic - as reported	$	0.07		$	0.10
Basic - pro forma	$	0.05		$	0.04
Diluted - as reported	$	0.06		$	0.09
Diluted - pro forma	$	0.04		$	0.03

Restricted Stock:

Restricted Stock is granted under the 2003 Option Plan. Compensation expense related to restricted stock issued is recognized ratably over the service vesting period. Restricted stock grants are normally vested over a five-year period.

In accordance with SFAS No. 123R, the fair value of restricted stock awards is estimated based on the closing market value stock price on the date of share issuance. The total number of restricted stock awards expected to vest is adjusted by estimated forfeiture rates. As of June 30, 2006, there was $1,030,000 of unamortized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 4.38 years. The unamortized compensation cost related to non-vested restricted stock awards was recorded as unearned stock-based compensation in shareholders equity at September 30, 2005. As part of the adoption of SFAS No. 123R, such unamortized compensation cost was reclassified as a component of paid-in capital.

A summary of the status of the Company’s restricted stock awards as of June 30, 2006, and of changes in restricted stock outstanding under the plan during the nine months ended June 30, 2006 is as follows:

	Number Of Shares		Weighted-Average Grant Date Fair Value Per Share
Restricted stock awards outstanding at September 30, 2005		50,000	$	8.50
Shares issued		62,588	$	11.91
Shares forfeited		-0-	$	-0-
Restricted stock awards outstanding at June 30, 2006		112,588	$	10.39

9

NOTE 2: Continued

In May 2006, the Company entered into an agreement with certain of its empolyees and executives to potentially grant 80,000 shares of restricted stock and 10,000 shares payable in cash. The restricted stock will only be granted  and cash only be paid if the Company achieves predetermined cumulative Earnings Before Income Taxes and Depreciation and Amortization (“EBITDA”) for the fiscal years ending 2006, 2007 and 2008. Cumulative EBITDA results must be reached or a reduced number of shares will be granted, if any. As required by SFAS 123R, 80,000 shares of this award will be treated as an equity award, with the fair value measured at the grant date and 10,000 shares will be treated as a liability award, with the fair value measured at the grant date and remeasured at the end of each reporting period (marked to market). In conjunction with this award, the Company recognized $42,000 of compensation expense for the quarter ended June 30, 2006.

NOTE 3 - Earnings Per Share:

The Company calculates earnings per share as required by Statement of Financial Accounting Standard No. 128, "Earnings per Share".

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Numerator:
Net income	$	1,010,000	$	433,000	$	2,026,000	$	629,000
Denominator:
Weighted average shares outstanding for basic earnings per share		6,630,055		6,512,411		6,596,737		6,469,632
Effect of dilutive common stock equivalents		526,149		429,711		419,605		486,479
Adjusted weighted average shares outstanding for diluted earnings per share		7,156,204		6,942,122		7,016,342		6,956,111
Basic net earnings per share	$	0.15	$	0.07	$	0.31	$	0.10
Diluted net earnings per share	$	0.14	$	0.06	$	0.29	$	0.09

For the three months ended June 30, 2006 and 2005, approximately 4,000 option shares and 79,500 option shares, and for the nine months ended June 30, 2006 and 2005, approximately 4,000 option shares and 79,500 option shares, respectively, attributable to the exercise of outstanding options were excluded from the calculation of diluted EPS because the effect was antidilutive.

NOTE 4 - Supplemental Cash Flow Information:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006		2005
Cash paid for:
Interest	$	21,000	$	29,000	$	68,000	$	87,000
Income Taxes		39,000		42,000		42,000		154,000

Significant non-cash transactions for the nine months ended June 30, 2006 were as follows:

· Restricted stock valued at $745,000 was issued to certain executives and employees.

· Capital equipment of $2,000 was acquired under a capital lease.

Significant non-cash transaction for the nine months ended June 30, 2005 was as follows:

· A note was issued for $39,000 for the purchase of capital equipment.

10

NOTE 5 - Segment Information:

The Company primarily operates in two business segments: Bankcard and transaction processing and check-related products, all of which are located in the United States.

The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on the Company’s product lines. The Company evaluates performance based upon two primary factors; one is the segment’s operating income and the other is based on the segment’s contribution to the Company’s future strategic growth.

	Three Months Ended June 30,						Nine Month Ended June 30,
	2006			2005			2006			2005
Revenues:
Bankcard and transaction processing	$	15,118,000		$	10,579,000		$	42,370,000		$	29,626,000
Check-related products		4,751,000			3,702,000			13,653,000			10,736,000
	$	19,869,000		$	14,281,000		$	56,023,000		$	40,362,000
Operating income:
Bankcard and transaction processing	$	2,762,000		$	1,651,000		$	7,156,000		$	4,233,000
Check-related products		1,418,000			624,000			3,685,000			1,577,000
Other - Corporate Expenses		(2,395,000	)		(1,572,000	)		(7,214,000	)		(4,782,000	)
	$	1,785,000		$	703,000		$	3,627,000		$	1,028,000

	June 30,		September 30,
	2006		2005
Total assets:
Bankcard and transaction processing	$	12,586,000	$	9,452,000
Check-related products		26,300,000		24,719,000
Other		9,049,000		6,646,000
	$	47,935,000	$	40,817,000

NOTE 6 - Commitments, Contingent Liabilities, and Guarantees:

The Company currently relies on cooperative relationships with, and sponsorship by, one bank in order to process its Visa, MasterCard and other bankcard transactions. The agreement between the bank and the Company requires the Company to assume and compensate the bank for bearing the risk of “chargeback” losses. Under the rules of Visa and MasterCard, when a merchant processor acquires card transactions, it has certain contingent liabilities for the transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In such a case, the disputed transaction is charged back to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant’s account, and if the merchant refuses or is unable to reimburse the Company for the chargeback due to merchant fraud, insolvency or other reasons, the Company will bear the loss for the amount of the refund paid to the cardholders. The Company utilizes a number of systems and procedures to manage merchant risk. In addition, the Company requires cash deposits by certain merchants, which are held by the Company’s sponsoring bank to minimize the risk that chargebacks are not collectible from merchants. A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Company’s sponsoring bank as the merchant processor. Therefore, management believes that the maximum potential exposure for the chargebacks would not exceed the total amount of transactions processed through Visa and MasterCard for the last four months and other unresolved chargebacks in the process of resolution. For the last four months through June 30, 2006, this potential exposure totaled approximately $644 million. At June 30, 2006, the Company, through its sponsoring bank, had approximately $110,000 of unresolved chargebacks that were in the process of resolution. At June 30, 2006, the Company, through its sponsoring bank, had access to $18.7 million in merchant deposits to cover any potential chargeback losses.

11

NOTE 6: Continued

For the three-month periods ended June 30, 2006 and 2005, the Company processed approximately $472 million and $300 million, respectively, of Visa and MasterCard transactions, which resulted in $2.6 million in gross chargeback activities for the three months ended June 30, 2006 and $1.9 million for the three months ended June 30, 2005. Substantially all of these chargebacks were recovered from the merchants.

The Company’s contingent obligation with respect to chargebacks constitutes a guarantee as defined in Financial Accounting Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantee, Including Indirect Guarantees of Others” (“FIN 45”). FIN 45 requires that guarantees issued or modified subsequent to December 31, 2002 be initially recorded as liabilities in the Statement of Financial Position at fair value. Since the Company’s agreement with its sponsoring bank, which establishes the guarantee obligation, was entered into prior to December 31, 2002 and has not been modified since that date, the measurement provisions of FIN 45 are not applicable to this guarantee arrangement.

In accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records a reserve for chargeback loss allowance based on its processing volume and historical trends and data. As of June 30, 2006 and 2005, the allowance for chargeback losses, which is classified as a component of the allowance for uncollectible accounts receivable, was $439,000 and $58,000, respectively. The expense associated with the valuation allowance is included in processing and transaction expense in the accompanying consolidated statements of income. For the three-month periods ended June 30, 2006 and 2005, the Company expensed $91,000 and $7,000, respectively.

In its check guarantee business, the Company charges the merchant a percentage of the face amount of the check and guarantees payment of the check to the merchant in the event the check is not honored by the checkwriter’s bank. Merchants typically present customer checks for processing on a regular basis and, therefore, dishonored checks are generally identified within a few days of the date the checks are guaranteed by the Company. Accordingly, management believes that its best estimate of the Company’s maximum potential exposure for dishonored checks at any given balance sheet date would not exceed the total amount of checks guaranteed in the last 10 days prior to the balance sheet date. As of June 30, 2006, the Company estimates that its maximum potential dishonored check exposure was approximately $2,287,000.

For the quarters ended June 30, 2006 and 2005, the Company guaranteed approximately $19,463,000 and $12,039,000 of merchant checks, respectively, which resulted in $196,000 and $47,000 of dishonored checks presented to the Company for payments, respectively. The Company has the right to collect the full amount of the check from the checkwriter. The Company establishes a reserve for this activity based on historical and projected loss experience. For the quarter ended June 30, 2006 and 2005, the check guarantee loss was $160,000 and $59,000, respectively. The check guarantee loss is included in processing and transaction expense in the accompanying consolidated statements of income.

NOTE 7 - Litigation:

The Company is involved in various legal cases arising in the ordinary course of business. Based upon current information, management, after consultation with legal counsel, believes the ultimate disposition thereof will have no material affect, individually or in the aggregate, on the Company’s business, financial condition or results of operations. It is possible that in the future we could become a party to such proceedings.

NOTE 8 - Effective Tax Rate:

The effective tax rate for the three and nine months ended June 30, 2006 was 45.0% and 45.7% as compared to 39.1% and 39.3% for the corresponding prior year periods. The increases in the tax rates were primarily due to stock compensation expense which was a non-deductible expense as the Company does not recognize a tax benefit in incentive stock options until a disqualifying disposition occurs.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. This discussion contains forward-looking statements, including statements regarding the Company's strategy, financial performance and revenue sources, which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth elsewhere herein, and in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

OVERVIEW

Electronic Clearing House, Inc. is an electronic payment processor that provides for the payment processing needs of merchants, banks and collection agencies. We derive the majority of our revenue from two main business segments: 1) bankcard and transaction processing services (“bankcard services”), whereby we provide solutions to merchants and banks to allow them to accept credit and debit card payments from consumers; and 2) check-related products (“check services”), whereby we provide various services to merchants and banks to allow them to accept and process check payments from consumers. The principal services we offer within these two segments include, with respect to our bankcard services, debit and credit card processing, and with respect to our check services, check guarantee (where, if we approve a check transaction and a check is subsequently dishonored by the check writer's bank, the merchant is reimbursed by us), check verification (where, prior to approving a check, we search our negative and positive check writer database to determine whether the check writer has a positive record or delinquent check-related debts), electronic check conversion (the conversion of a paper check at the point of sale to a direct bank debit which is processed for settlement through the Federal Reserve System’s Automated Clearing House (“ACH”) network), check re-presentment (where we attempt to clear a check on multiple occasions via the ACH network prior to returning the check to the merchant so as to increase the number of cleared check transactions), and check collection (where we provide national scale collection services for a merchant or bank). We operate our services under the following brands:

· MerchantAmerica, our retail provider of all credit card, debit card and check payment processing services to both the merchant and bank markets;

· National Check Network (“NCN”), our proprietary database of negative and positive check writer accounts (i.e., accounts that show delinquent history in the form of non-sufficient funds and other negative transactions), for check verification, check conversion capture services, and for membership to collection agencies;

· XPRESSCHEX, Inc. for check collection services; and

· ECHO, for wholesale credit card and check processing services.

We discuss our services in greater detail below. Overall, our ability to program and oversee the management of a merchant’s point-of-sale (POS) system, provide credit card and debit card processing, provide multiple services for the processing of checks, provide both electronic and traditional collection services, and fully integrate all of these services into a single Internet-based reporting capability allows us to provide for the majority of the payment processing needs of our customers.

We were incorporated in Nevada in December 1981. Our executive offices are located at 730 Paseo Camarillo, Camarillo, California 93010, and our telephone number is (805) 419-8700. Our common stock is traded on the NASDAQ Capital Market under the ticker symbol “ECHO.” Information on our website, www.echo-inc.com, does not constitute part of this quarterly report.

Bankcard and transaction processing services provide for the majority of our revenues. We typically receive a percentage-based fee on the dollar amount processed and a transaction fee on the number of transactions processed. For the quarter ended June 30, 2006, the bankcard and transaction processing business segment accounted for approximately 76.1% of the Company’s total revenue.

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We purchased a fully integrated, multi-modular bankcard processing system which, once fully implemented, should provide us with greater flexibility to price our credit card processing services and allow us to offer our services to other third parties. Management anticipates the clearing portion of this system to begin live customer deployment in the last quarter of 2006.

ECHO has invested significant resources and management focus in its check services business. Check services revenue increased approximately 28.3% from $3,702,000 in the third fiscal quarter of 2005 to $4,751,000 for the current fiscal quarter. Revenue from check collections and ACH fees continues to increase. Growth has come primarily from four sources: Internet wallet providers, check collection services, cross-selling electronic checks and collection services into the credit card merchant base we already serve and casino check cashing services.

Wallet providers allow a customer to fund an online wallet with a lump sum and then the customer can use the wallet at various sites on the Internet. (Probably the best known wallet service on the Internet is PayPal, a service owned by eBay, Inc.) ECHO provides back-end payment processing services for various providers of wallet services which permits them to fund the initial wallet transaction. Subsequent transactions of transferring funds from the online wallet are generally not handled by ECHObecause the payment is typically handled online by the wallet provider themselves.

Approximately 70% of ECHO’s credit card processing merchants operate their businesses in non-face-to-face environments such as mail order, phone order and the Internet. These relationships historically have higher margins than those seen with normal retail merchants because of the higher risk of fraud.

ECHO has established an integrated processing relationship with the largest check cashing provider to the gaming and casino market. Our services are primarily centered on providing check verification (using our NCN data base), funds movement, and several sophisticated risk management services that are used to assist the provider in confidently accepting checks.

ECHO is both a Third-Party Processor and an Acquirer Processor for the Visa POS Check Program. Visa officially released its POS Check Service as of December 2002 and several national banks have entered the program since its inception to both sell the service to their merchants and to connect all of their checking accounts to the Visa network. Visa’s connectivity to checking account balances has increased significantly over the past year, moving nationally to 30% and higher in many metropolitan areas. (See the discussion of the Visa POS Check Service Program below.)

In addition to being a Third-Party Processor, we are currently certified as an Acquirer Processor with Visa, a role that accepts transactions from the merchant’s point-of-sale terminal/systems and reformats them for submission to the Visa network. Most banks presently in the Visa Program are large national or regional banks and already had terminal management service providers that could act as Acquirer Processor for the Visa Program. In the future, as smaller banks make the decision to enter the Visa Program, it is expected that many will have no prior relationship with a terminal management provider and therefore, may potentially choose us as their Acquirer Processor.

We derive transaction revenue in our role as a Third-Party Processor and/or Acquirer Processor by negotiating a transaction fee with Visa and/or the bank that chose us as its Third-Party Processor and/or Acquirer Processor. This Third-Party Processor transaction fee averages $0.07 to $0.09 per transaction and the Acquirer Processor transaction fee is generally $0.02 to $0.04. The party that sells the service to the merchant (usually the bank) enjoys the largest mark-up on the product, offering the service in the range of $0.20 to $0.50 per check, with external cost in the $0.12 to $0.15 range, depending on what the bank negotiates with Visa and any third-party provider.

We entered into a sponsorship agreement with our primary credit card processing bank, First Regional Bank, to enable us to sell the Visa Program directly to merchants with an obligation to pay a $0.01 transaction fee per check to the bank. This allows the bank to realize added revenue, allows us to realize higher revenue in a marked-up pricing model, and a portion of the mark-up to be used to compensate and motivate resellers of our products and services to offer the Visa Program to merchants in the marketplace. The balance of the mark-up after paying the bank and the sales organization would be additional revenue to us. This will also enable us to use our direct sales channels to provide the Visa Program to ECHO’s current and potential merchant base.

Strategy

ECHO’s service strategy is to provide merchants, banks and industry-specific resellers with electronic payment services that combine credit card, debit card and electronic check and collection services with quality customer support. ECHO’s services enable merchants to maximize revenue by offering a wide variety of payment options, minimize costs by dealing with one source and improve their bad debt collection rates through use of ECHO’s integrated collection and risk management services.

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Our sales strategy is four-fold: to target providers of point-of-sale systems who serve various industries in the merchant marketplace; to continue to pursue community banks with the combined set of services we currently offer; to focus our direct sales team on specific associations and merchants in industries where both checks and credit cards are common forms of payment; and to continue to support and promote the Visa POS Check Program. We intend to capitalize on our advantage of being a full credit card and check processor by combining our products and using our lower overall processing costs to allow the system provider, community bank or association to enjoy a financial benefit from their customer’s processing activity.

Electronic Payment Services for Point-of-Sale System Providers

We believe there are significant opportunities in working closely with those firms that specialize in certain industries and provide a point-of-sale capability to merchants of some nature. By aligning our processing with these parties, we believe we can leverage our sales activity and have longer term relationships with merchants than are historically the case for most processors. We also believe our full processing capability allows us to include the point-of-sale system provider with some economic benefit from the processing volume of the users of its system. We are seeing good opportunities from this sales channel.

Promote Merchant Payment Processing for Regional and Community Banks

ECHO pursues small regional and community banks for credit card and check payment programs. ECHO has developed a service that allows community banks to offer credit card and check processing services using our back-end infrastructure with little or no technical involvement by the bank. Much of the reporting to the merchant utilizes the Internet as a delivery channel, an environment in which we have significant experience and knowledge. Due to the high costs and the perceived high risk, most community banks are either unable or unwilling to compete with national banks in providing credit card and check real time processing services and Internet-based reporting tools to their merchants. We have designed the program to be adopted by a bank at little or no cost while it allows the bank to generate revenue and earnings in competition to those earned by much larger banks that have had to make major investments in the technology.

This merchant payment processing service, which is marketed under the MerchantAmerica name, incorporates all of ECHO’s web-based features and functionalities and our full set of services and payment options. We believe that our fully integrated payment and reporting system allows community banks to enjoy competitive equality with much bigger banks without making significant investments in technology. We, in turn, benefit from the increased processing and transaction revenue. Additional benefits of the MerchantAmerica program to regional and community banks include the:

· Ability for banks to set processing fees for each merchant;

· Assurance that the bank controls the merchant relationship; and

· Reduction of fraud risk.

In addition to the benefits that the bank receives from the MerchantAmerica program, the bank’s merchants also receive numerous benefits, including a retail merchant account for credit cards, debit cards and checks; an online shopping cart and check-out payment system; sales tracking and online transaction history; all returned checks being automatically referred to our collection agency; and dedicated customer service available 24 hours a day, seven days a week.

As of June 30, 2006, there are twenty-eight participating banks. ECHO estimates that there are 10,000 community banks in the United States and no one provider of services has over 10% of the market. Based on third-party research, we estimate that approximately 6,000 of these banks do not offer any payment solution but refer their merchants to outside providers. The approximately 4,000 banks that are affiliated with a payment service, we believe, will be very responsive to the MerchantAmerica value proposition when a comparison of features and costs is reviewed.

Promote to Associations and Guilds

There are over 8,000 associations and guilds in the United States and many of the 4.1 million merchants belong to one of these organizations. We believe our combination of services and our controlled cost structure will allow us to attract many of these organizations to actively refer their members to us for meeting their payment processing needs. With the hiring of an experienced Senior Vice President of Sales, we expect to see increased activity in this sales channel in the coming months.

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Promote Visa POS Check Service Program

Given ECHO’s role as a “first adopter” in the early stages of the Visa Program and our subsequent investment of significant resources and management focus with respect to the Visa Program, we have seen solid growth in check services as the marketing efforts of participating banks in the Visa Program became more widely implemented.

In June of 2003, a large participating bank sold the Visa Program to the national retailer, Gap, and it deployed the service to all of their stores (Gap, Banana Republic and Old Navy). Their stores submit check MICR data (the numbers along the bottom of a check) in real time and then return the paper check to the check writer at the point of sale. ECHOresponds with an approval or decline to the check in less than two seconds and for those it approves, it moves the funds nightly from the customers account to the merchant’s account. ECHOalso coordinates all electronic check re-presentment and collection on returned checks when needed. Gap remains the largest merchant in the Visa Program to date. Other national merchants are also in the program, including Burlington Coat Factory, Pearle Vision, and Things Remembered.

The primary source of savings to merchants on the Visa Program are derived from (1) the elimination of having to handle and process paper checks and (2) the net financial benefit seen from the bad check write-off percentage falling below the rates charged by the national guarantee services.

While ECHO believes that the Visa Program has the potential to generate significant revenue for us in the future, the market potential of this service is still unproven and its success is largely dependent on the continuing marketing support of ECHO, Visa and Visa’s member banks.

Sales and Marketing

ECHOoffers its payment services through several sales channels.

· Primary Sales Channels - Direct sales personnel are dedicated to various industries and/or services. We employ approximately 21 people who serve in either field or office positions that are dedicated to sales.

· Secondary Sales Channels - All or a portion of our services are sold through banks who sign up with our MerchantAmerica Agent Bank Program, through banks who are selling the Visa POS Check Program, through third-party resellers, independent sales organizations (ISO’s) and through one of our 300 NCN Collection Agency Members. These channels offer lower margins to us due to the added participation in the overall revenue such channels require. Currently ECHOhas 150 authorized resellers registered to sell ECHO’s check products.

During the quarter, we appointed a Senior Vice President of Sales and we have added two new direct sales executives to cover the western region and we are actively pursuing an additional sales executive to cover vertical markets. This direct sales staff will be refocusing on selling our complete bankcard and check product suites. With the addition of these sales resources in fiscal 2006, we feel we are effectively building upon this year’s sales momentum and will be well positioned for 2007.

Management believes that we are distinctive in the number of payment methods that we allow, the combination of transaction types that we manage directly, our ability to integrate additional services, and our ability to support each merchant through one vertically integrated source.

Our marketing strategy is to build processing relationships with certain providers of point-of-sale software/hardware that serve select merchant markets; maximize cross-selling opportunities to our existing base of retail merchants and financial institutions; sell integrated suites of check, credit and debit card processing services through community banks and industry-specific resellers; enhance and market MerchantAmerica.com; and pursue associations aggressively.

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Competition

Bankcard processing and check processing services are highly competitive industries and are characterized by consolidation, rapid technological change, rapid rates of product obsolescence and introductions of competitive products often at lower prices and/or with greater functionality than those currently on the market. Credit card and debit card processors have similar direct costs and therefore their products are becoming somewhat of a commodity product where a natural advantage accrues to the highest volume processors. To offset this fact, we have focused on marketing to niche markets where we can maintain the margins we deem necessary to operate profitably but no assurance can be given that this strategy will be successful in the future.

There are a number of competitors in the check services industry, the largest of which are TeleCheck (the leading provider of conversion and guarantee services and a subsidiary of First Data Corporation), SCAN/eFunds (the largest verification provider in the nation), Certegy (now a part of Fidelity) and Global Payments. While all four have major national accounts, we have been successful in winning the processing relationships for national accounts when competing for such business against these parties. ECHObelieves that it can effectively compete due to its ownership of the NCN database, its integrated set of check and collection services and the technological advantage of having been certified as both a Third-Party Processor and Acquirer Processor with the Visa POS Check Program.

ECHO is among the top 50 credit card processors in the nation when evaluated by processing volume. ECHOis among a much smaller group when evaluated by processing capability. Of the top 50 firms, approximately 40 of them are independent sales organizations or banks that sell the service and may manage the front-end authorization service but they hire the back-end clearing and settlement services from a full service processor. There are probably 10 or fewer firms capable of full credit card processing and these would include First Data Corporation, Total Systems, NPC (Bank of America), Global Payments, RBS Lynk, and Heartland Payment Services. We believe we hold the distinction of being the smallest public company who, with the installation of the new clearing module in 2006, will serve as a full service processor in credit cards. All of our competitors have greater financial and marketing resources than we have. As a result, they may be better able to respond more quickly to new or emerging technologies and changes in customer requirements. Competitors also may enjoy per transaction cost advantages due to their high processing volumes that may make it difficult for ECHO to compete.

We believe that being the smallest processor also has some advantages. There are many merchants who are sizable to us that our larger competitors do not consider to be major merchants. We are finding these merchants appreciate getting preferential treatment from their processor. Also, our willingness to send top management into the field to meet regularly with our major merchants at their location is a perceived distinction and we are using it as a merchant retention tool. While we understand that slightly lower costs can be generated by processing high volumes, we do not think the economic advantages that high volume affords are enough to eliminate ECHOas an acceptable and competitive processor in most cases. Despite these potential advantages, we believe that our success will depend largely on our ability to continuously exceed expectations in terms of performance, service, and price, on our ability to develop new products and services, and on how well and how quickly we enhance our current products and introduce them into the market.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006 and 2005

Financial highlights for the third quarter of fiscal 2006 as compared to the same period last year were as follows:

· Total revenue increased 39.1% to $19.9 million

· Gross margins from processing and transaction revenue was 33.1% for the current quarter as compared to 36.6% for the prior year

· Operating income increased 153.9% from $703,000 to $1,785,000

· Diluted earnings per share were $0.14 as compared to $0.06 per share

· Bankcard and transaction processing revenue increased 42.9% to $15.1 million

· Bankcard processing volume increased 57.5% from $299.9 million to $472.1 million

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· Check-related revenue increased 28.3% to $4.8 million

· ACH transactions processed increased 18.5% to 9.3 million transactions

· Stock compensation expense increased to $269,000 from $0 as a result of the Company’s adoption of SFAS 123R this fiscal year.

Revenue. Total revenue increased 39.1% to $19,869,000 for the three months ended June 30, 2006, from $14,281,000 for the same period last year. The increase can be primarily attributed to the 42.9% growth in the bankcard processing revenue and 28.3% growth in the check services business segment as compared to the same period last year. This growth has occurred organically from our existing merchants and from our marketing initiatives. We have two merchants who each generated approximately 8% of the total bankcard processing revenue during the current quarter. The increase in revenue was primarily the result of a 57.5% increase in bankcard processing volume as compared to the prior year quarter.

Cost of Sales. Bankcard processing expenses are directly related to the changes in processing revenue. A major component of the Company’s bankcard processing expense, the interchange fees paid to the card issuing banks, is normally fixed as a percentage of each bankcard transaction dollar processed. Processing-related expenses, consisting primarily of data center processing costs, interchange fees, third-party processing fees, and communication expense, increased from $9,051,000 in the third fiscal quarter of 2005 to $13,299,000 in the current quarter, a 46.9% increase. The increase was primarily attributable to the 42.9% increase in bankcard processing revenue for the current quarter.

Gross margin was 33.1% for the current quarter as compared to 36.6% for the same period last year. The decrease in gross margin was primarily attributable to several high volume merchants that contributed slightly lower margin. Gross margin for this quarter was further impacted by a $213,000 increase in software amortization expense and an $83,000 increase in chargeback losses as compared to the same period last year. A majority of this increase in chargeback losses was related to the bankruptcy of one of our merchants.

Expense. Other operating costs such as personnel costs, telephone and depreciation expenses decreased slightly, from $1,493,000 in the third quarter of 2005 to $1,438,000 for the current fiscal quarter, a 3.7% decrease. This was attributable to the 39.1% increase in total revenue and the benefits from economies of scale in supporting such growth.

Research and development expenses decreased from $354,000 for the quarter ended June 30, 2005 to $316,000 in the current year quarter. Continued investment in research and development and IT initiatives is critical to our ability to maintain our competitive position and strengthen our infrastructure to support growth. Several of our major IT projects should be completed in the fourth quarter of 2006. However, we anticipate making continued investments in our IT initiatives and expect research and development expenses to remain at current levels for the remainder of the 2006 fiscal year and into fiscal 2007.

Selling, general and administrative expenses increased from $2,680,000 in the third fiscal quarter of 2005 to $3,031,000 for the current fiscal quarter, an increase of 13.1%. This increase was primarily attributable to the $269,000 increase in stock compensation expense as the result of the implementation of SFAS 123R starting this fiscal year. In addition, SOX compliance costs increased $115,000 as compared to the prior year quarter. As a percentage of total revenue, selling, general and administrative expenses decreased from 18.8% in the prior year quarter to 15.3% in the current quarter.

Operating Income. Operating income for the quarter ended June 30, 2006 was $1,785,000, as compared to operating income of $703,000 in the same period last year, a 153.9% increase. The increase in operating income was primarily due to 39.1% increase in revenue.

Interest Expense. Net interest was $52,000 for the three months ended June 30, 2006 as compared to $8,000 interest income for the prior year quarter. The increase was due to the increase cash and cash equivalents balances and increase in interest rates being earned.

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Effective Tax Rate. The effective tax rate for the quarter ended June 30, 2006 was 45.0% as compared to 39.1% for the prior year quarter. The increase in the tax rate was primarily due to stock compensation expense which was a non-deductible expense as the Company does not recognize a tax benefit from incentive stock options until a disqualifying disposition occurs.

Net Income. Net income for the current quarter ended June 30, 2006 was $1,010,000, as compared to $433,000 for the prior year quarter. This 133.3% increase was primarily attributable to the 39.1% increase in revenue.

Segment Results

Bankcard and Transaction Processing. Bankcard processing and transaction revenue increased 42.9%, from $10,579,000 in the fiscal quarter ended June 30, 2005 to $15,118,000 for the current year quarter ended June 30, 2006. This revenue increase was mainly attributable to organic growth from our existing merchants and several new merchants with high processing volume. We have two bankcard merchants who each generated approximately 8% of the total bankcard processing revenue and a total of 20.2% of the bankcard processing volume during the current quarter. Bankcard revenue made up 76.1% of total revenue for the current quarter as compared to 74.1% for the same period last year. We attribute this level of growth to the success our sales and marketing program.

Operating income from our bankcard and transaction processing segment was $2,762,000 for the current period as compared to $1,651,000 in the same period last year, a 67.3% increase. The increase in operating income was primarily attributable to the 42.9% revenue growth and offset by lower margin from the merchants with high processing volume.

Check Related Products. Check-related revenues increased from $3,702,000 for the prior year quarter to $4,751,000 for the current fiscal quarter, an increase of 28.3%. This increase was attributable to the 15.7% increase in ACH revenue and check verification revenue, and a 98.6% increase in collection revenue. This increase primarily came from add-on sales from our existing merchants. We have one check processing merchant who comprises approximately 10% of our total check processing revenue.

Check services revenue made up 23.9% of total revenues in the current quarter as compared to 25.9% in the prior year quarter. Check-related operating income was $1,418,000 for the quarter ended June 30, 2006 as compared to $624,000 in the same period last year. The improvement in this business segment was primarily attributable to the 28.3% increase in revenue.

Other Corporate Expenses. Other corporate expenses increased from $1,572,000 for the fiscal quarter ended June 30, 2005 to $2,395,000 for the current quarter, an increase of 52.4%. This increase was primarily attributable to the 39.1% increase in revenue and the $269,000 increase in stock compensation expense and a $155,000 increase due to SOX compliance costs.

Nine Months Ended June 30, 2006 and 2005

Financial highlights for the nine months ended June 30, 2006, as compared to the same period last year, were as follows:

· Total revenue increased 38.8% from $40.4 million to $56.0 million

· Gross margins from processing and transaction revenue decreased from 36.1% for the prior year nine month period to 33.3% for the current period

· Diluted EPS of $0.29 as compared to diluted EPS of $0.09

· Bankcard and transaction processing revenue increased 43.0% to $42.4 million

· Bankcard processing volume increased 57.2% to $ 1,323 million

· Check-related revenue increased 27.2% to $13.7 million

· ACH transactions processed increased 15.9% to 28.2 million transactions

· Stock compensation expense increased to $704,000 from $8,000.

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Revenue. Total revenue increased 38.8% to $56,023,000 for the nine months ended June 30, 2006, from $40,362,000 for the same nine month period last year. This revenue increase was the result of organic growth from our existing merchants and new merchants generated from our sales and marketing programs. Our bankcard processing volume increased 57.2% for the nine months ended June 30, 2006, as compared to the same period last year.

Cost of Sales. Processing-related expenses increased from $25,783,000 for the nine month period in 2005 to $37,357,000 for the same nine months ended June 30, 2006, a 44.9% increase. This increase was directly attributable to the 38.8% increase in revenue. Gross margin from processing and transaction services decreased to 33.3% in the current nine month period from 36.1% for the same nine month period last year. The decrease in gross margin was primarily attributable to several high volume merchants who yielded lower margins. Gross margin for the nine months ended June 30, 2006 was further impacted by a $694,000 increase in software amortization expense and a $407,000 increase in chargeback losses as compared to the same period last year.

Expense. Other operating costs increased slightly from $4,236,000 for the nine months ended June 30, 2005 to $4,266,000 for the nine months ended June 30, 2006, an increase of 0.7%. This increase was directly related to the 38.8% increase in total revenue and the benefits from economies of scale in supporting such growth.

Research and development expense decreased from $1,271,000 in the nine months ended June 30, 2005 to $1,189,000 in the current nine month period. We are continuing to invest in infrastructure improvement and software enhancement to remain competitive in our industry.

Selling, general and administrative expenses increased from $8,044,000 for the nine months ended June 30, 2005 to $9,584,000 in the current nine-month period, an increase of 19.1%. This increase was primarily attributable to a $511,000 increase in salaries due to the increase in employees to support the Company’s growth, a $696,000 increase in stock compensation expense as the result of the implementation of SFAS 123R starting this fiscal year, and a $167,000 increase in professional fees due mainly to costs related to Sarbanes-Oxley. As a percentage of total revenue, selling, general and administrative expenses decreased from 19.9% for the nine months ended June 30, 2005 to 17.1% in the current nine month period.

Operating Income. Operating income for the nine months ended June 30, 2006 was $3,627,000, as compared to operating income of $1,028,000 for the same period last year.

Interest. Net interest increased from $8,000 interest income for the nine months ended June 30, 2005 to $105,000 for the current nine-month period. This is attributable to an increase in the cash and cash equivalents, the higher interest earned and a reduction in the total loan balances.

Effective Tax Rate. Effective tax rate for the nine months ended June 30, 2006 was 45.7%, as compared to 39.3% for the nine months ended June 30, 2005. The increase in the tax rate was primarily due to stock compensation expense which was a non-deductible expense as the Company does not recognize a tax benefit from incentive stock options until a disqualifying disposition occurs.

Segment Results

Bankcard and Transaction Processing. Bankcard processing and transaction revenue increased 43.0%, from $29,626,000 for the nine months ended June 30, 2005 to $42,370,000 for the current nine-month period. This revenue increase was mainly attributable to the 57.2% increase in bankcard processing volume as compared to the same nine month period last year. The processing volume increase was due to our organic growth, particularly several high processing volume merchants.

Check-Related Products. Check-related revenues increased from $10,736,000 for the nine months ended June 30, 2005 to $13,653,000 for the current nine-month period, an increase of 27.2%. This was attributable to the 18.8% revenue growth in ACH revenue and check verification revenue and an 87.3% increase in check collection revenue.

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Check services revenue accounted for 24.4% of our total revenue for the current nine month period as compared to 26.6% in the same prior year period. Check-related operating income was $3,685,000 for the current nine-month period as compared to $1,577,000 in the same period last year, an increase of 133.7%. The improvement in operating income was primarily attributable to the 27.2% increase in check services revenue over the same period last year.

Other Corporate Expense. Other corporate expense increased from $4,782,000 for the nine months ended June 30, 2005 to $7,214,000 for the nine months ended June 30, 2006, an increase of 50.9%. The increases were primarily attributable to the 38.8% increase in revenue, higher salaries, stock compensation expenses and legal and settlement expenses related to a patent lawsuit.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2006 we had available cash and cash equivalents of $10,250,000, restricted cash of $2,322,000 in reserve with our primary processing bank and working capital of $11,740,000.

Accounts receivable, net of allowance for doubtful accounts, increased from $2,421,000 at September 30, 2005 to $3,136,000 at June 30, 2006. Allowance for doubtful accounts reserved mainly for chargeback losses increased to $528,000 at June 30, 2006 from $92,000 at September 30, 2005. The higher allowance was primarily related to provision for doubtful accounts related to four bankcard merchants’ chargeback receivables.

Net cash provided by operating activities for the nine months ended June 30, 2006 was $6,500,000, as compared to net cash provided by operating activities of $2,785,000 for the nine months ended June 30, 2005.

Cash amounts classified as settlement receivable/payable are amounts due to/from merchants and result from timing differences in our settlement process with those merchants. These timing differences account for the difference between the time that funds are received in our bank accounts and the time that settlement payments are made to merchants. Therefore, at any given time, settlement receivable/payable may vary and ultimately depends on the volume of transactions processed and the timing of the cut-off date. Settlement deposits are cash deposited in our bank accounts from the merchant settlement transactions.

In the nine months ended June 30, 2006, we used $662,000 for the purchase of mainly computer equipment and $3,011,000 for the acquisition and capitalization of software costs, as compared to $623,000 for the purchase of equipment and $2,896,000 for the acquisition and capitalization of software costs for the same nine-month period last year. During the nine months ended June 30, 2006, we paid off $307,000 of notes payable and capitalized lease obligations. During the nine months ended June 30, 2006, we had proceeds of $482,000 from stock option exercises.

We negotiated a secured $3,000,000 line of credit and a $1,000,000 equipment lease line with Bank of the West. As of June 30, 2006, both the $3,000,000 line of credit and the $1,000,000 equipment lease line are fully available.

At June 30, 2006 we had the following cash commitments:

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Payment Due By Period

Contractual Obligations	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
Long-term debt including interest	$	820,000	$	303,000	$	451,000	$	66,000	$	-0-
Capital lease obligations		96,000		53,000		43,000		-0-		-0-
Operating leases		1,270,000		646,000		624,000		-0-		-0-
Total contractual cash obligations	$	2,186,000	$	1,002,000	$	1,118,000	$	66,000	$	-0-

Our primary source of liquidity is expected to be cash flow generated from operations and cash and cash equivalents currently on hand and the secured $3,000,000 line of credit and the $1,000,000 equipment lease line which have yet to be utilized. Management believes that our cash flow from operations together with cash on hand combined with the available credit facilities will be sufficient to meet our working capital and other commitments.

OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2006, we did not have any off-balance sheet arrangements.

RISK FACTORS

Our business, and accordingly, your investment in our common stock, is subject to a number of risks. These risks could affect our operating results and liquidity. You should consider the following risk factors, among others, before investing in our common stock:

Risks Related to our Business

We rely on cooperative relationships with, and sponsorship by, banks, the absence of which may affect our operations.

We currently rely on cooperative relationships with, and sponsorship by, banks in order to process our Visa, MasterCard and other bankcard transactions. We also rely on several banks for access to the Automated Clearing House (“ACH”) for submission of both credit card and check settlements. Our banking relationships are currently with smaller banks (with assets of less than $500,000,000). Even though smaller banks tend to be more susceptible to mergers or acquisitions and are therefore less stable, these banks find the programs we offer more attractive and we believe we cannot obtain similar relationships with larger banks at this time. A bank could at any time curtail or place restrictions on our processing volume because of its internal business policies or due to other adverse circumstances. If a volume restriction is placed on us, it could materially adversely affect our business operations by restricting our ability to process credit card transactions and receive the related revenue. Our relationships with our customers and merchants would also be adversely affected by our inability to process these transactions.

We currently maintain one primary bankcard processing and sponsorship relationship with First Regional Bank in Agoura Hills, California. Our agreement with First Regional Bank continues through 2010. We also maintain several banking relationships for ACH processing. While we believe our current bank relationships are sound, we cannot assure that these banks will not restrict our increasing processing volume or that we will always be able to maintain these relationships or establish new banking relationships. Even if new banking relationships are available, they may not be on terms acceptable to us. With respect to First Regional Bank, while we believe its ability to terminate our relationship is cost-prohibitive, they may determine that the cost of terminating their agreement is less than the cost of continuing to perform in accordance with its terms, and may therefore determine to terminate their agreement prior to its expiration. Ultimately, our failure to maintain this and other banking relationships and sponsorships may have a material adverse effect on our business and results of operations.

Merchant fraud with respect to bankcard and ACH transactions could cause us to incur significant losses.

We significantly rely on the processing revenue derived from bankcard and ACH transactions. If any merchants were to submit or process unauthorized or fraudulent bankcard or ACH transactions, depending on the dollar amount, ECHO could incur significant losses which could have a material adverse effect on our business and results of operations. ECHOassumes and compensates the sponsoring bank for bearing the risk of these types of transactions.

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We have implemented systems and software for the electronic surveillance and monitoring of fraudulent bankcard and ACH use. As of June 30, 2006, we maintained a dedicated chargeback reserve of $830,000 at our primary bank specifically earmarked for such activity. Additionally, through our sponsoring bank, as of June 30, 2006, we had access to approximately $18.7 million belonging to our merchants on an aggregate basis. This money has been deposited at the sponsoring bank by the merchants to cover any potential losses. Despite a long history of managing such risk, we cannot guarantee that these systems will prevent fraudulent transactions from being submitted and processed or that the funds set aside to address such activity will be adequate to cover all potential situations that might occur. We do not have insurance to protect us from these losses. There is no assurance that our chargeback reserve will be adequate to offset against any unauthorized or fraudulent processing losses that we may incur. Depending on the size of such losses, our results of operations could be immediately and materially adversely affected.

Excessive chargeback losses could significantly affect our results of operations and liquidity.

Our agreements with our sponsoring bank require us to assume and compensate the bank for bearing the risk of “chargeback” losses. Under the rules of Visa and MasterCard, when a merchant processor acquires card transactions, it has certain contingent liabilities for the transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In such a case, the disputed transaction is charged back to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If we are unable to collect this amount from the merchant’s account, or if the merchant refuses or is unable to reimburse us for the chargeback due to merchant fraud, insolvency or other reasons, we will bear the loss for the amount of the refund paid to the cardholders.

A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to our sponsoring bank as the merchant processor. Therefore, management believes that the maximum potential exposure for the chargebacks would not exceed the total amount of transactions processed through Visa and MasterCard for the last four months and other unresolved chargebacks in the process of resolution. For the last four months through June 30, 2006, this potential exposure totaled approximately $644 million. At June 30, 2006, we, through our sponsoring banks, had approximately $110,000 of unresolved chargebacks that were in the process of resolution.

For the three-month period ended June 30, 2006 and 2005, we processed approximately $472 million (2006) and $300 million (2005) of Visa and MasterCard transactions, which resulted in $2.6 million in gross chargeback activities for the three months ended June 30, 2006 and $1.9 million for the three months ended June 30, 2005. Substantially all of these chargebacks were recovered from the merchants.

Nevertheless, if we are unable to recover these chargeback amounts from merchants, having to pay the aggregate of any such amounts would significantly affect our results of operations and liquidity.

Failure to participate in the Visa POS Check Service Program would cause us to significantly shift our operating and marketing strategy.

We have significantly increased our infrastructure, personnel and marketing strategy to focus on the potential growth of our check services through the Visa POS Check Service Program. We currently provide critical back-end infrastructure for the service, including ourNCN database for verification and our access to the Federal Reserve System’s Automated Clearing House for funds settlement and for checks written on bank accounts with banks not participating in the program.

Because we believe the market will continue to gain acceptance of the Visa POS Check Service Program, we have expended significant resources to market our check conversion services and verification services to our merchant base, to solidify our strategic relationships with the various financial institutions that have chosen us as their Acquirer Processor and Third-Party processor under the program, and to sell our other check products such as electronic check re-presentments and check guarantee to the Visa member banks.

Our failure to adequately market our services through this relationship could materially affect our marketing strategy going forward. Additionally, if we fail to adequately grow our infrastructure to address increases in the volume of transactions, cease providing services as a Third-Party processor or Acquirer Processor or are otherwise removed or terminated from the Visa Program, this would require us to dramatically shift our current operating strategy.

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Our inability to implement, and/or the inability of third-party software vendors to continue to support and provide maintenance services with respect to, the third-party vendors’ products, could significantly adversely affect our results of operations and financial condition.

We utilize various third-party software applications and depend on the providers of such software applications to provide support and maintenance services to us. In the event that a third-party software vendor fails to continue to support and maintain its software application, or fails to do so in a timely manner, this could significantly affect our results of operations and financial condition.

Our inability to ultimately implement, or a determination to cease the implementation of various of our software technology initiatives will significantly adversely affect our results of operations and financial condition.

We have spent significant time and monetary resources implementing several software technologies, which resulted in significant cost being capitalized by us as non-current software assets. The implementation of these technologies will provide us with substantial operational advantages that would allow us to attract and retain larger merchants, as well as the small and mid-market merchants that have been our target market. Management believes that the implementation of these software technologies, and the technologies themselves, continues to be in the best interests of, and the most viable alternative for, the Company. However, the inability to ultimately implement, or a determination to cease the implementation of these software technologies would cause these assets to become impaired, and the corresponding impairment would significantly adversely affect our results of operations and financial condition.

A significant amount of our bankcard processing revenue is dependent on approximately 100 merchant accounts, several of which are very large merchants. The loss of a substantial portion of these accounts would adversely affect our results of operations.

We depend on approximately 100 key merchant accounts for our organic growth and profitability. Two merchants accounted for approximately 16% of our bankcard processing revenue during the quarter ended June 30, 2006. The loss of those accounts or the loss of merchants from this select group could adversely affect our results of operations.

The business activities of our merchants could affect our business and results of operations.

We provide direct and back-end bankcard and check processing services to merchants across many industries. Several of these merchants provide consumers access to “Internet wallets,” which subsequently permit consumers to use funds in those “Internet wallets” to participate in gaming activities over the Internet. Our “Internet wallet” merchants collectively comprise approximately 27% of our check processing revenue, with one merchant who comprises approximately 10% of our check processing revenue. To the extent any of these merchants conduct activities which are deemed illegal by future legislation or otherwise become involved in activities that incur civil liability from third parties, legal authorities or those third parties could attempt to pursue claims against us for aiding the activities of those merchants. While we believe that the services we provide do not directly aid in the activities of our merchants, and while we have no intent to assist any such activities, other than to provide general processing services consistent with past practice, any claims by legal authorities or third parties would require us to expend financial and management resources to address and defend such claims, the aggregate effect of which could have an adverse impact on our business and results of operations. Additionally, the loss of any of those merchants would have a significant affect on our business and results of operations.

The business in which we compete is highly competitive and there is no assurance that our current products and services will stay competitive or that we will be able to introduce new products and services to compete successfully.

Weare in the business of processing payment transactions and designing and implementing integrated systems for our customers so that they can better use our services. This business is highly competitive and is characterized by rapid technological change, rapid rates of product obsolescence, and rapid rates of new product introduction. Our market share is relatively small as compared to most of our competitors and most of these competitors have substantially more financial and marketing resources to run their businesses. While we believe our small size provides us the ability to move quickly in some areas, our competitors’ greater resources enable them to investigate and embrace new and emerging technologies, to quickly respond to changes in customers needs, and to devote more resources to product and services development and marketing. We may face increased competition in the future and there is no assurance that current or new competition will allow us to keep our customers. If we lose customers, our business operations may be materially adversely affected, which could cause us to cease our business or curtail our business to a point where we are no longer able to generate sufficient revenue to fund operations. There is no assurance that our current products and services will stay competitive with those of our competitors or that we will be able to introduce new products and services to compete successfully in the future.

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If we are unable to process significantly increased volume activity, this could affect our operations and we could lose our competitive position.

We have built transaction processing systems for check verification, check conversion, ACH processing, and bankcard processing activities. While current estimates regarding increased volume are within the capabilities of each system, it is possible that a significant increase in volume in one of the markets would exceed a specific system’s capabilities. To minimize this risk, ECHO has redesigned and upgraded its check related processing systems and has purchased a high-end system to process bankcard activity. This system is not yet operational, and even when it becomes operational, no assurance can be given that it would be able to handle a significant increase in volume or that the operational enhancements and improvements will be completed in time to avoid such a situation. In the event we are unable to process increases in volume, this could significantly adversely affect our banking relationships, our merchant customers and our overall competitive position, and could potentially result in violations of service level agreements which would require us to pay penalty fees to the other parties to those agreements. Losses of such relationships, or the requirement to pay penalties, may severely impact our results of operations and financial condition.

We incur financial risk from our check guarantee service.

The check guarantee business is essentially a risk management business. Any limitation of a risk management system could result in financial obligations being incurred by ECHO relative to our check guarantee activity. While ECHO has provided check guarantee services for several years, there can be no assurance that our current risk management systems are adequate to assure against any financial loss relating to check guarantee. While ECHO is enhancing its current risk management systems and it is being conservative with reference to the type of merchants to which it offers guarantee services in order to minimize this risk, no assurance can be given that such measures will be adequate. During the quarter ended June 30, 2006, we incurred $160,000 in losses from uncollected guaranteed checks.

Security breaches could impact our continued operations.

We process confidential financial information and maintain several levels of security to protect this data. Security includes hand and card-based identification systems at our data center locations that restrict access to the specific facilities, various employee monitoring and access restriction policies, and various firewall and network management methodologies that restrict unauthorized access through the Internet. While these systems have worked effectively in the past, there can be no assurance that they will continue to operate without a security breach in the future. Depending upon the nature of the breach, the consequences of security breaches could be significant and dramatic to ECHO’s continued operations.

The industry in which we operate involves rapidly changing technology and our failure to improve our products and services or to offer new products and services could cause us to lose customers.

Our business industry involves rapidly changing technology. Recently, we have observed rapid changes in technology as evidenced by the Internet and Internet-related services and applications, new and better software, and faster computers and modems. As technology changes, ECHO’s customers desire and expect better products and services. Our success depends on our ability to improve our existing products and services and to develop and market new products and services. The costs and expenses associated with such an effort could be significant to us. There is no assurance that we will be able to find the funds necessary to keep up with new technology or that if such funds are available that we can successfully improve our existing products and services or successfully develop new products and services. Our failure to provide improved products and services to our customers or any delay in providing such products and services could cause us to lose customers to our competitors. Loss of customers could have a material adverse effect on ECHO.

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Our inability to protect or defend our trade secrets and other intellectual property could hurt our business.

We have expended a considerable amount of time and money to develop information systems for our merchants. We regard these information systems as trade secrets that are extremely important to our payment processing operations. We rely on trade secret protection and confidentiality and/or license agreements with employees, customers, partners and others to protect this intellectual property and have not otherwise taken steps to obtain additional intellectual property protection or other protection on these information systems. We cannot be certain that we have taken adequate steps to protect our intellectual property. In addition, our third-party confidentiality agreements can be breached and, if they are, there may not be an adequate remedy available to us. If our trade secrets become known, we may lose our competitive position, including the loss of our merchant and bank customers. Such a loss could severely impact our results of operations and financial condition.

Additionally, while we believe that the technology underlying our information systems does not infringe upon the rights of any third parties, there is no assurance that third parties will not bring infringement claims against us. We also have the right to use the technology of others through various license agreements. If a third party claimed our activities and/or these licenses were infringing their technology, while we may have some protection from our third-party licensors, we could face additional infringement claims or otherwise be obligated to stop utilizing intellectual property critical to our technology infrastructure. If we are not able to implement other technology to substitute the intellectual property underlying a claim, our business operations could be severely effected. Additionally, infringement claims would require us to incur significant defense costs and expenses and, to the extent we are unsuccessful in defending these claims, could cause us to pay monetary damages to the person or entity making the claim. Continuously having to defend such claims or otherwise making monetary damages payments could materially adversely affect our results of operations.

If we do not continue to invest in research and development, and/or otherwise improve our technology platforms, we could lose our competitive position.

Because technology in the payment processing industry evolves rapidly, we need to continue to invest in research and development in both the bankcard processing business segment and the check-related products segment in order to remain competitive. This includes investments in our technology platforms to permit them to process higher transaction volumes, to transition some of these technologies to more commonly used platforms, to permit us to process foreign currency transactions, and to expand our point-of-sale connection capability for our bankcard processing services. Research and development expenses decreased from $354,000 for the quarter ended June 30, 2005 to $316,000 for the quarter ended June 30, 2006. Most of our development project costs were capitalized once we entered into coding and testing phases. We continue to evaluate projects, which we believe will assist us in our efforts to stay competitive. Although we believe that our investment in these projects will ultimately increase earnings, there is no assurance as to when or if these new products will show profitability or if we will ever be able to recover the costs invested in these projects. Additionally, if we fail to commit adequate resources to grow our technology on pace with market growth, we could quickly lose our competitive position, including the loss of our merchant and bank customers.

Failure to obtain additional funds can impact our operations and future growth.

We use funds generated from operations, as well as funds obtained through credit facilities and equity financing, to finance our operations. In light of our recent financing efforts, and as a result of the cash flow generated from operations, we believe we have sufficient cash to support our business activities, including research, development and marketing costs. However, future growth may depend on our ability to continue to raise additional funds, either through operations, bank borrowings, or equity or debt financings. There is no assurance that we will be able to continue to raise the funds necessary to finance growth or continue to generate the funds necessary to finance operations, and even if such funds are available, that the terms will be acceptable to us. The inability to generate the necessary funds from operations or from third parties in the future may require us to scale back our research, development and growth opportunities, which could harm our overall operations.

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While we maintain insurance protection against claims related to our services, there is no assurance that such protection will be adequate to cover potential claims and our inability to otherwise pay such claims could harm our business.

We maintain errors and omissions insurance for the services we provide. While we believe the limit on our errors and omissions insurance policy is adequate and consistent with industry practice, if claims are brought by our customers or other third parties, we could be required to pay the required claim or make significant expenditures to defend against such claims in amounts that exceed our current insurance coverage. There is no assurance that we will have the money to pay potential plaintiffs for such claims if they arise beyond the amounts insured by us. Making these payments could have a material adverse effect on our business.

Involvement in litigation could harm our business.

We are involved in various lawsuits arising in the ordinary course of business. Although we believe that the claims asserted in such lawsuits are without merit, the cost to us for the fees and expenses to defend such lawsuits could have a material adverse effect on our financial condition, results of operations or cash flow. In addition, there can be no assurance that we will not at some time in the future experience significant liability in connection with such claims. For the three months ended June 30, 2006, we have spent approximately $22,000 in legal fees and expenses defending these claims.

Our inability to recover from natural disasters could harm our business.

We currently maintain two data centers: one in Camarillo, California, and one in Albuquerque, New Mexico. Should a natural disaster occur in any of the locations, it is possible that ECHO would not be able to fully recover full functionality at such data centers. To minimize this risk, ECHO centralized its data processing functionality in Camarillo during fiscal 2005 and in 2006, anticipates that Albuquerque will be a fully redundant site. Despite such contingent capabilities, it is possible a natural disaster could limit or completely disable a specific service offered by ECHOor site operated byECHOuntil such time that the specific location could resume its functionality. Our inability to provide such service could have a material adverse effect on our business and results of operations.

Increases in the costs and requirements of technical compliance could harm our business.

The services which ECHO offers require significant technical compliance. This includes compliance to both Visa and MasterCard regulations and association rules, NACHA guidelines and regulations with regard to the Federal Reserve System’s Automated Clearing House and check related issues, and various banking requirements and regulations. ECHO has personnel dedicated to monitoring our compliance to the specific industries we serve and when possible, ECHO is moving the technical compliance responsibility to other parties. As the compliance issues become more defined in each industry, the costs and requirements associated with that compliance may present a risk to ECHO. These costs could be in the form of additional hardware, software or technical expertise that ECHO must acquire and/or maintain. Additionally, burdensome or unclear requirements could increase the cost of compliance. While ECHOcurrently has these costs under control, we have no control over those entities that set the compliance requirements so no assurance can be given that ECHO will always be able to underwrite the costs of compliance in each industry wherein we compete.

Our internal controls over financial reporting may not be adequate and our independent auditors may not be able to certify as to their adequacy, which could have a significant and adverse effect on our business and reputation.

Effective with our year-end September 30, 2006 we will become subject to Section 404 of the Sarbanes-Oxley act of 2002 and rules and regulations of the SEC thereunder, which we refer to as Section 404. Section 404 requires a reporting company such as ours to, among other things, annually review and report on its internal controls over financial reporting, and evaluate and disclose changes in its internal controls over financial reporting quarterly. Accordingly, we are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting. We are currently performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we expect to incur additional expenses and diversion of management's time. We cannot be certain as to the completion of our evaluation and testing actions or the impact of the same on our operations and may not be able to ensure that the process is effective or that the internal controls are or will be effective in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, including the SEC. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could have a material adverse effect on our business, results of operations and financial condition.

Risks Associated With Our Common Stock

If we need to sell or issue additional shares of common stock or assume additional debt to finance future growth, our stockholders’ ownership could be diluted or our earnings could be adversely impacted.

Our business strategy may include expansion through internal growth, by acquiring complementary businesses or by establishing strategic relationships with targeted customers and suppliers. In order to do so, or to fund our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our results of operations. As of the date of this report, management has no plan to raise additional capital through the sale of securities and believes that our cash flow from operations together with cash on hand and our established line of credit with Bank of the West will be sufficient to meet our working capital and other commitments.

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We have adopted a number of anti-takeover measures that may depress the price of our common stock.

Our rights agreement, our ability to issue additional shares of preferred stock and some provisions of our articles of incorporation and bylaws could make it more difficult for a third party to make an unsolicited takeover attempt of us. These anti-takeover measures may depress the price of our common stock by making it more difficult for third parties to acquire us by offering to purchase shares of our stock at a premium to its market price.

Our stock price has been volatile.

Our common stock is quoted on the NASDAQ Capital Market, and there can be substantial volatility in the market price of our common stock. Over the course of the quarter ended June 30, 2006, the market price of our common stock has been as high as $18.19 and as low as $12.51. Additionally, over the course of the year ended September 30, 2005, the market price of our common stock has been as high as $10.35 and as low as $7.10. The market price of our common stock has been, and is likely to continue to be, subject to significant fluctuations due to a variety of factors, including quarterly variations in operating results, operating results which vary from the expectations of securities analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by us or our competitors of a material nature, loss of one or more customers, additions or departures of key personnel, future sales of common stock and stock market price and volume fluctuations. In addition, general political and economic conditions such as a recession, or interest rate or currency rate fluctuations may adversely affect the market price of our common stock.

We have not paid and do not currently plan to pay dividends, and you must look to price appreciation alone for any return on your investment.

Some investors favor companies that pay dividends, particularly in general downturns in the stock market. We have not declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth, and we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, your return on this investment likely depends on your selling our stock at a profit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We could be exposed to market risk from changes in interest rates on our lease lines. Our exposure to interest rate risk relates to the $3,000,000 line of credit and the $1,000,000 equipment lease line which have not been utilized as of June 30, 2006. A hypothetical 1% interest rate change would have no material impact on our results of operations.

Item 4. Controls and Procedures

As of June 30, 2006, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of June 30, 2006, our disclosure controls and procedures were effective.

During the quarter ended June 30, 2006, there was no change in our internal control over financial reporting that materially affects, or that is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1a. Risk Factors

For a listing of our Risk Factors, see Part I, Item 2.

Item 5. Other Information

On May 11, 2006, we entered into separation agreements with each of our principal executive officers (CEO, CFO and COO) and each of our senior vice presidents whereby, in the event of a Change in Control of us (as defined in each agreement) each such executive officer would be entitled, to the extent they remain employed by us at the time of such Change in Control, to the following: (i) an acceleration of vesting with respect to all stock option and restricted stock grants then outstanding and not yet vested, (ii) a portion of such executive’s anticipated cash or sales commission-based bonus, as applicable, for the fiscal year in which the Change in Control occurred, and (iii) in the event that the executive is terminated without Cause (as defined in each agreement), or ceases to provide services to us (or our successor) as a result of an Involuntary Termination (as defined in each agreement) within the two year period following the Change in Control, then the executive would be entitled to a one-time lump sum cash payment equal to a percentage of the executive’s anticipated total compensation for the fiscal year in which the Change in Control occurred, plus continued medical benefits for a period of time following such termination.

With respect to each of Messrs. Barry and Harris, our Chief Executive Officer and Chief Operating Officer, respectively, in the event of their termination without Cause or Involuntary Termination within the two year period following the Change in Control, they would each be entitled to a one-time lump sum payment equal to two times their anticipated total compensation for the fiscal year in which the Change in Control occurred, plus continued medical benefits for a period of two years following such termination.

With respect to Ms. Cheung, our Chief Financial Officer, in the event of her termination without Cause or Involuntary Termination within the two year period following the Change in Control, she would be entitled to a one-time lump sum payment equal to one and one-half times her anticipated total compensation for the fiscal year in which the Change in Control occurred, plus continued medical benefits for a period of one and one-half years following such termination.

With respect to our senior vice presidents, in the event of their termination without Cause or Involuntary Termination within the two year period following the Change in Control, they would each be entitled to a one-time lump sum payment equal to one and one-half times the respective executive’s anticipated total compensation for the fiscal year in which the Change in Control occurred, plus continued medical benefits for a period of one and one-half years following such termination.

The provision regarding the acceleration of vesting for previously issued stock option grants is consistent with the standard terms and conditions of our 2003 Incentive Stock Option Plan, as amended, which already provides for such accelerated vesting.

For purposes of the separation agreements, (a) “Change in Control” means the consummation of (i) a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power (which voting power shall be calculated by assuming the conversion of all equity securities convertible (immediately or at some future time) into shares entitled to vote, but not assuming the exercise of any warrant or right to subscribe to or purchase those shares) of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned, directly or indirectly, by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; provided, however, that in making the determination of ownership by the shareholders of the Company, immediately after the reorganization, equity securities which persons own immediately before the reorganization as shareholders of another party to the transaction shall be disregarded; or (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets; (b) Termination for “Cause” means termination by reason of: (i) any act or omission knowingly undertaken or omitted by the executive with the intent of causing damage to the Company or its affiliates, its properties, assets or business, or its shareholders, officers, directors or employees, (ii) any act of the executive involving a material personal profit to the executive, including, without limitation, any fraud, misappropriation or embezzlement, involving properties, assets or funds of the Company or any of its subsidiaries, (iii) the Executive's consistent failure to perform his normal duties or any obligation under any provision of this Agreement, in either case, as directed by our Board of Directors, (iv) the conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of the Company; (B) any felony offense; or (C) any crime of moral turpitude, or (v) the chronic or habitual use or consumption of drugs or alcoholic beverages; and (c) “Involuntary Termination” means the executive's cessation of the provision of services to the Company following (i) a material reduction in the executive's function, authority, duties, or responsibilities, without the executive's express written consent; or (ii) a material reduction in salary.

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The purpose of the agreements was to align the interests of each of our executive and senior officers with the interests of the Company. As of the date of this report, there is no agreement, transaction or other contemplated plan related to the change of control of the Company.

Item 6. Exhibits

Exhibit Number	Exhibit Description
10.1	Sample Separation Agreement between Electronic Clearing House, Inc. and Company Executives.
10.2	Settlement and License Agreement dated March 31, 2006, among Electronic Clearing House, Inc., XpressCheX, Inc. and LML Patent Corporation. (Confidential treatment requested for portions of this exhibit. These portions have been omitted form this Quarterly Report and submitted separately to the Securities and Exchange Commission.)
31.1	Certificate of Joel M. Barry, Chief Executive Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
31.2	Certificate of Alice L. Cheung, Chief Financial Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.1	Certificate of Joel M. Barry, Chief Executive Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
32.2	Certificate of Alice L. Cheung, Chief Financial Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ELECTRONIC CLEARING HOUSE, INC.

(Registrant)

Date: August 14, 2006	By:	/s/ Alice Cheung
	Alice Cheung, Treasurer and
	Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Exhibit Description
10.1	Sample Separation Agreement between Electronic Clearing House, Inc. and Company Executives.
10.2	Settlement and License Agreement dated March 31, 2006, among Electronic Clearing House, Inc., XpressCheX, Inc. and LML Patent Corporation. (Confidential treatment requested for portions of this exhibit. These portions have been omitted form this Quarterly Report and submitted separately to the Securities and Exchange Commission.)
31.1	Certificate of Joel M. Barry, Chief Executive Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-4(a) under the Securities and Exchange Act of 1934, as amended.
31.2	Certificate of Alice L. Cheung, Chief Financial Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.1	Certificate of Joel M. Barry, Chief Executive Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
32.2	Certificate of Alice L. Cheung, Chief Financial Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.

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EX-10.1

EXHIBIT 10.1

SEPARATION AGREEMENT

This Separation Agreement (this “Agreement”) is made and entered into as of the [__] day of [__________], 2006, by and between Electronic Clearing House, Inc., a Nevada corporation (the “Company”) and [____________] (“Executive”).

RECITALS

WHEREAS, Executive is employed by the Company as the [___________] of the Company; and

WHEREAS, the Company considers it essential to its best interests and to the best interests of its stockholders to foster the continuous employment of its key personnel.

NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Definitions.

a. “Anticipated Annual Bonus” shall mean the highest possible annual bonus award to be received by Executive in a given fiscal year based upon and assuming the successful completion by each of the Company and Executive, as applicable, of performance criteria previously determined by the Board of Directors of the Company for such fiscal year.

b. “Change-in-Control” shall mean the consummation of (i) a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power (which voting power shall be calculated by assuming the conversion of all equity securities convertible (immediately or at some future time) into shares entitled to vote, but not assuming the exercise of any warrant or right to subscribe to or purchase those shares) of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned, directly or indirectly, by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization; provided, however, that in making the determination of ownership by the stockholders of the Company, immediately after the reorganization, equity securities which persons own immediately before the reorganization as stockholders of another party to the transaction shall be disregarded; or (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets.

c. “Common Stock” means the common stock, $.01 par value of the Company.

d. “Exchange Act” means the Securities Exchange Act of 1934, as amended. References to a particular section of the Exchange Act include references to successor provisions.

e. “Involuntary Termination” shall mean Executive's cessation of the provision of services following (i) a material reduction in Executive's function, authority, duties, or responsibilities, without Executive's express written consent; or (ii) a material reduction in salary.

f. “Options” shall mean options issued by the Company to the Executive to purchase Common Stock pursuant to the Company's Amended and Restated 2003 Incentive Stock Option Plan.

g. “Restricted Stock” shall mean shares of Common Stock acquired by Executive pursuant to, or outside of, the Company's Amended and Restated 2003 Incentive Stock Option Plan.

h. “Sales Commission Plan” shall mean a plan setting forth, for a given fiscal year, sales commission compensation payable to Executive based on performance criteria previously determined by the Board of Directors of the Company for such fiscal year.

i. “Subsidiary” means (a) any corporation of which more than 50% of the Voting Securities are at the time, directly or indirectly, owned by the Company, (b) any partnership or limited liability company in which the Company has a direct or indirect interest (whether in the form of voting power or participation in profits or capital contribution) of more than 50%, and (c) any other entity designated by the Board of Directors of the Company (“Board”) in which the Company has a direct or indirect interest.

j. “Termination Date” shall mean the date in which Executive (i) is terminated by the Company without Cause, or (ii) ceases to provide services to the Company as a result of an Involuntary Termination with respect to Executive.

k. Termination for “Cause” shall mean termination by reason of: (i) any act or omission knowingly undertaken or omitted by Executive with the intent of causing damage to the Company or its affiliates, its properties, assets or business, or its stockholders, officers, directors or employees; (ii) any act of Executive involving a material personal profit to Executive, including, without limitation, any fraud, misappropriation or embezzlement, involving properties, assets or funds of the Company or any of its subsidiaries; (iii) Executive's consistent failure to perform his normal duties or any obligation under any provision of this Agreement, in either case, as directed by the Board; (iv) conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of the Company; (B) any felony offense; or (C) any crime of moral turpitude; or (v) the chronic or habitual use or consumption of drugs or alcoholic beverages.

l. “Total Cash Compensation” shall mean an amount equal to the sum of Executive's annual base salary for the prior fiscal year including any bonus awards.

m. “Voting Securities” shall mean the issued and outstanding shares of Common Stock of the Company that are entitled to vote on a particular matter.

2. Vesting. In the event of a Change in Control, and provided that Executive is employed by the Company at the time of such Change in Control: (i) all of the outstanding Options shall become immediately vested and exercisable, and (ii) the entire unvested portion of any shares of Restricted Stock shall accelerate and immediately vest.

3. Payment of Bonus. In the event of a Change in Control, and provided that Executive is employed by the Company at the time of such Change in Control, Executive shall be entitled to receive the following: (A) (i) in the event such Change in Control occurs in the first six (6) months of the Company’s then existing fiscal year, Executive shall receive a one time lump-sum cash payment equal to the product of Executive’s Anticipated Annual Bonus, multiplied by 0.50, or (ii) in the event such Change in Control occurs during any period following the first six (6) months of the Company’s then existing fiscal year, Executive shall receive a one time lump-sum cash payment equal to a pro-rated portion of Executive’s Anticipated Annual Bonus, pro-rated based upon the number of months of service the Executive had provided in the then existing fiscal year (each a “Bonus Payment”); and (B) in the event that Executive is entitled to receive commissions based on sales under any then existing Sales Commission Plan, Executive shall be entitled to receive any and all then earned sales commissions (“Sales Commission Payments”) for the remainder of the then existing fiscal year (notwithstanding when the Change in Control occurs). Any Bonus Payment shall be payable by Company (or its corporate successor) to Executive within five (5) business days following the consummation of such Change in Control, and any Sales Commission Payments will be payable in accordance with the terms of the Sales Commission Plan. The Company shall cause any successor/acquiring entity in such Change in Control to adopt the Sales Commission Plan.

4. Termination.In the event that (i) a Change in Control occurs with respect to the Company (and provided that Executive is employed by the Company at the time of such Change in Control), and (ii) within a period of two (2) years following the closing of such Change in Control, Executive either (a) is terminated by the Company (or its corporate successor) without Cause, or (b) ceases to provide services to the Company (or its corporate successor) as a result of an Involuntary Termination with respect to Executive, then Executive shall be entitled to receive the following compensation:

(i) a one time lump-sum cash payment in the amount of [__________ percent (__%)] of the total amount of Executive's Total Cash Compensation, payable by Company (or its corporate successor) to Executive within five (5) business days following the Termination Date;

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(ii) for a period of [_________ (___) years] after the Termination Date, the Company (or its corporate successor) shall continue to make available to Executive medical benefits on a basis that is substantially similar (in benefits to Executive and costs to Company), in the aggregate, to the benefits that were available to the Executive immediately prior to the Change in Control.

5. Termination of Agreement. In the event that Executive ceases to provide services to the Company (or its successor) for any reason, prior to a Change of Control, this Agreement shall terminate without further action by the Company or Executive, and shall thereafter be deemed null and void.

6. General Release and Waiver. As a condition to any payment under this Agreement, in addition to the other requirements set forth herein, Executive shall enter into and deliver to the Company a general release and waiver in such form and containing such terms and conditions as the Board may require.

7. Executive Covenants.

a. For a period of one (1) year after the Termination Date (“Restricted Period”), Executive covenants not to, either directly or indirectly, for Executive or on behalf of or in conjunction with any other person, company, partnership, corporation, business, group, or other entity (each, a “Person”), solicit or attempt to solicit, recruit or attempt to recruit any employee, agent, or contract worker of the Company with whom Executive had contact during the course of [his or her] employment with the Company.

b. Executive further covenants and agrees that during the Restricted Period, Executive shall not, either directly or indirectly, for [himself or herself] or on behalf of or in conjunction with any other person or entity, (i) induce or attempt to induce any employee, officer or consultant of the Company to supply Confidential Information or Trade Secrets, as defined in Section 8 herein, of the Company to any third person, firm or corporation, or (ii) induce or attempt to induce any Person who, as of the date of the inducement or attempted inducement or within twelve (12) months prior to that date, is or was a customer, supplier, vendor, licensee, licensor or other business relation of the Company, to cease doing business with the Company or in any way interfere with the relationship between any such customer, supplier, vendor, licensee, licensor or other business relation and the Company.

c. The covenants in this Section 7 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. If any provision of this Section 7relating to the time period, scope, or geographic areas of the restrictive covenants shall be declared by a court of competent jurisdiction to exceed the maximum time period, scope, or geographic area, as applicable, that such court deems reasonable and enforceable, then this Agreement shall automatically be considered to have been amended and revised to reflect such determination.

d. All of the covenants in this Section 7 shall be construed as an agreement independent of any other provisions in this Agreement, and the existence of any claim or cause of action Executive may have against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants.

e. Executive has carefully read and considered the provisions of this Section 7 and, having done so, agrees that the restrictive covenants in this Section 7 impose a fair and reasonable restraint on Executive and are reasonably required to protect the interests of the Company and its officers, directors, employees, and stockholders.

8. Trade Secrets and Confidential Information.

a. For purposes of this Section, “Confidential Information” means any data or information (other than Trade Secrets) that is valuable to the Company (or, if owned by someone else, is valuable to that third party) and not generally known to the public or to competitors in the industry, including, but not limited to, any non-public information (regardless of whether in writing or retained as personal knowledge) pertaining to research and development; product costs and processes; stockholder information; pricing, cost, or profit factors; quality programs; annual budget and long-range business plans; marketing plans and methods; contracts and bids; and personnel. “Trade Secret” means information including, but not limited to, any technical or nontechnical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers or other information similar to any of the foregoing, which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

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b. Executive acknowledges that [he or she] has been employed by the Company in a confidential relationship wherein [he or she], in the course of his employment with the Company, has received and has had access to Confidential Information and Trade Secrets of the Company and accordingly, [he or she] is willing to enter into the covenants contained in Sections 8, 9, and 10 of this Agreement in order to provide the Company with what [he or she] considers to be reasonable protection for its interests.

c. Executive hereby agrees that, during the Restricted Period, [he or she] will hold in confidence all Confidential Information of the Company that came into [his or her] knowledge during [his or her] employment by the Company and will not disclose, publish or make use of such Confidential Information without the prior written consent of the Company.

d. Executive hereby agrees to hold in confidence all Trade Secrets of the Company that came into [his or her] knowledge during [his or her] employment by the Company and shall not disclose, publish, or make use of at any time after the Termination Date such Trade Secrets without the prior written consent of the Company for as long as the information remains a Trade Secret.

e. Notwithstanding the foregoing, the provisions of this Section will not apply to (i) Confidential Information or Trade Secrets that otherwise become generally known in the industry or to the public through no act of Executive or any person or entity acting by or on Executive's behalf, (ii) information independently developed by Executive without reference to the Company's Confidential Information or Trade Secrets, or (iii) disclosure of Confidential Information or Trade Secrets to the extent required to be disclosed by a court or governmental agency pursuant to a statute, regulation or valid order (provided that Executive first notifies the Company and gives it the opportunity to seek a protective order or to contest such required disclosure).

f. The parties agree that the restrictions stated in this Section 8 are in addition to and not in lieu of protections afforded to trade secrets and confidential information under applicable state law. Nothing in this Agreement is intended to or shall be interpreted as diminishing or otherwise limiting the Company's rights under applicable state law to protect its trade secrets and confidential information.

9. Return of Company Property. Upon the Termination Date or as promptly thereafter as is practicable, Executive shall deliver to the Company all correspondence, reports, records, designs, patents, business plans, financial statements, manuals, memoranda, customer lists, customer databases, charts, advertising materials, other similar data and other property delivered to or compiled by Executive by or on behalf of the Company or its representatives, vendors or customers which pertain to the business of the Company or future plans of the Company.

10.No Prior Agreements. Executive hereby represents and warrants that the execution of this Agreement by Executive and the performance of his duties hereunder will not violate or be a breach of any agreement with the Company, a former employer, client, or any other person or entity.

11.Assignment; Binding Effect. No assignment or transfer by any party of such party's rights and obligations under this Agreement will be made except with the prior written consent of the other parties to this Agreement; provided that the Company may assign this Agreement only to the surviving entity in a Change-in-Control, provided that any such assignee shall assume this Agreement in a writing delivered to Executive. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties and their respective heirs, legal representatives, successors, and permitted assigns.

12.Complete Agreement; Waiver; Amendment. Executive has no oral representations, understandings, or agreements with the Company or any of their respective officers, directors, or representatives covering the same subject matter as this Agreement. This Agreement is the final, complete, and exclusive statement of expression of the agreement between the Company and Executive with respect to the subject matter hereof, and cannot be varied, contradicted, or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be later modified except by a further writing signed by duly authorized officers of the Company and by Executive, and no term of this agreement may be waived except by a writing signed by the party waiving the benefit of such term.

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13. Notice. Whenever any notice is required hereunder, it shall be given in writing addressed as follows:

To the Company: Electronic Clearing House, Inc.

730 Paseo Camarillo

Camarillo, California 93010

Attn: Board of Directors

Facsimile No.: (805) 419-8682

To the Executive:	_____________________
	_____________________
	_____________________
	Facsimile No.: (___) ________

14. Severability; Headings. If any provision of the Agreement is rendered or declared illegal or unenforceable by reason of any existing or subsequently enacted legislation or by the decision of any arbitrator or by decree of a court of last resort, the parties shall promptly meet and negotiate substitute provisions for those rendered or declared illegal or unenforceable to preserve the original intent of this Agreement to the extent legally possible, but all other provisions of this Agreement shall remain in full force and effect.

15. Equitable Remedy. Because of the difficulty of measuring economic losses to the Company as a result of a breach of the covenants set forth in Sections 7 through 11, and because of the immediate and irreparable damage that would be caused to the Company for which monetary damages would not be a sufficient remedy, it is hereby agreed that in addition to all other remedies that may be available to the Company at law or in equity, the Company shall be entitled to specific performance and any injunctive or other equitable relief as a remedy for any breach or threatened breach of Executive's covenants.

16. Jointly Drafted. The parties and their respective counsel have participated jointly in the negotiation and drafting of this Agreement. In the event that an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

17. Governing Law. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California, not including the choice-of-law rules thereof. All disputes arising from or relating to this Agreement shall be subject to the exclusive jurisdiction of and be litigated in the state or federal courts located in the State of California. All parties hereby consent to the exclusive jurisdiction and venue of such courts for the litigation of all disputes and waive any claims of improper venue, lack of personal jurisdiction, or lack of subject matter jurisdiction as to any such disputes.

18. Attorney's Fees. The losing party shall be liable to the prevailing party for its reasonable costs and attorney's fees incurred in any action to enforce this Agreement.

N WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above.

Electronic Clearing House, Inc.
By:
	Name:
	Title:
EXECUTIVE:
[______________]

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EX-10.2

EXHIBIT 10.2

*TEXT OMITTED AND FILED SEPARATELY. CONFIDENTIAL TREATMENT REQUESTED BY ELECTRONIC CLEARING HOUSE, INC. UNDER 17 C.F.R. SECTIONS 200.80(b)(4) 200.83 AND 240.24b-2

SETTLEMENT AND LICENSE AGREEMENT

THIS SETTLEMENT AND PATENT LICENSE AGREEMENT (the “Settlement and License Agreement”) is entered on April 3, 2006(the “Effective Date”) by and among LML Patent Corp., a Delaware corporation having its principal place of business at Corporation Trust Centre, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware, 19801 (“LICENSOR”), and Electronic Clearing House, Inc., a Nevada corporation having its principal place of business at 730 Paseo Camarillo, Camarillo, California 93010 and its wholly-owned subsidiary Xpresschex, Inc., a New Mexico corporation having its principal place of business at 215 Central NW, Suite 3A, Albuquerque, New Mexico 87102 (collectively “ECHO” and/or the “LICENSEE”).

RECITALS

WHEREAS, LICENSOR owns rights in certain U.S. Patents related to making, using, offering for sale and selling Electronic Check Conversion systems and services in the Direct Consumer Field; and

WHEREAS, LICENSOR filed suit against LICENSEE in the United States District Court for the District of Delaware, Case No. CA-04-858, alleging infringement of certain LICENSOR patents by certain of LICENSEE’s products, systems and/or services (“Delaware Litigation”).

WHEREAS, LICENSOR desires to grant to LICENSEE, and LICENSEE desires to obtain from LICENSOR, a license for the right to use the invention of LICENSOR’s patents for use in connection with all the transactions in which LICENSEE is involved in the Direct Consumer Field; and the parties desire to settle the litigation between them.

NOW, THEREFORE, in consideration of the covenants contained in this Settlement and License Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

1. DEFINITIONS.

The following terms, when used in thisSettlement and License Agreement with initial capital letters, shall have the respective meanings set forth in this Section 1.

1.1. “Affiliate” means, with respect to any party to this Settlement and License Agreement, any Person that, directly or indirectly, controls, is controlled by, or is under common control with, such Party, such as parents, subsidiaries and sister corporations.

1.2. “Acquirer Processor” means the role of accepting transactions from a merchant prior to submission to Visa and then submitting them to Visa for qualification under the Visa POS Check program.

1.3. “ACH” means the Automated Clearing House.

*TEXT OMITTED AND FILED SEPARATELY. CONFIDENTIAL TREATMENT REQUESTED BY ELECTRONIC CLEARING HOUSE, INC. UNDER 17 C.F.R. SECTIONS 200.80(b)(4) 200.83 AND 240.24b-2

1.4. “ACH Processor” means a party which processes ACH files and/or items on behalf of one of the participants in the ACH system provided that the party did not perform the ECC function.

1.5. “Capture Service Provider” means the service of capturing and storing the check data upon electronic submission to a data center and the transfer of files of captured data on a routine basis for ACH submission by another party.

1.6. “Confidential Information” has the meaning set forth in Section 6.

1.7. “Consumer” means any entity which either:

(a) purchases or offers to purchase goods or services from a Merchant; or

(b) settles all or part of a payment obligation other than the purchase of goods and services, including, without limitation, the payment of taxes, duties, fees and fines.

1.8. “Direct Consumer Field” means the field of use in which a Consumer effects a transaction through the action of a natural person at the physical business premises of a Merchant and the use of ECC, also called point-of-purchase transaction. The NACHA standard entry class code for a Direct Consumer Field transaction is “POP.”

1.9. “Effective Date” has the meaning set forth in the preamble.

1.10. “ECC” is the acronym for “Electronic Check Conversion” and means the process or system by which a paper check is converted to an electronic transaction.

1.11. “Final Judgment” is the decision of the District Court for the District of Delaware in Case No. CA-04-858.

1.12. “Funds Transfer” means, with respect to any transaction, the transfer of funds from the banking account of the Consumer that is a party to such transaction to the banking account of the Merchant that is a party to such transaction and vice versa.

1.13. “Gross Revenue” means the total revenue received by LICENSEE for serving as an Acquirer Processor and/or a Third Party Processor for any Visa ECC Transaction.

1.14. “ISO” means Independent Sales Organization.

1.15. “Licensed Activity” means making, using, offering for sale or selling one or more steps of ECC in the Direct Consumer Field.

1.16. “Licensed Patents” means any and all LICENSOR patents, including but not limited to U.S. Patent Nos. 6,354,491; 6,283,366; 6,164,528; and 5,484,988, to the extent necessary to perform ECC in the Direct Consumer Field. Such patents include any such patents currently owned or controlled by LICENSOR and any such patents later acquired by, granted to or controlled by LICENSOR.

1.17. “License Term” means the time period beginning on the Effective Date and ending on January 16, 2013.

1.18. “LICENSOR” means LML Patent Corp. and any entity controlled by LICENSOR. For purposes of this Settlement and License Agreement, “control” of an entity means the ability, directly or indirectly, to direct and manage the activities of such entity.

1.19. “Merchant” means any entity which offers ECC services to Consumers in connection with the purchase of goods or services or uses ECC to effectuate a Funds Transfer.

1.20. “Merchant Account Information” means the electronic form of information relating to the bank and banking account of a Merchant.

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*TEXT OMITTED AND FILED SEPARATELY. CONFIDENTIAL TREATMENT REQUESTED BY ELECTRONIC CLEARING HOUSE, INC. UNDER 17 C.F.R. SECTIONS 200.80(b)(4) 200.83 AND 240.24b-2

1.21. “Non-Visa ECC Transaction” means any ECC transaction in the Direct Consumer Field that is not a Visa ECC Transaction.

1.22. “Participating Transaction” means those check transactions that are processed in the Visa POS Check program that go directly from Visa to the bank where the check writer’s checking account resides and, where upon verification of funds, clearance of the check occurs from the check writer’s bank through the Visa network rather than through the ACH, independent of LICENSEE.

1.23. “Parties” means LICENSOR and LICENSEE, collectively.

1.24. “Party” means each of LICENSOR and LICENSEE, individually.

1.25. “Person” means an individual, corporation, partnership, joint venture, trust, unincorporated organization or similar organization or any other legal entity.

1.26. “Territory” means the United States of America, its territories and possessions, including, without limitation, the District of Columbia and the Commonwealth of Puerto Rico;

1.27. “Third Party Processor” means the entity that clears ECC transactions under the VISA POS Check service through the ACH in those cases where the check transactions first went to Visa for clearance through the Visa Network but could not be cleared by through the Visa network.

1.28. “Visa ECC Transaction” means any ECC transaction processed through the Visa network (a.k.a. the Visa Net).

1.29. “Visa POS Check Guarantee” means a transaction that has been processed through the Visa POS Check program and the merchant or bank have requested that LICENSEE guarantee the transaction in addition to performing the ECC function.

2. SETTLEMENT OF THE LITIGATION.

2.1. Stipulated Dismissal. Within three (3) business days of the receipt of the release fee payment specified in Section 5.1, the parties shall file with the Court a Stipulated Dismissal with prejudice substantially in the form attached hereto as Exhibit 1 and LICENSOR shall send a letter to the Special Discovery Master substantially in the form attached hereto as Exhibit 2. In addition. LICENSEE need not produce the documents that are the subject of Special Discovery Master Order No. 5 and LICENSEE’s objections thereto (DI 362).

2.2. No Award of Fees or Costs. Each party shall bear responsibility for its own costs and fees associated with the litigation and no request, motion, petition or otherwise for such fees and/or costs shall be made to the Court.

2.3. No Admissions of Liability. By entering into this Settlement and License Agreement, LICENSEE is not making any admissions of liability.

2.4. No Attempt To Invalidate. LICENSEE agrees that, in absence of a subpoena or court order requiring its participation or support, it shall not take any action, participate in or support any suit, claim, action, litigation, administrative proceedings, or proceeding of any nature brought by or against LICENSOR that concerns or challenges the validity or enforceability of the Licensed Patents, unless such suit, claim, action, litigation or proceedings to enforce one or more of the Licensed Patents is brought by LICENSOR or its successors, assigns, Affiliates, or licensees against LICENSEE, or places LICENSEE in a reasonable apprehension of being sued on one or more of the Licensed Patents.

2.5. Retention of Jurisdiction to Enforce This Agreement. Except as provided under Section 9.2, the United States District Court for the District of Delaware shall retain jurisdiction for purposes of enforcing the terms of this Settlement and License Agreement.

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3. LICENSE OF RIGHTS.

3.1. License Grant. LICENSOR hereby grants to LICENSEE, and LICENSEE hereby accepts from LICENSOR, a personal, non-exclusive, license under the Licensed Patents to perform the Licensed Activity in the Territory during the License Term.

3.2. No Transfer Of License Grant. Except as expressly provided for in Section 10.2, the license granted hereunder is not assignable or transferable.

3.3. No Implied License. Except as expressly provided herein, nothing in this Settlement and License Agreement is intended to grant any rights or license, express or implied, to either Party in or to any intellectual property owned, licensed or controlled by the other Party.

3.4. No License To Other Fields Of Use. Nothing in this Settlement and License Agreement is intended to grant, nor should anything in this Settlement and License Agreement be construed to grant, any rights or license, express or implied, to perform ECC in any field of use other than the Direct Consumer Field.

3.5. Covenant Not to Sue. Subject to and except as set forth in Section 5.3, LICENSOR covenants not to sue Persons, including VISA, banks, ISO’s, processors or merchants, using LICENSEE’S ECC Direct Consumer Field products, services or systems based on an allegation that the use of LICENSEE’S ECC Direct Consumer Field products, services or systems infringes whether by inducing infringement, contributorily infringing or directly, one or more of the Licensed Patents. All Visa ECC Direct Consumer Field transactions processedby merchants, banks, processors or ISO’s, provided that such merchants, banks, processors or ISO’s had designated LICENSEE as their third-party processor, as defined in Exhibit 4, including without limitation Participating Transactions, as identified in Exhibit 4 as transaction 9, are covered by this covenant. Within thirty (30) days of the Effective Date, LICENSEE shall provide to LICENSOR a list containing the names and addresses of all such banks, ISO’s processors and merchants, and shall update this list once per quarter at the time the report of Section 5.4 is sent to LICENSOR. Nothing herein, however, shall preclude or is intended to preclude LICENSOR from asserting, in litigation or otherwise, the Licensed Patents against such Persons based on the use by such Persons of ECC products, services or systems that are not connected to or reliant upon the LICENSEE as an Acquirer Processor and/or Third Party Processor for a portion of their transaction activity. Moreover, nothing herein shall preclude or is intended to preclude LICENSOR from asserting, in litigation or otherwise, the Licensed Patents against such Persons if LICENSEE is not abiding by the defined royalty arrangements as set forth in Section 5.3 for ECC transactions performed in whole or in part by such Persons.

4. RELEASE.

4.1. LICENSOR, for itself and its successors, assigns, Affiliates, and licensees, hereby releases and forever discharges LICENSEE and any parents, subsidiaries, Affiliates, directors, officers, employees, agents, shareholders and customers from any and all causes of action (including all demands, damages of any type or kind, debts, liabilities, accounts, costs, expenses, liens, obligations, injunctive relief, fees, actions, causes of action (at law, in equity, under federal or state law, in any kind of forum), suits, promises, rights, rights to subrogation, rights to contribution, and remedies of any nature whatsoever) in law or at equity related to the Licensed Patents, whether known or unknown, which may have arisen prior to the Effective Date.

4.2. LICENSEE, for itself and its successors, assigns, Affiliates, and licensees, hereby releases and forever discharges LICENSOR and any parents, subsidiaries, Affiliates, directors, officers, employees, agents and shareholders from any and all causes of action (including all demands, damages of any type or kind, debts, liabilities, accounts, costs, expenses, liens, obligations, injunctive relief, fees, actions, causes of action (at law, in equity, under federal or state law, in any kind of forum), suits, promises, rights, rights to subrogation, rights to contribution, and remedies of any nature whatsoever) in law or at equity related to the Licensed Patents, whether known or unknown, which may have arisen prior to the Effective Date.

5. PAYMENTS.

5.1. Release Fee Payment.

As consideration for LICENSOR entering into the release set forth in Section 4.1, LICENSEE agrees to pay LICENSOR Four Hundred Thousand ($400,000.00) U.S. Dollars by wire transfer to the following account on the Effective Date:

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Beneficiary:	LML Patent Corp.
Beneficiary Address:	1330 Riverbend Drive, Suite 600 Dallas, Texas 75247
Bank Name:	*
Bank Address:	*
Bank Account #:	*
Bank Routing #:	*

The Release Fee Payment is not refundable. Said payment recognizes part of the ECC transaction volume of the LICENSEE has been generated from other parties and the payment by LICENSEE will therefore inure to the benefit of those same parties whose transactions LICENSEE has processed as ECC transactions over the years such that those parties will not be required to also make any royalty payment, except as set forth in Section 5.3, on such past transactions.

5.2. Standstill Fee Payment.

As consideration for LICENSOR entering in the Standstill agreement set forth in Section 10.15 herein, LICENSEE agrees to pay LICENSOR Two Hundred Thousand ($200,000.00) U.S. Dollars by wire transfer to the above account on the Effective Date. This paragraph shall not supercede any provision set forth in Section 10.15 herein.

5.3. Direct Consumer Field Running Royalties.

(a) * performed by LICENSEE. As further consideration for entering into this Settlement and License Agreement, on transactions processed on or after April 1, 2006, LICENSEE agrees to pay running royalties to LICENSOR *.

(b) * Coordinated by Third Party. For * coordinated by a third party wherein LICENSEE performs a portion of the ECC activity, * LICENSEE will be required to do the following:

(1) LICENSEE will advise the party coordinating the ECC activity, in writing with a copy to LICENSOR, that they can qualify the transactions under this Settlement and LicenseAgreement for a payment of *. Should either the party or LICENSEE pay the * to LICENSOR, LICENSOR shall have no further rights against LICENSEE or the third party with regard to the transactions in question.

(2) Should LICENSEE advise the party of the opportunity to qualify the transaction by making such royalty payment and they refuse to do so, for any reason, and should LICENSEE decide not to pay the royalty itself, LICENSOR will leave LICENSEE alone and pursue only the third party coordinating the ECC transaction. LICENSEE’s activities and revenues for services provided as solely a Capture Service Provider or an ACH Processor, whatever they may be, will not qualify LICENSEE to make * to LICENSOR under any circumstance and LICENSOR agrees to leave LICENSEE alone if written notice to the party, with a copy to LICENSOR, was given by LICENSEE of the opportunity to qualify the transactions.

(c) Non-Qualified Transactions for Royalty Payment under this Agreement. LICENSOR agrees that LICENSEE’s * , do not qualify as transactions for which a royalty should be paid to LICENSOR unless an ECC transaction is performed or conducted by LICENSEE in connection with LICENSEE’s *. LICENSEE will have no obligation or liability to LICENSOR for a third party that may use LICENSEE’s *, even if used as a first step in performing an ECC transaction (by someone other than LICENSEE) and LICENSOR specifically agrees to leave LICENSEE alone in such situations. LICENSEE will have no obligation or liability to LICENSOR for a third party that performs an ECC transaction and subsequently asks LICENSEE to *  the transaction other than to provide to LICENSOR in writing the name of the third party performing ECC transactions. Should LICENSEE have performed the ECC function on a transaction *, then LICENSEE’s only obligation to LICENSOR will be the single payment as set forth in 5.3.(a) for a *. Should LICENSEE * a Visa POS Check transaction, its only obligation to LICENSOR will be the payment of * LICENSEE receives for being the Acquiring Processor and/or Third Party Processor, depending on whatever role LICENSEE plays with the specific Visa POS Check * transaction.

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(d) Rate for *. As further consideration for entering into this Settlement and License Agreement, on transactions processed on or after April 1, 2006, LICENSEE agrees to pay running royalties to LICENSOR*.

(e) No Royalty Payment for *. No royalty will be due LICENSOR on * from LICENSEE or any other party, including Visa, banks, merchants, ISO’s, processors or such other parties that may assist in processing such transactions, that are processed by Visa for those merchants and/or banks who use LICENSEE as either their Acquirer Processor and/or Third Party Processor provided that LICENSEE has not received any fees or revenue from VISA for such transactions. Should LICENSEE receive any Acquirer Processor and/or Third Party Processor fees in association with processing a *, such fee will be counted toward the royalty obligation LICENSEE has to LICENSOR as defined in Section 5.3.(d).

(f) Particular Merchant Rate. Once a running royalty rate has been established for a particular merchant (i.e. 5.3(d)), the running royalty rate for that merchant will be calculated, during the License Term, in that manner even if the use of the Visa network is discontinued, provided however, that if the Visa network is discontinued, LICENSEE’S pricing to such Merchant shall not increase by * above the rate that the Visa bank or Visa charged to that Merchant prior to the discontinuation of the Visa network. If LICENSEE’S pricing to such Merchant does increase by *, the transactions for that merchant will be considered Non-Visa ECC Transactions and the running royalty rate set forth in Section 5.3(a) will apply.

5.4. Running Royalty Payments, Timing and Reports.

(a) Payments. Running royalty payments are to be deposited via the ACH to the same LICENSOR bank account identified in Section 5.1. Running royalty payments are not refundable.

(b) Timing. All running royalties payable pursuant to Sections 5 are to be paid to LICENSOR by LICENSEE within fifteen (15) days of the end of each calendar quarter during the License Term. LICENSEE shall keep full and true books of account and other records in sufficient detail so that the royalties due and payable to LICENSOR hereunder may be properly ascertained. When any royalty payment is due, LICENSEE shall report to LICENSOR the number of non-Visa ECC transactions and Gross Revenue from Visa ECC Transactions originated in the Direct Consumer Field for the period for which the royalty payment is due. LICENSOR shall have the right, at its expense, to have an independent professional accountant audit LICENSEE’s books and records solely for the purpose of determining the accuracy of any royalty payments due and payable hereunder; provided that LICENSOR provides LICENSEE with reasonable prior notice, and such audit is conducted during normal business hours. Such audits may be conducted no more than once per calendar year. Any information obtained as a result of such audits shall be maintained by the independent professional accountant in confidence, and only disclosed to LICENSOR to the extent necessary to collect any underpayment by LICENSEE under this Settlement and License Agreement. If the audit shows an underpayment of more than seven percent (7%), LICENSEE shall reimburse for the full cost of the audit.

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(c) Interest on Overdue Royalties. LICENSEE covenants and agrees to pay to LICENSOR interest upon any of the royalties payable under Sections 5 that are in arrears at the lower of the rate of 9 percent (9%) per annum and the maximum rate allowed by applicable law which interest shall be payable by LICENSEE at the same time as payment of any part of the principal amount in respect of which it is owed.

5.5. Direct Consumer Field Most Favored Running Royalty Rates. If, at any time during the term of this Settlement and License Agreement, LICENSOR grants a license to the Licensed Patents in the Direct Consumer Field to any third party, other than an Affiliate of LICENSOR, * running royalty rate lower than that specified in Section 5.3(a), or at a percentage of Gross Revenue from * royalty rate lower than that specified in Section 5.3(d), regardless of any transaction volume levels that might be involved in the third party agreement to qualify for said running royalty rate, LICENSEE shall be immediately advised and shall be entitled to receive such reduced running royalty rate with respect to the Licensed Activity, effective as of the date that the reduced running royalty rate is provided to such third party and shall not be subject to any transaction volume qualifying level in order to receive the lower running royalty rate. Upon good cause shown, and provided that LICENSOR does not acknowledge that it has granted a reduced running royalty rate with respect to the Licensed Activity, LICENSEE shall have the right, at its expense, to have an independent professional accountant audit, no more than once per year, LICENSOR’s running royalty rates and, if it is found that a lower running royalty rate has been offered to others and not immediately offered to LICENSEE according to this section, LICENSOR agrees to pay all audit expenses and to return all running royalties paid over those that would have been paid at the lower running royalty rate plus an interest rate of 9% per annum on such funds. Any information obtained as a result of such audits shall be maintained by the independent professional accountant in confidence, and only disclosed to LICENSEE to the extent necessary to inform LICENSEE of any overpayment by LICENSEE under this Settlement and License Agreement.

6. CONFIDENTIALITY.

6.1. The terms and conditions of this Settlement and License Agreement shall constitute confidential information of each Party (“Confidential Information”). No Party shall disclose any Confidential Information to any third Person without the prior written consent of the other Party, except that a Party may disclose Confidential Information as required by SEC rules and/or regulations and may also disclose Confidential Information in response to a discovery request, subpoena or court order to produce such Confidential Information, or as otherwise required by law.

6.2. Notwithstanding the provisions of Section 6.1, LICENSOR may release publicly the statement in substantially the same form as attached hereto as Exhibit 3 and LICENSEE may release publicly the statement in substantially the same form as attached hereto as Exhibit 5.

6.3. In reference to the identity of ISO’s, processors, merchants, banks and such other information that is shared by LICENSEE under Section 3.5 of this Settlement and License Agreement with LICENSOR, LICENSOR agrees such data will be considered Confidential Information and LICENSOR agrees to limit access thereto to only those with a need to know. LICENSOR specifically agrees that such information will never be used by LICENSOR in any manner other than to honor the spirit and terms as set forth in Section 3.5 of this Settlement and License Agreement and, under no circumstances shall the information be used for marketing, promotional or any similar activity by LICENSOR or its Affiliates.

7. REPRESENTATIONS AND WARRANTIES.The express representations and warranties contained in this Section 7 of this Settlement and License Agreement are the only representations and warranties made by either Party. No other representations or warranties shall be implied in law or in fact.

7.1. LICENSOR. LICENSOR represents and warrants as follows.

(a) LICENSOR is a corporation organized and validly existing under the laws of the state of its incorporation and has all requisite corporate power and authority to enter into and legally perform its obligations under this Settlement and License Agreement. When executed and delivered, this Settlement and License Agreement shall constitute a valid and binding obligation of LICENSOR, legally enforceable against it in accordance with its terms.

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(b) LICENSOR represents that it has the right, authority and capacity to enter into this Settlement and License Agreement and grant the rights set forth in Section 3. LICENSOR furtherrepresents that no person other than LICENSOR has the right to enforce any of the rights in the Licensed Patents that are the subject of this Settlement and License Agreement.

(c) LICENSOR represents that it has not entered into any agreement in conflict with this Settlement and License Agreement or which would interfere with or diminish the rights granted hereunder.

7.2. LICENSEE. LICENSEE represents and warrants as follows.

(a) LICENSEE is a corporation organized and validly existing under the laws of the state of its incorporation and has all requisite corporate power and authority to enter into and legally perform its obligations under this Settlement and License Agreement. When executed and delivered, this Settlement and License Agreement shall constitute a valid and binding obligation of LICENSEE, legally enforceable against it in accordance with its terms.

(b) LICENSEE represents that it has the right, authority and capacity to enter into this Settlement and License Agreement and to accept the rights set forth in Section 3, and undertake the payment and royalty obligations set forth in Section 5.

(c) LICENSEE represents that it has not entered into any agreement in conflict with this Settlement and License Agreement or which would interfere with or diminish the rights granted hereunder.

8. INVESTIGATION AND ENFORCEMENT. LICENSOR covenants and agrees that if LICENSEE notifies it in writing of any third party who appears to be conducting the Licensed Activity without a license from LICENSOR (such notice shall include a detailed explanation supported by documents if available) as to why LICENSEE believes that the third party appears to be conducting the Licensed Activity, LICENSOR will investigate the same in good faith and will take reasonable efforts to initiate license discussions with or enforce its patent rights against such third party.

9. TERMINATION AND SURVIVAL.

9.1. Termination. Except as specifically set forth in Sections 9.2 through 9.5 herein, the license grants and covenants in Section 3 and the royalty provisions in Section 5 are non-terminable.

9.2. Failure to Pay Royalties. In the event that LICENSEE fails to meet its obligations under Section 5, LICENSOR may not file a patent infringement suit and is limited to only filing a breach of contract action seeking to collect the unpaid royalties. However, prior to filing any such action, LICENSOR must provide written notice to LICENSEE, followed by a thirty (30) day period during which LICENSEE may cure any breaches, and if such breaches are not cured during that thirty (30) day period, there shall be another thirty (30) day period during which the parties shall negotiate in good faith to resolve their dispute. Any action for breach of this Settlement and License Agreement will be submitted to the American Arbitration Association and the decision of a single arbitrator shall be deemed binding on both Parties. In any such action, the parties agree that time is of the essence and agree that the discovery period shall not be longer than 60 days. The parties also agree to jointly ask the arbitrator to issue his/her decision within 150 days from initiation of the action. If the arbitrator decides to hold a hearing/trial in any such action, such hearing/trial shall be held in Dallas, Texas or Phoenix, Arizona. The arbitrator shall have experience with patent license disputes.

9.3. Finding of Invalidity or Unenforceability. If the claims of the ‘988 Patent that are asserted in the Delaware Litigation are declared invalid or unenforceable in a final judgment rendered by any U.S. District Court or binding decision of an administrative body, the obligation of LICENSEE to pay a running royalty with respect to ECC transactions conducted in the Direct Consumer Field, on or after the date of said final judgment shall terminate. However, if the finding of invalidity or unenforceability is overturned on appeal for any of the asserted claims of the ‘988 Patent, the running royalty provisions of Section 5.3 will be reinstated and LICENSEE will pay LICENSOR on the next subsequent Royalty Payment Date the royalties due for ECC transactions conducted after the date of the final judgment.

9.4. Finding of Non-Infringement. If Telecheck or Nova are found in a Final Judgment not to infringe the claims of the ‘988 Patent that are asserted in the Delaware Litigation, the obligation of LICENSEE to pay a running royalty with respect to ECC transactions conducted in the Direct Consumer Field, on or after the date of the Final Judgment shall terminate. However, if the finding of non-infringement is overturned on appeal, and a Final Judgment is then entered against Telecheck or Nova in favor of LICENSOR, for any of the asserted claims of the ‘988 Patent the running royalty provisions of Section 5 will be reinstated and LICENSEE will pay LICENSOR on the next subsequent Royalty Payment Date the royalties due for ECC transactions in the Direct Consumer Field conducted after the date of the Final Judgment. If the Delaware Litigation is decided in LML’s favor and either TeleCheck or Nova file an appeal, LICENSEE will continue all royalty payments hereunder to LICENSOR pending such appeal. If such appeal results in a finding that TeleCheck or Nova do not to infringe the claims of the ‘988 patent, the obligation of LICENSEE to pay a running royalty with respect to ECC transactions conducted in the Direct Consumer Field shall terminate.

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9.5. Survival. The provisions of this Settlement and License Agreement shall survive except to the extent a provision is terminated in accordance with specific provisions contained herein.

10. MISCELLANEOUS PROVISIONS.

10.1. Amendment/Waiver. No modification, amendment, supplement to or waiver of any provision of this Settlement and License Agreement will be binding upon the Parties unless made in a writing signed by the Parties. A failure of any Party to exercise any right provided for herein shall not be deemed to be a waiver of any right hereunder.

10.2. Assignment. This Settlement and License Agreement may not be assigned or transferred by a Party without the prior written consent of the other Party (not unreasonably withheld); provided, however, that either Party may assign its rights and obligations under this Settlement and License Agreement, in whole or in part to, any subsequent purchaser of such Party or any material portion of its assets (whether such sale is structured as a sale of stock, a sale of assets, a merger or otherwise), provided, further that (in the event that such subsequent purchaser conducted ECC transactions prior to the date of purchase) any such subsequent purchaser of LICENSEE is already a licensee under the Licensed Patents. If such subsequent purchaser of LICENSEE is not a licensee under the Licensed Patents but has conducted ECC transactions prior to the date of purchase for which royalties would be due to LICENSOR, this Settlement and License Agreement may still be assigned if, and only after, such subsequent purchaser enters into a release agreement with LICENSOR for any and all such transactions it conducted prior to the date of the release and pays LICENSOR a fee equal to what LICENSOR would have received if the transactions had been processed under LICENSEE’S running royalty fee structure as set forth in Section 5.3. If such subsequent purchaser of LICENSEE or any material portion of its assets is not a licensee under the Licensed Patents but has not conducted ECC transactions prior to the date of purchase for which royalties would be due to LICENSOR, this Settlement and License Agreement may be assigned to said subsequent purchaser by LICENSEE without further qualification. This Settlement and License Agreement shall be binding upon and inure to the benefit of the permitted assigns and successors of the Parties.

10.3. Inclusion of Acquired Companies. In the event that LICENSEE acquires another company or business, or acquires products, services, technology, assets or business operations, the license and rights granted to LICENSEE under this Settlement and License Agreement may be extended to, and shall cover, such acquired company or business, if and only after, LICENSEE enters into a release agreement with LICENSOR for any and all ECC Direct Consumer Field transactions such company or business conducted prior to the date of the release and pays LICENSOR a fee equal to what LICENSOR would have received if the transactions had been processed under LICENSEE’S running royalty fee structure as set forth in Section 5.3.

10.4. Entire Settlement and License Agreement. This Settlement and License Agreement sets forth the entire agreement between the Parties as it relates to the subject matter of this Settlement and License Agreement, and such documents replace and supersede any and all prior agreements, promises, proposals, representations, understandings and negotiations, written or not, between the Parties relating to the same.

10.5. Expenses. Except as otherwise specifically provided in this Settlement and License Agreement, all costs and expenses incurred in connection with this Settlement and License Agreement and the transactions contemplated hereby shall be paid by the Party incurring such costs or expenses.

10.6. Governing Law and Choice of Forum. Except as provided under Section 9.2, this Settlement and License Agreement shall be construed and interpreted in accordance with the laws of Delaware, without regard to conflict of law provisions. Except as provided under Section 9.2, any disputes arising hereunder shall be resolved in a Court of competent jurisdiction in Wilmington, Delaware.

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10.7. Headings. The Section headings contained in this Settlement and License Agreement are for convenience of reference only and shall not serve to limit, expand or interpret the Sections to which they apply, and shall not be deemed to be a part of this Settlement and License Agreement.

10.8. Interpretation; Construction. The Parties have participated jointly in the negotiation and drafting of this Settlement and License Agreement. In the event an ambiguity or question of intent or interpretation arises, this Settlement and License Agreement shall be construed as if jointly drafted by the Parties and no presumption or burden of proof shall arise favoring or disfavoring either Party by virtue of the authorship of any provision of this Settlement and License Agreement. The word “including” shall mean “including without limitation.”

10.9. Licensee’s Retained Rights. The Parties acknowledge and agree that the Licensed Patents are “intellectual property” as defined in Section 101(35A) of the United States Bankruptcy Code, as the same may be amended from time to time (the “Code”), which have been licensed hereunder in a contemporaneous exchange for value. The Parties further acknowledge and agree that if LICENSOR (i) becomes insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they become due; (ii) applies for or consents to the appointment of a trustee, receiver or other custodian for it, or makes a general assignment for the benefit of its creditors; (iii) commences, or has commenced against it, any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceedings; or (iv) elects to reject, or a trustee on behalf of it elects to reject, this Settlement and License Agreement or any agreement supplementary hereto, pursuant to Section 365 of the Code (“365”), or if this Settlement and License Agreement or any agreement supplementary hereto is deemed to be rejected pursuant to 365 for any reason, this Settlement and License Agreement, and any agreement supplementary hereto, shall be governed by Section 365(n) of the Code (“365(n)”) and LICENSEE will retain and may elect to fully exercise its rights under this Settlement and License Agreement in accordance with 365(n).

10.10. Notices. If a Party is required or permitted to give notice to the other Party under this Settlement and License Agreement, such notice shall be deemed given either (a) when transmitted by facsimile or (b) two business days after depositing the notice in the U.S. mail, first-class postage prepaid, at the address specified below, or at such other address or facsimile number as the Party may specify in writing in accordance with this Section.

10.11. Scope of Agreement. Unless expressly provided to the contrary in this Settlement and License Agreement, this Settlement and License Agreement shall be binding upon and inure to the benefit of the parties, their successors in interest, their assigns and licensees, successors, assigns, and heirs.

To LICENSOR   Mr. Patrick H. Gaines CEO and President LML Patent Corp. Suite 1680 1140 West Pender St. Vancouver, BC V6E 4GI   with copy to:   Russell E. Levine, P.C. Kirkland & Ellis LLP 200 East Randolph Drive Chicago, Illinois 60601 To ECHO   Mr. Joel M. Barry Chairman of the Board and CEO Electronic Clearing House, Inc. 730 Paseo Camarillo Camarillo, California 93010     with copy to:   V. Joseph Stubbs Stubbs Alderton & Markiles, LLP 15260 Ventura Boulevard 20^th Floor Sherman Oaks, California 91403    

10.12. Relationship of the Parties. This Settlement and License Agreement does not constitute and shall not be construed as constituting a partnership or joint venture between LICENSOR and LICENSEE, and neither Party shall have any right to obligate or bind the other Party in any manner whatsoever, and nothing herein contained shall give or is intended to give any rights of any kind to any third persons, except as expressly provided herein.

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10.13. Severability. If any provision of this Settlement and License Agreement is found or held to be invalid or unenforceable, the meaning of said provision will be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation shall save such provision, it will be severed from the remainder of this Settlement and License Agreement, as appropriate. The remainder of this Settlement and License Agreement shall remain in full force and effect unless the severed provision is essential and material to the rights or benefits received by either Party. If either Party deems the severed provisions to be material, then that Party may terminate this Settlement and License Agreement upon giving thirty (30) days prior written notice.

10.14. Counterparts. This Settlement and License Agreement, which with exhibits included consists of 30 pages, may be executed in two or more counterparts, each of which shall be considered one and the same document.

10.15. Standstill. The parties agree that neither party shall initiate any patent infringement suit, action, or administrative proceeding against the other in the United States or Canada prior to April 1, 2009, except for breach of this Settlement and License Agreement, and the parties further agree that any and all statute of limitations, claims for monetary damages and other defenses are tolled during this standstill period. Any such suit filed after April 1, 2009 shall be preceeded by a sixty (60) day notice to the other party prior to initiation of any suit, during which time the parties shall negotiate in good faith to informally resolve any disputes that may exist between them.

* * * * *

IN WITNESS WHEREOF, the Parties have caused this Settlement and License Agreement to be executed by their duly authorized officers as of the Effective Date.

LML PATENT CORP.

By:
Name:	Patrick H. Gaines
Title:	CEO and President
Dated:	March __, 2006

ELECTRONIC CLEARING HOUSE, INC.		XPRESSCHEX, INC.
By:		By:
Name:	Joel M. Barry	Name:
Title:	Chairman of the Board and CEO	Title:
Dated:	March __, 2006	Dated:	March __, 2006

11

EXHIBIT 1

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF DELAWARE

LML PATENT CORP.,   Plaintiff,   v.   TELECHECK SERVICES, INC., ELECTRONIC CLEARING HOUSE, INC., XPRESSCHEX, INC., and NOVA INFORMATION SYSTEMS, INC.   Defendants. ) ) ) ) ) ) ) ) ) ) ) ) )           Civil Action No. 04-858 SLR   Jury Trial Demanded

STIPULATED DISMISSAL PERTAINING

TO SOME BUT NOT ALL DEFENDANTS

WHEREAS, plaintiff, LML Patent Corp., and defendants Electronic Clearing House, Inc. and XpressChex, Inc., as indicated by the signature of counsel appearing below, have agreed to the dismissal of Electronic Clearing House, Inc. and XpressChex, Inc. from this action pursuant to Federal Rule of Civil Procedure 41 and subject to the terms of this Order and a confidential Settlement and License Agreement, dated March __, 2006,

NOW, THEREFORE, it is ordered as follows:

1.  The claims by LML Patent Corp. against Electronic Clearing House, Inc. and XpressChex, Inc. are hereby dismissed with prejudice with respect to Electronic Clearing House, Inc. and XpressChex, Inc.

2.  Each party shall bear its own costs and attorneys fees attributable to the prosecution and defense of the claims against Electronic Clearing House, Inc. and XpressChex, Inc.

3.  As a result of this stipulated dismissal, the following motions are rendered moot:

· LML’S MOTION FOR SUMMARY JUDGMENT NO. 2: FOR A RULING THAT ECHO INFRINGESCLAIMS 1, 2, 4, 5, 6, 9, 10, 11 AND 16 OF THE ‘988 PATENT (Dkt. No. 315)

· ECHO AND XPRESSCHEX’SMOTION FOR SUMMARY JUDGMENT OF NON-INFRINGEMENT (Dkt. No. 347)

STIPULATED AND AGREED

12

/s/ Richard K. Herrmann	/s/ Francis DiGiovanni
Richard K. Herrmann #405 MORRIS JAMES HITCHENS & WILLIAMS 222 Delaware Avenue, 10th Floor Wilmington, Delaware 19801 (302) 888-6800 rherrmann@morrisjames.com Russell E. Levine, P.C. Jamie H. McDole KIRKLAND & ELLIS LLP 200 East Randolph Drive Chicago, Illinois 60601 312.861.2000 Counsel for Plaintiff LML Patent Corp.	Francis DiGiovanni (I.D. No. 3189) CONNOLLY BOVE LODGE & HUTZ LLP The Nemours Building 1007 N. Orange Street Wilmington, Delaware 19801 302.658.9141 fdigiovanni@cblh.com Mark B. Mizrahi BELASCO JACOBS & TOWNSLEY, LLP Howard Hughes Center 6100 Center Drive, Suite 630 Los Angeles, CA 90045 310.743.1188 Counsel for Defendants Electronic Clearing House, Inc. and Xpresschex, Inc.

SO ORDERED this ______ day of ______________________, 2006.

Judge Sue L. Robinson

13

CERTIFICATE OF SERVICE

I hereby certify that on the __ day of _______, 2006, I electronically filed the foregoing document, STIPULATED DISMISSAL, with the Clerk of the Court using CM/ECF which will send notification of such filing to the following:

Francis DiGiovanni, Esq. (I.D. No. 3189) CONNOLLY BOVE LODGE & HUTZ The Nemours Building 1007 N. Orange Street Wilmington, Delaware 19801   Mark B. Mizrahi, Esq. BELASCO JACOBS & TOWNSLEY Howard Hughes Center 6100 Center Drive, Suite 630 Los Angeles, CA 90045   Richard D. Kirk, Esq. (I.D. No. 922) THE BAYARD FIRM 222 Delaware Avenue, Suite 900 Wilmington, DE 19801 Mark Scarsi, Esq. Vision Winter, Esq. O'Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071     William Marsden, Esq. Timothy Devlin, Esq. Fish & Richardson 919 N. Market Street, Suite 1100 Wilmington, DE 19801

/s/ Richard K. Herrmann

Richard K. Herrmann (I.D. No. 405)

Mary B. Matterer (I.D. No. 2696)

MORRIS, JAMES, HITCHENS & WILLIAMS

222 Delaware Avenue, 10^th Floor

Wilmington, Delaware 19801

302.888.6800

rherrmann@morrisjames.com

mmatterer@morrisjames.com

Counsel for Plaintiff LML Patent Corp.

14

EXHIBIT 2

___________, 2006

VIA FACSIMILE

The Honorable Louis C. Bechtle

Conrad, O'Brien, Gellman & Rohn PC

1515 Market Street, 16th Floor

Philadelphia, PA 19102-1916

Re: LML Patent Corp. v. TeleCheck, et al,

D. Del., Civil Action No. 04-858 SLR

Dear Judge Bechtle:

This letter is to inform your Honor of a significant development in the above captioned case. On March __, 2006, plaintiff LML Patent Corp. and defendants Electronic Clearing House, Inc. and XpressChex, Inc. (collectively “ECHO”) settled LML’s claims against ECHO. As a result of this settlement, LML and ECHO signed and filed a stipulated dismissal of ECHO pursuant to Federal Rule of Civil Procedure 41, attached hereto.

The dismissal of ECHO from this case renders moot LML’s November 10, 2005 application for fees relating to its motion to compel the production of documents from ECHO. If you have any questions, please feel free to call me.

Very truly yours,

Richard K. Herrmann

RKH/djp

cc: All counsel via email

15

EXHIBIT 3

Statement for Public Release Pursuant to Section 6.2

Electronic Clearing House, Inc. and its wholly-owned subsidiary

Xpresschex, Inc. Enter Into Patent License With LML

VANCOUVER, BC, April 3, 2006 - LML Patent Corp. (“LML”), a wholly-owned subsidiary of LML Payment Systems Inc. (the “Corporation”) (Nasdaq: LMLP) announced today that Electronic Clearing House, Inc. and its wholly-owned subsidiary Xpresschex, Inc. (collectively “ECHO”) have settled litigation, and entered into a patent license agreement, with LML. The Settlement and License Agreement provides ECHO with a license to LML’s patents for electronic check conversion in the Direct Consumer Field (NACHA standard entry class code “POP”), including LML’s U.S. Patent Nos. 5,484,988; 6,164,528 and 6,283,366. Terms of the Settlement and License Agreement are confidential.

“We are extremely pleased to have settled our litigation with ECHO and we welcome them as another of our valued licensees,” said Patrick H. Gaines, chief executive officer and president of LML Patent Corp. and LML Payment Systems Inc. “Revenue attributed to the settlement is expected to be recorded this quarter and revenue from running royalties is expected to be recorded in the period in which they are earned,” he added. Mr. Gaines also said “Our litigation against Telecheck and Nova will continue until they too acknowledge the value of our patented technology.”

LML was represented in the license negotiations and in the litigation by Russell E. Levine of the law firm Kirkland & Ellis LLP.“As a result of the settlement of the litigation against ECHO, LML’s pending motion asking the court to rule as a matter of law that ECHO infringes LML’s ‘988 patent will be dismissed as moot,” said Mr. Levine. “Oral argument on that and other motions was held on December 19, 2005 and a decision from the court was expected prior to the scheduled trial date in April 2006,” Mr. Levine added. “LML’s similar motions related to the other defendants, Telecheck Services, Inc. and Nova Information Systems, Inc. will remain pending as will other motions addressing issues not unique to ECHO,” he added.

About LML Payment Systems Inc. (www.lmlpayment.com)

The Corporation, through its subsidiary LML Payment Systems Corp., is a financial payment processor providing check processing solutions including electronic check authorization, electronic check conversion (ECC) and primary and secondary check collection including electronic check re-presentment (RCK) to national, regional and local retailers. The Corporation also provides selective routing of debit, credit and EBT transactions to third party processors and banks for authorization and settlement. The Corporation’s intellectual property estate, owned by subsidiary LML Patent Corp., includes U.S. Patent No. 6,354,491, No. 6,283,366, No. 6,164,528, and No. 5,484,988 all of which relate to electronic check processing methods and systems.

About Kirkland & Ellis LLP (www.kirkland.com)

Kirkland & Ellis LLP is a 1,000-attorney law firm representing global clients in complex corporate and tax, workout, insolvency and bankruptcy, litigation, dispute resolution and arbitration, and intellectual property and technology matters. The Firm has offices in Chicago, London, Los Angeles, New York, Munich, San Francisco and Washington.

Statements contained in this news release which are not historical facts are forward-looking statements, subject to uncertainties and risks. For a discussion of the risks associated with the Corporation’s business, please see the documents filed by the Corporation with the SEC.

LML Payment Systems, Inc. Patrick H. Gaines President and CEO (604) 689-4440   Investor Relations (800) 888-2260 Kirkland & Ellis LLP Brian Pitts (312) 861-3115

16

EXHIBIT 4

Non-Visa transaction types:

#1) An ECC transaction in the Direct Consumer Field where LICENSEE serves as the party that captures the check data and clears the transaction through the ACH.

#2) An ECC transaction in the Direct Consumer Field where another party has captured the check data and is having LICENSEE settle the transaction through the ACH.

#3) An ECC transaction in the Direct Consumer Field where LICENSEE captures the check data and transfers the capture file off to the third party (or designee) for ACH processing.

#4) A point of purchase check transaction that is processed through LICENSEE’s verification database, whether as a prelude to being converted by another party or not.

#5) A point of purchase guarantee transaction wherein LICENSEE provides a check guarantee service and in so doing, uses or accepts an electronic file from itself or any party, whether the check data was captured through ECC or not.

Visa transaction types:

#6) LICENSEE operates as the Third Party Processor.

#7) LICENSEE operates as an Acquirer Processor.

#8) LICENSEE sells the Visa ECC Transaction service directly to a merchant and thereby processes Direct Consumer Field transactions both as the Acquirer Processor and the Third Party Processor.

#9) Participating Transactions are Direct Consumer Field transactions that do not get directed to LICENSEE as the Third Party Processor but are settleddirectly between the merchant, Visa and the check writer banks.

17

EXHIBIT 5

FOR IMMEDIATE RELEASE

Electronic Clearing House (ECHO) Settles Patent Litigation

Camarillo, Calif., April 3, 2006 - Electronic Clearing House, Inc. (NASDAQ: ECHO), a leading provider of electronic payment and transaction processing services, announced today that it and its wholly owned subsidiary, XpressCheX, Inc., have reached an agreement with LML Patent Corp. (“LML”), a wholly-owned subsidiary of LML Payment Systems Inc., to settle a litigation matter alleging infringement of certain LML patents.

Under the terms of the settlement, ECHO and XpressCheX entered into an agreement to license LML’s patents for electronic check conversion in the Direct Consumer Field (NACHA standard entry class code “POP”), including LML’s U.S. Patent Nos. 6,354,491; 5,484,988; 6,164,528 and 6,283,366.

Each of ECHO, XpressCheX and LML also agreed, for a period continuing through April 1, 2009, not to initiate any other patent infringement claims in the United States or Canada against each other.

Specific financial and other terms of the agreement were not disclosed.

“We are pleased to put the LML patent issue behind us.  Whenever possible, we believe it is preferable to resolve business uncertainties so, in this case, while we were confident in our own legal position, we felt reaching a settlement prior to a long and costly trial was the best option.  With this settled, we can now dedicate our time and resources toward an effective execution of our strategic sales and operational initiatives,” stated Joel Barry, Chairman and Chief Executive Officer of ECHO.

About Electronic Clearing House, Inc. (ECHO)

ECHO (www.echo-inc.com) provides a complete solution to the payment processing needs of merchants, banks and collection agencies. ECHO's services include debit and credit card processing, check guarantee, check verification, check conversion, check re-presentment, and check collection.

Contact:

Donna Rehman, Corporate Secretary

(800) 262-3246, ext. 8533

Electronic Clearing House, Inc.

Camarillo, CA

URL:http://www.echo-inc.com

E-MAIL:corp@echo-inc.com

#    #    #

18

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CEO PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joel M. Barry, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Electronic Clearing House, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2006

/s/ Joel M. Barry

Joel M. Barry

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CFO PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Alice L. Cheung, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Electronic Clearing House, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2006

/s/ Alice L. Cheung

Alice L. Cheung

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Electronic Clearing House, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel M. Barry, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Joel M. Barry

Joel M. Barry

Chief Executive Officer

August 14, 2006

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Electronic Clearing House, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alice L. Cheung, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Alice L. Cheung

Alice L. Cheung

Chief Financial Officer

August 14, 2006