SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)

         [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

         [  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM TO

                        COMMISSION FILE NUMBER: 000-24695

                              TOWNE SERVICES, INC.
                    (Exact name of registrant in its charter)

                     GEORGIA                               62-1618121
         (STATE OR OTHER JURISDICTION OF                (I.R.S.  EMPLOYER
         INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)

       3950 JOHNS CREEK COURT, SUITE 100,                     30024
                SUWANEE, GEORGIA                           (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

      (Registrant's telephone number, including area code): (678) 475-5200

           Securities registered pursuant to Section 12(b)of the Act:

              NONE                               NONE
        (Title of class)      (Name of each exchange on which registered)

           Securities registered pursuant to Section 12(g)of the Act:

                           COMMON STOCK, NO PAR VALUE
                              (Title of each class)

         Indicate by check mark whether the Registrant: (1) 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 |X| No |_|

         Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|

         The estimated aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing sale price of its
Common Stock on March 28, 2001, as reported on the National Association of
Securities Dealers Automated Quotation System, was approximately $8,658,179. As
of March 26, 2001, the Registrant had 5,037,421 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE PROXY STATEMENT FOR THE REGISTRANT'S 2001 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K.

<PAGE>


                               INDEX OF FORM 10-K

                                                                          PAGE

                                     PART I

Item 1. Business.............................................................  1
Item 2. Properties........................................................... 10
Item 3. Legal Proceedings.................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.................. 11

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data.............................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and
        Results of Operations................................................ 14
Item 7A.Quantitative and Qualitative Disclosure About Market Risk............ 21
Item 8. Financial Statements and Supplementary Data.......................... 21
Item 9. Changes and Disagreements With Accountants on Accounting and
        Financial Disclosure................................................. 22

                                    PART III

Item 10.Directors and Executive Officers of the Registrant................... 22
Item 11.Executive Compensation............................................... 22
Item 12.Security Ownership of Certain Beneficial Owners and Management....... 22
Item 13.Certain Relationships and Related Transactions....................... 22

                                     PART IV

Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 22




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                                     PART I

ITEM  1.  BUSINESS

         THIS ANNUAL REPORT CONTAINS SEVERAL "FORWARD-LOOKING STATEMENTS"
CONCERNING TOWNE SERVICES' OPERATIONS, PERFORMANCE, PROSPECTS, STRATEGIES AND
FINANCIAL CONDITION, INCLUDING ITS FUTURE ECONOMIC PERFORMANCE, INTENT, PLANS
AND OBJECTIVES AND THE LIKELIHOOD OF SUCCESS IN DEVELOPING AND EXPANDING ITS
BUSINESS. THESE STATEMENTS ARE BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES
WHICH ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE
CONTROL OF TOWNE SERVICES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF SEVERAL
FACTORS. PLEASE SEE "DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS" AT THE END
OF ITEM 7 FOR A DESCRIPTION OF SOME OF THE IMPORTANT FACTORS THAT MAY AFFECT
ACTUAL OUTCOMES.

GENERAL

         Towne Services, Inc. provides services and products that process sales
and payment information and related financing transactions for businesses and
banks in the United States. We deliver these services and products online via an
electronic hub, or gateway, that links business and bank customers with us and
other providers of products and services that can benefit these customers. We
use this electronic gateway to deliver a variety of business and management
solutions using internet and telecommunication connections. We also provide
these solutions through our proprietary software housed at our clients'
locations.

         The primary business capabilities we offer our customers include a
virtual credit card system and merchandise forecasting system. Our virtual
credit card system processes the in-house credit transactions of businesses and
includes an automated receivables management system that allows banks to quickly
finance the working capital needs of their business customers. Towne Services'
merchandise forecasting system, or RMSA Merchandise Planning service, processes
sales and inventory transactions of retailers, giving them greater control over
inventory levels and the ability to make better inventory purchase decisions,
improve cash flow and improve operating margins.

         We offer the following automated business management systems: (a) TOWNE
CREDIT(R), which processes consumer credit transactions for small and medium
size businesses; (b) TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which process
business-to-business credit transactions for commercial businesses; and (c) RMSA
Merchandise Planning service, which processes sales and inventory transactions
and provides merchandising information for specialty retail stores. Through the
use of our online services and products, our business customers are able to:

         o        use the internet to conduct business electronically;

         o        accelerate cash flow;

         o        develop and implement retail marketing plans;

         o        improve customer services;

         o        improve retail merchandising strategies; and

         o        automate their records, reduce paperwork and shift other
                  administrative burdens to Towne Services.

Our systems also benefit our bank customers who can:

         o        receive secure, reliable and prompt information;

         o        closely monitor customer accounts;

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         o        generate status reports;

         o        finance the accounts receivable of their business customers;
                  and

         o        generate fee income and potential new customers.

         Our electronic processing systems enable businesses to offer in-house
credit to their customers at costs comparable to traditional credit card
transactions. As with credit card transactions, the business pays a discount fee
to the bank on each transaction. The business' customer pays fees to the bank
for amounts owed by the customer for purchases made on in-house credit, and, in
some instances, pays interest to the bank. The discount fees and interest create
a pool of funds from which we collect our transaction fees. The remaining
amounts generate fee income for the bank. We also generate revenue by charging
our business and bank customers initial set-up fees.

         Our merchandise planning and point of sale systems enable business
customers to compete with larger chain retailers by providing automated
processing and business management capabilities similar to those used by larger
companies. We generate revenue from these systems by charging initial set-up and
recurring monthly service fees.

TOWNE'S MARKET

         We provide our products and services to businesses that extend in-house
credit to their customers and to the banks these businesses use. We believe that
the electronic transaction processing industry generally has not offered our
business customers a way to process their in-house credit transactions
electronically, focusing instead on credit and debit card transactions.

         A variety of small and medium size businesses use the TOWNE CREDIT
system, including hardware stores, clothing stores, auto parts stores and
pharmacies. We market the TOWNE FINANCE and CASHFLOW MANAGER products and
services to commercial businesses, such as furniture manufacturers, equipment
distributors, plumbing suppliers and other industry supply stores. We market the
RMSA Merchandise Planning service to small and medium size independent specialty
retail businesses, such as men's and women's apparel stores, sporting goods
stores, golf pro shops, shoe stores and college bookstores.

         Many of these businesses process a large portion of their sales using
in-house credit and use labor-intensive manual processes and products to run
their businesses. These credit receivables are generally collected manually
through a month-end billing process. We believe that the manual billing and
collections process utilized by many businesses is highly inefficient, causing
them to carry excess receivables and bad debts. In addition, because of the
difficulties in tracking and managing receivables from this manual process,
banks have been reluctant to finance these businesses based on their
receivables. Our processing systems allow businesses to automate many of their
manual business tasks including the processing of in-house accounts, payment
processing and bad debt collections. Our processing systems also permit banks to
provide financing for these businesses based upon their receivables.

         In addition, most small businesses face difficulties competing with
larger businesses due to their more limited resources. They generally do not
have large office staffs to perform essential management functions and do not
have efficient practices and procedures to track their inventory and sale
information. Our merchandise planning and transaction systems use sophisticated
software to assist retailers in the day-to-day management of their businesses.
By using our products and systems, businesses can improve their profitability by
effectively managing their day-to-day operations, including markups, markdowns,
proper flow of receipts and transactions. By improving a business' efficiency,
our systems can also help improve our customers' cash flow.

TOWNE'S STRATEGIES

         Our goal is to become one of the leading providers of electronic
commerce business solutions for small and medium size businesses in the United
States. We plan to attain this goal by implementing the following key business
strategies:
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  MAXIMIZE ELECTRONIC GATEWAY TO CUSTOMERS

         When a business customer installs TOWNE CREDIT and TOWNE FINANCE, it
establishes an electronic gateway that links it with Towne, the business' bank
and other companies that provide products and services that can benefit its
operations. We intend to maximize this distribution channel by developing,
acquiring and implementing the business and management tools that businesses
need to succeed in an electronic commerce marketplace.

  EXPAND DIRECT SALES AND MARKETING EFFORTS NATIONWIDE

         As of March 23, 2001, we had 103 direct sales representatives in 41
states performing sales and marketing tasks. Of this total, five persons are
dedicated to developing bank customer relationships and 98 persons are focused
on developing business customers.

  CONTINUE TO LEVERAGE BANK RELATIONSHIPS

         We have relationships with businesses and organizations that have large
numbers of banks and businesses as their customers. In addition, our executive
officers and directors have extensive experience in the electronic processing
and financial services industries, and several members of the board of directors
have experience in the management of banks or companies that have banks as
customers. Through these relationships, we believe we attract customers that
would be difficult to reach through traditional marketing methods.

SEGMENT INFORMATION

         Our operations are organized along our product and services lines and
include two segments - accounts receivable and inventory. We account for segment
reporting under SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." See note 2 of Notes to our consolidated financial
statements.

PRODUCTS AND SERVICES

         We design our products and services to be simple to use, fast and
reliable. Our automated processing systems, TOWNE CREDIT and TOWNE FINANCE,
process in-house credit transactions for businesses in much the same way as
credit card transactions are processed. The CASHFLOW MANAGER system is similar
to the TOWNE FINANCE system except that commercial business customers manually
transmit their transaction information to their banks for processing. Our RMSA
Merchandise Planning service processes sales and inventory transactions and
organizes merchandise information for specialty retail stores.

  TOWNE CREDIT

         TOWNE CREDIT is an automated transaction processing system designed for
consumer-based credit transactions conducted by businesses. The system uses
remote point of sale terminals and communications networks to capture and
transmit transaction data and generate a "virtual credit card" account funded by
a business' bank. A typical in-house credit transaction for our business
customer is processed through TOWNE CREDIT as follows:

                  STEP 1: The participating business sells goods or services on
         an in-house account.

                  STEP 2: The business enters sales information at the point of
         sale into an electronic cash register or computer terminal loaded with
         our proprietary computer software.

                  When a customer makes a purchase on account, a store clerk
         records the transaction on a point of sale terminal. The PC-based
         terminal stores names and addresses of customers, account balances and
         payment activity, which the business owner can retrieve quickly at the
         point of sale. The TOWNE CREDIT system captures the transaction data,

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         including dollar amount and customer information, for use in billing,
         tracking inventory and generating sales and tax reports.

                  STEP 3: The business closes out its daily transactions and
         electronically transmits transaction data to Towne through the computer
         system across the internet or telecommunications lines.

                  STEP 4: We process the data, calculate receivables, perform
         other accounting functions and transmit reports electronically to the
         business and its bank upon request by the next business day.

                  On a daily basis, the business owner or manager transmits the
         sales activity by batch to our computer processing center across an
         ordinary telephone line or internet connection. Our customer
         communication software supports a wide range of business customers,
         including those in rural areas. Our systems process data from purchase
         transactions, calculate receivables, post these transactions and
         perform other accounting functions automatically, and our systems can
         be programmed to generate daily customized reports. Our network systems
         then transmit reports to businesses and their banks by the business day
         following receipt of transaction data.

                  STEP 5: The bank retrieves the sales and payment information
         and advances funds to the business' bank account based upon pre-set
         lending terms.

                  STEP 6: We bill the business' customer, collect and process
         the customer's payment and transmit payment information to the bank for
         credit to the business' bank account.

                  The bank that serves the business usually offers a line of
         credit, in which case the bank funds the prior day's sales at discounts
         similar to those in major credit card transactions. Through a graphic
         interface with our communications server, the bank has daily access to
         the information it needs to finance the business' accounts receivable.
         TOWNE CREDIT works as a supplement to the bank's current loan
         processing systems and creates the general ledger account entries
         necessary for the bank to account for the line of credit loans to the
         business. We assume no credit risk from business customers in these
         transactions.

         With TOWNE CREDIT, many administrative burdens of running a business
are outsourced to us. We generate and print statements and send them to the
businesses' customers. A national bank as our agent maintains an automated lock
box through which payments can be received. If a customer chooses to pay the
business directly when he or she receives the bill, the business owner records
that payment in a point of sale terminal to be processed electronically on our
system. The system allows businesses to quickly track account balances and
payment history and verify customer transaction information by checking the
receivables reports generated or, if needed, by dialing into our processing
network to verify or update information.

         We also settle payments for our customers. We transmit, upon request,
transaction information directly to the bank and arrange for funds to be
transferred from the automated lock box via Automated Clearing House (ACH) to
the bank. Funds are then transferred to the business' bank account via the
bank's internal deposit system.

         Through TOWNE CREDIT, businesses are able to receive accelerated
funding for in-house charge accounts and eliminate costly and inefficient manual
processing. Sales also may be enhanced by the business' ability to offer finance
options, such as sales on account, to its customers. The bank that serves the
business is able to generate fee income in the form of transaction discounts and
may profit from interest-bearing consumer credit accounts.

  TOWNE FINANCE

         Our automated asset management and financing software system, TOWNE
FINANCE, is a commercial version of TOWNE CREDIT that addresses
business-to-business credit transactions. TOWNE FINANCE facilitates accounts
receivable financing for commercial businesses by allowing these businesses and
their banks to better manage and control assets that fluctuate in value. With
TOWNE FINANCE, businesses have the ability to convert invoices to the cash they
need to finance their ongoing operations.

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         Using TOWNE FINANCE, banks can assign percentage values to specific
assets of their business customers, such as accounts receivable, inventory, real
estate, furniture, fixtures and equipment. By assigning these values, banks can
develop a risk-based formula for lending to their business customers. TOWNE
FINANCE tracks the accounts receivable, maintains a parallel aging of the
accounts and allows the bank to control advances and pay downs based on daily
activity of new sales and account payments. The system supports discretionary
lines of credit as well as automatic daily funding of eligible assets. TOWNE
FINANCE works as a supplement to the banks' current loan processing systems and
creates the general ledger account entries necessary for banks to account for
these asset-based loans.

         Once a bank customer agrees to use TOWNE FINANCE, the bank must approve
a credit line for the customer. After credit is established, we load historical
invoice data onto our host computer. The bank specifies a set of standards at
the processing level and assigns a loan officer to monitor the credit as it
would any other loan. We then take over the statement rendering and remittance
processing functions for the bank much like we do for TOWNE CREDIT. Access to an
automated lock box allows the bank to control the payments associated with the
accounts and apply the payments to the outstanding loan balance. After payments
are received, we process the payments and transmit funds electronically to the
customers' operating account at the bank.

         The bank provides a line of credit that is controlled using TOWNE
FINANCE daily processing and reporting functions. The bank retains all credit
and funding responsibility and we provide a specialized sales force, back room
processing and monitoring services. TOWNE FINANCE allows banks to provide a cost
effective accounts receivable financing program for its commercial customers.
Banks using TOWNE FINANCE gain fee income on advances of funds, net of all
processing expenses, and strengthen relationships with business customers that
have experienced cash flow problems or that might have otherwise turned to
non-traditional lenders.

  CASHFLOW MANAGER

         The CASHFLOW MANAGER system is an asset management system that also
addresses business-to-business credit transactions. The software program enables
the banks that service commercial businesses to better manage and control assets
that fluctuate in value so they can make lending decisions with respect to these
assets. CASHFLOW MANAGER transaction processing occurs in much the same way as
TOWNE FINANCE processing, except that the commercial business manually transmits
the information for processing.

         The CASHFLOW MANAGER system uses special deposit tickets to batch
process invoices turned into the bank. The CASHFLOW MANAGER system provides
general ledger reports that help the bank manually interface with the bank's
general ledger system. At the end of the month, statements are sent to the
business' customer directing payments to the bank's lock box. The bank typically
advances funds on all of the business' accounts receivable and adjusts the
reserve percentage after the month-end close period. Any excess reserves are
deposited into the business' operating account after the month-end
reconciliation.

         With CASHFLOW MANAGER, banks generate income from the discount fee
charged from each batch of receivables advanced, interest charged either to the
merchant, the merchant's customers, or both parties and spread income generated
from the reserve account. The bank provides multiple services to the borrower by
establishing a loan account, operating account and restricted reserve account,
as well as by implementing the CASHFLOW MANAGER program. The restricted reserve
account and the receivables act as collateral in addition to other collateral
that may be required by the bank.

  RMSA MERCHANDISE PLANNING

         We develop each customized RMSA Merchandise Plan using a combination of
data supplied by the customer coupled with proprietary business models. The RMSA
Merchandise Plan enables our business customers to manage inventory at the
classification level, such as women's blouses or men's suits. We need four basic
pieces of information about each class of merchandise offered by the business:
sales, markdowns, merchandise received and merchandise on order but not yet
delivered. This data is collected monthly and transmitted to our computer
systems, which also house historical information such as sales,

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markdowns and merchandise receipts for each individual business customer.
Merchandise planning models for the particular industry, geographical region,
season and other current business trends are also incorporated into each RMSA
Merchandise Plan. The RMSA Merchandise Plan is then provided to our retail
business customers electronically or via hard copy, at their option.

         Our Merchandise Planning customers receive on a monthly basis:

         o        the current month's sales forecast and a rolling forecast up
                  to ten months into the future;

         o        a review of markdowns,  timing of  deliveries  and the other
                  factors  needed to achieve  optimal  sales;

         o        analysis of sales history for missed opportunities;

         o        a review of current profitable sales trends; and

         o        specific information so clients know how much to buy and when
                  to receive it.

  THE CHARTER SYSTEM

         The Charter System uses sophisticated point-of-sale software to assist
retailers in the day-to-day management of their business. The Charter System
also enables us to easily collect the data necessary to develop the RMSA
Merchandise Plan.

         The Charter System operates as a stand-alone system separate from the
RMSA Merchandise Plan. Clients have the opportunity to purchase or lease the
Charter System software. With this software, a client receives a point of sale
system with features that provide a full range of capabilities to track
inventory and perform simple or sophisticated transactions quickly and
efficiently. The Charter System allows our business customers to work with data
at the stock keeping unit, or SKU, or summary levels and provides specific
recommendations on what merchandise to re-order, markdown and transfer.

         The Charter System can track merchandise on many attributes including
style, size, vendor, color and other SKU categories. The sales and inventory
report that can be generated by the Charter System enables the retailer to
determine what inventory is selling quickly and what inventory is moving slowly.
This retail purchase order management system provides a complete overview of
merchandise on hand and on order. It also provides comprehensive customer
profiles designed to enable the retailer to collect detailed information ranging
from vendor preferences to customers' birthdays.

ANCILLARY SERVICES AND NEW PRODUCTS

         We provide an array of value-added services in connection with our
processing systems, including:

         COLLECTION SERVICES. Our processing systems help our customers identify
delinquent accounts. We maintain an agreement with Credit Collection Services of
Georgia, a national collections firm, that enables our customers to have on-line
access to professional debt collection services. We maintain an electronic
interface with Credit Collection Services so account information is readily
delivered to assist in collecting past due amounts.

         DOCUMENT IMAGING AND ARCHIVING PRODUCTS. We began offering AUGUSTA and
EzVIEW VAULT(TM) after our July 1999 acquisition of Imaging Institute, Inc. Both
products are imaging software and equipment that offer unique and functional
document imaging and archiving solutions tailored for small to medium size
businesses. The AUGUSTA product is an active file folder document imaging system
designed for small to medium size organizations. It is designed to quickly scan,
file, and retrieve documents electronically. With EzVIEW VAULT(TM), documents
are quickly scanned onto the Mastering Station, saved in electronic "folders,"
and finally archived permanently onto a CD-ROM disc. Each disc also contains a
self-running Windows viewing module that will allow the viewing, printing, and
faxing of documents from any Windows-based computer with a CD-ROM drive.


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         We plan to design and develop new and improved products and services
that business customers can access through our electronic gateway to help
automate their businesses and provide better service to their clients. We also
plan to enter new agreements and relationships with other companies and
organizations to give our customers access to a variety of other business
management tools. We have in the past and may again in the future offer
processing services to companies providing lease financing.

SALES AND MARKETING

         We employ three distinct sales forces to market our products and
services. The bank sales force focuses on developing relationships with banks
through which TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER are marketed to
business customers. Our business representatives call on business customers of
banks that have contracted with us, as well as other businesses who might use
our products. We also employ a direct sales force, our analysts, to market our
products and services that process inventory, accounts receivable and point of
sale transaction information for retail businesses. These analysts play the dual
roles of being business consultants for our existing customers and salespeople
who promote our products and services to potential new customers.

         In addition to direct sales, we also market TOWNE CREDIT, TOWNE FINANCE
and CASHFLOW MANAGER through several strategic alliances that have businesses
and banks across the United States as their customers or members. These
alliances enable us to reach and provide services to large groups of banks and
businesses in new geographic markets. We will continue to pursue additional
alliances with companies and organizations that will provide us access to large
groups of banks and businesses nationwide such as bankers' banks, trade
associations and merchant franchise operations.

         We mainly market our RMSA Merchandise Planning service by focusing on
lead generation. We achieve this lead generation primarily through referrals,
direct mail, trade shows and educational seminars. We also market our RMSA
Merchandise Planning service through alliances with associations in many of the
industries that we service. Our alliances promote our RMSA Merchandise Planning
services while improving business performance for members of the respective
associations. Our association alliances include, for the college bookstore
industry, the Independent College Bookstores Association, for the Christian
bookstore industry, the Parable Group, and several golf organizations, including
Marriott Properties and Club Corporation of America. These relationships are
designed to expose association members to our RMSA Merchandise Planning
services.

         We have used our board members' and senior managers' expertise and
contacts to develop relationships with banks and banking organizations. We
believe that endorsements by local bankers are the most effective sales tools to
reach their businesses. Banks often have longstanding relationships with their
business customers and provide immediate credibility and access for our products
and services. We believe that our relationships with banks enable us to attract
business customers that would be difficult and expensive to reach when employing
traditional marketing methods.

RECRUITING AND TRAINING

         We hire sales personnel who are experienced in marketing products and
services to banks and businesses. In recruiting experienced sales personnel, we
focus on hiring people who have established relationships with banks and
businesses in a particular market. We have a full-time employee responsible for
recruiting bank and business representatives. We have developed and implemented
an intensive five-week training program for our sales force. The first week of
training focuses on overviews of our policies and procedures as well as an
introduction to all of our products. During the first week, we also instruct our
new sales representatives on pricing of the products to customer banks and
businesses. The second week focuses on sales skill training with detailed
product and pricing training. This week ends with product sales presentations
and role playing. The third and fourth weeks consist of field training, in which
the sales representative travels with a seasoned sales representative to observe
sales calls and presentations. The fifth week addresses strategic product
presentations, leadership and management training and new account set-up. The
sales representatives then return to their respective territories to begin
selling.

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TECHNOLOGY

         Our automated electronic processing systems communicate data to and
from remote customer locations and our computer processing center in Suwanee,
Georgia. We use our proprietary technologies together with third party
telecommunications networks to transmit and process transaction data for our
customers. Transactions are interactively processed and returned to the sending
system. Our systems can use telephone lines and internet connections to
transport transaction data, which allows us to access customers located across
the country.

         We designed our communications systems to support a large number of
telecommunications lines and high volumes of data traffic. This configuration is
scalable, allowing us to add new servers and new communications lines as needed
without having to rebuild our communications system. Our communications servers
process multiple data protocols. This allows us to service a wide range of
customers without requiring them to change the communications systems they
currently use.

         Our communications and processing system servers can manage data
traffic across multiple time zones as well as balance both client/server and
on-line batch mode processing loads. This "cluster processing" uses multiple
servers that work in tandem. A bank of processors work in a shared network
environment to co-process reporting jobs. The host processing system is also
scalable.

         We designed our systems using software and hardware capable of
interacting with the variety of operating platforms used by our customers,
including client/server and mainframe operating systems. We have developed
software to support a wide range of operating systems used by our customers. Our
transaction reporting software is not hardware dependent, which allows us to
change our equipment to take advantage of the most recent technologies in our
operations. This could include a complete change-over of operating systems
and/or hardware. The CASHFLOW MANAGER system is single- or multi-user capable.

         Our computer processing system stores data redundantly at both the
customer terminal location and at our processing center. Potential service
interruptions are minimized by hosting the client's data on multiple servers and
locations so that no single hardware failure would result in service
interruption. In addition, we keep mirror servers on location, create daily
digital backup tapes and store them offsite. Although we believe that our system
configuration and disaster recovery measures adequately protect us against
system failures that may occur due to destruction of our processing center,
natural disasters or other loss or impairment of our network capabilities, a
failure of our system, or the failure of our telecommunications providers to
supply the necessary services, could negatively affect our business and
financial results and harm our reputation.

CUSTOMERS

         As of December 31, 2000, we provided processing services to a diverse
customer base of 3,453 small and medium size retail merchants and commercial
businesses located in all 50 states as well as the District of Columbia. We had
3,366 retail merchants and commercial business customers as of February 28,
2001. A variety of businesses use the TOWNE CREDIT system, including hardware
stores, clothing stores, auto parts stores and pharmacies. TOWNE FINANCE and
CASHFLOW MANAGER products and services are marketed to commercial businesses,
such as furniture manufacturers, equipment distributors, plumbing suppliers and
agricultural supply stores. In addition, we market our RMSA Merchandise Planning
service to small to medium size independent specialty retail businesses, such as
men's and women's apparel stores, sporting goods stores, golf pro shops, shoe
stores and college bookstores.

         As of December 31, 2000, we had executed 789 contracts with banks in 36
states. Most of our current bank customers have asset sizes of $2 billion or
less. As of February 28, 2001, we had executed 792 contracts with banks. These
bank customers market our products and services to businesses in their
communities.

         The majority of our contracts with our customers are cancelable at will
or on short notice or provide for renewal at frequent periodic intervals, and,
accordingly, we may have to rebid or modify such contracts on a frequent basis.
Because our customer base is relatively diverse and includes thousands of
businesses and hundreds of banks, we do not rely on any single business or bank
for a significant portion of our revenue. No single business customer accounted
for more than 1.0% of our total revenues in 2000. No single bank customer
accounted for more than 3.0% of our total revenues in 2000. We do not anticipate


                                       8
<PAGE>

that one or more new customers will account for large portions of the set-up fee
revenues generated for particular quarters in which the underlying contracts are
signed.

         Our aggregate overseas sales represent only 1% of our overall sales.
For the year ended December 31, 2000, our sales to countries outside of North
America totaled $336,536, primarily to Malaysia and Taiwan. No individual
foreign customer accounted for more than 1% of our total revenues in 2000.

CUSTOMER SERVICE

         Our products are supported by the following levels of customer service.
Each customer bank provides first line customer service support to the
businesses on accounting and loan-related issues, and we provide a help desk for
technical support for our network systems and terminals. We provide many service
features to our businesses, including toll-free customer service and terminal
support during business hours and on an emergency basis, 48-hour hardware
replacement, turnkey installation and training for new businesses and flexible
reporting capabilities. As part of our ongoing service, we assign a business
specialist to each bank who helps structure and market to prospects selected by
the bank. We attempt to establish long-term relationships through the continued
support and interaction of our professional account managers and consultants.

         We assign a support specialist to each client and field representative
to service and maintain our RMSA Merchandise Planning service. The support
specialist is responsible for complete set-up of new client information,
including all historical data, classification set-up with start-up factors and
annual rate and profile information, and for the processing of monthly data for
entry into the RMSA Merchandise Plan. Our support staff communicates with
clients and analysts about the need for specific basic monthly information and
explains monthly reports and client information.

         Our Charter System product is supported by a staff of trained
individuals who provide help desk technical support to all clients and analysts
using the Charter System software. They are responsible for insuring ongoing
operation of the applications as intended and monitoring clients closely. We
provide training for new clients on site and off site in all applications and
procedures for our Charter System products, and we fully train all of our new
field representatives.

         Our staff of client representatives trains customers on the use of our
processing system and hardware at the customer location. Customer service
representatives provide technical support for all of our products and services
through a call-in support center available during normal business hours. After
hours, customers can reach our technical support personnel by pager.

COMPETITION

         Many companies provide online processing products and services. In
addition, many other companies market business-to-business software and
marketing support to banks that allows the banks to track and finance the
in-house charge accounts of their customers similar to a factoring operation.
Most of these competitors do not offer a point of sale system, but rather
require businesses to forward paper invoices to the banks where bank personnel
input the invoices onto the software purchased by the banks.

         The electronic transaction processing industry is intensely
competitive. Increased competition is likely from both existing competitors and
new entrants into our future markets. We may not be able to compete successfully
as other companies develop new products and services, decrease prices, improve
customer service and hire additional personnel. Competitors may offer new
products and services resulting in greater competition and lower market share
for us. Some of our competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater resources than we
have. Competitors may be able to adapt more quickly to new technologies and
changes in customer requirements and may also be able to devote greater
resources to marketing.

         We face limited organized competition in the area of inventory
management. To our knowledge, there are several competitors that provide
forecasting and planning service to retailers that are similar to our RMSA
Merchandise Planning service.

                                       9
<PAGE>


         Our Charter System product has numerous competitors on the national and
regional level, several of which offer more advanced solutions that allow them
to garner significant market share. Several of these competitors also offer
e-commerce and accounting modules in addition to services comparable to our
Charter System product.

TRADEMARKS AND OTHER PROPRIETARY RIGHTS

         We operate under the following trademarks and service marks: TOWNE
SERVICES(R), TOWNE CREDIT(R), TOWNE FINANCE(R), and CASHFLOW MANAGER(SM).

         We attempt to protect ourselves through a combination of copyright law,
trademark and trade secret laws, employee and third party confidentiality
agreements and other methods. We do not have patents on our systems and
products.

         Unauthorized parties may attempt to copy aspects of our technology,
products and services or to otherwise obtain and use information that we regard
as proprietary, despite our efforts to protect them. Third parties may claim
that our current or future products and services infringe their patent,
copyright or trademark rights. No assurance can be given that, if such actions
or claims are brought, we will ultimately prevail. Any such claims, whether with
or without merit, could be costly and time consuming, cause delays in
introducing new or improved products and services, require us to enter royalty
or licensing agreements or discontinue using the challenged technology and
otherwise could have a material adverse effect on our business and financial
results.

EMPLOYEES

         At March 23, 2001, we had 226 full-time employees of which 103 were in
sales and marketing, and 123 were in operations and general administration. Of
these employees, 102 were based in Suwanee, Georgia, and 124 were based in 41
other states. Management believes that our relationship with our employees is
satisfactory.

SEASONALITY

         The electronic transaction processing industry is prone to seasonal
fluctuations in purchasing activity. We expect our revenues to be higher in the
third and fourth calendar quarters and lower in the first calendar quarter of
each year. The decline in retail activity following the holiday season typically
results in lower first quarter revenues.

ITEM 2.   PROPERTIES

         Our principal executive offices and our processing center are located
at 3950 Johns Creek Court, Suite 100, Suwanee, Georgia 30024, and our main
telephone number is (678) 475-5200. We lease our Georgia facilities, which total
approximately 41,000 square feet. We own our 12,000 square foot building in
Riverside, California that houses our RMSA Merchandise Planning subsidiary. We
lease our offices in Bristol, Tennessee; New York, New York; and Dallas, Texas,
which total approximately 8,300 square feet. We believe that our facilities will
be adequate to support our operations for the foreseeable future.

ITEM  3.   LEGAL PROCEEDINGS

         Except for the two lawsuits described below, we are not a party to, and
none of our material properties is subject to, any material litigation other
than routine litigation incidental to our business.

         1. IN RE TOWNE SERVICES, INC./SECURITIES LITIGATION; Case No.
1:99-CV-2641-BBM; filed in U.S. District Court, Northern District of Georgia on
January 31, 2001. Before being combined into one lawsuit as explained below,
this lawsuit was previously known prior to consolidation as (a) THOMAS J. GOLAB
V. TOWNE SERVICES, INC., DREW W. EDWARDS, HENRY M. BAROCO, AND BRUCE F.
LOWTHERS; Case No. 1:99-CV-2641-JTC; filed in U.S. District Court, Northern
District Court of Georgia, on October 12, 1999; and (b) JAMES E. BOLEN V. TOWNE
SERVICES, INC., DREW W. EDWARDS, HENRY M. BAROCO, AND BRUCE F. LOWTHERS; Case
No. 1:99-CV-3067; filed in U.S. District Court, Northern District of Georgia, on
November 24, 1999.

                                       10
<PAGE>

         The two original suits are purported securities class actions brought
by the named individual shareholders against the Company, two of its former
officers and a current officer. No class has yet been certified. The complaints
allege, among other things, that Towne Services should have disclosed in the
prospectus used for its secondary public offering in June 1999 that it allegedly
experienced serious problems with its network infrastructure and processing
facilities during the move of its corporate headquarters in June 1999, and that
these problems allegedly led to a higher than usual number of customers
terminating their contracts during the second quarter. The complaints seek an
unspecified awards of damages. The court recently granted a motion to
consolidate the GOLAB and BOLEN cases and the plaintiffs have filed an amended
complaint. This amended complaint combines the claims in the GOLAB and BOLEN
cases. We have filed a motion to dismiss for failure to state a claim. Discovery
has not yet commenced and will be stayed pending the court's ruling on the
motion to dismiss. We believe that the allegations in the complaints are without
merit and intend to defend the lawsuits vigorously. Our directors and executive
officers liability insurance carrier is presently providing a defense under a
reservation of rights.

         2. EDWARD H. SULLIVAN, JR. AND LISA SULLIVAN V. TOWNE SERVICES, INC.,
TOWNE SERVICES, INC., AS THE SUCCESSOR TO BANKING SOLUTIONS, INC., BANC
LEASING.COM, INC., THE SUCCESSOR TO BSI CAPITAL FUNDING, INC., MOSELEY &
STANDERFER, P.C., DAVID R. FRANK, DON G. SHAFER, AND SHANNON W. WEBB; filed in
the District Court of Collin County, Texas; Judicial District 199; Civil Action
No. 199-1848-99, on or about November 15, 1999.

         This lawsuit arises out of Towne Service's acquisition of Banking
Solutions, Inc. ("BSI") through a stock purchase made by its subsidiary, BSI
Acquisition Corp., in December 1998. Plaintiff Edward Sullivan, Jr. was employed
by BSI. Sullivan alleges, among other things, that he had a buy-out agreement
with BSI and certain BSI shareholders under which, in certain circumstances,
Sullivan was to receive a commission based on the gross sales price paid by any
purchaser of BSI. Sullivan contends that BSI and the other shareholders
allegedly fraudulently induced him to release them from the agreement by
fraudulently misrepresenting the gross sales price paid by Towne Services'
subsidiary in the stock purchase. Sullivan contends that Towne Services is
liable to him as the successor to BSI, and also for allegedly tortiously
interfering with the agreement. Sullivan also contends Towne Services conspired
with the other defendants to misrepresent the "gross purchase price." We deny
all allegations of the petition. Mr. Sullivan and his wife seek an unspecified
amount of damages including a percentage of the gross sales price paid by Towne
Services' subsidiary for the acquisition of BSI, as well as punitive damages,
attorneys' fees, and pre-judgment and post-judgment interest. We have filed a
motion for summary judgment seeking dismissal of all claims against us. The
court has not yet ruled on the motion, and discovery is ongoing. We believe that
the allegations in the complaint are without merit and intend to defend the
lawsuit vigorously. We also contend that we are entitled to indemnification from
the BSI shareholders for our expenses in defending this action. Specifically,
the BSI stock purchase agreement provides that the BSI shareholders will
indemnify us against any claims, damages, liabilities, costs and expenses
(including reasonable attorneys' and accountants' fees and expenses) we suffer
that arise out of any breach of the representations made by BSI in the
agreement, provided that the aggregate amount of all such claims, etc. exceeds
$100,000.

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

REVERSE STOCK SPLIT

         We held a special meeting of shareholders on December 20, 2000 to
consider and vote on the adoption and approval of an amendment to our amended
and restated articles of incorporation, which provided for a one-for-five
reverse stock split of the issued and outstanding shares of our common stock.

         Only shareholders of record at the close date of business on November
22, 2000 were entitled to vote at the special meeting. We solicited proxies for
the meeting pursuant to the Georgia Business Corporation Code, and there was no
solicitation in opposition to management's solicitation.

         We received proxies and ballots from the holders of 22,074,229 shares
of our common stock, representing 80% of the outstanding shares of stock.


                                       11
<PAGE>


         The shareholders approved the amendment to our amended and restated
articles of incorporation with the number of votes specified below:

  Voted For             Voted Against        Abstentions and Broker Non-Votes
  ---------             -------------        --------------------------------

  21,379,000                677,779                          17,450

       97%                      3%                             0.1%


                                     PART II

ITEM  5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Since our initial public offering in August 1998, our common stock has
traded on the Nasdaq Stock Market's National Market under the symbol TWNE. As of
March 23, 2001, we had 328 shareholders of record.

         To date, we have not paid cash dividends on our common stock. We do not
anticipate paying cash dividends on our common stock in the near future.

         The following table sets forth the high and low sales price information
for our common stock as reported by Nasdaq, for each full quarterly period in
1999 and 2000. The stock prices have been adjusted to reflect the December 20,
2000 one-for-five stock split discussed in Item 4.

                                                                  STOCK PRICE
                                                                  -----------

                                                              HIGH        LOW
                                                              ----        ---

First Quarter 1999.......................................      53.15     26.90
Second Quarter 1999......................................      56.55     35.00
Third Quarter 1999.......................................      48.15     15.00
Fourth Quarter 1999......................................      22.65      8.15
First Quarter 2000.......................................      25.65      8.75
Second Quarter 2000......................................      10.00      2.95
Third Quarter 2000.......................................       5.30      3.75
Fourth Quarter 2000......................................       4.53      1.00

ITEM  6.   SELECTED FINANCIAL DATA

         The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, our consolidated financial
statements and related notes and other financial information included elsewhere
in this Annual Report on Form 10-K, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 below. The
selected consolidated financial data of Towne Services as of December 31, 1997,
1998, 1999 and 2000 were derived from Towne Services' consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated balance sheet as of December 31, 1996 was
derived from unaudited financial statements which, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of Towne's financial condition and results of
operations. All amounts presented have been restated for the pooling of
interests resulting from the acquisition of Forseon Corporation in June 1999.
The acquisition of Imaging Institute, Inc. in July 1999 is accounted for as a
purchase. These results may not be indicative of future results. All numbers
have been rounded and are in thousands, except for per share data, which have
been adjusted for the December 20, 2000 one-for-five reverse stock split.


                                       12
<PAGE>
<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                                ------------------------
                                                               1996         1997          1998        1999          2000
                                                               ----         ----          ----        ----          ----
                                                            (UNAUDITED)

<S>                                                    <C>          <C>           <C>          <C>           <C>
STATEMENTS OF OPERATIONS DATA:
Revenues  .............................................   $   11,933   $    12,897   $   18,149   $   29,774    $  25,276
Costs and expenses:
    Costs of processing, servicing and support.........        2,692         3,389        4,302        7,338        8,228
    Research and development...........................          857           968        1,041          536           --
    Sales and marketing................................        6,791         7,988       13,389       20,014       16,268
    Stock compensation expense.........................          112            --        6,268          145           33
    Employee termination costs.........................           --            --        2,291        1,320          886
    Acquisition expense................................           --            --           --        2,343           --
    General and administrative, excluding stock
      compensation, employee termination and acquisition
      expenses noted above.............................        1,677         2,680        5,569       10,947       14,999
                                                          ----------   -----------   ----------   ----------    ---------
          Total costs and expenses.....................       12,129        15,025       32,860       42,643       40,414
                                                          ----------   -----------   ----------   ----------    ---------
Operating loss.........................................         (196)       (2,128)     (14,711)     (12,869)     (15,138)
                                                          -----------  ------------  ----------   ----------    ---------
Other expenses:
    Interest expense (income), net.....................           52           155         (226)        (711)      (1,093)
    Other expense (income).............................            4            (1)          (6)           4        2,755
    Financing costs for stock issued to nonemployees...           --            --          323           --           --
                                                          ----------   -----------   ----------   ----------    ---------
          Total other expenses.........................           56           154           91         (707)       1,662
                                                          ----------   -----------   ----------   -----------   ---------
    Loss before provision (benefit) from
      income taxes, extraordinary loss on early
      extinguishment of debt and cumulative effect of
      an accounting change.............................   $     (252)  $    (2,282)  $  (14,802)  $  (12,162)   $ (16,800)
                                                          -----------  -----------   ----------   ----------    ---------
    Provision (benefit) for income taxes...............          182           104          (11)         222          187
    Loss before extraordinary loss on early
      extinguishment of debt and cumulative effect of
      an accounting change.............................   $     (434)  $    (2,386)  $  (14,791)  $  (12,384)   $ (16,987)
                                                          -----------  -----------   ----------   ----------    ---------
    Extraordinary loss on early extinguishment of debt.           --            --          476           --           --
    Cumulative effect of an accounting change..........           --            --           --        3,183           --
                                                          ----------   -----------   ----------   ----------    ---------
Net loss................................................. $     (434)  $    (2,386)  $  (15,267)  $  (15,567)   $ (16,987)
                                                          ===========  ===========   ==========   ==========    =========
Preferred stock dividends..............................           --            --       (5,108)         (94)        (160)
Accretion of warrants with redemption feature..........           --            --         (692)          --           --
Net loss attributable to common shareholders
    before extraordinary loss and cumulative effect
    of accounting change:
    Basic .............................................   $     (434)  $    (2,386)  $  (20,591)  $  (12,478)   $ (17,147)
                                                          ===========  ===========   ==========   ==========    =========
    Diluted............................................   $     (434)  $    (2,516)  $  (20,591)  $  (12,478)   $ (17,147)
                                                          ===========  ===========   ==========   ==========    =========
Net loss per share attributable to common shareholders
    before extraordinary loss and cumulative effect
      of accounting change:
    Basic .............................................   $    (0.25)  $     (1.07)  $    (5.91)  $    (2.54)   $   (3.14)
                                                          ===========  ===========    ==========  ==========    =========
    Diluted............................................   $    (0.25)  $     (1.13)  $    (5.91)  $    (2.54)   $   (3.14)
                                                          ===========  ===========    ==========  ==========    =========
Net loss attributable to common shareholders:
    Basic .............................................   $     (434)  $    (2,386)  $  (21,067)  $  (15,661)   $ (17,147)
                                                          ===========  ===========   ==========   ==========    =========
    Diluted............................................   $     (434)  $    (2,386)  $  (21,067)  $  (15,661)   $ (17,147)
                                                          ===========  ===========   ==========   ==========    =========
Net loss per share attributable to common shareholders:
    Basic .............................................   $    (0.25)  $     (1.07)  $    (6.04)  $    (3.19)   $   (3.14)
                                                          ===========  ===========    =========   ==========    =========
    Diluted............................................   $    (0.25)  $     (1.07)  $    (6.04)  $    (3.19)   $   (3.14)
                                                          ===========  ===========    ==========  ==========    =========

    Weighted Average Common Shares Outstanding.........        1,712         2,231         3,486       4,907        5,467
                                                          ==========   ===========    ==========  ==========    =========
</TABLE>

                                       13
<PAGE>
<TABLE>
<CAPTION>


                                                                                     AT DECEMBER 31,
                                                               1996         1997          1998        1999          2000
                                                               ----         ----          ----        ----          ----
                                                            (UNAUDITED)
OTHER OPERATING DATA AT END OF PERIOD:
<S>                                                        <C>           <C>         <C>          <C>          <C>
    Number of sales people.............................           77            86          170          166          100
    Number of bank contracts...........................           17            74          641          823          789
    Number of business customers.......................        1,378         1,492        3,043        3,861        3,453

BALANCE SHEET DATA:
    Working capital....................................   $      815   $     2,638   $   10,258   $   21,692    $  10,197
    Total assets.......................................        4,289         7,200       38,747       57,737       37,174
    Long-term debt, net of current portion.............          197         1,642           55        1,028          771
    Shareholders' equity...............................        1,601         2,722       29,394       48,902       31,389
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         This Annual Report contains several "forward-looking statements"
concerning Towne Services' operations, performance, prospects, strategies and
financial condition, including its future economic performance, intent, plans
and objectives and the likelihood of success in developing and expanding its
business. These statements are based upon a number of assumptions and estimates
which are subject to significant uncertainties, many of which are beyond the
control of Towne Services. Words such as "may," "would," "could," "will,"
"expect," "anticipate," "believe," "intend," "plan" and "estimate" are meant to
identify such forward-looking statements. Those statements involve risks,
uncertainties and assumptions, including industry and economic conditions,
competition and other factors discussed in this and our other filings with the
SEC. If one or more of this risks or uncertainties materialize or underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. See "Disclosure Regarding Forward-Looking Statements" at the end of
this Item for a description of some of the important factors that may affect
actual outcomes.

OVERVIEW

         Towne Services, Inc. provides services and products that process sales
and payment information and related financing transactions for businesses and
banks in the United States. We deliver these services and products online via an
electronic hub, or gateway, that links business and bank customers with the
company and other providers of products and services that can benefit these
customers. We use this electronic gateway to deliver a variety of business and
management solutions using internet and telecommunication connections. We also
provide these solutions through our proprietary software housed at our clients'
locations. We generate revenues through the deployment and use of three primary
products: TOWNE CREDIT(R), which processes consumer credit transactions for
small and medium size businesses; TOWNE FINANCE(R) and CASHFLOW MANAGER(SM),
which process business-to-business credit transactions for commercial
businesses; and RMSA Merchandise Planning service, which processes sales and
inventory transactions and provides merchandising information for specialty
retail stores; and ancillary services related to these products. With each of
these products, we generate initial set-up fees, discount fees and recurring
monthly transaction processing fees. Management believes the prices charged for
both the initial set-up fees and the recurring transaction fees are based upon
the relative fair value of the related services provided.

         Bank set-up fees include charges for installation, implementation and
training of our bank and business customers. In response to the issuance of the
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB No. 101") we began recognizing all revenues from set-up fees
on a deferred basis over the estimated life of the contract terms and for
certain cancellation clauses and/or return guarantees until the guarantee period
is expired. The effects of this change in accounting principle were applied
cumulatively as of the beginning of 1999. Prior to the adoption of SAB No. 101,
we recognized set-up fees upon execution of the related contract or until
guarantee periods expired. Set-up fees charged to each bank vary depending on
the asset size of the bank and the number of communities served. Set-up fees are
also charged to our business customers based either upon a flat rate or upon the
expected transaction volume.

                                       14
<PAGE>


         With each of our transaction processing products, our business customer
pays a discount fee to its bank equal to a percentage of the value of each
transaction processed. The business' customer pays fees to the bank for amounts
owed by the customer for purchases made on in-house credit, and in some
instances pays interest to the bank. We generate recurring revenue by collecting
a portion of the discount fee and, if applicable, interest paid on these
accounts, as well as by charging monthly transaction processing fees. Monthly
transaction processing fees include charges for electronic processing, statement
rendering and mailing, settling payments, recording account changes and new
accounts, leasing and selling point of sale terminals, telephone and software
support services, rental fees and collecting debts.

         Other revenues include non-recurring charges for software license fees,
maintenance agreements, the sale of hardware and equipment and marketing
materials and supplies.

         Costs of processing, servicing and support include installation costs
for our products and costs related to customer service, information systems
personnel and installation services.

         Research and development expenses consist of salary and related
personnel costs, including costs for employee benefits, computer equipment and
support services, used in product and technology development. Most research and
development expenditures are expensed as incurred; however, we capitalize
certain development costs under Statement of Financial Accounting Standards
("SFAS") No. 86 when the products reach technological feasibility.

         Sales and marketing expenses consist primarily of salaries and
commissions, travel expenses, advertising costs, trade show expenses, hiring
costs and costs of marketing materials. These expenses also include the costs
incurred to develop our indirect marketing channels.

         On December 20, 2000, we effected a one-for-five reverse split of the
issued and outstanding shares of our common stock. We have restated the offering
prices and numbers of shares issued in each transaction below to take the
reverse split into account.

         In August 1998, we completed our initial public offering of our common
stock. The total proceeds of the IPO, net of underwriting discounts and offering
expenses, were approximately $27.0 million. We issued 770,000 shares of common
stock (3,850,000 shares on a pre-split basis) at an offering price of $40.00 per
share ($8.00 on a pre-split basis). After the IPO, we converted all outstanding
shares of Series A Preferred Stock to 243,581 shares of common stock, and
warrants for 61,796 shares of common stock were exercised.

         In December 1998, we acquired the outstanding capital stock of Banking
Solutions, Inc., for approximately $14.9 million in cash and stock. Banking
Solutions is a developer and provider of a transaction processing system,
CASHFLOW MANAGER, an accounts receivable financing program similar to the TOWNE
FINANCE product. In connection with the acquisition of Banking Solutions, we
issued 148,886 shares of common stock at $33.65 per share. We paid the remainder
of the purchase price in cash. We recorded this transaction using the purchase
method of accounting. We have recorded goodwill in the amount of $14.6 million
as a result of this merger, which is being amortized over a period of 12 years.

         In June 1999, we completed a public offering of 900,000 shares of
common stock (4,500,000 shares on a pre-split basis) at an offering price to the
public of $35.625 per share ($7.125 on a pre-split basis), and on July 20, 1999,
we sold 135,000 shares of common stock (675,000 shares on a pre-split basis)
pursuant to an underwriters' over-allotment provision in connection with this
public offering. The total proceeds to us from the public offering, net of
underwriting discounts and offering expenses, were approximately $32.6 million.

         In June 1999, we acquired Forseon Corporation, a company based in
Riverside, California. Forseon provides products and services for retail
businesses that process inventory, accounts receivable and point of sale
transaction information and generate merchandise plans and management reports.
We issued a total of 415,069 shares of our common stock in exchange for all
outstanding stock and options to acquire stock in Forseon. The merger was
accounted for as a pooling of interests. We incurred approximately $2.3 million
in expenses related to the acquisition of Forseon.

                                       15
<PAGE>


         In July 1999, we acquired all of the issued and outstanding stock of
Imaging Institute, Inc., a Bloomington, Minnesota-based company, for
approximately $1.2 million cash and the issuance of up to 16,203 shares of our
common stock. Imaging Institute's main products include AUGUSTA and EzVIEW
VAULT(TM), which offer unique and functional document imaging and archiving
solutions tailored for small to medium size businesses. In connection with the
purchase of Imaging Institute, we recorded goodwill in the amount of $1.9
million, which is being amortized over 5 years.

         For the years ended December 31, 1998, 1999 and 2000, we had net losses
of approximately $15.3 million, $15.6 million and $17.0 million, respectively.
As of December 31, 2000, we had an accumulated deficit of $57.0 million, of
which $17.1 million related to 2000. Of this $17.1 million, $5.3 million is
related to one-time charges, including $2.7 million in fixed asset write-offs,
$1.3 million related to Imaging Institute goodwill impairment and a $763,000
writedown of Credit Collection Solutions assets to their net realizable value.
The deficit for 2000 also included a one time note receivable write off of
$473,000.

         Our total revenues increased from $18.1 million in 1998 to $29.8
million in 1999 and decreased to $25.3 million in 2000. We have experienced net
losses in each of these periods and expect to continue to incur losses for the
foreseeable future. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development and in relatively new and changing markets. There can be no
assurance that we will be successful in addressing these risks and difficulties
or that we will achieve profitability in the future.

RESULTS OF OPERATIONS

         The following table sets forth our condensed historical operating
information, as a percentage of total revenues, for the periods indicated:
<TABLE>
<CAPTION>

                                                                                      YEARS ENDED
                                                                                       DECEMBER 31,
                                                                                      ------------
                                                                             1998        1999        2000
                                                                             ----        ----        ----
<S>                                                                          <C>          <C>        <C>
Revenues ................................................................       100%         100%       100%

   Costs of processing, servicing, and support...........................        24           25         33
   Research and development..............................................         5            2         --
   Sales and marketing...................................................        74           67         64
   Stock compensation expense............................................        35           --         --
   Employee termination costs............................................        13            4          4
   Acquisition expense...................................................        --            8         --
   General and administrative, excluding stock compensation,
      employee termination and acquisition expenses noted above..........        31           37         59
                                                                            -------     --------    -------
         Total costs and expenses........................................       182          143        160
                                                                            -------     --------    -------
Operating loss...........................................................       (81)         (43)       (60)
Interest expense (income), net...........................................        (1)          (2)        (4)
Other expense (income), net..............................................        --           --         11
Financing costs for stock issued to nonemployees.........................         2           --         --
                                                                            -------     --------    -------
         Total other expenses............................................         1           (2)         7
                                                                            -------     ---------   ------
Net loss before provision (benefit) from income taxes,
   extraordinary loss and cumulative effect of an accounting change......       (82)%        (41)%      (66)%
                                                                            =======     ========    =======
Net loss before extraordinary item and cumulative effect of an
   accounting change.....................................................       (81)%        (42)%      (67)%
                                                                            =======     ========    =======
Net loss ................................................................       (84)%        (52)%      (67)%
                                                                            ========    ========    =======
Net loss attributable to common shareholders.............................      (116)%        (53)%      (68)%
                                                                            =======     ========    =======
</TABLE>

                                       16
<PAGE>


COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 2000

         REVENUES. Our revenues decreased from $29.8 million in 1999 to $25.3
million in 2000. During these two periods, recurring revenues accounted for
approximately 73% and 65% of total revenues, respectively. Set-up fees accounted
for approximately 15% and 24% of total revenues, respectively. Other
nonrecurring revenues accounted for approximately 12% and 11% of total revenues,
respectively. The decrease in revenues during these periods is attributed
primarily to a decrease in deferred bank revenues recognized, bank set-up fee
revenue and a decrease in software license fee revenues.

         COSTS OF PROCESSING, SERVICING AND SUPPORT. Costs of processing,
servicing and support increased from $7.3 million in 1999 to $8.2 million in
2000. These costs were approximately 25% and 33% of total revenues,
respectively, for these two periods. Costs of processing, servicing and support
increased as a result of additional services and support functions necessary to
support our anticipated growth. We anticipate that these costs will remain
constant as our customer base expands.

         RESEARCH AND DEVELOPMENT. Research and development expense for the year
ended December 31, 1999 was approximately $536,000. This expense represented
approximately 2% of total revenues for this period. We incurred no similar
expense for the year ended December 31, 2000.

         SALES AND MARKETING. Sales and marketing expenses decreased from $20.0
million in 1999 to $16.3 million in 2000. Sales and marketing expenses were
approximately 67% and 64% of total revenues, respectively, during these two
periods. The decrease in the dollar amount of these expenses is primarily the
result of the decrease in the number of sales personnel, related business travel
expenses, and recruiting expenses to attract new sales employees.

         EMPLOYEE TERMINATION COSTS. Employee termination costs decreased from
$1.3 million in 1999 to $886,000 in 2000. These expenses represented
approximately 4% of total revenues, during these two periods. In 1999, we
recorded $1.3 million relating to severance benefits for two former employees.
The severance benefits consisted of $1.0 million in cash payments and $234,000
related to the early vesting of previously unvested stock options. In 2000, this
expense decreased due to smaller severance agreements for terminated employees.

         ACQUISITION EXPENSE. Acquisition expense for the year ended December
31, 1999 was approximately $2.3 million, all of which related to the acquisition
of Forseon. This cost represented approximately 8% of total revenues for this
period. We incurred no similar acquisition expense for the year ended December
31, 2000.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased from $10.9 million in 1999 to $15.0 million in 2000. These costs
represented approximately 37% and 59% of total revenues, respectively, for these
two periods. The increase in these expenses was primarily the result of
amortization of expenses relating to acquisitions and the write down of Credit
Collections Solutions and Imaging Institute assets. We anticipate that general
and administrative expenses should decrease due to a reduction in one-time
charges and the implementation of a formal budgetary process with improved
controls.

         INTEREST INCOME, NET. We reported net interest income of $711,000 in
1999 and $1.1 million in 2000. Net interest income increased as a result of
earnings on investments of cash proceeds received from our second public
offering in June 1999.

         INCOME TAXES. As of December 31, 2000, we had net operating loss carry
forwards ("NOLs") of approximately $40.5 million for federal tax purposes, which
will expire if not utilized beginning 2011. Due to changes in our ownership
structure, our use of NOLs as of October 1, 1997 of approximately $2.5 million
will be limited to approximately $550,000 in any given year to offset future
taxes. In addition, due to our acquisitions during 1998 and 1999, NOLs of
approximately $5.3 million will be limited to approximately $1.6 million in any
given year to offset future taxes. If we do not realize taxable income in excess
of the limitation in future years, certain NOLs will be unrealizable.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999

         REVENUES. Our revenues increased from $18.1 million in 1998 to $29.8
million in 1999. During these two periods, recurring revenues accounted for
approximately 69% and 73% of total revenues, respectively. Set-up fees accounted
for

                                       17
<PAGE>

approximately 20% and 15% of total revenues, respectively. Other nonrecurring
revenues accounted for approximately 11% and 12% of total revenues,
respectively. The increase in revenues during these periods is attributed
primarily to an increase in transaction processing revenues and set-up fees as a
result of the increase in the number of customers. The increase in other
nonrecurring revenues is primarily a result of an increase in software license
fee revenues of our inventory management, collection works and document imaging
products.

         COSTS OF PROCESSING, SERVICING AND SUPPORT. Costs of processing,
servicing and support increased from $4.3 million in 1998 to $7.3 million in
1999. These costs were approximately 24% and 25% of total revenues,
respectively, for these two periods. Costs of processing, servicing and support
increased as a result of additional services and support functions necessary to
support our growth both through the acquisition of new customers and the
acquisition of complementary businesses. We anticipate that these costs will
continue to increase as our customer base expands.

         RESEARCH AND DEVELOPMENT. Research and development expenses decreased
from $1.0 million in 1998 to $536,000 in 1999. Research and development expenses
represented approximately 5% and 2% of total revenues, respectively, during
these two periods. Research and development costs decreased in 1999 compared to
1998 as a result of our products reaching technological feasibility and being
capitalized in accordance with SFAS 86. In addition, we did not incur
significant costs to make our products year 2000 compliant because our products
are currently designed to properly function through and beyond the year 2000.

         SALES AND MARKETING. Sales and marketing expenses increased from $13.4
million in 1998 to $20.0 million in 1999. Sales and marketing expenses were
approximately 74% and 67% of total revenues, respectively, during these two
periods. The increase in the dollar amount of these expenses in 1999 was
primarily the result of a significant increase in the number of sales personnel
in remote locations, related business travel expenses, recruiting expenses to
attract new sales employees and increased costs for marketing materials used to
recruit potential bank and business customers.

         STOCK COMPENSATION EXPENSE. Stock compensation expense was $6.3 million
in 1998 and $145,000 in 1999. In the first quarter of 1998, we sold shares of
common stock and issued options to acquire common stock at what management
believed to be the fair market value of the common stock at that time. We
retained an independent appraiser who subsequently valued the common stock at a
higher price. We will record $725,000 of stock compensation expense over the
five-year vesting period of the options.

         EMPLOYEE TERMINATION COSTS. Employee termination costs decreased from
$2.3 million in 1998 to $1.3 million in 1999. These expenses represented
approximately 13% and 4% of total revenues, respectively, during these two
periods. In connection with the acquisition of Banking Solutions in December
1998, we recognized a one-time charge in the amount of $2.3 million relating to
employee terminations that were not finalized at the date of the purchase. In
1999, we recorded $1.3 million relating to severance benefits for two former
employees. The severance benefits consisted of $1.0 million in cash payments and
$234,000 related to the early vesting of previously unvested stock options.

         ACQUISITION EXPENSE. Acquisition expense for the year ended December
31, 1999 was approximately $2.3 million, all of which related to the acquisition
of Forseon. This cost represented approximately 8% of total revenues for this
period. We incurred no similar acquisition expense for the year ended December
31, 1998.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased from $5.6 million in 1998 to $10.9 million in 1999. These costs
represented approximately 31% and 37% of total revenues, respectively, for these
two periods. The increase in these expenses was primarily the result of
increases in the number of executive and administrative employees and expenses
related to our growth, amortization expenses relating to acquisitions,
write-offs of uncollectible accounts receivables, costs incurred for relocation
to our new office facility and a one-time charge relating to a sublease
agreement that was terminated early. We also incurred additional costs related
to being a public company, including annual and other public reporting expenses,
directors' and officers' liability insurance, investor relations programs and
professional services fees.

                                       18
<PAGE>


         INTEREST INCOME, NET. We reported net interest income of $226,000 in
1998 and $711,000 in 1999. Net interest income increased as a result of earnings
on investments of cash proceeds received from our initial public offering in
August 1998 and our second public offering in June 1999.

         EXTRAORDINARY LOSS. We reported an extraordinary loss during 1998
resulting from the early extinguishment of debt in the amount of $476,000. The
extraordinary loss was comprised of $218,000 unamortized discount on a
promissory note and $258,000 deferred debt issuance costs. See note 5 of Notes
to our consolidated financial statements. We incurred no similar extraordinary
losses for the corresponding year ended December 31, 1999.

         CUMULATIVE EFFECT OF ACCOUNTING CHANGE. We reported a cumulative effect
of an accounting change during 1999 in the amount of $3.2 million related to
revenue recognition of initial set-up fees. In response to the issuance of the
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," we began recognizing all revenues from set-up fees on a deferred
basis. The effect of this change in accounting principle was applied
cumulatively as of the beginning of 1999.

         INCOME TAXES. As of December 31, 1999, we had net operating loss carry
forwards ("NOLs") of approximately $27.3 million for federal tax purposes, which
will expire if not utilized beginning 2011. Due to changes in our ownership
structure, our use of our NOLs as of October 1, 1997 of approximately $2.5
million will be limited to approximately $550,000 in any given year to offset
future taxes. In addition, due to our acquisitions during 1998 and 1999, NOLs of
approximately $6.1 million will be limited to approximately $1.6 million in any
given year to offset future taxes. If we do not realize taxable income in excess
of the limitation in future years, certain NOLs will be unrealizable.

         During our short history, our operating results have varied
significantly and are likely to fluctuate significantly in the future as a
result of a combination of factors. See "Disclosure Regarding Forward-Looking
Statements" at the end of this Item for a description of some of the important
factors that may affect outcomes.

LIQUIDITY AND CAPITAL RESOURCES

         We have financed our operations primarily through sales of equity
securities in private placements, our initial public offering, our second public
offering and through credit facilities. During 1997, we received aggregate net
proceeds of $3.5 million from the sale of common stock in private transactions.
In March 1998, we received net proceeds of $1.5 million from the sale of Series
A preferred stock in a private placement. In July 1998, we received net proceeds
of approximately $27.0 million from the initial public offering of our common
stock. In June 1999, we received net proceeds of approximately $32.6 million
from a second public offering of our common stock and approximately $1.9 million
from the sale of our Series B preferred stock in a private placement.

         In June 1999, we entered into a five-year capital lease obligation with
Synovus Leasing Company to finance the purchase of office furniture and
fixtures. The capital lease obligation of $633,000 includes interest of $122,000
or 8.75% of the principal. The amount of the minimum monthly lease obligation,
consisting of principal and interest, is $11,000.

         In June 1999, we entered into a five-year capital lease obligation with
NEC America, Inc. to finance the purchase of office telecommunications
equipment. The capital lease obligation of $546,000 includes interest of
$104,000 or 8.61% of the principal. The amount of the minimum monthly lease
obligation, consisting of principal and interest, is $9,000.

         In August 1999, we entered into a five-year capital lease obligation
with Synovus Leasing Company to finance the purchase of a generator. The capital
lease obligation of $510,000 includes interest of $98,000, or 8.75%, of the
principal. The amount of the minimum monthly lease obligation, consisting of
principal and interest, is $8,500.

         Net cash used in operating activities was approximately $9.9 million in
1998, $9.8 million in 1999 and $9.0 million in 2000. Net cash used in operating
activities during 1998 primarily represents (a) a $15.3 million net loss and (b)
a $3.1 million increase in accounts receivable, partially offset by (c) $6.4
million in non-cash compensation expense and (d) $975,000 in accrued expenses.
Net cash used in operating activities during 1999 primarily represents (a) a
$15.6 million net loss, partially offset by (b) a $2.2 million increase in
accounts receivable, (c) a $1.2 million increase in accounts payable and accrued
expenses

                                       19
<PAGE>

and (d) a $2.0 million increase in deferred revenue. Net cash used in operating
activities during 2000 represents (a) a $17.0 million net loss, (b) a $1.2
million decrease in accounts payable, and (c) a $1.7 million decrease in
deferred revenue. This cash use was offset by a $6.9 million non-cash
depreciation and amortization charge and a $1.9 million decrease in accounts
receivable.

         Net cash provided by (used in) investing activities was approximately
($13.0) million for 1998, ($12.1) million for 1999 and $1.4 million in 2000. Net
cash used in investing activities during 1998 represents (a) an increase of
$10.4 million to acquire Banking Solutions, Inc., (b) $1.9 million for the
purchase of computer equipment and other capital equipment used in conducting
our business, (c) $510,000 to acquire some of the assets and liabilities of
Credit Collection Solutions, Inc. and (d) $170,000 in notes due from
shareholders. Net cash used in investing activities during 1999 represents (a)
an increase of $1.8 million of expenses related to acquisitions, (b) $1.1
million in notes due from shareholders, (c) $1.4 million for the purchase of
short-term investments and (d) $7.9 million for the purchase of computer
equipment and other capital equipment used in conducting our business. Net cash
provided by investing activities in 2000 primarily represents a $1.1 million
reduction in notes receivable primarily related to the write off of certain
notes receivable and $848,000 provided by sales of short term investments.

         Net cash provided by (used in) financing activities was $33.3 million,
$28.8 million and $(1.4) million for the years ended December 31, 1998, 1999 and
2000, respectively. Net cash provided by financing activities for 1998 consisted
primarily of (a) $28.2 million of net proceeds received from sales of our common
stock, (b) $1.5 million from the issuance of preferred stock, (c) $584,000 from
the exercise of stock options and (d) $3.1 million of net proceeds from
outstanding debt obligations. Net cash provided by financing activities for 1999
consisted primarily of (a) $35.0 million of proceeds from the issuance of
securities, offset by (b) $5.4 million for the repayment of outstanding
short-term debt obligations and (c) $391,000 related to stock option exercises
and repurchases of common stock. Net cash used in financing activities for 2000
consisted primarily of (a) repurchase and retirement of $770,000 of stock issued
in the Imaging Institute acquisition as contractually required, and (b) $652,000
of stock repurchases.

         On June 27, 2000, the Board of Directors authorized the repurchase of
up to $3.0 million of our common stock in the open market at prevailing prices,
subject to normal trading restrictions. There is no expiration date for the
program. Under this program, we purchased 383,143 shares through December 31,
2000. As of December 31, 2000, 357,543 shares remain in treasury at a cost of
$629,000. In January 2001, we purchased an additional 102,900 shares at a cost
of $243,000.

RECENT ACCOUNTING STANDARDS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. A company may also implement SFAS No. 133 as of
the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied
retroactively; it must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. The adoption of SFAS No. 133
on January 1, 2001, did not to have a material impact on our financial
statements.

         In response to the issuance of the SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements," we began recognizing all
revenues from set-up fees on a deferred basis. The effects of this change in
accounting principle were applied cumulatively as of the beginning of 1999.


                                       20
<PAGE>


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report contains several "forward-looking statements"
concerning our operations, performance, prospects, strategies and financial
condition, including our future economic performance, intent, plans and
objectives and the likelihood of success in developing and expanding our
business. These statements are based upon a number of assumptions and estimates
which are subject to significant uncertainties, many of which are beyond our
control. Words such as "may," "would," "could," "will," "expect," "anticipate,"
"believe," "intend," "plan" and "estimate" are meant to identify such
forward-looking statements.

         Actual results may differ materially from those expressed or implied by
such forward-looking statements. Factors that could cause these results to
differ materially include, but are not limited to:

         o        whether our management team can attain our goals and improve
                  our financial condition;

         o        the possible negative impact of lawsuits on our stock price
                  and ability to meet our sales and other business objectives;

         o        the distraction of management's time and attention, increased
                  legal and other costs, and other possible adverse effects on
                  our business and operations if we again face a potential
                  delisting from the Nasdaq National Market for failure to
                  maintain the continued listing requirements;

         o        market acceptance of new products and services;

         o        whether we will be able to achieve or maintain profitability
                  or other desired results of operations; and

         o        other factors discussed in this Annual Report and in our
                  filings with SEC, including our registration statements on
                  Form S-4 (No. 333-76493) as declared effective on June 10,
                  1999, and Form S-1 (No. 333-76659) declared effective on June
                  23, 1999, and the "Risk Factors" sections contained therein.

         In addition, the amount of revenue associated with particular set-up
fees can vary significantly based upon the number of products used by customers
for any particular period. We establish our expenditure levels for product
development, sales and marketing and other operating revenue based, in large
part, on our anticipated revenues. As a result, if revenues fall below
expectations, operating results and net income are likely to be adversely and
disproportionately affected because only a portion of our expense varies with
revenues.

ITEM  7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates.

         Our short-term and long-term investments are deposited principally in a
single financial institution with significant assets and consist of U.S.
Treasury bills and notes with maturities of less than three years. We do not
consider the interest rate risk for these investments to be material. In
addition, we do not have any material outstanding borrowings and, therefore, we
do not have a significant risk due to potential fluctuations in interest rates
for loans at this time.

ITEM  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements of Towne Services, including
Towne Services' consolidated balance sheets as of December 31, 1999 and 2000 and
consolidated statements of income, cash flows and shareholders' equity for each
of the three years in the period ended December 31, 2000, together with the
report thereto of Arthur Andersen LLP dated February 16, 2001 and the schedule
containing certain supporting information, are attached hereto as pages F-1
through F-26.
                                       21
<PAGE>

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE

         Not applicable.

                                    PART III

         Some information required by Part III is omitted from this Annual
Report because we will file a definitive Proxy Statement pursuant to Regulation
14A of the Securities Exchange Act of 1934 (the "Proxy Statement") not later
than 120 days after the end of the financial year covered by this Annual Report,
and this information is incorporated herein by reference into this Annual
Report.

ITEM  10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by Item 10 is incorporated herein by reference
from the Proxy Statement.

ITEM  11.   EXECUTIVE COMPENSATION

         The information required by Item 11 is incorporated herein by reference
from the Proxy Statement, except for those portions relating to the Compensation
Committee's Report on Executive Compensation and to Towne's Comparative
Performance.

ITEM  12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 12 is incorporated herein by reference
from the Proxy Statement.

ITEM  13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 13 is incorporated herein by reference
from the Proxy Statement.

                                     PART IV

ITEM  14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)  FINANCIAL STATEMENTS

         The following consolidated financial statements of Towne Services, Inc.
and its subsidiaries are filed as part of this Annual Report and are attached
hereto as pages F-1 to F-26:

         Report of Independent Public Accountants

         Consolidated Balance Sheets of December 31, 1999 and 2000

         Consolidated Statements of Operations for the years ended
         December 31, 1998, 1999 and 2000

         Consolidated Statements of Shareholders' Equity for the years ended
         December 31, 1998, 1999 and 2000

         Consolidated Statements of Cash Flows for the years ended
         December 31, 1998, 1999 and 2000

         Notes to Consolidated Financial Statements

(a)(2)  FINANCIAL STATEMENT SCHEDULES


                                       22
<PAGE>
<TABLE>
<CAPTION>


                  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

                                                       BEGINNING     CHARGED TO                     ENDING
DESCRIPTION                                             BALANCE        EXPENSE       DEDUCTIONS     BALANCE
-----------                                            ---------     ----------      ----------     -------

<S>                                                    <C>          <C>               <C>        <C>
December 31, 1998 Allowance for Doubtful Accounts......    71,000       375,000           48,000     398,000
December 31, 1999 Allowance for Doubtful Accounts......   398,000     1,644,000        1,510,000     532,000
December 31, 2000 Allowance for Doubtful Accounts......   532,000     1,206,000        1,196,000     542,000
</TABLE>

(a)(3)  EXHIBITS

EXHIBIT
NO.                                DESCRIPTION
-------                          ----------------

3.1        --     Amended and Restated Articles of Incorporation, as filed with
                  the Secretary of State of the State of Georgia on July 29,
                  1998, as amended on June 11, 1999; December 20, 2000; and
                  January 19, 2001.

3.2        --     Amended and Restated Bylaws, effective May 19, 1998.**

3.3        --     Amendment to the Amended and Restated Bylaws, effective May
                  21, 1999.**

4.1        --     See Exhibits 3.1 through 3.3 for provisions of the Amended and
                  Restated Articles of Incorporation and Amended and Restated
                  Bylaws defining the rights of security holders.

10.1       --     1996 Stock Option Plan (including form of Stock Option
                  Agreement).*/+

10.2       --     1998 Stock Option Plan (including form of Stock Option
                  Agreement).*/+

10.3       --     Form of Non-Qualified Stock Option Agreement.*/+

10.4       --     Amended and Restated Director Stock Option Plan adopted March
                  22, 2000 by the Board of Directors and approved by the
                  shareholders on April 26, 2000 (incorporated by reference to
                  Appendix A to Towne's definitive Proxy Statement for its 2000
                  Annual Meeting filed on April 26, 2000). +

10.5       --     Form of Director Stock Option Agreement under Amended and
                  Restated Director Stock Option Plan. +

10.6       --     Employment Agreement by and between Towne Services, Inc. and
                  Lynn Boggs dated June 8, 2000 (incorporated by reference to
                  Towne's Quarterly Report on Form 10-Q filed on August 11,
                  2000). +

10.7       --     Employment Agreement by and between Towne Services, Inc. and
                  Henry M. Baroco dated February 9, 2001.+

10.8       --     Employment Agreement by and between Towne Service, Inc. and
                  Randall S. Vosler dated February 9, 2001.+

10.9       --     Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Henry M. Baroco in the
                  principal sum of $33,990.58 (incorporated by reference to
                  Towne's Quarterly Report on Form 10-Q filed on August 11,
                  2000).

10.10      --     Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Henry M. Baroco in the
                  principal sum of $96,418.80 (incorporated by reference to
                  Towne's Quarterly Report on Form 10-Q filed on August 11,
                  2000).


                                       23
<PAGE>

10.11      --     Promissory Note dated July 22, 1999 issued to Towne Services,
                  Inc. by Henry M. Baroco (incorporated by reference to Towne's
                  Annual Report on Form 10-K filed on March 22, 2000).

10.12      --     Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Cleve B. Shultz in the
                  principal sum of $50,000.00 (incorporated by reference to
                  Towne's Quarterly Report on Form 10-Q filed on August 11,
                  2000).

10.13      --     Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Bruce F. Lowthers, Jr. in
                  the principal sum of $86,484.47 (incorporated by reference to
                  Towne's Quarterly Report on Form 10-Q filed on August 11,
                  2000).

10.14      --     Form of Indemnification Agreement entered into between Towne
                  Services, Inc. and its directors and officers.*

10.15      --     Form of Towne Services, Inc. Bank Marketing Agreement.

10.16      --     Form of Towne Services, Inc. Retail Processing Agreement.

10.17      --     Form of Towne Services, Inc. Commercial Processing Agreement.

10.18      --     Form of CASH FLOW MANAGER Merchant Services Agreement
                  (incorporated by reference to the exhibits to Towne's Annual
                  Report on Form 10-K filed on March 26, 1999).

10.19      --     Form of CASH FLOW MANAGER License Agreement.

10.20      --     Form of Independent Bankers Bank General Marketing Agent
                  Agreement (incorporated by reference to the exhibits to
                  Towne's Annual Report on Form 10-K filed on March 26, 1999).

10.21      --     Form of General Marketing Agent Agreement.*

10.22      --     Referral Agreement dated December 15, 1999 between Towne
                  Services Inc. and NOVA Information Systems, Inc. (incorporated
                  by reference to the exhibits to the Company's Annual Report on
                  Form 10-K filed on March 21, 2000).

10.23      --     Master License Agreement dated December 8, 1999 between Towne
                  Services, Inc. and Trans Union LLC. (incorporated by reference
                  to the exhibits to the Company's Annual Report on Form 10-K
                  filed on March 21, 2000).

10.24      --     Sublease Agreement by and among Technology Park/Atlanta, Inc.
                  and Towne Services, Inc. dated March 9, 1999 (incorporated by
                  reference to Towne's Quarterly Report on Form 10-Q filed on
                  May 7, 1999).

10.25      --     Stock Purchase Warrant by and between Towne Services Inc., and
                  Synovus Financial Corporation dated June 16, 1999
                  (incorporated by reference to Towne's Quarterly Report on Form
                  10-Q filed on August 16, 1999).

21.1       --     Subsidiaries of Towne Services, Inc.

23.1       --     Consent of Arthur Andersen LLP.

24.1       --     Power of Attorney (contained or the signature page hereof).


*                 Incorporated by reference to the exhibits to the Company's
                  Registration Statement on Form S-1 (No. 333-53341) as declared
                  effective by the SEC on July 30, 1998.


                                       24
<PAGE>


**                Incorporated by reference to the exhibits to the Company's
                  Registration Statement on Form S-1 (No. 333-76859) as declared
                  effective by the SEC on June 23, 1999.

***               Incorporated by reference to the exhibits to the Company's
                  Registration Statement on Form S-4 (No. 333-76493) as declared
                  effective by the SEC on June 10, 1999.

+                 This agreement is a compensatory plan or arrangement required
                  to be filed as an exhibit to this Form 10-K pursuant to Item
                  14(c).

(b)  REPORTS ON FORM 8-K

             Form 8-K filed on October 11, 2000. Current report under Item 5
reporting that we issued a press release announcing that the Nasdaq Stock Market
had notified us that our common stock would be delisted from the Nasdaq National
Market at the opening of business on January 9, 2001 if we failed to maintain a
minimum bid price of $1.00 for a ten consecutive trading day period before
January 8, 2001.

                                      25

<PAGE>



                                   SIGNATURES

             Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereto duly authorized.

                                          Towne Services, Inc.


                                          By: /s/   G.  LYNN BOGGS
                                             -----------------------------------
                                                    G.  Lynn Boggs
                                            CHAIRMAN AND CHIEF EXECUTIVE OFFICER

March 29, 2001

                                POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, G. Lynn Boggs and
Henry M. Baroco, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report (Form 10-K) and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

     Pursuant to the requirements of the Securities Exchanges Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

                 SIGNATURE                                    TITLE                                         DATE
                 ---------                                    -----                                         ----
<S>                                             <C>                                      <C>
    /s/         G. LYNN BOGGS                        Chairman of the Board and                            March 29, 2001
--------------------------------------------
                G. Lynn Boggs                        Chief Executive Officer
                                                     (principal executive officer)

    /s/       RANDALL S. VOSLER                      Senior Vice President, Chief Financial Officer       March 29, 2001
--------------------------------------------
              Randall S. Vosler                      (principal financial and accounting officer)

    /s/        HENRY M. BAROCO                       President, Chief Operating Officer and               March 29, 2001
--------------------------------------------
               Henry M. Baroco                       Director

    /s/        FRANK W. BROWN                        Director                                             March 29, 2001
--------------------------------------------
               Frank W. Brown

    /s/        JOHN W. COLLINS                       Director                                             March 29, 2001
--------------------------------------------
               John W. Collins

    /s/     RICHARDSON M. ROBERTS                    Director                                             March 29, 2001
--------------------------------------------
            Richardson M. Roberts

    /s/        JOE M. RODGERS                        Director                                             March 29, 2001
--------------------------------------------
               Joe M.  Rodgers


                                       26
<PAGE>

          SIGNATURE                                    TITLE                                            DATE
          ---------                                    -----                                           -----

    /s/    JOHN D. SCHNEIDER, JR.                    Director                                             March 29, 2001
--------------------------------------------
           John D. Schneider, Jr.

    /s/    J. DANIEL SPEIGHT, JR.                    Director                                             March 29, 2001
--------------------------------------------
           J. Daniel Speight, Jr.

    /s/        GLENN W. STURM                        Director                                             March 29, 2001
--------------------------------------------
               Glenn W. Sturm

    /s/       J. STEPHEN TURNER                      Director                                             March 29, 2001
--------------------------------------------
              J. Stephen Turner

    /s/       BAHRAM YUSEFZADEH                      Director                                             March 29, 2001
--------------------------------------------
              Bahram Yusefzadeh


</TABLE>

                                       27
<PAGE>

                              TOWNE SERVICES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1999 AND 2000

                                TABLE OF CONTENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                              F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheets as of December 31, 1999 and 2000          F-3

Consolidated Statements of Operations for the Years Ended

December 31, 1998, 1999 and 2000                                      F-4

Consolidated Statements of Shareholders' Equity for the Years

Ended December 31, 1998, 1999 and 2000                                F-5

Consolidated Statements of Cash Flows for the Years Ended

December 31, 1998, 1999 and 2000                                      F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            F-7


<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Towne Services, Inc.:

    We have audited the accompanying consolidated balance sheets of TOWNE
SERVICES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1999
and 2000 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Towne Services, Inc. and
subsidiaries as of December 31, 1999 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.

    As explained in Note 2 to the financial statements, effective January 1,
1999 the Company changed its method of accounting for initial set-up fees upon
adoption of Securities and Exchange Commission Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements."

    Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) of
this Form 10-K is presented for the purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia

February 16, 2001, except for Note 12, as to which the date is March 13, 2001



                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                              TOWNE SERVICES, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 2000

                                                                                          DECEMBER 31,              DECEMBER 31,
                                                                                              1999                       2000
                                                                                   ----------------------------------------------

                                     ASSETS


<S>                                                                                           <C>              <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                                        $ 20,981,000     $ 11,997,000
  Investments                                                                                         1,350,000          498,000
  Accounts receivable, net of allowance
     for uncollectible accounts of  $532,000 and $542,000
     at December 31, 1999 and December 31, 2000, respectively                                         5,289,000        2,137,000
  Notes receivable from employees                                                                       509,000           93,000
  Other                                                                                                 600,000          486,000
                                                                                   ----------------------------------------------
       Total current assets                                                                          28,729,000       15,211,000
                                                                                   ----------------------------------------------

PROPERTY AND EQUIPMENT, net                                                                          11,120,000        7,932,000
NOTES RECEIVABLE FROM EMPLOYEES                                                                         804,000          167,000
GOODWILL, net                                                                                        15,905,000       13,004,000
OTHER INTANGIBLES, net                                                                                1,034,000          689,000
OTHER ASSETS, net                                                                                       145,000          171,000
                                                                                   ----------------------------------------------
                                                                                                   $ 57,737,000     $ 37,174,000
                                                                                   ==============================================


                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                                  $ 1,516,000        $ 272,000
  Dividends payable                                                                                      94,000          254,000
  Accrued liabilities                                                                                 1,809,000        2,190,000
  Accrued compensation                                                                                  950,000        1,308,000
  Accrued termination costs                                                                             230,000          221,000
  Deferred Revenue                                                                                    2,207,000          499,000
  Current portion of long-term debt                                                                     231,000          270,000
                                                                                   ----------------------------------------------
     Total current liabilities                                                                        7,037,000        5,014,000
                                                                                   ----------------------------------------------

LONG TERM DEBT, NET OF CURRENT PORTION                                                                1,028,000          771,000

COMMITMENTS AND CONTINGENCIES (Note 9)

REDEEMABLE COMMON STOCK                                                                                 770,000                -

SHAREHOLDERS' EQUITY:
  Preferred stock, $100 par value; 20,000,000 shares authorized, 20,000
    issued and outstanding at December 31, 1999 and December 31, 2000                                 1,880,000        1,880,000
  Common stock, no par value; 50,000,000 shares authorized, 5,439,544 issued and
   outstanding December 31, 1999 and 5,497,864 shares issued and 5,140,321 outstanding
     at December 31, 2000                                                                            86,690,000       86,953,000
  Warrants outstanding                                                                                  161,000          161,000
  Accumulated deficit                                                                               (39,829,000)     (56,976,000)
  Less treasury stock, at cost, 357,543 shares at December 31, 2000                                           -         (629,000)
                                                                                   ----------------------------------------------
     Total shareholders' equity                                                                      48,902,000       31,389,000
                                                                                   ----------------------------------------------
                                                                                                   $ 57,737,000     $ 37,174,000
                                                                                   ==============================================

</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

                                      F-3
<PAGE>

<TABLE>
<CAPTION>

                              TOWNE SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

                                                                              1998               1999               2000
                                                                         -----------------------------------------------------


<S>                                                                      <C>                <C>                <C>
REVENUES                                                                   $ 18,149,000       $ 29,774,000       $ 25,276,000
                                                                         -----------------------------------------------------

COSTS AND EXPENSES:
  Costs of processing, servicing, and support                                 4,302,000          7,338,000          8,228,000
  Research and development                                                    1,041,000            536,000                  -
  Sales and marketing                                                        13,389,000         20,014,000         16,268,000
  Stock compensation expense                                                  6,268,000            145,000             33,000
  Employee termination costs                                                  2,291,000          1,320,000            886,000
  Acquisition expense                                                                 -          2,343,000                  -
  General and administrative, net of stock compensation, employee
     terminations and acquisition expenses noted above                        5,569,000         10,947,000         14,999,000
                                                                         -----------------------------------------------------
     Total costs and expenses                                                32,860,000         42,643,000         40,414,000
                                                                         -----------------------------------------------------
OPERATING LOSS                                                              (14,711,000)       (12,869,000)       (15,138,000)
                                                                         -----------------------------------------------------

OTHER EXPENSES:
  Interest income, net                                                         (226,000)          (711,000)        (1,093,000)
  Other expense (income), net                                                    (6,000)             4,000          2,755,000
  Financing costs for stock issued to nonemployees                              323,000                  -                  -
                                                                         -----------------------------------------------------
     Total other (income) expenses                                               91,000           (707,000)         1,662,000
                                                                         -----------------------------------------------------

  Loss before provision (benefit) from income taxes, extraordinary loss
     and cumulative effect of an accounting change                          (14,802,000)       (12,162,000)       (16,800,000)
                                                                         -----------------------------------------------------

  Provision (benefit) for income taxes                                          (11,000)           222,000            187,000

  Loss before extraordinary item and cumulative effect of an accounting
     change                                                                 (14,791,000)       (12,384,000)       (16,987,000)
                                                                         -----------------------------------------------------

  Extraordinary loss on early extinguishment of debt                            476,000                  -                  -
  Cumulative effect of an accounting change                                           -          3,183,000                  -


NET LOSS                                                                  $ (15,267,000)     $ (15,567,000)     $ (16,987,000)
                                                                         =====================================================

PREFERRED STOCK DIVIDENDS                                                    (5,108,000)           (94,000)          (160,000)

ACCRETION OF WARRANTS WITH REDEMPTION  FEATURE                                 (692,000)                 -                  -

                                                                         -----------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                              $ (21,067,000)     $ (15,661,000)     $ (17,147,000)
                                                                         =====================================================

NETLOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS BEFORE
   EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE:
Basic                                                                           $ (5.91)           $ (2.54)           $ (3.14)
                                                                         =====================================================
Diluted                                                                         $ (5.91)           $ (2.54)           $ (3.14)
                                                                         =====================================================
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS:
Basic                                                                           $ (6.04)           $ (3.19)           $ (3.14)
                                                                         =====================================================
Diluted                                                                         $ (6.04)           $ (3.19)           $ (3.14)
                                                                         =====================================================

Weighted Average Common Shares Outstanding                                    3,486,362          4,906,680          5,467,138
                                                                         =====================================================

</TABLE>

The accompanying notes are an integral part of these consolidated statements.

                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                              TOWNE SERVICES, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                                                                                                            TOTAL
                               PREFERRED STOCK             COMMON STOCK         TREASURY STOCK   WARRANTS  ACCUMULATED SHAREHOLDERS'
                              SHARES       AMOUNT      SHARES      AMOUNT                       OUTSTANDING    DEFICIT     EQUITY
                              ------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>         <C>         <C>           <C>       <C>      <C>      <C>           <C>
BALANCE, DECEMBER 31, 1997          -   13,618,977   5,700,000            -       -          -    41,000   (3,019,000)   2,722,000
                              ------------------------------------------------------------------------------------------------------
Issuance of preferred stock    15,000    1,500,000           -            -       -          -         -            -    1,500,000
Issuance of common stock            -            -   1,052,308    5,532,000       -          -         -            -    5,532,000
Preferred stock
     dividend (Note 7)              -            -                5,100,000       -          -         -   (5,108,000)      (8,000)
Exercise of stock options           -            -     813,636      670,000       -          -         -            -      670,000
Employee compensation expense       -            -           -    2,275,000       -          -         -            -    2,275,000
Accretion of warrants with
   redemption feature               -            -           -      692,000       -          -         -     (692,000)           -
Conversion of preferred stock (15,000)  (1,500,000)  1,217,903    1,508,000       -          -         -            -        8,000
Conversion of
     outstanding warrants           -            -     308,982      255,000       -          -         -            -      255,000
Initial public offering
     transactions,
     net (Note 3)                   -            -   3,850,000   26,989,000       -          -         -            -   26,989,000
Issuance of comon shares for
  purchase of
  Banking Solution, Inc.            -            -     744,431    5,010,000       -          -         -            -    5,010,000
Repurchase of common stock          -            -     (39,205)           -       -          -         -      (82,000)     (82,000)
Change in value of redeemable
   common stock                     -            -           -     (210,000)      -          -         -            -     (210,000)
Net loss                            -            -           -            -       -          -         -  (15,267,000) (15,267,000)
                              ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998          -            -  21,567,032   53,521,000       -          -    41,000  (24,168,000)  29,394,000
                              ======================================================================================================



Accrued preferred
    stock dividends                 -            -           -            -       -          -         -      (94,000)     (94,000)
Exercise of stock options           -            -     217,901       73,000       -          -         -            -       73,000
Employee compensation expense       -            -           -      379,000       -          -         -            -      379,000
Private Placement Offering     20,000    1,880,000           -            -       -          -   120,000            -    2,000,000
Secondary public offering
    transactions,
    net (Note 3)                    -            -   5,175,000   32,648,000       -          -         -            -   32,648,000
Issuance of redeemable common
  shares for purchase of
  Imaging Institute, Inc.           -            -      81,016            -       -          -         -            -            -
Conversion of redeemable
  common stock and impact
  of cashless exercise              -            -     156,773       69,000       -          -         -            -       69,000
Net loss                            -            -           -            -       -          -         -  (15,567,000) (15,567,000)
                              ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999     20,000    1,880,000  27,197,722   86,690,000       -          -   161,000  (39,829,000)  48,902,000
                              ======================================================================================================

Accrued preferred
    stock dividends                 -            -           -            -       -          -         -     (160,000)    (160,000)
Exercise of stock options           -            -     387,693      243,000       -          -         -            -      243,000
Employee compensation expense       -            -           -       33,000       -          -         -            -       33,000
Repurchase and retirement of
    common shares for purchase
    of Imaging Institute, Inc       -            -     (81,016)           -       -          -         -            -            -
Issuance of common shares
    for Forseon ESOP                -            -      10,520        9,000       -          -         -            -        9,000
Common shares purchased
    and retired                     -            -     (25,600)     (22,000)      -          -         -            -      (22,000)
Five for one reverse
    stock spilt                     -            - (21,991,455)           -       -          -         -            -            -
Purchase of treasury stock          -            -           -            - 357,543   (629,000)        -            -     (629,000)
Net loss                            -            -           -            -       -          -         -  (16,987,000) (16,987,000)
                              ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000     20,000  $ 1,880,000   5,497,864  $86,953,000 357,543 $ (629,000)$ 161,000 $(56,976,000)$ 31,389,000
                              ======================================================================================================

</TABLE>

The accompanying notes are an integral part of these consolidated statements.

                                      F-5

<PAGE>

<TABLE>
<CAPTION>
                              TOWNE SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1998, 1999 and 2000

                                                                                   1998              1999              2000
                                                                             ---------------------------------------------------

<S>                                                                           <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss                                                                    $ (15,267,000)   $ (15,567,000)    $ (16,987,000)
  Adjustments to reconcile net loss to net cash
     used in operating activities:
      Compensation expense recognized for stock option grants
          and employee termination agreements                                     6,353,000          379,000            33,000
      Financing Costs for stock issued to nonemployees                              323,000                -                 -
      Loss on disposal of property and equipment                                          -           86,000                 -
      Extraordinary loss on extinguishment of debt                                  476,000                -                 -
      Depreciation and amortization                                                 454,000        1,378,000         3,207,000
      Amortization of intangibles and goodwill                                      114,000        1,820,000         3,724,000
      Amortization of debt financing fees                                            14,000                -                 -
      Amortization of debt discount                                                  33,000                -                 -
      Provision for doubtful accounts                                               165,000        1,315,000         1,206,000
      Changes in operating assets and liabilities, net of assets acquired:
           Accounts receivable                                                   (3,087,000)      (2,220,000)        1,946,000
           Prepaid & Other Assets                                                  (234,000)        (366,000)           89,000
           Deferred tax benefit                                                     (17,000)         132,000                 -
           Accounts payable                                                        (459,000)       1,276,000        (1,243,000)
           Accrued liabilities                                                      551,000          482,000           381,000
           Accrued compensation                                                     (74,000)        (250,000)          358,000
           Deferred revenue                                                         226,000        1,981,000        (1,709,000)
           Accrued termination costs                                                498,000         (267,000)           (9,000)
                                                                             -------------------------------------------------
                   Total Adjustments                                              5,336,000        5,746,000         7,983,000
                                                                             -------------------------------------------------
                    Net cash used in operating activities                        (9,931,000)      (9,821,000)       (9,004,000)
                                                                             -------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Notes receivable from shareholders                                               (170,000)      (1,064,000)        1,053,000
  Purchase of short-term investments, net                                                 -       (1,350,000)          848,000
  Purchase of property and equipment, net                                        (1,941,000)      (7,906,000)           (9,000)
  Acquisitions, net of cash acquired                                            (10,861,000)      (1,764,000)         (475,000)
                                                                             -------------------------------------------------
                     Net cash (used in) provided by investing activities        (12,972,000)     (12,084,000)        1,417,000
                                                                             -------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from exercise of stock options                                           584,000           73,000           243,000
  Repayment of debt                                                              (2,520,000)      (5,431,000)         (228,000)
  Proceeds from short/long-term borrowings                                        5,633,000                -                 -
  Proceeds from issuance of preferred stock                                       1,500,000        1,880,000                 -
  Proceeds from warrants issued on preferred stock                                        -          120,000                 -
  Issuance of common stock for ESOP plan                                                  -                -             9,000
  Repurchase of redeemable common stock                                                   -                -          (770,000)
  Proceeds from issuance of common stock                                         28,206,000       32,648,000                 -
  Repurchase of common stock                                                        (83,000)        (464,000)         (651,000)
                                                                             -------------------------------------------------
                      Net cash provided by (used in) financing activities        33,320,000       28,826,000        (1,397,000)
                                                                             -------------------------------------------------
NET INCREASE (DECREASE) IN CASH                                                  10,417,000        6,921,000        (8,984,000)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                     3,643,000       14,060,000        20,981,000
                                                                             -------------------------------------------------
CASH AND CASH EQUIVALENTS ENDING OF PERIOD                                     $ 14,060,000     $ 20,981,000      $ 11,997,000
                                                                             =================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes                                                     $     10,000     $    151,000      $    192,000
                                                                             =================================================
Cash paid for interest                                                         $    213,000     $     89,000      $     98,000
                                                                             =================================================
Acquisitions of property and equipment through capital leases                  $          -     $  1,360,000      $     11,000
                                                                             =================================================
ACQUISTIONS:
  Fair value of assets acquired                                                     414,000          168,000                 -
  Liabilities assumed                                                            (1,290,000)         (46,000)                -
  Value of common shares issued                                                  (5,010,000)        (770,000)                -
</TABLE>


The accompanying notes are an integral part of these consolidated statements.

                                       F-6
<PAGE>


                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND BACKGROUND

         Towne Services, Inc. ("Towne Services" or the "Company") provides
services and products that process sales and payment information and related
financing transactions for businesses and banks in the United States. Towne
Services delivers these services and products online via an electronic hub, or
gateway, that links business and bank customers with the Company and other
providers of products and services that can benefit these customers. Towne
Services uses this electronic gateway to deliver a variety of business and
management solutions using Internet and telecommunication connections. Towne
Services also provides these solutions through its proprietary software housed
at its clients' locations. The Company's primary business capabilities include a
"virtual credit card" system that processes the in-house credit transactions of
businesses and an automated receivables management system that allows banks to
quickly finance the working capital needs of their business customers.

         The virtual credit card system processes the in-house credit
transactions of businesses and includes an automated receivables management
system that allows banks to quickly finance the working capital needs of their
business customers. Towne Services' merchandise forecasting system processes
sales and inventory transactions of businesses which allow business owners
greater control over inventory levels and the ability to make better inventory
purchase decisions, in an effort to improve cash flow and operating margins.

         The Company's automated asset management systems are TOWNE CREDIT(R),
which processes consumer credit transactions for small and medium size
businesses, TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which process
business-to-business credit transactions for commercial businesses, and RMSA
Merchandise Planning System, which processes sales and inventory transactions
and provides merchandising information for specialty retail stores. Through the
use of the Company's products and services, businesses can automate certain
manual processes, accelerate cash flow, provide better customer service, reduce
paperwork and shift many other administrative burdens to Towne Services.

         The Company has incurred significant losses in each year since it
commenced operations. The Company had net losses of approximately $15.3 million,
$15.6 million, and $17.0 million for the years ended December 31, 1998, 1999 and
2000, respectively. The Company expects that it will continue to incur net
losses until it is able to attain sufficient revenues to support its business.
The Company can provide no assurances as to when, if ever, this may occur.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The accompanying financial statements include the accounts of Towne
Services and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

REVENUE RECOGNITION

         The Company's revenues are generated primarily through initial set-up
fees, recurring monthly transaction processing fees and software license fees.
In response to the issuance of the Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," the Company is required to recognize


                                       F-7
<PAGE>
                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

revenues related to the initial set-up fees on a deferred basis over the
estimated life of the contract terms and in the case of certain cancellation
clauses and/or return guarantees, until the guarantee period is expired. Prior
to the adoption of SAB No. 101, the Company recognized initial set-up fees upon
the execution of the related contract or until the guarantee period expired.
Transaction fees are recognized on a monthly basis as earned. Revenues related
to software license fees are recognized in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-2, "Software
Revenue Recognition," ("SOP 97-2"), as amended. The Company also leases point of
sale terminal equipment to certain customers under month-to-month operating
leases. Such operating lease revenues are recognized on a monthly basis as
earned.

CHANGES IN ACCOUNTING PRINCIPLES

         In response to the issuance of SAB No. 101, the Company began
recognizing all revenues from set-up fees on a deferred basis. The effects of
this change in accounting principle were applied cumulatively as of the
beginning of 1999. The pro forma results of this adjustment for the year ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>

<S>                                                                                       <C>
           Revenues.....................................................................  $  15,827,000
           Net loss attributable to common shareholders before extraordinary item.......    (22,913,000)
           Net loss attributable to common shareholders.................................    (23,389,000)
           Net loss attributable to common shareholders per common share, before
                extraordinary item......................................................          (6.57)
           Net loss attributable to common shareholders per common shares...............          (6.71)
</TABLE>

CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVESTMENTS

         The Company classifies all of its investments as trading securities.
Unrealized gains and losses on trading securities have been reflected in other
expenses, (income).



                                       F-8
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
that do not extend the useful lives of these assets are expensed as incurred.
Depreciation is provided using the straight-line method for financial reporting.
The detail of property and equipment at December 31, 1999 and 2000 is as
follows:
<TABLE>
<CAPTION>

                                                        1999             2000   USEFUL LIVES
                                                        ----             ----   ------------

<S>                                              <C>              <C>         <C>
             Furniture and fixtures..............$ 2,060,000      $2,212,000    Five - Seven years
             Automobiles  .......................     45,000          89,000    Three - Five years
             Computers and equipment.............  3,251,000       2,908,000    Three - Seven years
             Point-of-sale equipment.............  2,007,000       2,672,000    Three years
             Land................................    404,000         404,000         -
             Buildings...........................    931,000         931,000    Thirty years
             Leasehold improvements..............  1,171,000       1,198,000    Five - Nineteen years
             Computer software...................  4,509,000       3,549,000    Three - Five years
             Software  development costs.........    113,000               0    Three years
                                               -------------   -------------
                                                  14,491,000      13,963,000
             Less accumulated depreciation....... (3,371,000)     (6,031,000)
                                               --------------  --------------
                                                 $11,120,000      $7,932,000
                                               =============   =============
</TABLE>

The Company leases point of sale equipment to its customers under operating
lease agreements.

GOODWILL AND OTHER INTANGIBLES

         In connection with the purchase of certain assets of Credit Collection
Solutions, Inc. ("CCS") (Note 4), the Company recorded goodwill in the amount of
$440,000, which was originally being amortized over a period of 5 years. As
explained in Note 4, the Company recorded a $240,000 goodwill impairment
adjustment in December 2000.

         In connection with the purchase of Banking Solutions, Inc. ("BSI")
(Note 4), the Company recorded goodwill in the amount of $14.6 million, which is
being amortized over a period of 12 years. The Company allocated $1.1 million to
BSI's customer list, which is being amortized over a period of 5 years.

         In connection with the purchase of Imaging Institute, Inc. (Note 4),
the Company recorded goodwill in the amount of $1.9 million, which was
originally being amortized over a period of 5 years. As explained in Note 4, the
Company recorded a $1,376,000 goodwill impairment adjustment in December 2000.

LONG-LIVED ASSETS

         The Company periodically reviews the values assigned to long-lived
assets, such as property and equipment and intangibles, to determine whether any
impairments are other than temporary. The Company reviews the value of its long
lived assets by calculating whether the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those assets as
described in Note 4. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.

         In 2000, the Company wrote-off approximately $2.7 million of software
and consulting costs related to a processing system that the Company was no
longer developing.

CAPITALIZED SOFTWARE COSTS

         Research and development expenses consist of salary related personnel
costs, including costs for employee benefits, computer equipment and support
services used in products necessary to deliver the Company's services. Research
and development costs are expensed as incurred; however, the Company capitalizes
certain research and development costs for



                                       F-9
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


products to be sold and marketed under SFAS No. 86, "Accounting for the Costs of
Software to be Sold, Leased, or Otherwise Marketed," upon establishing
technological feasibility, subject to a periodic assessment of recoverability
based on expected future revenues. The Company capitalized approximately
$113,000 at December 31, 1999. There were no capitalized costs related to
research and development in 2000.

         The Company capitalizes costs incurred to develop software for internal
use under SOP 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." Pursuant to SOP-98-1, costs are capitalized during
the application development stage of the project. Costs incurred prior to the
application development stage and costs to maintain are expensed as incurred.

COMPREHENSIVE INCOME (LOSS)

         SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting of comprehensive income in a company's financial statements.
Comprehensive income (loss) includes all changes in a company's equity during
the period that results from transactions and other economic events other than
transactions with its stockholders. For the Company, comprehensive income (loss)
equals net income (loss).

NET LOSS PER SHARE

         The Company calculates net loss per share in accordance with SFAS No.
128, "Earnings Per Share." Basic loss per share is based on the weighted average
number of shares outstanding. Diluted loss per share is based on the weighted
average number of shares outstanding, and the dilutive effect of common stock
equivalent shares issuable upon the exercise of stock options and warrants
(using the treasury stock method.) Basic net loss per share was equivalent to
diluted net loss per share for the years ended December 31, 1998, 1999, and 2000
because common equivalent shares from stock options and warrants have been
excluded as their effect is antidilutive.

         On November 20, 2000, the Board of Directors announced a one-for-five
reverse stock split of the Company's common stock. The reverse stock split was
effected for all shareholders of record as of the close of business on December
20, 2000. All references to the number of shares and per share amounts in the
Balance Sheets and Statements of Operations and the accompanying Notes to the
Consolidated Financial Statements have been adjusted to reflect the split on a
retroactive basis, unless otherwise indicated. Previously awarded stock options
and any agreements payable in common stock have been adjusted to reflect the
split.

INCOME TAXES

         The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes," which requires the use of an asset and
liability method of accounting for deferred income taxes. Under SFAS No. 109,
deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to apply to taxable income in the period in which
the deferred tax asset or liability is expected to be settled or realized.

RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform to the
current year presentation.


                                      F-10
<PAGE>


                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FAIR VALUE OF FINANCIAL INSTRUMENTS

         The book values of cash, trade accounts receivable, trade accounts
payable, and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments. The fair
value of the Company's long-term debt is estimated based on the current rates
offered to the Company for debt of similar terms and maturities.

RISK OF POSSIBLE SYSTEM FAILURE

         The Company's operations depend on its ability to protect its network
infrastructure and equipment against damages from human error, natural
disasters, power and telecommunications failures, intentional acts of vandalism,
and similar events. Despite precautions taken by the Company, the occurrence of
human error, a natural disaster, or other unanticipated problems could halt the
Company's services, damage network equipment, and result in substantial expense
for the Company to repair or replace damaged equipment. In addition, the failure
of the Company's telecommunications providers to supply the necessary services
could also interrupt the Company's services. The inability of the Company to
supply services to its customers could negatively affect the Company's business
and financial results and may also harm the Company's reputation.

LOSS OF CUSTOMERS

         Customer attrition is a normal part of the electronic processing
business. The Company has and will experience losses of customers due to
attrition. Towne Services' written agreements with its customers generally
provide that either party may terminate the agreement upon 30 to 60 days' notice
for any reason. Consolidation in the financial services industry in the United
States may result in fewer potential bank customers. In addition, the Company
may elect not to process or continue processing for customers that experience
financial difficulties or other problems.

PRODUCT RISKS

         Towne Services may be required to recall certain of its products if
they are unable to perform their intended functions. Towne Services has not
experienced any product recalls or product liability judgments or claims.
However, a product liability judgment against Towne Services could negatively
affect its business and financial results.

SEGMENT INFORMATION

         Towne's operations are organized along its product and services lines
and include two segments - accounts receivable and inventory. The Company
accounts for segment reporting under SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."

         The accounts receivable segment includes TOWNE CREDIT, TOWNE FINANCE,
CASHFLOW MANAGER. These products and services are accounts receivable financing
and cash management tools for the business market and, as credit solutions, also
provide secure and profitable lending tools to the bank market.

         The inventory segment includes RMSA Merchandise Planning and The
Charter System. These products revolve around the critical inventory management
and related cash management aspects of the retail business markets.

         In 1999, the Company considered all operations as one business segment
due to the acquisition and intended integration of the Forseon products and
operations. In 2000, the Company reorganized its operations to segment the
business based on the different products and services, recognizing that the
substantive nature of the accounts receivable and inventory product groups were
best served as separate segments from a management perspective. Accordingly,
prior period segment information is not available. Additionally, no corporate
overhead costs or interest are allocated to the Forseon (inventory) segment, but
are all included in the accounts receivable segment costs.


                                      F-11
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following table summarizes the financial information concerning
Towne's reportable segments from continuing operations for the year ended
December 31, 2000 (in thousands).

                        Accounts Receivable      Inventory        Total
 -------------------- ------------------------ -------------- --------------
      Revenues             $  13,414            $ 11,862      $  25,276
   Operating loss            (15,590)                452        (15,138)
    Total assets              34,288               2,886         37,174

TRADEMARKS AND OTHER PROPRIETARY RIGHTS

         Towne Services believes that its technologies, trademarks and other
proprietary rights are important to its success. The Company attempts to protect
itself through a combination of copyright law, trademark and trade secret laws,
employee and third party confidentiality agreements and other methods. However,
unauthorized parties may attempt to copy aspects of the Company's technology,
products and services or to otherwise obtain and use information that the
Company regards as proprietary, despite the Company's efforts to protect them.
Third parties may claim that the Company's current or future products and
services infringe the patent, copyright or trademark rights of such third
parties. No assurance can be given that, if such actions or claims are brought,
the Company will ultimately prevail. Any such claims, whether with or without
merit, could be costly and time consuming, cause delays in introducing new or
improved products and services, require Towne Services to enter royalty or
licensing agreements or require Towne to discontinue using the challenged
technology and could have a material adverse effect on the Company's business
and financial results.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 delays the effective date of SFAS
No. 133 to the beginning of the first quarter of the fiscal year beginning after
June 15, 2000. In June 2000, SFAS 133 was amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement 133," to be adopted concurrently with SFAS 133. The adoption of
this statement on January 1, 2001, did not have a material effect on the
Company's financial statements.

3.  PUBLIC OFFERINGS

         In August 1998, we completed our initial public offering of our common
stock. The total proceeds of the IPO, net of underwriting discounts and offering
expenses, were approximately $27.0 million. We issued 770,000 shares of common
stock (3,850,000 shares on a pre-split basis) at an offering price of $40.00 per
share ($8.00 on a pre-split basis). After the IPO, we converted all outstanding
shares of Series A Preferred Stock to 243,581 shares of common stock, and
warrants for 61,796 shares of common stock were exercised.

         In June 1999, the Company completed a secondary pubic offering of
900,000 shares of common stock (4,500,000 on a pre-split basis) at an offering
price to the public of $35.625 per share ($7.125 on a pre-split basis), and on
July 20, 1999, the Company sold 135,000 shares of common stock (675,000 shares
on a pre-split basis) pursuant to an underwriters' over-



                                      F-12
<PAGE>


                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

allotment provision in connection with this public offering. The total proceeds
from the public offering, net of underwriting discounts and offering expenses,
were approximately $32.6 million.

4.  ACQUISITIONS

         In June 1998, the Company acquired certain assets and liabilities of
Credit Collection Solutions, Inc. ("CCS") for approximately $510,000 cash and
the issuance of up to 20,000 shares of the Company's common stock if specified
sales levels of CollectionWorks Software are achieved. These sales levels were
not achieved. CCS is a developer of computer software for processing payments
and tracking collections. In connection with the purchase of CCS, the Company
has recorded goodwill in the amount of $440,000, which is being amortized over a
period of 5 years. This amount includes $200,000 that was originally recognized
as purchased in-process development at the time of the acquisition.

         In November 2000, the Company elected to dispose of all the assets of
CCS. Accordingly, the Company recorded a writedown of CCS assets to their net
realizable value in anticipation of a future sale. This writedown totaled
$763,000 and consisted of a goodwill impairment of $240,000, accounts receivable
write off of $237,000, and a note receivable write off of $286,000. On January
31, 2001, the assets and liabilities of CCS were sold to the former owner for
$425,000 through a combination of cash and a note receivable.

         In December 1998, the Company acquired the outstanding stock of Banking
Solutions, Inc. ("BSI") for approximately $14.9 million in cash and stock. In
connection with the acquisition of Banking Solutions, the Company issued 148,886
shares of Towne's common stock at $33.65 per share. The Company paid the
remainder of the purchase price in cash. BSI is a developer and provider of a
transaction processing system, CASHFLOW MANAGER, an accounts receivable
financing program similar to the TOWNE FINANCE product. The Company recorded
this transaction using the purchase method of accounting. The Company has
allocated goodwill in the amount of $14.6 million, which is being amortized over
a period of 12 years. The Company has recorded $1.1 million to an intangible
asset for BSI's customer list, which is being amortized over a period of 5
years. The Company recognized a one-time charge in the amount of $2.3 million
consisting of $1.8 million in cash and $0.5 million in stock in December 1998
related to employee terminations which were not identified at the date of
purchase. BSI's operations have been included in the operations of the Company
since acquisition.

         In June 1999, the Company acquired Forseon Corporation ("Forseon"), a
company based in Riverside, California. Forseon provides products and services
for retail businesses that process inventory, accounts receivable and point of
sale transaction information and generate merchandise forecasts and management
reports. Towne issued a total of 415,069 shares of its common stock in exchange
for all outstanding stock and options to acquire stock in Forseon. The merger
was accounted for as a pooling of interests. The Company incurred approximately
$2.3 million in expenses related to the acquisition of Forseon.

         On July 20, 1999, the Company acquired all of the issued and
outstanding stock of Imaging Institute, Inc., a Bloomington, Minnesota-based
company, for approximately $1.2 million cash and the issuance of 16,203 shares
of the Company's common stock. Imaging Institute's main products include AUGUSTA
and EzVIEW VAULT(TM), which offer unique and functional document imaging and
archiving solutions tailored for small to medium size businesses. In connection
with the purchase of Imaging Institute, the Company has recorded goodwill in the
amount of $1.9 million, which is being amortized over a five-year period. In
December 2000, the Company performed an undiscounted cash flow analysis on the
goodwill from Imaging Institute. Based on anticipated sales of Imaging Institute
products, which are primarily sold with CollectionWorks software, it was
determined that the carrying value of the goodwill was impaired and the Company
recorded a $1,376,000 goodwill impairment adjustment.


                                      F-13
<PAGE>
                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         Pro forma financial information as if the acquisitions had occurred at
the beginning of the respective periods during which they occurred would be as
follows:
<TABLE>
<CAPTION>

                                                             1998          1999
                                                             ----          ----
<S>                                                         <C>           <C>
         Revenues....................................       $26,568,724   $29,981,455
         Net loss before extraordinary item..........       (15,706,623)  (12,545,815)
         Net loss....................................       (16,182,863)  (15,728,659)
         Net loss attributable to common shareholders       (21,982,834)  (15,823,165)

         Net loss attributable per common share......             (6.00)        (3.20)

</TABLE>

5.  LONG-TERM DEBT

    Long-term debt consists of the following at December 31, 1999 and 2000:

<TABLE>
<CAPTION>
                                                                                       1999           2000
                                                                                       ----           ----
<S>                  <C>                                                           <C>           <C>
                         Lease payable to Synovus Leasing Company, monthly
                         principal and interest payments of approximately
                         $11,000, average interest rate of 8.75%, due June 24,
                         2004................................................       $   470,000     $ 386,000

                         Lease payable to NEC America, Inc., monthly principal
                         and interest payments of approximately $9,000, average
                         interest rate of 8.61%, due July 22, 2004...                   400,000       329,000

                         Lease payable to Synovus Leasing Company, monthly
                         principal and interest payments of approximately
                         $8,500, average interest rate of 8.75%, due August
                         15, 2004............................................           389,000       315,000

                         Lease payable to NEC America, Inc., monthly principal
                         and interest payments of approximately $300, average
                         interest rate of 8.61%, due May 25, 2004............                 -        11,000
                                                                                   ------------     ---------
                                                                                      1,259,000     1,041,000

                         Less current portion................................          (231,000)     (270,000)
                                                                                   ------------     ---------

                               Long-term debt                                      $  1,028,000     $ 771,000
                                                                                   ============     =========

</TABLE>

         The aggregate annual maturities for long-term debt in fiscal years
subsequent December 31, 2000 are as follows:

                            2001..............          $ 270,000
                            2002..............            285,000
                            2003..............            311,000
                            2004..............            175,000
                                                     -------------
                                                       $1,041,000
                                                     =============

         In August 1998, the Company repaid all of its then current and
long-term debt obligations then outstanding using proceeds of the initial public
offering. This resulted in an extraordinary one-time charge to net income of
$476,000, which is comprised of $218,000 unamortized discount on a note payable
to Sirrom Investments, Inc. and $258,000 deferred debt issuance costs.

         As of December 31, 2000, the Company had $1,139,000 of equipment
capitalized under leases, which is used as collateral for leases.

                                      F-14
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  INCOME TAXES

    The following is a reconciliation of income taxes at the federal statutory
rate with income taxes recorded by the Company for the years ended December 31,
1998, 1999 and 2000:
<TABLE>
<CAPTION>
                                                       1998               1999            2000
                                                    -----------       ------------    ------------
<S>                                                 <C>              <C>            <C>
           Income tax benefit computed
              at the federal statutory rate         $  5,195,000      $ 5,217,000    $   5,775,000
           State income tax benefit,
             net of federal income tax benefit           611,000          614,000          628,000
           Effect of change in
           accounting            principle                    --       (1,202,000)              --
           Permanent amortization difference                  --               --        1,330,000
           Other, net....................                (94,000)        (214,000)        (390,000)
           Change in valuation allowance.             (5,701,000)      (4,637,000)      (4,870,000)
                                                  --------------    -------------   --------------
                                                   $      11,000    $    (222,000)   $    (187,000)
                                                  ==============   ==============   ==============
</TABLE>

         Deferred income tax assets and liabilities for 1998, 1999 and 2000
reflect the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences that give rise to deferred tax assets and liabilities at December
31, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>

                                                         1998            1999             2000
                                                     ------------    ------------     -----------
<S>                                                  <C>             <C>              <C>
             Deferred tax assets:
               Deferred revenues                     $    16,000     $    796,000     $     923,000
               Amortization of intangibles                      --        415,000            97,000
               Deferred compensation                     132,000           94,000                --
               Accounts receivable reserves              153,000          200,000           210,000
               Other                                      70,000          131,000           190,000
               AMT carryforwards                          15,000               --                --
               Net operating loss carryforwards        6,714,000       10,289,000        15,284,000
                                                     -----------     ------------     -------------

            Deferred tax assets                        7,100,000       11,925,000        16,704,000

            Deferred tax liability:
               Depreciation                              (91,000)        (411,000)         (320,000)
                                                     -----------     ------------     --------------
                                                       7,009,000       11,514,000        16,384,000
            Valuation allowance                       (6,877,000)     (11,514,000)      (16,384,000)
                                                     -----------     ------------     --------------
               Net deferred tax asset                $   132,000     $          0     $           0
                                                     ===========     ============     =============
</TABLE>


         Due to the Company's current year operating loss position, no benefit
for income taxes for the year ended December 31, 2000 has been provided in the
accompanying financial statements, as management has not determined it is more
likely than not that such benefits will be realized.

         At December 31, 2000, the Company had net operating loss carryforwards
("NOLs") of approximately $40.5 million which will expire if not utilized
beginning in 2011. Due to changes in the Company's ownership structure, the
Company's use of its NOLs as of October 1, 1997 of approximately $2.5 million
will be limited to approximately $550,000 in any given year to offset future
taxes. In addition, due to the Company's acquisitions during 1998 and 1999, NOLs
of approximately $5.3 million will be limited to approximately $1.6 million in
any give year to offset future taxes. If the Company does not realize taxable
income in excess of the limitation in future years, certain NOLs will be
unrealizable.
                                      F-15
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.  SHAREHOLDERS' EQUITY

PREFERRED STOCK

         In January 1998, the Company authorized 20,000,000 shares of Series A
Preferred Stock ("Preferred Stock") with a stated value of $100 per share. The
board of directors has the authority to issue these shares and to establish
dividends, voting and conversion rights, redemption provisions, liquidation
preferences, and other rights and restrictions. In March 1998, the Company sold
15,000 shares of Preferred Stock to Capital Appreciation Partners, L.P. for $1.5
million.

         In July 1998, the IPO was declared effective by the Securities and
Exchange Commission (Note 3) and all outstanding shares of Series A Preferred
Stock were converted to 243,581 shares of common stock at a conversion price of
$6.25 per share. The Company recorded $5.1 million as a preferred stock dividend
for the difference between the estimated fair market value of the common stock
at the date of the issuance and the conversion price.

         In June 1999, the Company sold 20,000 shares of Series B Preferred
Stock and issued a warrant to purchase 6,000 shares of the Company's common
stock to Synovus Financial Corporation for $2,000,000. The shares are
convertible into common stock at a conversion price equal to $45.40. The Series
B Preferred Stock is redeemable at any time on or after June 30, 2002 at the
option of the Company for cash, in whole or part, on at least 10 business days
but not more than 90 calendar days' notice. The Company allocated $1.8 million
and $120,000 to the preferred stock and warrants, respectively, based on the
relative fair value at the date of issuance.

         The holders of the Series B Preferred Stock are entitled to receive
cumulative cash dividends when, as and if declared by the Board of Directors out
of any funds legally available therefore at the rate of $2.00 per share of
Series B Preferred Stock per quarter. Dividends are payable quarterly on March
31, June 30, September 30 and December 31 in each year. Dividends accrue on each
share of Series B Preferred Stock beginning June 1999 and accrue from day to
day, whether or not earned or declared and whether or not there are funds
legally available for the payment of such dividends. Any accumulation of
dividends on the Series B Preferred Stock does not bear interest. The accrued
balance of Series B Preferred Stock dividends is $254,000 at December 31, 2000.

COMMON STOCK

         In February 1998, the Company sold 15,200 shares of common stock to
third parties at $6.25 per share. The Company recorded $323,000 as financing
costs for stock issued to nonemployees for the difference between the sale price
to these third parties and the estimated fair market value on the date of sale.

         In October 1998, the Company issued 6,645 shares of common stock at
$28.125 per share as an incentive compensation to employees for achieving
performance expectations established in the second quarter of 1998.

         In connection with the acquisition of BSI (Note 4), Towne issued
148,886 shares of restricted common stock of the Company at $33.65 per share.

         In connection with the acquisition of Forseon (Note 4), Towne issued a
total of 415,069 shares of its common stock in exchange for all outstanding
stock and options to acquire stock in Forseon. The merger was accounted for as a
pooling of interests. In June 2000, the Company issued 10,520 shares to meet
certain merger requirements related to the Forseon ESOP Plan.

         In connection with the acquisition of Imaging Institute (Note 4), the
Company issued 16,203 shares of the common stock at $47.50 per share. These
shares were subject to redemption and were classified as redeemable common stock
at

                                      F-16
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999. In 2000, the Company redeemed these shares for $770,000 cash.
Subsequent to the redemption, these shares were retired.

STOCK SALE TO EMPLOYEES

         In February 1998, the board of directors authorized the sale of the
Company's common stock to all employees of the Company for approximately $5.95
per share. The stock sale was available through March 6, 1998, and employees
purchased 188,617 shares. The Company recorded $3.8 million as compensation
expense for the difference between the sales price to employees and the
estimated fair market value at the date of sale.

TREASURY STOCK

         On June 27, 2000, the Board of Directors authorized the repurchase of
up to $3.0 million of our common stock in the open market at prevailing prices,
subject to normal trading restrictions. There is no expiration date for the
program. Under this program, we purchased 383,143 shares through December 31,
2000. As of December 31, 2000, 357,543 shares remain in treasury at a cost of
$629,000. In January 2001, we purchased an additional 102,900 shares at a cost
of $243,000.

1996 STOCK OPTION PLAN

         In November 1996, the Company adopted the Towne Services, Inc. 1996
Stock Option Plan. As of December 31, 2000, options to acquire 418,000 shares
had been authorized for issuance and options to acquire 301,640 shares were
outstanding. All of these options were issued at the fair market value of the
common stock as determined by the Board of Directors. Effective May 19, 1998,
the Company decided not to issue any additional options under this plan.

1998 STOCK OPTION PLAN

         In May 1998, the Company adopted the Towne Services, Inc. 1998 Stock
Option Plan. The 1998 plan advances the interests of Towne and its subsidiaries
by giving eligible employees, directors, key consultants and advisors an
opportunity to acquire or increase their proprietary interests in the Company.
This gives them an incentive to achieve the Company's objectives by allowing
them to participate in its success and growth.

         Awards under the plan can be incentive stock options, non-qualified
stock options or restricted stock. The Compensation and Stock Option Committee
of the Board of Directors grants these awards. This committee must have at least
two non-employee independent directors. This committee generally has discretion
to determine the terms of an option grant, within limitations, including the
following for any option intended to be an incentive stock option under the
Internal Revenue Code:

        o  the number of shares subject to options granted to a person in a
           year may not exceed 100,000 shares;
        o  if the option is granted to a shareholder holding more than 10% of
           the combined voting power of all classes of stock, the option price
           per share may not be less than 110% of the fair market value of such
           share at the time of grant; and
        o  the term of the option may not exceed 10 years, or 5 years if granted
           to a shareholder owning more than 10% of the total combined voting
           power of all classes of stock.

         When it was adopted, the 1998 plan provided that no more than 400,000
(2,000,000 shares on a pre-split basis) may be subject to outstanding options.
This number automatically increases on January 1 of each year by the lesser of
three percent of the number of shares outstanding on the preceding trading day
or 100,000 shares. Accordingly, as of December 31, 2000, there were 600,000
shares available for grant under the 1998 plan. At December 31, 2000, there were
253,164 options outstanding under the 1998 plan.


                                      F-17
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The Board of Directors without the consent of the shareholders may
amend the 1998 plan. However, an amendment, although effective when made, will
be subject to shareholder approval within one year after approval by the Board
if it does any of the following:

        o  increases the total number of shares issuable pursuant to incentive
           stock options;
        o  changes the class of employees eligible to receive incentive stock
           options that may participate; or
        o  otherwise materially increases the benefits to recipients of
           incentive stock options.

AMENDED AND RESTATED DIRECTOR STOCK OPTION PLAN

         The Company also has a stock option plan for non-employee directors of
the Company (the "Director Plan") that provides for the issuance of options to
purchase up to 60,000 shares of the Company's common stock. The options are
non-qualified stock options, or stock options which are not incentive stock
options as defined in Section 422 of the Internal Revenue Code. The options
generally vest immediately, but directors are prohibited from disposing of any
shares acquired by exercise for at least six months after the date of grant.
Options granted under the Director Plan generally expire five years from the
date of grant. Under the plan, the number of shares available for issuance will
increase automatically on January 1 of each year by the lesser of 10,000 shares
or an amount equal to 1% of the total number of shares of common stock
outstanding on the last trading day before January 1, but not above 100,000
shares in total.

         The plan provides for automatic non-qualified stock option grants to
non-employee directors in the following amounts on the occurrence of the
following events:

        o  6,000 options on the date of initial election as a director of
           Towne Services or a subsidiary;
        o  2,000 options on January 1 of each calendar year for service as a
           non-employee director during that year; and
        o  1,000 options on January 1 of each calendar year for service on
           each committee of the Board of Directors on which the director will
           serve during that year.

         All options granted will be evidenced by an option agreement between
Towne and the optionee. Other than these automatic grants of options, no other
options will be granted under the plan to directors of Towne. However, the Board
of Directors, as administrator of the plan, may grant options under the plan to
directors of subsidiaries who are not directors of Towne.

OPTIONS

         In September 1997, the board of directors granted options to purchase
20,000 shares of common stock outside the Plan to a member of the board of
directors. These options vested immediately and have an exercise price of $5.00
per share. No compensation expense was recorded for these options, as the option
price was established at the estimated fair market value of the common stock at
the date of grant.

         The Company granted options to purchase 22,200 and 12,000 shares of
common stock at $6.25 per share to key employees in January 1998 and February
1998, respectively. These options vest 20% per year beginning upon the first
anniversary of the date of grant. The Company will record $726,750 of
compensation expense over the five-year period of the options for the difference
between the exercise price and the estimated fair market value on the date of
grant.

         In February 1998, the board of directors approved an amendment to the
vesting period for options to purchase 79,400 shares of common stock granted
during 1996 and 1997 to nonemployee directors from a five year vesting period to
immediate vesting. As of the date of the amendment, options to purchase 30,000
of these shares were already vested. As this change in vesting period created a
new measurement date, the Company recorded compensation expense of $1.9 million
for the difference between the original exercise price and the estimated fair
market value on the date the options were amended.

                                      F-18


<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In February 1998, the board of directors granted options to purchase
4,000 shares of common stock to each nonemployee director, and options to
purchase 6,000 shares of common stock to a new nonemployee director. These
options vested immediately and have an exercise price of $6.25 per share. The
Company has recorded $978,000 as compensation expense for the difference between
the exercise price and the estimated fair market value on the date of grant.

         In May 1998, the board of directors granted options to certain board
members and key employees to purchase 119,000 shares of common stock. These
options vested immediately and have an option price of $36 per share. Options to
purchase 34,000 shares expire on May 2003, and the remaining options to purchase
85,000 shares expire in May 2008. All of these options vested immediately. The
Company did not record any compensation expense related to these grants as the
option price represented the estimated fair value of the Company's common stock
at the date of grant.

         In August 1999, the board granted options to purchase 2,000 shares to
two non-employee directors in consideration for their service on a subcommittee
formed to search for a new CEO and assist in the management transition. All of
these options vested immediately and had an exercise price of $20.95. No
compensation was recorded for these options, as the price was established at the
estimated fair value of the common stock at the date of grant.

         In September 1999, the board of directors granted Incentive Stock
Options ("ISO's") to employees to purchase 34,400 shares of common stock. These
options vest at 33% per year beginning in September 2000 and have an exercise
price of $19.20 per share.

         In November 1999, the board of directors granted ISO's to certain
sales employees to purchase 32,050 shares of common stock. Of the 32,050 options
granted, 12,000 of these options vest at 50% per year beginning in November
2000, and the remaining 20,050 options vest at 100% beginning in November 2000.
All options have an exercise price of $12.95 per share.

         In November 1999, the board of directors granted options to
non-employee board members to purchase an aggregate of 1,368 shares of common
stock as compensation for their services performed during 1999. All of these
options vested immediately and have an option price of $16.90 per share. The
Company did not record any compensation expense related to these grants as the
option price represented the estimated fair value of the Company's common stock
at the date of grant.

         In 1999, we recognized approximately $234,000 for severance benefits
relating to unvested stock options issued and outstanding for two former key
employees.

         In January 2000, the non-employee board members were automatically
granted options to purchase an aggregate of 31,000 shares of common stock
pursuant to the Director Stock Plan. All of these options vested immediately and
have an option exercise price of $18.28. The Company did not record any
compensation expense related to these grants as the option price represented the
estimated fair value of the Company's common stock at the date of grant.


                                      F-19
<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Stock option activity for the years ended December 31, 1998, 1999 and
2000 is as follows:

                                                      NUMBER OF         WEIGHTED
                                                         SHARES          AVERAGE
                                                     SUBJECT TO   EXERCISE PRICE
                                                        OPTIONS        PER SHARE
                                                     ----------   --------------

Options outstanding at December 31, 1997                743,296      $      3.20
Granted                                                 255,051            24.40
Canceled                                                (11,290)            7.25
Exercised                                              (174,489)            4.20
                                                      --------              ----
Options outstanding at December 31, 1998                812,568      $      9.35
Granted                                                 167,418            17.45
Canceled                                                 (6,684)           24.70
Exercised                                               (97,741)            5.50
                                                       -------              ----
Options outstanding at December 31, 1999                875,561      $     14.35
Granted                                                 226,933            11.20
Canceled                                               (176,100)           18.25
Exercised                                               (77,539)            6.50
                                                       --------             ----
Options outstanding at December 31, 2000                848,855      $     16.85
                                                        =======            =====

Exercisable at December 31, 1998                        674,849
                                                        =======
Exercisable at December 31, 1999                        663,561
                                                        =======
Exercisable at December 31, 2000                        636,022
                                                        =======

         The following table sets forth the range of exercise prices, number of
         shares, weighted average exercise price, and remaining contractual
         lives by groups of similar price and grant date at December 31, 2000:
<TABLE>
<CAPTION>

                                                                         WEIGHTED
                                                                         AVERAGE
                            OPTIONS OUTSTANDING                         REMAINING           OPTIONS EXERCISABLE
                          RANGE OF         NUMBER        WEIGHTED      CONTRACTUAL       NUMBER          WEIGHTED
                      EXERCISE PRICES     OF SHARES    AVERAGE PRICE       LIFE         OF SHARES      AVERAGE PRICE
                      ---------------     --------     -------------   ------------     ---------      -------------

<S>                <C>                <C>             <C>             <C>          <C>               <C>
                      $1.50-$2.50         301,640         $2.35           4.88         298,120           $2.40
                      $3.00-$5.03         164,643          4.35           6.25         113,490            4.20
                            $6.25          17,200          6.25           6.23          17,200            6.25
                      $10.00-$23.45       175,051         16.65           8.03          41,831           17.50
                      $27.50-$33.75        13,100         28.90           7.00           9,100           30.30
                      $35.00-$38.75        97,221         37.15           6.50          93,881           37.55
                      $39.40-$45.63        80,000         40.80           7.48          62,400           42.80
                                           ------                                   ----------
                           Total          848,855        $16.85                        636,022          $18.70
                                          =======                                   ==========
</TABLE>

         During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it also allows
an entity to continue to measure compensation costs for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting in APB No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in the statement had been applied.

                                      F-20

<PAGE>
                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         The Company has elected to account for its stock-based compensation
plan under APB No. 25. For options issued in 1998, 1999, and 2000, the Company
has determined the fair value using the Black-Scholes pricing method. The
Company used the following weighted average assumptions for grants in 1998,
1999, and 2000:
<TABLE>
<CAPTION>

                               1998                1999                  2000
                               ----                ----                  ----
<S>                     <C>              <C>                  <C>
Risk-free interest rate    4.6% to 5.6%        4.7% to 6.4%         6.32% to 6.82%
Expected dividend yield        0.0%                0.0%                  0.0%
Expected lives........      Five years      Four to Five Years   Three to Five years
Expected volatility...         55%                 92%                   125%
</TABLE>

         The total value of the options granted during the years ended December
31, 1998, 1999 and 2000 were computed as approximately $3.2 million, $3.1
million and $1.2 million, respectively, which would be amortized over the
vesting period of the options. If the Company had accounted for these options in
accordance with SFAS No. 123, the Company's reported pro forma net loss and pro
forma net loss per share for the years ended December 31, 1998, 1999 and 2000
would have increased to the following pro forma amounts:
<TABLE>
<CAPTION>

                                                   1998             1999              2000
                                                -------------     ------------     ---------
<S>                                       <C>              <C>              <C>
   Net loss attributable to
      common shareholders:
        As reported.....................    $(21,067,000)    $(15,661,000)    $(17,147,000)
        Pro forma.......................     (23,479,000)     (17,233,000)     (18,747,000)
      Basic:
        As reported.....................           (6.04)           (3.19)           (3.14)
        Pro forma.......................           (6.74)           (3.51)           (3.43)
      Diluted:
        As reported.....................           (6.04)           (3.19)           (3.14)

        Pro forma.......................           (6.74)           (3.51)           (3.43)

</TABLE>

WARRANTS

         In October 1997, the Company issued warrants to certain principals of
Rodgers Capital Corporation in connection with services performed by Rodgers
Capital Corporation to assist the Company in securing a marketing agreement with
a third party. These warrants allow the holders to purchase 15,000 shares of
common stock for $5.00 per share. The warrants vested immediately and expire in
2002. The Company has recorded $41,000, the estimated fair value of these
warrants at the date of issuance using the minimum value method under SFAS No.
123, as warrants outstanding on the accompanying balance sheet.

         In connection with the issuance of the Series B Preferred Stock, the
Company issued a warrant to purchase 6,000 shares of the Company's common stock
for $45.40 per share and is exercisable beginning 12 months after the issue
date. The term of the warrant is 5 years. The Company allocated $120,000 to the
warrant based on the relative fair value of the warrant using the Black-Scholes
pricing method.

                                      F-21

<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.  EMPLOYEE BENEFIT PLANS

         On January 1, 1997, Forseon adopted a 401(k) defined contribution plan
covering employees 21 years of age with at least six months of employment with
Forseon. Employees may contribute between 2% and 15% of their pay, with a
maximum annual contribution of $10,000. Forseon contributes in cash amounts
equal to 25% of employee's contribution up to 6% of the employee's pay. The
amount expensed for Forseon's match provision of this plan was $78,000 and
$32,000 for the years ended December 31, 1998 and 1999, respectively. As a
result of the merger with the Company, contributions to this plan ceased on
August 15, 1999. Effective August 31, 1999, employees of Forseon Corporation
began participating in the Company's 401(k) defined contribution plan.

         On January 1, 1999, the Company adopted a 401(k) defined contribution
plan covering employees 18 years of age with at least one month of employment
with the Company. Employees may contribute between 1% and 15% of their pay, with
a maximum annual contribution of $10,500. The Company contributes in cash
amounts equal to 25% of employee's contribution up to 6% of the employee's pay.
Company matching contributions vest 20% per year beginning in the second year of
employment. The amount expensed for the Company match provision of this plan was
$87,000 and $164,000 for the years ended December 31, 1999 and 2000,
respectively.

9.  COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

         Except for the two lawsuits described below, the Company is not a party
to, and none of its material properties is subject to, any material litigation
other than routine litigation incidental to its business.

         1. IN RE TOWNE SERVICES, INC./SECURITIES LITIGATION; Case No.
1:99-CV-2641-BBM; filed in U.S. District Court, Northern District of Georgia on
January 31, 2001. Before being combined into one lawsuit as explained below,
this lawsuit was previously known prior to consolidation as (a) THOMAS J. GOLAB
V. TOWNE SERVICES, INC., DREW W. EDWARDS, HENRY M. BAROCO, AND BRUCE F.
LOWTHERS; Case No. 1:99-CV-2641-JTC; filed in U.S. District Court, Northern
District Court of Georgia, on October 12, 1999; and (b) JAMES E. BOLEN V. TOWNE
SERVICES, INC., DREW W. EDWARDS, HENRY M. BAROCO, AND BRUCE F. LOWTHERS; Case
No. 1:99-CV-3067; filed in U.S. District Court, Northern District of Georgia, on
November 24, 1999.

         The two original suits are purported securities class actions brought
by the named individual shareholders against the Company, two of its former
officers and a current officer. No class has yet been certified. The complaints
allege, among other things, that Towne Services should have disclosed in the
prospectus used for its secondary public offering in June 1999 that it allegedly
experienced serious problems with its network infrastructure and processing
facilities during the move of its corporate headquarters in June 1999, and that
these problems allegedly led to a higher than usual number of customers
terminating their contracts during the second quarter. The complaints seek an
unspecified awards of damages. The court recently granted a motion to
consolidate the GOLAB and BOLEN cases and the plaintiffs have filed an amended
complaint. This amended complaint combines the claims in the GOLAB and BOLEN
cases. The Company has filed a motion to dismiss for failure to state a claim.
Discovery has not yet commenced and will be stayed pending the court's ruling on
the motion to dismiss. The Company believes that the allegations in the
complaints are without merit and intends to defend the lawsuits vigorously. The
Company's directors and officers liability insurance carrier is presently
providing a defense under a reservation of rights.

         2. EDWARD H. SULLIVAN, JR. AND LISA SULLIVAN V. TOWNE SERVICES, INC.,
TOWNE SERVICES, INC., AS THE SUCCESSOR TO BANKING SOLUTIONS, INC., BANC
LEASING.COM, INC., THE SUCCESSOR TO BSI CAPITAL FUNDING, INC., MOSELEY &
STANDERFER, P.C., DAVID R. FRANK, DON G. SHAFER, AND SHANNON W. WEBB; filed in
the District Court of Collin County, Texas; Judicial District 199; Civil Action
No. 199-1848-99, on or about November 15, 1999.

         This lawsuit arises out of Towne Service's acquisition of Banking
Solutions, Inc. ("BSI") through a stock purchase made by its subsidiary, BSI
Acquisition Corp., in December 1998. Plaintiff Edward Sullivan, Jr. was employed
by BSI. Sullivan


                                      F-22

<PAGE>


                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

alleges, among other things, that he had a buy-out agreement with BSI and
certain BSI shareholders under which, in certain circumstances, Sullivan was to
receive a commission based on the gross sales price paid by any purchaser of
BSI. Sullivan contends that BSI and the other shareholders allegedly
fraudulently induced him to release them from the agreement by fraudulently
misrepresenting the gross sales price paid by Towne Services' subsidiary in the
stock purchase. Sullivan contends that Towne Services is liable to him as the
successor to BSI, and also for allegedly tortiously interfering with the
agreement. Sullivan also contends Towne Services conspired with the other
defendants to misrepresent the "gross purchase price." The Company denies all
allegations of the petition. Mr. Sullivan and his wife seek an unspecified
amount of damages including a percentage of the gross sales price paid by Towne
Services' subsidiary for the acquisition of BSI, as well as punitive damages,
attorneys' fees, and pre-judgment and post-judgment interest. The Company has
filed a motion for summary judgment seeking dismissal of all claims against us.
The court has not yet ruled on the motion, and discovery is ongoing. The Company
believes that the allegations in the complaint are without merit and intends to
defend the lawsuit vigorously. The Company also contends that it is entitled to
indemnification from the BSI shareholders for its expenses in defending this
action. Specifically, the BSI stock purchase agreement provides that the BSI
shareholders will indemnify the Company against any claims, damages,
liabilities, costs and expenses (including reasonable attorneys' and
accountants' fees and expenses) it suffers that arise out of any breach of the
representations made by BSI in the agreement, provided that the aggregate amount
of all such claims, etc. exceeds $100,000.

LEASES

         In February 1998, the Company began leasing office space for its
corporate facility under a noncancelable operating lease agreement with a
nonrelated third party expiring in January 2003. For the years ended December
31, 1998 and 1999, the Company incurred approximately $210,000 and $172,000
respectively, in rent expense for this leased office space. As a result of the
Company's relocation to a new corporate facility in May 1999, the Company
entered into a sublease agreement on the previously leased facility. This
sublease agreement, which is with a nonrelated third party, began in August 1999
and expires in January 2003. The Company recognized a one-time non-cash charge
of $200,000 in 1999 related to the loss on this sublease agreement. No expense
was incurred in 2000 because this facility was subleased to a nonrelated third
party.

          In May 1999, the Company began leasing its current office space for
its corporate facility under a noncancelable operating lease agreement with a
nonrelated third party expiring in July 2004. For the year ended December 31,
2000, the company incurred approximately $499,000 in rent expense on this leased
office space. In addition to the operating lease for its corporate facility, the
Company leases certain office space under monthly operating leases that are
renewable. For the years ended December 31, 1998, 1999 and 2000, the Company
incurred approximately $154,000, $147,000 and $104,000 respectively, in rent
expense on these leased offices.

         Future minimum rental payments for all noncancelable leases are as
follows:

                             2001..............      $  475,000
                             2002..............         479,000
                             2003..............         439,000
                             2004..............         239,000
                             2005..............               0
                                                     ----------
                                                     $1,632,000
                                                     ==========

EMPLOYMENT AGREEMENTS

         The Company has entered into employment agreements with certain
executive officers of the Company. The agreements, which are substantially
similar, provide for compensation to the officers in the form of annual base
salaries and


                                      F-23

<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


bonuses based on earnings of the Company. The employment agreements also provide
for severance benefits upon the occurrence of certain events, including a change
in control, as defined.

10.  RELATED-PARTY TRANSACTIONS

         In September 1997, the Company loaned its President $78,990 to exercise
stock options. The full recourse loan was secured by the underlying common stock
and personal assets of the president, bore interest at 9.0% per annum, and was
due in full in April 2002. On April 24, 2000, the note was superseded by an
Amended and Restated Promissory Note. This note was for the principal amount of
$96,418.80, bore interest at 9.0% per annum, and was due in full in April 2002.

         In October 1998, the Company loaned its President $30,000 to fund the
exercise of options to acquire 20,000 shares of the Company's common stock. The
full recourse loan bore interest at 9.0% per annum and was due in full in April
2002. On April 24, 2000, the note was superseded by an Amended and Restated
Promissory Note. This note was for the principal amount of $33,900.58, bore
interest at 9.0% per annum, and was due in full in April 2002.

         In July 1999, the Company loaned its President $300,000. The full
recourse loan bore interest at 8.00% per annum, and was due in full in July
2002.

         The President's three notes, totaling $473,000 of principal and
interest, were forgiven in 2000 in exchange for performance obligations and
recognized as compensation expense by the Company.

         On April 1, 1998, the Company loaned its former Chief Financial Officer
$75,000 pursuant to a full recourse promissory note to fund the exercise of
options to acquire 15,000 shares of its common stock. This full recourse note
accrues interest at the rate of 8.75% per year and matures on the earlier of (i)
December 31, 2000 or (ii) the date on which the common stock purchased is sold.
All shares of common stock received upon this exercise as well as other personal
assets of the executive were pledged as collateral for the loan. Management of
the Company believes this note will be repaid in full.

         In October 1998, the Company loaned its former Chief Executive Officer
$50,000 to fund the exercise of options to acquire 20,000 shares of the
Company's common stock. The full recourse loan bears interest at 8.5% per annum,
and matured in February 2000. The note was paid in full in March 2000.

         In July 1999, the Company loaned its former Chief Executive Officer
$300,000. The full recourse loan bears interest at 8.00% per annum, and is due
in full in July 2004. The note was paid in full in March 2000.

         In July 1999, the Company loaned its former Chief Financial Officer
$100,000. The full recourse loan bears interest at 8.00% per annum, and is due
in full in July 2002.

         In July 1999, the Company loaned a former Executive Vice President of
the Company $50,000. The full recourse loan bears interest at 8.00% per annum,
and is due in full in July 2002.

         The former Chief Executive Officer received a cash payment of $1.0
million for severance benefits in 1999 in accordance with the employment
agreement between the executive and the Company.

         In March 2000, the Company invested $100,000 in Nexity Bank. One of the
Company's directors is also a director of Nexity.

         During the years ended December 31, 1998, 1999 and 2000, the Company
incurred fees of approximately $1.0 million, $1.4 million and $278,000
respectively, for legal services to a law firm in which a director and
shareholder of the Company is a partner. As of December 31, 1999 and 2000,
approximately $6,000 and $80,000 respectively, of such fees are included in
accounts payable and accrued liabilities in the accompanying balance sheets.

                                      F-24

<PAGE>


                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         During the years ended December 31, 1998, 1999 and 2000, the Company
incurred costs of approximately $121,000, $313,000 and $236,000, respectively,
for communication services from The InterCept Group, Inc., of which a director
and shareholder of the Company is the Chief Executive Officer. As of December
31, 1999 and 2000, approximately $35,000 and $60,000 respectively, of such fees
are included in the accrued accounts payable in the accompanying balance sheets.
The Company also invoiced InterCept $825,000 during 1999 for license fees
related to the CollectionWorks software and Imaging Institute software products.

         In October 1997, Rodgers Capital Group, L.P. purchased 40,000 shares of
common stock from the Company at a price of $5.00 per share. In addition, the
Company paid Rodgers Capital a total of $217,000 and $438,000 as compensation
for services provided by Rodgers Capital in connection with obtaining equity
investments for the Company during 1998 and 1999, respectively. The Company
incurred no expenses to Rodgers Capital in 2000. A director and shareholder of
the Company is the Chairman of Rodgers Capital.

         During the years ended December 31, 1999 and 2000, the Company incurred
costs of approximately $167,000 and $274,000, respectively from Phoenix
International Ltd., Inc. (now named Sphinx International, Inc.) for commission
fees related to sales of the Company's products. Phoenix International had a
strategic marketing alliance with the Company, and its Chairman and Chief
Executive Officer is a director and shareholder of the Company. The Company also
invoiced Phoenix International approximately $276,000 during 1999 for
marketing-related services of the Company's products. As of December 31, 1999,
approximately $80,000 of such fees are included in the accounts payable in the
accompanying balance sheets. No sales were made to Phoenix in 2000.

         During the years ended December 31, 1998 and 1999, the Company incurred
costs of approximately $113,000 and $100,000 respectively, from Brown Burke
Capital Partners, Inc. for merger and acquisition advisory services in
connection with the purchase of BSI in December 1998 and Imaging Institute in
July 1999 (Note 4). No expenses to Browne Burke Capital were incurred in 2000.
One of the principals of Browne Burke Capital is a director and shareholder of
the Company.

         During the years ended 1998, 1999 and 2000 the Company invoiced FLAG
Financial Corporation $207,000, $219,000 and $24,000 respectively, for set-up
fees and processing services related to the purchase of TOWNE CREDIT and TOWNE
FINANCE products. The Chief Executive Officer of FLAG Financial Corporation is a
director and shareholder of the Company.

                                      F-25

<PAGE>

                              TOWNE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



11.  QUARTERLY DATA  (UNAUDITED)

     In thousands, except for per share data. All per share data has been
adjusted to reflect the one-for-five reverse stock split on December 20, 2000.
<TABLE>
<CAPTION>

                                                     March 31       June 30      September 30     December 31     Total
                                                     --------       -------      ------------     -----------     -----
                      2000
                      ----
<S>                                                <C>            <C>             <C>             <C>          <C>
Net sales                                             6,700          6,780           6,320           5,476        25,276
Total costs and expenses                              10,448         9,907           8,347          11,712        40,414
Operating loss                                       (3,748)        (3,127)         (2,027)         (6,236)      (15,138)
Loss before extraordinary item and cumulative        (3,359)        (2,885)         (1,775)         (8,968)      (16,987)
effect of accounting change
Net loss                                             (3,359)        (2,885)         (1,775)         (8,968)      (16,987)
Net loss per common share, basic and diluted          (0.62)        (0.53)          (0.33)          (1.66)        (3.14)

                      1999
                      ----
Net sales                                             7,493          7,934           7,251           7,096        29,774
Total costs and expenses                              9,224         11,709          11,969           9,741        42,643
Operating loss                                       (1,731)        (3,775)         (4,718)         (2,645)      (12,869)
Loss before extraordinary item and cumulative        (1,545)        (3,494)         (4,399)         (2,946)      (12,384)
effect of an accounting change
Net loss                                             (4,728)        (3,494)         (4,399)         (2,946)      (15,567)
Net loss per common share, basic and diluted          (1.08)        (0.79)          (0.81)          (0.54)        (3.19)


</TABLE>

12.  SUBSEQUENT EVENT

         On March 13, 2001, the Company executed a letter of intent to engage in
a merger with Private Business, Inc. The merger is subject to normal closing
conditions, including shareholder approval. The Company anticipates the merger
to be completed during the first half of 2001.


                                      F-26