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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003

Commission file number 000-25959

Private Business, Inc.

(Exact name of registrant as specified in its charter)


Tennessee
    
    62-1453841(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)9020 Overlook Blvd., Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)


(615) 221-8400
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes  x          No  o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).   Yes  o     No  x

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practical date.

Class
    
    Outstanding as of July 31, 2003Common Stock, no par value
    
    14,105,844 shares


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|                                              |                                                                                                                                                 |                                                        |  |  |  |  |  | 
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|Part 1 Financial Information                 
|                                              | Item 1. Financial Statements                                                                                                                   
|                                              |                                                                                                                                                 | CONSOLIDATED BALANCE SHEETS  UNAUDITED               
|                                              |                                                                                                                                                 | CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED     
|                                              |                                                                                                                                                 | CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED     
|                                              |                                                                                                                                                 | CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED     
|                                              |                                                                                                                                                 | Notes to Consolidated Financial Statements  Unaudited
|                                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Three and Six Months Ended June 30, 2003 and 2002
|                                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                             
|                                              | Item 4. Disclosure Controls and Procedures                                                                                                     
|PART II  Other Information                  
|                                              | Item 1. Legal Proceedings                                                                                                                      
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                                                                    
|                                              | Item 6. Exhibits and Reports on Form 8-K                                                                                                       
|                                              | Signatures                                                                                                                                     
|EX-10.1  ADDENDUM TO EMPLOYMENT AGREEMENT    
|EX-10.1  ASSET PURCHASE AGREEMENT            
|EX-31.1  SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2  SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO 
|EX-32.2  SECTION 906 CERTIFICATION OF THE CFO



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PRIVATE BUSINESS, INC.

Form 10-Q

For Quarter Ended June 30, 2003

INDEX

Page No.Part I  Financial InformationItem 1 
    
    Financial StatementsUnaudited Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended
June 30, 2003 and 2002
    
    
    4Unaudited Consolidated Statements of Operations for the six months ended
June 30, 2003 and 2002
    
    
    5Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7 13Item 2 
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    14 - 22Item 3 
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4 
    
    Disclosure Controls and Procedures
    
    
    22Part II  Other InformationItem 1 
    
    Legal Proceedings
    
    
    23  24Item 4 
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 6 
    
    Exhibits and Reports on Form 8-K
    
    
    25


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Part 1
Financial Information




Item 1.  Financial Statements




PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS  UNAUDITED

June 30,
    
    December 31,(in thousands, except per share data)
    
    2003
    
    2002ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,630
    
    
    $
    1,146Accounts receivable  trade, net of allowance for doubtful accounts of $466 and $632, respectively
    
    
    5,386
    
    
    
    6,726Accounts receivable  other
    
    
    103
    
    
    
    420Current portion of note receivable
    
    
    57
    
    
    
    Deferred tax assets
    
    
    1,218
    
    
    
    1,009Prepaid and other current assets
    
    
    1,485
    
    
    
    1,613Total current assets
    
    
    9,879
    
    
    
    10,914PROPERTY AND EQUIPMENT, NET
    
    
    5,080
    
    
    
    6,468OTHER ASSETS:Software development costs, net
    
    
    1,386
    
    
    
    1,456Deferred tax assets
    
    
    1,835
    
    
    
    2,252Intangible and other assets, net
    
    
    12,000
    
    
    
    12,211Note receivable, net of current portion
    
    
    118
    
    
    
    Total other assets
    
    
    15,339
    
    
    
    15,919Total assets
    
    $
    30,298
    
    
    $
    33,301LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES:Accounts payable
    
    $
    2,141
    
    
    $
    2,039Accrued liabilities
    
    
    4,599
    
    
    
    5,718Dividends payable
    
    
    655
    
    
    
    575Deferred revenue
    
    
    526
    
    
    
    470Current portion of long-term debt and capital lease obligations
    
    
    5,667
    
    
    
    5,463Other short term notes payable
    
    
    538
    
    
    
    Total current liabilities
    
    
    14,126
    
    
    
    14,265REVOLVING LINE OF CREDIT
    
    
    950
    
    
    
    950OTHER NONCURRENT LIABILITIES
    
    
    255
    
    
    
    623LONG-TERM DEBT, net of current portion
    
    
    20,440
    
    
    
    23,190CAPITAL LEASE OBLIGATIONS, net of current portion
    
    
    
    
    
    
    148Total liabilities
    
    
    35,771
    
    
    
    39,176COMMITMENTS AND CONTINGENCIESPREFERRED STOCK, series B convertible, no par value; 20,000,000 shares authorized, 40,031 shares issued and outstanding
    
    
    114
    
    
    
    114STOCKHOLDERS DEFICIT:Common stock, no par value; 33,333,333 shares authorized; shares issued and outstanding, 14,087,397
and 14,047,253, respectively
    
    
    0
    
    
    
    0Additional paid-in capital
    
    
    (7,159
    )
    
    
    (7,195
    )Retained earnings
    
    
    1,572
    
    
    
    1,206Total stockholders deficit
    
    
    (5,587
    )
    
    
    (5,989
    )Total liabilities and stockholders deficit
    
    $
    30,298
    
    
    $
    33,301


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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Three Months Ended June 30, 2003 and 2002

(in thousands, except per share data)
    
    2003
    
    2002REVENUES:Participation fees
    
    $
    7,148
    
    
    $
    10,287Software license
    
    
    75
    
    
    
    177Retail planning services
    
    
    2,286
    
    
    
    2,559Maintenance and other
    
    
    1,670
    
    
    
    1,592Total revenues
    
    
    11,179
    
    
    
    14,615OPERATING EXPENSES:General and administrative
    
    
    4,255
    
    
    
    5,631Selling and marketing
    
    
    4,653
    
    
    
    5,453Research and development
    
    
    399
    
    
    
    142Amortization
    
    
    423
    
    
    
    590Other operating expense, net
    
    
    28
    
    
    
    81Total operating expenses
    
    
    9,758
    
    
    
    11,897OPERATING INCOME
    
    
    1,421
    
    
    
    2,718INTEREST EXPENSE, NET
    
    
    399
    
    
    
    507INCOME BEFORE INCOME TAXES
    
    
    1,022
    
    
    
    2,211Income tax provision
    
    
    399
    
    
    
    862NET INCOME
    
    
    623
    
    
    
    1,349Preferred stock dividends
    
    
    40
    
    
    
    40NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    583
    
    
    $
    1,309EARNINGS PER SHARE:Basic
    
    $
    0.04
    
    
    $
    0.09Diluted
    
    $
    0.04
    
    
    $
    0.09WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    14,087
    
    
    
    14,004Diluted
    
    
    14,116
    
    
    
    14,559


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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Six Months Ended June 30, 2003 and 2002

(in thousands, except per share data)
    
    2003
    
    2002REVENUES:Participation fees
    
    $
    14,209
    
    
    $
    20,215Software license
    
    
    151
    
    
    
    309Retail planning services
    
    
    4,644
    
    
    
    5,304Maintenance and other
    
    
    3,241
    
    
    
    3,407Total revenues
    
    
    22,245
    
    
    
    29,235OPERATING EXPENSES:General and administrative
    
    
    9,897
    
    
    
    11,809Selling and marketing
    
    
    9,097
    
    
    
    11,236Research and development
    
    
    848
    
    
    
    393Amortization
    
    
    849
    
    
    
    942Other operating expense, net
    
    
    72
    
    
    
    37Total operating expenses
    
    
    20,763
    
    
    
    24,417OPERATING INCOME
    
    
    1,482
    
    
    
    4,818INTEREST EXPENSE, NET
    
    
    751
    
    
    
    1,003INCOME BEFORE INCOME TAXES
    
    
    731
    
    
    
    3,815Income tax provision
    
    
    285
    
    
    
    1,488NET INCOME
    
    
    446
    
    
    
    2,327Preferred stock dividends
    
    
    80
    
    
    
    80NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    366
    
    
    $
    2,247EARNINGS PER SHARE:Basic
    
    $
    0.03
    
    
    $
    0.16Diluted
    
    $
    0.03
    
    
    $
    0.16WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    14,076
    
    
    
    13,979Diluted
    
    
    14,090
    
    
    
    14,413


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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
For the Six Months Ended June 30, 2003 and 2002

(in thousands)
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    446
    
    
    $
    2,327Adjustments to reconcile net income to net cash provided by operating activities:Write-off of debt issuance costs
    
    
    
    
    
    
    34Depreciation and amortization
    
    
    2,288
    
    
    
    2,542Deferred taxes
    
    
    208
    
    
    
    2,162Non-cash stock based compensation
    
    
    
    
    
    
    46Gain on sale of certain property and equipment, net
    
    
    
    
    
    
    (168
    )Gain on sale of Bank Insurance division
    
    
    (427
    )
    
    
    Changes in assets and liabilities:Accounts receivable, net
    
    
    1,657
    
    
    
    (186
    )Prepaid and other current assets
    
    
    627
    
    
    
    (1,357
    )Other assets
    
    
    (148
    )
    
    
    82Accounts payable
    
    
    102
    
    
    
    (1,523
    )Accrued liabilities
    
    
    (1,119
    )
    
    
    (1,899
    )Deferred revenue
    
    
    56
    
    
    
    (600
    )Other noncurrent liabilities
    
    
    (368
    )
    
    
    (356
    )Net cash provided by operating activities
    
    
    3,322
    
    
    
    1,104CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (79
    )
    
    
    (1,902
    )Software development costs
    
    
    (412
    )
    
    
    (420
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    2,218Acquisition of businesses
    
    
    
    
    
    
    (845
    )Proceeds from sale of Bank Insurance division
    
    
    325
    
    
    
    Net cash used in investing activities
    
    
    (166
    )
    
    
    (949
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments on long-term debt
    
    
    (2,488
    )
    
    
    (2,370
    )Repayments on capitalized lease obligations
    
    
    (205
    )
    
    
    (217
    )Early extinguishment of long-term debt
    
    
    
    
    
    
    (2,188
    )Proceeds from revolving line of credit, net
    
    
    
    
    
    
    2,650Proceeds from exercise of employee stock options
    
    
    
    
    
    
    136Stock issued through employee stock purchase plan
    
    
    21
    
    
    
    38Net cash used in financing activities
    
    
    (2,672
    )
    
    
    (1,951
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    484
    
    
    
    (1,796
    )CASH AND CASH EQUIVALENTS at beginning of year
    
    
    1,146
    
    
    
    2,648CASH AND CASH EQUIVALENTS at end of period
    
    $
    1,630
    
    
    $
    1,852SUPPLEMENTAL CASH FLOW INFORMATION:Cash payments for income taxes during period
    
    $
    197
    
    
    $
    72Cash payments of interest during period
    
    $
    751
    
    
    $
    1,006NON-CASH INVESTING ACTIVITIES:Note receivable for sale of Bank Insurance division
    
    $
    175
    
    
    $
    NON-CASH FINANCING ACTIVITIES:Notes payable for certain insurance and software support contracts
    
    $
    538
    
    
    $
    


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

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PRIVATE BUSINESS, INC.
Notes to Consolidated Financial Statements  Unaudited

A.  Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial reporting and in accordance with Rule 10-01
of Regulation S-X.

In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals, which are necessary for a fair presentation of the
financial position, and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.

These consolidated financial statements, footnote disclosures and other
information should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2002.

B.  Summary of Significant Accounting Policies

Principles of Consolidation

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

Our significant accounting policies include revenue recognition,
self-insurance reserves (2002 only) and software development costs. Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2002
for a more detailed description of these accounting policies.

Stock-Based Compensation

The Company has elected to account for its stock-based compensation plans
under the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and does not utilize the fair value method. However, the Company has adopted
the disclosure requirements of SFAS No. 123, and has adopted the additional
disclosure requirements as specified in SFAS No. 148, Accounting For
Stock-Based Compensation  Transition and Disclosure.

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The following table illustrates the effect on net income (loss) available
to common shareholders and earnings (loss) per share if the fair value based
method had been applied to all outstanding and unvested awards for the three
and six month periods ended June 30, 2003 and 2002, respectively.

Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(in thousands, except per share data)
    
    2003
    
    2002
    
    2003
    
    2002Net income available to common shareholders, as reported
    
    $
    583
    
    
    $
    1,309
    
    
    $
    366
    
    
    $
    2,247Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (306
    )
    
    
    (238
    )
    
    
    (483
    )
    
    
    (467
    )Pro forma net income (loss)
    
    $
    277
    
    
    $
    1,071
    
    
    $
    (117
    )
    
    $
    1,808Earnings (loss) per share:Basicas reported
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.16Basicpro forma
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    (0.01
    )
    
    $
    0.13Dilutedas reported
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.16Dilutedpro forma
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.13


C.  Reclassifications

Certain prior period amounts have been reclassified to conform with
current period presentation.

D.  Sale of Bank Insurance Business

On June 30, 2003, the Company entered into an agreement to sell certain
operating assets of its Bank Insurance business for cash of $325,000 and a note
receivable for $175,000. The note is secured by all assets of the business
sold, is due in equal quarterly installments of principal and interest through
June 2006 and bears interest at 3%. The result of this transaction is a gain
on sale of approximately $427,000, which is included in maintenance and other
revenues in the accompanying 2003 statement of operations.

E.  Stock Option Grants

On May 30, 2003, the Companys Board of Directors approved grants of
incentive stock options totaling 745,700 to certain employees of the Company.
All of the grants have an exercise price equal to the market value of a share
of stock as of the date of grant. As such, no compensation expense was
recorded in accordance with Accounting Principles Bulletin No. 25.

F.  Notes Payable

During the second quarter of 2003, the Company entered into several
short-term notes payable. The notes are for the Companys Directors and
Officers insurance coverage, as well as various annual software maintenance
and support contracts. All of the notes are unsecured and have monthly
payments that extend less than twelve months.

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G.  Acquisition of Access Retail Management

On May 28, 2002, the Company entered into an asset purchase agreement to
acquire certain operating assets of CAM Commerces (CAM) retail planning
division, known as Access Retail Management, in exchange for cash consideration
of $800,000. The acquisition has been recorded in accordance with SFAS No. 141,
Business Combinations(SFAS No. 141), resulting in the operating results of
the CAM division being included with those of the Company subsequent to the
date of acquisition. The Company has finalized its initial allocation of
purchase price, resulting in identifiable furnitures and fixtures of $10,000,
intangible assets of approximately $210,000 and goodwill of approximately
$570,000.

H.  Sale of Company Headquarters and Other Properties

During the quarter ended March 31, 2002, the Company sold its former
headquarters building and consolidated its operations into the Technology and
Business Center, which is adjacent to the former headquarters building. The net
proceeds from the sale were approximately $2.2 million. During the third
quarter of 2001, the Company recorded an impairment charge of $4.1 million to
write down the headquarters building, land and fixtures to their estimated fair
market value of approximately $2.0 million. Therefore the sale in March 2002
resulted in a net gain of approximately $200,000 being recorded in the first
quarter of 2002, which is included in other operating expense, net in the
accompanying 2002 consolidated statement of operations.

I.  Net Income Per Share

Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net
income available to common shareholders by the weighted average number of
common and common equivalent shares outstanding during the period, which
includes the additional dilution related to conversion of stock options as
computed under the treasury stock method and the conversion of the preferred
stock under the if-converted method.

The following table represents information necessary to calculate earnings
per share for the three and six month periods ended June 30, 2003 and 2002:

Three Months Ended
    
    Six Months EndedJune 31,
    
    June 30,(in thousands)
    
    2003
    
    2002
    
    2003
    
    2002Net income available to common shareholders
    
    $
    583
    
    
    $
    1,309
    
    
    $
    366
    
    
    $
    2,247Weighted average common shares outstanding
    
    
    14,087
    
    
    
    14,004
    
    
    
    14,076
    
    
    
    13,979Plus additional shares from common stock equivalent shares:Options and convertible preferred stock
    
    
    29
    
    
    
    555
    
    
    
    14
    
    
    
    434Adjusted weighted average common shares outstanding
    
    
    14,116
    
    
    
    14,559
    
    
    
    14,090
    
    
    
    14,413


For the six months ended June 30, 2003 and 2002, approximately 2.2 million
and 2.4 million employee stock options and the preferred shares were excluded
from diluted earnings per share calculations, as their effects were
anti-dilutive.

J.  Comprehensive Income

Comprehensive income for the three and six months ended June 30, 2003 and
2002 was comprised solely of net income.

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K.  Bank Covenants

The Companys credit facility is secured by a pledge of all Company assets
and imposes financial covenants and requirements and contains limitations on
the Companys ability to sell material assets, redeem capital stock and pay
dividends, among other actions. As of June 30, 2003, the Company was in
compliance with all such covenants.

L.  Legal Proceedings

As a result of the merger with Towne, we assumed certain outstanding
litigation against Towne. Except for the lawsuits described below, we are not
currently a party to, and none of our material properties is currently subject
to, any material litigation other than routine litigation incidental to our
business.

In Re Towne Services, Inc. / Securities Litigation

As previously disclosed, Towne, two of its former officers and a current
officer are defendants in a securities class action lawsuit filed in November
1999 in the District Court of Georgia, Atlanta Division. The complaints
alleged, among other things, that Towne 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 Complaint seeks an
unspecified amount of damages. Towne and its officers answered, denying
liability. The parties reached a tentative settlement, which is subject to
certain conditions including court approval, and which is memorialized in a
Memorandum of Understanding signed January 17, 2003. Counsel for plaintiffs
agreed to dismiss all claims and release all defendants for a negotiated
settlement amount which will be funded by Townes directors and officers
insurance carrier and Towne. The settlement funds were placed in escrow on
February 21, 2003. Counsel for defendants estimate it will take a minimum of
six months for the court to approve the class-action settlement. The parties
also continue to pursue the question as to whether the carrier will also pay
the cost of defense, including the attorneys fees incurred by Towne, as
provided by the underlying insurance policy.

Edward H. Sullivan, Jr. and Lisa Sullivan v. Towne Services, Inc.

(Towne Services, Inc. as the successor to Banking Solutions, Inc., Bane
Leasing.Com, Inc., the successor to BSI Capital Funding, Inc., Moseley &
Standerfer, P.C., David R. Frank, Don G. Shafer, and Shannon W. Webb)

This lawsuit was the result of Townes acquisition of Banking Solutions,
Inc. (BSI) through a stock purchase made by its subsidiary, BSI Acquisition
Corp. This lawsuit was filed in December 1998 in the District Court of Collin
County, Texas. 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s subsidiary in the stock
purchase. Sullivan contends that Towne is liable to him as the successor to
BSI, and also for allegedly tortiously interfering with the agreement. Sullivan
also contends Towne conspired with the other defendants to misrepresent the
gross purchase price. The District Court of Collin County, Texas granted
Townes Motion for Summary Judgment on all claims. The Order was entered on
July 15, 2002. PBI has sought indemnification from the BSI shareholders for its
expenses in defending this action based on the provisions of the BSI stock
purchase agreement.

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##### Table of Contents



Towne Services, Inc. v. Clipper, et al.

As previously reported, Towne filed an action against six former BSI sales
representatives and The Clipper Group, a company founded by one or more of
former BSI sales representatives, on April 24, 2001 in the 277th District Court
of Williamson County, Texas. Towne contends that the defendants formed a
competing company, and are marketing a competing product, to Townes bank
customers, in violation of the named individuals employment contracts, and in
particular, in violation of trade secret and confidentiality provisions and
non-solicitation of customer and employee provisions contained in those
contracts. The parties have reached a settlement agreement in this matter, and
executed the final settlement agreement on September 30, 2002. The pending
claims were dismissed by agreement of the parties.

The Company is subject to various other legal proceedings, tax matters and
other claims which arise in the ordinary course of business. In the opinion of
management, the amount of any ultimate liability with respect to these actions
will not materially affect the financial position or results of operations of
the Company.

M.  Segment Information

Prior to August 2001, the Company operated in one business segment,
accounts receivable financing. As a result of the Companys merger with Towne
in August 2001, it now operates in a second business segment, retail inventory
forecasting. The Company accounts for segment reporting under SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information.No
corporate overhead costs or interest have been allocated to income (loss)
before taxes of the retail inventory forecasting segment, but are included in
the accounts receivable financing segment costs. Additionally, $1.5 million of
goodwill associated with the Towne merger has been allocated to the retail
inventory forecasting segment and is therefore included in the segments total
assets.

The following tables summarize the financial information concerning the
Companys reportable segments for the three and six months ended June 30, 2003
and 2002.

Three Months Ended
    
    Three Months EndedJune 30, 2003
    
    June 30, 2002Accounts
    
    Retail
    
    
    
    
    
    Accounts
    
    RetailReceivable
    
    Inventory
    
    
    
    
    
    Receivable
    
    Inventory(in thousands)
    
    Financing
    
    Forecasting
    
    Total
    
    Financing
    
    Forecasting
    
    TotalRevenues
    
    $
    8,893
    
    
    $
    2,286
    
    
    $
    11,179
    
    
    $
    12,056
    
    
    $
    2,559
    
    
    $
    14,615Income (loss) before taxes
    
    $
    700
    
    
    $
    322
    
    
    $
    1,022
    
    
    $
    2,261
    
    
    $
    (50
    )
    
    $
    2,211Assets
    
    $
    25,527
    
    
    $
    4,771
    
    
    $
    30,298
    
    
    $
    31,476
    
    
    $
    6,345
    
    
    $
    37,821Total expenditures for
additions to long-lived
assets:
    
    $
    235
    
    
    $
    
    
    
    $
    235
    
    
    $
    1,276
    
    
    $
    
    
    
    $
    1,276


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##### Table of Contents



Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2002Accounts
    
    Retail
    
    
    
    
    
    Accounts
    
    RetailReceivable
    
    Inventory
    
    
    
    
    
    Receivable
    
    Inventory(in thousands)
    
    Financing
    
    Forecasting
    
    Total
    
    Financing
    
    Forecasting
    
    TotalRevenues
    
    $
    17,601
    
    
    $
    4,644
    
    
    $
    22,245
    
    
    $
    23,931
    
    
    $
    5,304
    
    
    $
    29,235Income (loss) before taxes
    
    $
    295
    
    
    $
    436
    
    
    $
    731
    
    
    $
    3,443
    
    
    $
    372
    
    
    $
    3,815Assets
    
    $
    25,527
    
    
    $
    4,771
    
    
    $
    30,298
    
    
    $
    31,476
    
    
    $
    6,345
    
    
    $
    37,821Total expenditures for
additions to long-lived
assets:
    
    $
    491
    
    
    $
    
    
    
    $
    491
    
    
    $
    2,322
    
    
    $
    
    
    
    $
    2,322


N.  New Accounting Pronouncements

In August of 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections.This statement rescinds
Statement No. 4, which required all material gains and losses from
extinguishment of debt to be classified as an extraordinary item, net of
related income tax effects. Upon adoption of this statement, extinguishment
gains and losses will be classified as ordinary gains and losses in the income
statement. The statement is effective for fiscal years beginning after May 15,
2002, resulting in it being effective for the Company on January 1, 2003. The
Company early adopted this statement during December 2002, which did not have a
material impact on the Companys financial position or results of operations.
However, certain debt extinguishment losses that had previously been reflected
as extraordinary items were reclassified to ordinary expenses.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,requiring that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146, which applies to all entities, is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 during fiscal 2003 did not materially impact
the Companys financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure,which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123 to require more prominent
and more frequent disclosures in financial statements about the effects of
stock-based compensation. SFAS No. 148 is effective for financial statements
issued for fiscal years ending after December 15, 2002, and interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The Company has included
the required interim disclosures elsewhere in this document.

At the November 21, 2002 Emerging Issues Task Force (EITF) meeting, the
Task Force reached a consensus in Issue 00-21, Multiple-Deliverable Revenue
Arrangements, which addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, or rights to use
assets, other than those arrangements accounted for under other more specific
literature. The final consensus will be applicable to agreements entered into
in fiscal periods beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to
all existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion

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##### Table of Contents



No. 20, Accounting Changes. The Company expects that adoption of this new
consensus will not have a material effect on the Companys financial position
or results of operations.

In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Financial instruments that fall within the scope of SFAS No. 150 must
be classified by the issuer as liabilities (or assets in some circumstances).
Many of those instruments were previously classified as equity. The statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently evaluating the
requirements and impact, if any, of SFAS No. 150 on its consolidated financial
position.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, to expand upon and strengthen
existing accounting guidance that addresses when a company should include in
its financial statements the assets, liabilities and activities of another
entity. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that guidance by requiring a variable
interest entity, as defined, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. FIN 46 also requires disclosure about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the
requirements and impact, if any, of FIN 46 on its consolidated results of
operations and financial position.

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##### Table of Contents






PRIVATE BUSINESS, INC.



|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
Three and Six Months Ended June 30, 2003 and 2002
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------

Overview

We are a leading provider of solutions that enable community banks to
manage accounts receivable financing provided to their small business
customers. Our solution is called BusinessManager, and is based on software,
marketing, and online electronic transaction processing services. One element
of BusinessManager is our proprietary software, which enables our network of
client banks to purchase accounts receivable from their small business
customers. The banks then process, bill and track those receivables on an
ongoing basis. As a major component of our program, we work with client banks
to design, implement and manage the sale of BusinessManager accounts receivable
financing services to their small business customers. We also give our client
banks the option of outsourcing to us their application hosting and transaction
processing in our Technology and Business Center. Through our subsidiary,
Retail Merchandising Service Automation, (RMSA), we also provide
merchandising forecasting information and consulting services to customers in
the retail industry.

In previous filings we have discussed that part of our growth strategy is
to acquire or develop new products or services. During 2003, marketing and
sales activity has begun for three new products; LineManager (LM),
Collections Manager and Identification Manager. LineManager allows banks and
financial institutions to electronically monitor asset based arrangements in a
more timely, cost efficient manner. Collections Manager allows our bank and
merchant customers on-line access to collection services, thereby creating
efficient, timely follow-up on past due accounts. Identification Manager is an
electronic web-based compliance program for banks who must adhere to the
requirements of Section 326 of the USA Patriot Act (Act), which is effective
October 1, 2003. Section 326 of the Act, among other things, mandates that
banks perform background checks on all persons opening accounts at financial
institutions. These institutions must then document and retain the results of
these background checks. Although the revenue contributions from these new
products during 2003 may be insignificant in relation to total consolidated
revenues, these products are complimentary to our core business and we believe
will provide significant growth in future years.

Critical Accounting Policies and Estimates

Managements Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Companys consolidated financial statements. The
preparation of these consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. On an on-going basis, management evaluates its critical
accounting policies and estimates.

In December 2001, the Securities and Exchange Commission (SEC) requested
that all registrants list their three to five critical accounting policies in
the text of Managements Discussion and Analysis of Financial Condition and
Results of Operations. The SEC indicated that a critical accounting policy
is one that is both important to the understanding of the financial condition
and results of operations of the Company and requires managements most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following accounting policies fit this definition:

14Table of Contents

Revenue Recognition. We generate revenue from four main sources:



| |  |  | participation fees earned on client bank purchases of small business accounts receivable.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | software license fees from new client banks.
| | - |  | --------------------------------------------



| |  |  | retail planning services.
| | - |  | -------------------------



| |  |  | maintenance fees and other revenues, comprised primarily of fees received for insurance
brokerage services, paper-based form sales, software maintenance, medical, leasing and
processing services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There are two types of participation fees. The first type is earned upon
the client banks initial purchase of a small business accounts receivable
during the first 30 days in our program. The second type is an ongoing
participation fee earned from subsequent period purchases. Both types of fees
are based on a percentage of the receivables that a client bank purchases from
its small business customers during each month. The second type of fee is a
smaller percentage of the ongoing receivables purchased. Participation fees are
recognized as earned.

Software license fees for BusinessManager consist of two components: the
license fee and customer training and support fee. These are one-time fees that
we receive upon the initial licensing of our BusinessManager program to a
community bank. Our license agreements are executed with terms ranging from
three to five years, and are renewable for subsequent terms. Some agreements
contain performance or deferred payment terms that must be met in order for us
to receive payment and recognize revenue. We recognize revenues from the
license fee once we have met the terms of the customer agreement. The customer
training and support fee are recognized ratably over the twelve-month service
period subsequent to the activation of the license agreement.

Retail planning services revenue is generated from fees charged primarily
for providing inventory merchandising and forecasting information for specialty
retail stores; and ancillary services related to these products. RMSA uses a
proprietary software to process sales and inventory transactions and provide
the merchandising forecasting information. During the second quarter of 2002,
we completed a strategic acquisition of certain operating assets of CAM
Commerces retail planning division, known as Access Retail Management, which
operates in the same niche market as RMSA. We recognize revenues as the
transactions occur and merchandising and forecasting services are performed.

Maintenance fees and other revenues include several ancillary products and
services we provide to client banks. Annual software maintenance fees are
generated from our client banks starting on the first anniversary date of the
BusinessManager license agreement and annually thereafter. These revenues are
recognized ratably over a twelve-month period beginning on the first
anniversary date of the agreement. Additionally, since 1995, we have brokered,
through our Private Business Insurance subsidiary, credit and fraud insurance
products from a national insurance company. We earn fees based on a percentage
of the premium that is paid to the insurance company. We also provide a
standard set of forms that client banks may purchase and use in the normal
course of administering the BusinessManager program. Revenues related to these
forms are recognized in the period that they are shipped to the client bank. We
also offer processing services to our client banks for an additional fee, based
on the volume of transactions processed through the system. We also have some
industry-focused applications for the medical and dental markets. 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.

Software Development Costs.Software development costs incurred in the
research and development of new software products and enhancements to existing
software products are expensed as incurred until

15



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##### Table of Contents



technological feasibility has been established. After such time, any
additional costs are capitalized in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed.Capitalized software
development costs are amortized on a straight-line basis over three years.

Self-Insurance Reserves.Prior to January 1, 2003, the Company was
primarily self-insured for employee medical costs with certain limits of per
claim and aggregate stop loss insurance coverage that management considers
adequate. The Company maintains an accrual for these costs based on claims
filed and an estimate of claims incurred but not reported. The difference
between actual settlements and recorded accruals are expensed in the period
identified. The Company was self-insured for employee medical claims up to
$40,000 per employee per year or an aggregate of approximately $11 million per
year. Effective January 1, 2003 the Company ceased being self-insured for
medical costs.

Results of Operations

The following table sets forth, for the periods indicated, the percentage
relationships of the identified consolidated statements of operations items to
total revenue.

Second Quarter
    
    Year to Date2003
    
    2002
    
    2003
    
    2002Revenues:Participation fees
    
    
    63.9
    %
    
    
    70.4
    %
    
    
    63.9
    %
    
    
    69.1
    %Software license
    
    
    0.7
    %
    
    
    1.2
    %
    
    
    0.7
    %
    
    
    1.1
    %Retail planning services
    
    
    20.5
    %
    
    
    17.5
    %
    
    
    20.9
    %
    
    
    18.1
    %Maintenance and other
    
    
    14.9
    %
    
    
    10.9
    %
    
    
    14.5
    %
    
    
    11.7
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating Expenses:General and administrative
    
    
    38.1
    %
    
    
    38.5
    %
    
    
    44.5
    %
    
    
    40.4
    %Selling and marketing
    
    
    41.6
    %
    
    
    37.3
    %
    
    
    40.9
    %
    
    
    38.4
    %Research and development
    
    
    3.6
    %
    
    
    1.0
    %
    
    
    3.8
    %
    
    
    1.3
    %Amortization
    
    
    3.8
    %
    
    
    4.0
    %
    
    
    3.8
    %
    
    
    3.2
    %Other operating expense, net
    
    
    0.2
    %
    
    
    0.6
    %
    
    
    0.3
    %
    
    
    0.1
    %87.3
    %
    
    
    81.4
    %
    
    
    93.3
    %
    
    
    83.4
    %Operating Income
    
    
    12.7
    %
    
    
    18.6
    %
    
    
    6.7
    %
    
    
    16.6
    %Interest expense, net
    
    
    3.6
    %
    
    
    3.5
    %
    
    
    3.4
    %
    
    
    3.4
    %Income Before Income Taxes
    
    
    9.1
    %
    
    
    15.1
    %
    
    
    3.3
    %
    
    
    13.2
    %Income Tax Provision
    
    
    3.6
    %
    
    
    5.9
    %
    
    
    1.3
    %
    
    
    5.2
    %Net Income
    
    
    5.5
    %
    
    
    9.2
    %
    
    
    2.0
    %
    
    
    8.0
    %Preferred Stock Dividends
    
    
    0.4
    %
    
    
    0.3
    %
    
    
    0.4
    %
    
    
    0.3
    %Net Income Available to Common Shareholders
    
    
    5.1
    %
    
    
    9.0
    %
    
    
    1.6
    %
    
    
    7.7
    %


Participation Fees.Participation fees decreased 30.5% and 29.7% to $7.1
million and $14.2 million for the second quarter and first six months of 2003
compared to $10.3 million and $20.2 million for the comparable periods of 2002.
The decreases were primarily due to a reduction in the total funding through
our BusinessManager program to $1.15 billion and $2.27 billion for the second
quarter and first six months of 2003, compared to $1.37 billion and $2.64
billion for the comparable periods of 2002. Also affecting participation fees
are rate concessions and pricing changes initiated by banks in response to the
current lending environment, particularly the relatively low cost of
traditional financing. The decrease in funding is due to a combination of two
factors; fewer merchants funding through our BusinessManager program and lower
funding levels at

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##### Table of Contents



existing merchants due to the slower economy. As a percentage of total
revenues, participation fees accounted for 63.9% for the second quarter and six
month period ended June 30, 2003 compared to 70.4% and 67.1% for the comparable
periods of 2002.

Software license. Software license fees decreased 57.6% and 51.1% to
$75,000 and $151,000 for the second quarter and first six months of 2003,
compared to $177,000 and $309,000 for the comparable periods of 2002. The
decrease was due to several contributing factors, including our sales
organization restructure that occurred in January 2003, which caused temporary
disruption to the sales cycle and our continued focus on marketing more
specifically to banks in targeted areas where we wish to better penetrate and
support the small business market. Software license fees accounted for 0.7% of
total revenues for the second quarter and six months ended June 30, 2003
compared to 1.2% and 1.1% for the comparable periods in 2002.

Retail planning services. Retail planning services revenues declined 10.7%
and 12.4% to $2.3 and $4.6 million during the second quarter and six months
ended June 30, 2003 as compared to $2.6 and $5.3 million for the comparable
periods of 2002. The decline is due to fewer forecasting service clients as a
result of the slower retail economy. As a percentage of total revenues, retail
planning services accounted for 20.5% and 20.9% for the second quarter and
first six months of 2003 compared to 17.5% and 18.1% in the comparable periods
of 2002.

Maintenance and other. Maintenance and other fees increased 4.9% to $1.7
and decreased 4.9% to $3.2 million for the second quarter and six months ended
June 30, 2003 compared to $1.6 and $3.4 million for the comparable periods for
2002. Maintenance and other fees consist primarily of software maintenance
fees, credit and fraud risk insurance commissions earned from the sale of
policies to our BusinessManager banks, commissions earned through our referrals
of certain merchants to alternative financing companies and account
verification services performed for some of our BusinessManager banks. The
increase for the second quarter of 2003 was attributable to the gain on sale of
the Bank Insurance division totaling $427,000, which was partially offset by
decreases in our insurance revenues and Towne processing and machine rental
fees. Our insurance revenues decreased 22.2% and 19.7% to $710,000 and $1.4
million for the second quarter and first six months of 2003 compared to
$913,000 and $1.8 million for the comparable periods in 2002. The decline in
insurance revenues is due to the lower funding levels through the
BusinessManager program as discussed above. Towne processing and machine rental
fees were $0 during the second quarter and first six months of 2003 compared to
approximately $129,000 and $344,000 in the comparable periods of 2002. This
decline is the result of the Towne products being eliminated during 2002.
Maintenance and other fees accounted for 14.9% and 14.6% of total revenues for
the second quarter and six month period ended June 30, 2003 compared to 10.9%
and 11.7% for the comparable periods in 2002.

Total revenues. Total revenues for the second quarter and first six months
of 2003 decreased 23.5% and 23.9% to $11.2 and $22.2 million compared to $14.6
and $29.2 million for the comparable periods of 2002.

General and administrative. General and administrative expenses decreased
24.4% and 16.2% to $4.3 and $9.9 million for the second quarter and six month
period ended June 30, 2003 compared to $5.6 and $11.8 million for the
comparable periods in 2002. The decrease is primarily due to reductions in
salary and benefits expense as a result of reduced headcount, as well as,
reduced consulting charges. During the first six months of 2002, consulting and
general fees were approximately $266,000 higher due to our implementation of a
new operating system and higher professional service fees. Also contributing to
the decrease for the second quarter was the reversal of all corporate
discretionary bonus expense that was expensed during the first four months of
2003 totaling approximately $150,000. The ninth amendment to our credit
agreement, executed in April 2003 precludes the payment of any discretionary
bonuses to employees. General and administrative expenses include the cost of
our executive, finance, human resources, information and support services,
administrative functions and general operations. As a percentage of total
revenue, general and administrative expenses decreased 1.0% and increased 10.1%
to 38.1% and 44.5% for the second quarter and six month period ended June 30,
2003 compared to the same periods in the prior year.

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##### Table of Contents



Selling and marketing. Selling and marketing expenses decreased 14.7% and
19.0% for the second quarter and six month period ended June 30, 2003 to $4.7
and $9.1 million compared to $5.5 and $11.2 million for the comparable periods
of 2002. The decrease for the six months ended June 30, 2003 compared to the
same period in 2002 was primarily due to lower commissions expense, as a result
of lower revenues, as well as, fewer sales personnel. This resulted in
decreased compensation, training, and travel expenses. Selling and marketing
expenses include the cost of wages and commissions paid to our dedicated
business development and bank sales force, travel costs of our sales force,
recruiting for new sales and marketing personnel and marketing fees associated
with direct and telemarketing programs. As a percentage of total revenue,
selling and marketing expenses increased 11.5% and 6.5% to 41.6% and 40.9% for
the second quarter and six month period of 2003 compared to 37.3% and 38.4% for
the comparable periods in 2002.

Research and development. Research and development expenses increased 181%
and 116% to $399,000 and $848,000 for the second quarter and six month period
ended June 30, 2003 compared to $142,000 and $393,000 for the year earlier
periods. These costs include the non-capitalizable direct costs associated with
developing new versions of our products and other projects that have not yet
reached technological feasibility. The increase in costs for the first six
months of 2003 was primarily due to less capitalized activity related to the
development and production of the new LineManager product compared to the same
period in 2002. As a percentage of total revenues, research and development
expenses increased to 3.6% and 3.8% for the second quarter and first six months
of 2003 compared to 1.0% and 1.3% for the same periods in the prior year.

Amortization. Amortization expenses decreased 28.3% and 9.9% to $423,000
and $849,000 for the first six months of 2003 compared to $590,000 and $942,000
for the comparable periods in 2002. These expenses include the cost of
amortizing intangible assets including trademarks, software development costs
and debt issuance costs. The decrease was primarily related to a catch-up entry
for amortization of identifiable intangibles from the Towne acquisition that
was recorded during the second quarter of 2002 after completion of a formal
valuation.

Other operating expenses, net. Other operating expenses for the first six
months of 2002 included a net gain on the sale of certain property and
equipment of approximately $183,000. This gain relates primarily to the sale of
the Companys former headquarters. Partially offsetting this gain was a loss on
extinguishment of debt related to the write-off of a portion of our capitalized
debt issuance costs of approximately $56,000. This amount had been previously
classified as an extraordinary loss, however the amount was reclassified in
accordance with SFAS No. 145, Recission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections(SFAS No. 145).
Excluding the net gain and debt issuance cost write-off, other operating
expenses were approximately $164,000 for the first six months of 2002 compared
to $72,000 for the first six months of 2003. Other operating expenses include
property tax and other miscellaneous costs associated with providing support
and services to our client banks.

Operating income.As a result of the above factors, our operating income
decreased 47.7% and 69.2% to operating income of $1.4 and $1.5 million for the
second quarter and six months of 2003, compared to $2.7 and $4.8 million for
the comparable periods of 2002. As a percentage of total revenue, operating
income decreased to 12.7% and 6.7% for the second quarter and six months of
2003 compared to 18.6% and 16.6% for the same periods in 2002.

Interest expense, net. Interest expense, net decreased 21.3% and 25.1% to
$399,000 and $751,000 for the second quarter and six months ended June 30, 2003
compared to $507,000 and $1.0 million for the comparable periods in 2002. The
decrease was primarily due to the reduction of our debt balances in 2003 and
more favorable interest rates.

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Income tax provision.The income tax provision was approximately $399,000
and $285,000 for the second quarter and six months ended June 30, 2003 compared
to $862,000 and $1.5 million for the same periods in 2002. As a percentage of
income before taxes, the income tax rate was 39.0% for both 2003 and 2002.

Liquidity and Capital Resources

Our primary sources of capital have historically been cash provided by
operations, short-term and long-term debt, and investment from stockholders.
During the first six months of 2003 our operating activities provided cash of
approximately $3.3 million. We used approximately $166,000 in our investing
activities, consisting of capital expenditures of $79,000 and $412,000 of
software development costs, partially offset by the receipt of $325,000 in
proceeds from the sale of the Bank Insurance division. We currently estimate
that total capital expenditures for 2003 will be approximately $275,000
(excluding expenditures for software development costs).

Cash used in financing activities totaled $2.7 million for the first six
months of 2003, which is the result of $2.7 million in repayments of long-term
debt and capitalized lease obligations. Subsequent to June 30, 2003, a
principal prepayment of $295,000 was made using proceeds from the sale of the
Bank Insurance division.

The Company is the borrower under a credit agreement dated August 7, 1998
between the Company as borrower, Fleet National Bank as administrative agent
and a syndicate of other lenders. This credit facility has been amended from
time to time. The credit facility is secured by a pledge of all of our assets
and contains financial and non-financial covenants and contains limitations on
our ability to sell material assets, redeem capital stock and pay cash
dividends, among other actions.

On April 11, 2003, we entered into an amendment to our credit facility.
The amended credit facility modifies financial and certain non-financial
covenants for 2003 and requires us to take certain other actions (as set forth
in the amended credit facility). As of June 30, 2003, the Company was in
compliance with all amended covenants. Pursuant to the amendment, we agreed to
pay certain fees to our lenders, to increase the interest rates payable under
the credit facility, and to use our best efforts to consummate a capital event
(as defined in the amended credit facility) on or before December 31, 2003.

Our amended credit facility includes term loans with current balances of
$6.4 million (the Term A Loan) and $19.4 million (the Term B Loan), and a
revolving line of credit with availability equal to the lesser of $3.0 million
or 60% of the eligible receivables (as defined in the amended credit facility).
The revolving line of credit includes swing line advances and a $2 million
sublimit for standby letters of credit. The interest rate for the Term A Loan
and any advances under the revolving loan is the greater of: (1) 5.5% per
annum; or (2) 4.0% over the Eurodollar rate or 2.75% over the prime rate. The
interest rate for the Term B Loan is 4.5% over the Eurodollar rate or 3.5% over
the prime rate. The applicable margin on all outstanding loans increases by 1%
on January 1, 2004. The amended credit facility also includes a provision
requiring early payment on the term loans if we have excess cash, as defined in
the credit agreement, on hand at year-end. At December 31, 2002, no excess cash
payments were required.

The amended credit facility provided for the payment to the lenders of a
fee totaling 2% of the outstanding debt as of April 11, 2003, which is
approximately $600,000. Twenty-five percent of this fee was paid immediately
upon entering into the amendment, twenty-five percent of this fee is payable on
September 30, 2003, and 50% is payable on December 31, 2003. Fifty percent of
the September 30, 2003 fee will be waived by the Lenders in the event of a
documentation benchmark (as defined in the credit facility amendment) and 100%
of the September and December payments will be waived to the extent that no
amount remains outstanding under the credit facility as of the applicable
payment date.

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The $6.4 million term loan is generally repayable in quarterly
installments of $1.2 million through September 30, 2003 and then increasing to
$1.3 million beginning December 31, 2003 until maturity (August 7, 2004). The
$19.4 million term loan is repayable in equal quarterly installments of $65,000
until December 31, 2004, at which time the required quarterly payments increase
to $2.9 million until September 30, 2005 and $3.9 million until December 31,
2005 with a final payment of $3.4 million due March 31, 2006. The revolver
bears an annual commitment fee and matures August 7, 2004. As of June 30, 2003,
we had $6.4 million outstanding at 5.5%, $19.4 million outstanding at 5.625%,
$620,000 in standby letters of credit and $950,000 outstanding draws against
the revolver at 6.75%.

As of June 30, 2003, we had a working capital deficit of approximately
$4.2 million compared to a working capital deficit of approximately $3.4
million as of December 31, 2002. The increase in working capital deficit
resulted primarily from decreases in accounts receivable and prepaid assets and
an increase in other short-term notes payable, partially offset by an increase
in cash and a decrease in accrued liabilities. We believe that our line of
credit availability along with future operating cash flows will be sufficient
to meet our working capital and capital expenditure requirements for the next
twelve months.

The following is a schedule of our obligations and commitments for future
payments:

(in thousands)
    
    Payments Due by PeriodLess than
    
    1-2
    
    3-4
    
    4 yearsContractual Obligations
    
    Total
    
    1 year
    
    years
    
    years
    
    & afterRevolving Line of Credit
    
    $
    950
    
    
    $
    0
    
    
    $
    950
    
    
    $
    0
    
    
    $
    0Long-Term Debt
    
    
    25,808
    
    
    
    5,368
    
    
    
    20,440
    
    
    
    0
    
    
    
    0Capitalized Lease Obligations
    
    
    299
    
    
    
    299
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Leases
    
    
    8,853
    
    
    
    1,653
    
    
    
    2,704
    
    
    
    2,502
    
    
    
    1,994Other
    
    
    538
    
    
    
    538
    
    
    
    0
    
    
    
    0
    
    
    
    0Total Contractual Cash Obligations
    
    $
    36,448
    
    
    $
    7,858
    
    
    $
    24,094
    
    
    $
    2,502
    
    
    $
    1,994Standby Letter of Credit Commitment
    
    $
    620
    
    
    $
    620
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0


We may, in the future, acquire businesses or products complementary to our
business, although we cannot be certain that any such acquisitions will be
made. The need for cash to finance additional working capital or to make
acquisitions may cause us to seek additional equity or debt financing. We
cannot be certain that such financing will be available, or that our need for
higher levels of working capital will not have a material adverse effect on our
business, financial condition or results of operations.

New Accounting Pronouncements

In August of 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145. This statement rescinds Statement No. 4, which required
all material gains and losses from extinguishment of debt to be classified as
an extraordinary item, net of related income tax effects. Upon adoption of this
statement, extinguishment gains and losses will be classified as ordinary gains
and losses in the income statement. The statement is effective for fiscal years
beginning after May 15, 2002, resulting in it being effective for the Company
on January 1, 2003. The Company early adopted the statement during December
2002, which did not have a material impact on the Companys financial position
on results of operations. However, certain debt extinguishment losses that had
previously been reflected as extraordinary items were reclassified to ordinary
expenses.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,requiring that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146, which applies to all entities, is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 during fiscal 2003 did not materially
impact the Companys financial position or results of operations.

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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure,which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123 to require more prominent
and more frequent disclosures in financial statements about the effects of
stock-based compensation. SFAS No. 148 is effective for financial statements
issued for fiscal years ending after December 15, 2002, and interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The Company has included
the required interim disclosures elsewhere in this document.

At the November 21, 2002 Emerging Issues Task Force (EITF) meeting, the
Task Force reached a consensus in Issue 00-21, Multiple-Deliverable Revenue
Arrangements, which addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, or rights to use
assets, other than those arrangements accounted for under other more specific
literature. The final consensus will be applicable to agreements entered into
in fiscal periods beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to
all existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes. The
Company expects that adoption of this new consensus will not have a material
effect on the Companys financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Financial instruments that fall within the scope of SFAS No. 150 must
be classified by the issuer as liablities (or assets in some circumstances).
Many of those instruments were previously classified as equity. The Statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently evaluating the
requirements and impact, if any, of SFAS No. 150 on its consolidated financial
position.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, to expand upon and strengthen
existing accounting guidance that addresses when a company should include in
its financial statements the assets, liabilities and activities of another
entity. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that guidance by requiring a variable
interest entity, as defined, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. FIN 46 also requires disclosure about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the
requirements and impact, if any, of FIN 46 on its consolidated results of
operations and financial position.

Note Regarding Forward Looking Information

This interim report contains several forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements containing the words may, would, could,
will, expect, anticipate, believe, intend, plan, and estimate and
words of similar importance. Such statements include statements concerning our
operations, 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

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assumptions and estimates which are subject to significant uncertainties, many
of which are beyond our control. Actual results may differ materially from
those expressed or implied by such forward-looking statements. The Company
assumes no obligation to update this information. Factors that could cause
actual results to differ materially are discussed in our filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K
for the year ended December 31, 2002, and include, among other factors, our
substantial leverage, our ability to regain compliance with The Nasdaq SmallCap
Market continued listing standards, the timely development and market
acceptance of products and technologies and competitive market conditions.

Inflation

We do not believe that inflation has had a material effect on our results
of operation. There can be no assurance, however, that our business will not be
affected by inflation in the future.




Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk from exposure to changes in interest
rates based on our financing and cash management activities. Our exposure
relates primarily to our long-term debt obligations that expire in 2004 and
2006. In the event that interest rates associated with these debt obligations
were to increase 100 basis points, the annual impact on future cash flows would
be approximately $270,000.




Item 4.   Disclosure Controls and Procedures

Within
the 90 day period preceding the filing of this report, an evaluation was performed under the supervision and with the
participation of the Companys management, including the CEO and CFO, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures. Based on that evaluation, the Companys
management, including the CEO and CFO, concluded that the Companys disclosure
controls and procedures were adequate. Since the date of their
evaluation, there have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls.

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PART II  Other Information




Item 1.  Legal Proceedings

As a result of the merger with Towne, the Company assumed certain
outstanding litigation against Towne. Except for the lawsuits described below,
the Company is not currently a party to, and none of its material properties is
currently subject to, any material litigation other than routine litigation
incidental to its business.

In Re Towne Services, Inc. / Securities Litigation

As previously disclosed, Towne, two of its former officers and a current
officer are defendants in a securities class action lawsuit filed in November
1999 in the District Court of Georgia, Atlanta Division. The complaints
alleged, among other things, that Towne 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 Complaint seeks an
unspecified amount of damages. Towne and its officers answered, denying
liability. The parties reached a tentative settlement, which is subject to
certain conditions including court approval, and which is memorialized in a
Memorandum of Understanding signed January 17, 2003. Counsel for plaintiffs
agreed to dismiss all claims and release all defendants for a negotiated
settlement amount which will be funded by Townes directors and officers
insurance carrier and Towne. The settlement funds were placed in escrow on
February 21, 2003. Counsel for defendants estimate it will take a minimum of
six months for the court to approve the class-action settlement. The parties
also continue to pursue the question as to whether the carrier will also pay
the cost of defense, including the attorneys fees incurred by Towne, as
provided by the underlying insurance policy.

Edward H. Sullivan, Jr. and Lisa Sullivan v. Towne Services, Inc.

(Towne Services, Inc. as the successor to Banking Solutions, Inc., Bane
Leasing.Com, Inc., the successor to BSI Capital Funding, Inc., Moseley &
Standerfer, P.C., David R. Frank, Don G. Shafer, and Shannon W. Webb)

This lawsuit was the result of Townes acquisition of Banking Solutions,
Inc. (BSI) through a stock purchase made by its subsidiary, BSI Acquisition
Corp. This lawsuit was filed in December 1998 in the District Court of Collin
County, Texas. 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s subsidiary in the stock
purchase. Sullivan contends that Towne is liable to him as the successor to
BSI, and also for allegedly tortiously interfering with the agreement. Sullivan
also contends Towne conspired with the other defendants to misrepresent the
gross purchase price. The District Court of Collin County, Texas granted
Townes Motion for Summary Judgment on all claims. The Order was entered on
July 15, 2002. PBI has sought indemnification from the BSI shareholders for its
expenses in defending this action based on the provisions of the BSI stock
purchase agreement.

Towne Services, Inc. v. Clipper, et al.

As previously reported, Towne filed an action against six former BSI sales
representatives and The Clipper Group, a company founded by one or more of
former BSI sales representatives, on April 24, 2001 in the 277th

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District Court of Williamson County, Texas. Towne contends that the defendants
formed a competing company, and are marketing a competing product, to Townes
bank customers, in violation of the
named individuals employment contracts, and in particular, in violation of
trade secret and confidentiality provisions and non-solicitation of customer
and employee provisions contained in those contracts. The parties have reached
a settlement agreement in this matter, and executed the final settlement
agreement on September 30, 2002. The pending claims were dismissed by agreement
of the parties.

The Company is subject to various other legal proceedings, tax matters and
other claims which arise in the ordinary course of business. In the opinion of
management, the amount of any ultimate liability with respect to these actions
will not materially affect the financial position of results of operations of
the Company.




Item 4.  Submission of Matters to a Vote of Security Holders

The 2003 annual meeting of shareholders was held on May 28, 2003. At the
meeting, the election of Thomas L. Black as a Class 1 Director, the reelection
of Glenn W. Sturm as a Class 1 Director and the reelection of Gregory S. Daily
as a Class 1 Director were approved. Continuing directors consisted of: Class
2 directors Brian J. Conway, William B. King and Richardson M. Roberts; and
Class 3 directors Bruce R. Evans, Frank W. Brown and David B. Ingram. No other
matters were voted upon at the annual meeting.

The following table sets forth the voting tabulation for the matter voted
upon at the meeting:

BrokerVotes For
    
    Votes Withheld
    
    Abstentions
    
    Non-VotesElection of Class 1
Director Thomas L. Black
    
    
    9,240,718
    
    
    
    521,126
    
    
    
    0
    
    
    
    0Reelection of Class 1
Director Glenn W. Sturm
    
    
    9,310,815
    
    
    
    451,029
    
    
    
    0
    
    
    
    0Reelection of Class 1
Director Gregory S. Daily
    
    
    9,616,110
    
    
    
    145,734
    
    
    
    0
    
    
    
    0


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Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

3.1
    
    
    
    Amended and Restated Charter of the Company (incorporated by reference to
Exhibit 3.1 to the Companys registration statement on Form S-1)3.2
    
    
    
    Amended and Restated By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Companys registration statement on Form S-1)10.1
    
    
    
    Addendum to Employment Agreement with Henry M. Baroco dated April 15, 200310.2
    
    
    
    Asset Purchase Agreement between Private Business Insurance, LLC, Private
Business Inc. and InsurManager, LLC dated June 30, 200331.1
    
    
    
    Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certificate of CEO pursuant to 18 U.S.C. Section 1350, adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certificate of CFO pursuant to 18 U.S.C. Section 1350, adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002


(b) Reports on Form 8-K



| | 1. |  | A current report on Form 8-K was filed on May 15, 2003 to announce the Companys
March 31, 2003 financial results.
| | -- |  | ------------------------------------------------------------------------------------------------------------------

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Signatures

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

Private Business, Inc.
   (Registrant)Date:  August 11, 2003
    
    By:
    
    /s/ Henry M. BarocoHenry M. Baroco
Chief Executive OfficerDate:  August 11, 2003
    
    By:
    
    /s/ Gerard M. Hayden, Jr.Gerard M. Hayden, Jr.
Chief Financial Officer


26