<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                   FORM 10-K

[x]    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934 (Fee Required) for the fiscal year ended July 31, 1996, or

[ ]    Transition Report pursuant to Section 13 or 15(d) of the Securities
       Exchange act of 1934 (No   Fee Required) for the transition period from
       ____________ to ____________.

                         COMMISSION FILE NO.:  0-24420

                              PMT SERVICES, INC.
            (Exact name of registrant as specified in its charter)

          TENNESSEE                                        62-1215125
 (State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                       Identification No.)

   TWO MARYLAND FARMS, SUITE 200, BRENTWOOD, TN                    37027
     (Address of principal executive offices)                    (Zip Code)

     Registrant's telephone number, including area code:  (615) 254-1539
     
          Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of Each Exchange
           Title of Each Class                     on Which Registered
                 NONE                                      NONE
          Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK, $.01 PAR VALUE PER SHARE
                                (Title of Class)
                                        
   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  
                                              ----      ----

   Indicate by check mark if disclosure of delinquent filers pursuant 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 aggregate market value of the shares of Common Stock (based upon the
closing price of these shares in the over-the-counter market on October 11,
1996) of the registrant held by nonaffiliates on October 11, 1996 ($19.50 per
share), was $645,578,837.

   As of October 11, 1996, 33,106,607 shares of the registrant's Common Stock
were outstanding.
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
                                        
     Documents incorporated by reference and the part of Form 10-K into which
the document is incorporated:


     Portions of the Registrant's Proxy
     Statement Relating to the Annual
     Meeting of Shareholders to be held
      on December 16, 1996..........................Part III




                                       2
<PAGE>
 
                                    PART I

ITEM 1.   BUSINESS

GENERAL

   PMT Services, Inc. (the "Company") is an independent service organization
which markets and services electronic credit card authorization and payment
systems to merchants located throughout the United States.  The Company's
operating and growth strategies focus on expanding the Company's customer base
of small merchants through trade and other association affiliations,
telemarketing, merchant portfolio purchases and superior customer service.  PMT
has experienced rapid growth in its total merchant portfolio base which has
fostered significant growth in the Company's revenues and earnings.  From July
31, 1989 to July 31, 1996, the Company's merchant portfolio base increased from
approximately 6,800 merchants to approximately 89,500 merchants.  During this
same period, PMT's revenues increased from $4.3 million for fiscal year 1989 to
$149.8 million for fiscal year 1996.  This increase in revenues resulted
primarily from the purchase of merchant portfolios and, to a lesser extent, new
merchant contracts generated through the Company's marketing and sales efforts
and revenue enhancements with existing merchants.

   PMT targets small merchants as its primary customer base.  These merchants
generally have a low volume of credit card transactions, are difficult to
identify and have traditionally been underserved by credit card processors.
Management of the Company estimates that there are approximately 3.0 million
merchant locations in the United States currently accepting VISA and MasterCard
credit cards in the small merchant market segment and that approximately 2.0
million of such small merchant locations utilize electronic processing for
credit card transactions.  Management believes the small merchant market offers
the Company significant growth opportunities for (i) the "first time"
installation and subsequent servicing of credit card authorization and payment
systems and (ii) the conversion of small merchants currently accepting credit
cards from paper-based to electronic processing.

   PMT utilizes exclusive contractual relationships with trade associations,
distributors and wholesalers ("Associations") to reach small merchants that
would otherwise be difficult to identify and locate using customary marketing
practices.  Pursuant to these relationships, Associations endorse the processing
systems marketed and serviced by PMT and participate in originating new
customers for the Company.  Following introductions generated by its Association
relationships, PMT employs direct telemarketing to solicit merchants on a
nationwide basis.  Telemarketing represents an important element of the
Company's overall marketing strategy by affording the Company cost-effective
access to small merchants dispersed throughout the United States.  PMT is
augmenting its telemarketing efforts with a field sales force.  Through the use
of telemarketing and a field sales force, management believes the Company's cost
structures will continue to be competitive with the cost structures of its
competitors using only a field sales force as a result of the lower costs
associated with telemarketing.

   Since fiscal year 1991, the Company has acquired 24 merchant portfolios,
ranging in size from approximately 100 to 15,000 merchant accounts.  During
fiscal 1996, the Company purchased five merchant portfolios representing a total
of approximately 34,500 merchant accounts, generating approximately $3.3 billion
in aggregate annual charge volume.  Management believes increased competition in
the industry and other factors have pressured certain competitors to dispose of
all or a portion of their merchant portfolios.  As a result, management believes
many opportunities for portfolio purchases exist as the industry continues to
consolidate.  The Company's experience in making merchant portfolio purchases,
coupled with operating efficiencies, enhances the Company's ability to
successfully integrate purchased merchant portfolios on a cost-effective basis.


                                       3
<PAGE>
 

   PMT provides comprehensive customer service and support to its merchants
requiring consultative problem solving and account management.  Management
believes that providing cost-effective, reliable and responsive service is the
most effective long-term strategy to retain its merchant base. Through
internally generated sales of merchant accounts, purchases of merchant account
portfolios, retention of merchants and the increasing use and acceptance of
credit cards, management believes the Company has developed a stable and
recurring base of revenues.

INDUSTRY OVERVIEW

   The number of credit cards in use has grown dramatically since their
introduction over 40 years ago.  According to recent industry statistics, in
1994 there were approximately 746 million "general purpose" credit cards honored
by all types of merchants.  General-purpose cards were dominated by VISA and
MasterCard in 1995, the total number of cards in circulation increased by 43.1
million to 405 billion from 1994.  According to the Nilson Report, there are
currently over 7,000 financial institutions that issue VISA and MasterCard
credit cards in the United States.  Approximately $575 billion was charged to
VISA and MasterCard credit and debit cards in 1995, as compared with $80 billion
in 1983.  Despite this rapid growth, credit and debit card transactions
represented less than 20% of consumer spending in the United States in 1994 (the
majority of the remainder was either cash or check).  Today, consumers
increasingly expect to be able to use their credit cards in almost all purchase
transactions, regardless of merchant location, type or size, as credit card use
continues to incrementally displace cash and checks.  In addition, VISA and
MasterCard have aggressively attempted to increase the number of merchants
accepting credit cards as a method of payment.  According to industry
statistics, in 1995 there were approximately 3.3 million merchant locations that
accepted VISA and MasterCard credit cards as a method of payment.

   Electronic credit card transaction processing services encompass a variety of
functions including data capture, communication, authorization and settlement,
provided by several parties.  A typical transaction begins when a customer
presents a credit card to a merchant for payment.  The card is swiped through an
electronic terminal which has been placed with the merchant by a bank or a non-
bank service provider, such as PMT.  The cardholder's purchase is electronically
authorized by the issuing bank.  Simultaneously, pertinent data relating to the
transaction are recorded electronically by the terminal and transferred to a
processing bank where the data is stored for use in settlement and client
reporting.  Both the authorization and data capture functions of the terminal
involve transmissions of data via an electronic network.  The processing bank
transmits the total merchant charge to the card issuing institution through the
VISA and MasterCard credit card associations and arranges for funds to be
transferred to the merchant's bank.  The merchant's account is credited with the
full retail purchase amount, generally within 24 to 72 hours, and the card
issuer then enters the transaction on the cardholder's monthly statement.

   Historically, the larger acquiring banks have marketed credit card processing
services to national and regional merchants, not emphasizing small merchants
with a low volume of transactions, as small merchants are often difficult to
identify and expensive to service.  This created an opportunity for non-banks,
including independent service organizations such as PMT, that recognized the
business potential of providing electronic processing to these small merchants.
Management estimates that there are approximately 3.0 million small merchant
locations nationwide accepting VISA and MasterCard credit cards, only
approximately 2.0 million of which process transactions electronically.


                                       4
<PAGE>


   The transaction processing industry has undergone rapid consolidation over
the last several years with the three largest acquirers controlling almost 50%
of the market share.  The costs to convert from paper-based to electronic
processing, merchant requirements for improved customer service and the demands
for additional customer applications have made it difficult for some community
and regional banks and independent service organizations to remain competitive.
Many of these providers are unwilling or unable to invest the capital required
to meet those evolving demands, and are leaving the transaction processing
business or otherwise seeking partners to provide transaction processing for
their customers. Despite this ongoing consolidation, the industry remains
fragmented with respect to the number of entities providing merchant services.
In 1994, although the ten largest bankcard processors accounted for
approximately 62.1% of the total charge volume processed, there were over 400
additional registered service providers marketing and selling transaction
processing services to merchants. Management believes that these factors will
result in continuing industry consolidation over the next several years.

 
OPERATING STRATEGY

   As of July 31, 1996, the Company serviced approximately 89,500 merchant
accounts.  The following are the primary elements of the Company's operating
strategy:

   Focus on Small Merchants.  PMT has focused its marketing efforts on small
merchants which have traditionally been underserved by processing banks.
Management believes it understands the unique characteristics of this market
segment and has tailored its marketing and servicing efforts accordingly.  The
Company is able to provide electronic processing systems at rates that generally
are lower than those available from small local processing banks as a result of
its transaction volume.  See "Merchant Services."
 
   Create Association Relationships. PMT utilized exclusive contractual
relationships with Associations to reach small merchants that would otherwise be
difficult to identify and locate using customary marketing practices.  Pursuant
to these relationships, Associations endorse the processing systems marketed and
serviced by PMT and participate in originating new customers for the Company.
PMT's endorsement by local, state and national Associations are a continuous
source of leads for its telemarketing solicitation efforts.  PMT is currently a
party to 177 Association endorsement contracts.  Based upon information provided
by the Associations with which the Company has a relationship, management
believes these Associations represent approximately 990,000 merchants.

   Minimize Marketing Expense.  Using the leads generated by its Association
relationships, PMT employs direct telemarketing to solicit merchants on a
nationwide basis.  Management believes  telemarketing is uniquely suited to the
small business segment of the market because telemarketing, when combined with
Association relationships and a field sales force, provides the Company with a
cost-effective means of contacting small merchants that traditionally have been
difficult to reach.

   Deliver Customer Service Support.  Management believes providing cost-
effective, reliable and responsive service is the most effective long-term
strategy to retain its merchant base.  The size of the Company's merchant base
enables it to support a customer service program designed to provide
consultative problem solving and account management.  PMT is continuing to
upgrade its customer service information systems by installing new hardware and
creating proprietary software application to further enhance the customer
service it provides and to accommodate future growth.

   Increase Operating Efficiencies.  Currently, the Company outsources its
processing and network services from third parties which have excess capacity
and the expertise to handle the Company's needs. 


                                       5
<PAGE>


Management believes because its merchant base generates significant transaction
volume in the aggregate, the Company has been able to negotiate competitive
pricing from its processing and network providers at prices below what the
Company would experience to build and support these systems internally. The
Company has achieved significant reductions in certain operating expenses
through operational efficiencies, economies of scale and improved labor
productivity. The Company intends to outsource processing and network services
as long as it is economically more attractive than to develop and support these
services within the Company allowing management to focus on its core business of
sales, marketing and customer service.
 
   Maintain a Stable and Recurring Revenue Base.  Through merchant retention and
increased credit card use, the Company has developed a stable and recurring base
of revenues.  In addition to its high customer service level, the Company's
endorsements from Associations provide an additional link to its merchants that
tends to reduce attrition.  Furthermore, management believes that the low
transaction volume of its individual merchants make them less likely to change
providers because of the up-front costs associated with a transfer.


GROWTH STRATEGY

   The Company's growth strategy is to pursue internal growth through its
internal marketing venues and to acquire complementary merchant portfolios.
Through the use of direct telemarketing solicitation and a field sales force,
PMT obtains new merchant accounts by offering merchants a more competitive
discount rate and by offering better levels of service than those obtainable
from other sources, particularly  local banks.  In addition to increasing its
penetration of the small merchant segment, management intends to continue the
Company's growth through purchases of merchant portfolios from banks and other
independent service organizations, assuming adequate financing and acceptable
transaction terms are achieved.  From fiscal year 1991 through fiscal year 1996,
the Company has successfully acquired 24 merchant portfolios ranging in size
from approximately 100 to 15,000 merchant accounts.  Management believes
portfolio acquisitions will continue to be an attractive source of new
customers.  The Company's efforts have historically been focused on identifying
small merchant portfolios that typically are electronically processed and
average approximately 2,000 merchants, although the Company has made and is
focusing on acquisitions of substantially larger merchant portfolios.


MARKETING

   The Company's marketing strategy is to solicit prospective merchants
primarily through the Company's Association marketing program.  The Company
initiated its Association marketing program in 1988, and currently has entered
into exclusive marketing arrangements with 177 Associations.  Under these
arrangements, PMT obtains the exclusive endorsement of the Association and
receives initial and ongoing marketing assistance from the Association to its
members.  The Company's telemarketing force places calls to merchants whose
names and telephone numbers are obtained through its Association relationships.
If a merchant expresses an interest in the system, the telemarketer arranges for
the merchant to receive additional information regarding the system.  If the
merchant agrees to utilize the system, the telemarketer assists the merchant in
completing the appropriate paperwork which is forwarded to a processing bank for
review and acceptance.  As part of this review, an outside agency may be
utilized to inspect the merchant location, inventory and signage to confirm the
business is an active, going concern.  PMT typically pays referral compensation
to the Associations in exchange for the continuing endorsement of PMT's
services.


                                       6
<PAGE>
 
The average term of the Company's marketing arrangements with Associations is
three years and most of the agreements provide for automatic renewals for
additional one-year periods.

   According to information provided by the Associations with which the Company
has a relationship, management believes such Associations represent
approximately 990,000 merchants.  Based on estimates of the total market size of
these Associations and the current number of accounts served by the Company, the
Company's penetration into this market as of July 31, 1996 was approximately
1.9%.

   The Company views pricing as the most important component of its marketing,
and believes it offers competitive pricing in the markets it serves.  The
Company usually charges a one-time, negotiated set-up fee. The Company also
negotiates a specific discount rate and various fees, within the terms of the
Company's processing agreements, based on the number of transactions and
aggregate dollar amounts of the transactions processed through the card reading
terminal.


PORTFOLIO ACQUISITIONS

   The Company expects to continue to acquire selected merchant portfolios that
complement the Company's existing customer base of small merchants.  The Company
performs an extensive review of the cash flow characteristics of each portfolio,
the types of business conducted by and credit status of the merchants in the
portfolio, the Company's ability to control attrition of the portfolio and the
opportunities the portfolio provides for revenue enhancement and cost reduction.
The Company determines a valuation of each portfolio-acquisition opportunity
based on a combination of these factors.

   Management believes the consolidation activity in the transaction processing
industry offers the Company many opportunities for portfolio purchases.  The
Company's experience in completing merchant portfolio purchases, coupled with
operating efficiencies, should enhance the Company's ability to successfully
integrate purchased merchant portfolios on a cost-effective basis.  Smaller
independent service organizations are the Company's primary source of portfolio
acquisitions.  Typically these service organizations have built portfolios to
the limits of their servicing capabilities, are facing increasing competitive
pressures from larger, lower cost providers and/or are seeking additional
liquidity.  In certain instances, the Company has completed multiple
acquisitions of merchant portfolios from the same independent service
organizations, a trend which the Company expects to continue.  Another source of
portfolio acquisitions are commercial banks which, in an effort to lower their
internal overhead, often sell or outsource their credit card servicing
operations, creating the opportunity for buyers to acquire the existing merchant
portfolio.  Often, the small-merchant portion of these portfolios is viewed as
being unattractive by acquiring banks or third-party processors and can be
acquired at favorable terms.  Management believes the portfolio acquisition
market will continue to be an attractive source of new customers in the future.
Since fiscal year 1991, the Company has acquired 24 merchant portfolios, ranging
in size from approximately 100 to 15,000 merchant accounts.

 
RECENTLY COMPLETED ACQUISITIONS

   In March 1996, PMT purchased a merchant portfolio consisting of approximately
15,000 merchant accounts with approximately $1.4 billion in annual credit card
charge volume from UMB Bank, n.a. ("UMB").


                                       7
<PAGE>
 
   In April 1996, PMT purchased a merchant portfolio consisting of approximately
7,000 merchant accounts with approximately $300 million in annual credit card
charge volume from Bankcard America, Inc., an Illinois corporation doing
business as American Bankcard Center ("ABC").  This acquisition represented the
sixth merchant portfolio purchased by the Company from ABC.

   In July 1996, PMT purchased two merchant portfolios from two independent
service organizations consisting of an aggregate of approximately 7,500 merchant
accounts and approximately $1 billion in annual credit card charge volume.  The
larger of the two acquisitions was accounted for as a pooling of interests.

   Effective August 1996 PMT purchased three merchant portfolios consisting of
approximately 13,500 accounts with approximately $968 million in annual credit
card charge volume.  One of these was accounted for as a pooling of interests.


PROCESSING RELATIONSHIPS

   PMT markets and services electronic credit card authorization and payment
systems pursuant to contractual relationships with processing banks that are
members of VISA and MasterCard.  Under such contractual relationships, PMT's
processing banks process merchant credit card transactions pursuant to
contracts,  the terms of which have been negotiated by PMT (or certain other
independent service organizations from whom PMT has acquired merchant
portfolios) and approved by the processing bank.  PMT's processing banks
withhold from the merchants a discount rate and various fees for the processing
of each credit card transaction.  From PMT's discount rate revenues, amounts are
paid to the issuing bank, the network service provider, VISA or MasterCard and
to the processing bank.

   Generally the Company's agreements with processing banks contain aspects of
both marketing and service.  The marketing portions of the agreements permit PMT
to originate new merchants which then enter into contractual agreements with the
processing banks for processing of credit card transactions.  The service
portion of the agreements permits PMT to provide appropriate service (including
terminal programming and shipping, employee training, equipment supply and
repair and operational support) to the merchants solicited to process on the
processing banks' systems.  Although the marketing portion of the agreements is
limited as to time, the service portion of these agreements is not.
Accordingly, PMT has a right to continue to receive revenues from these
processors, notwithstanding termination of the marketing portion of the
processing agreements, so long as the merchant processes through the PMT
processing bank's system, PMT provides appropriate service to the merchant and
PMT otherwise remains in compliance with the agreement.  Under the terms of
PMT's agreement with its principal processing bank, PMT is permitted to transfer
merchants to another processing bank, subject to the payment of termination
fees.  See "Agreements with Processing Banks."


AGREEMENTS WITH PROCESSING BANKS

   As of July 31, 1996, the Company relied on eleven banks to process the credit
card transactions of PMT's clients.  At that date, the Company's agreement with
its principal processing bank, First National Bank of Omaha ("FNBO"), applied to
approximately 51.8% of the Company's aggregate merchant base.  While the
marketing portion of the Company's processing agreements expires at various
times between 1996 and 2002, these agreements provide for the Company to
continue to receive revenues as long as the merchants subject to the agreement
process credit card transactions with the banks, PMT provides the


                                       8
<PAGE>
 
appropriate service to the merchants and PMT otherwise remains in compliance
with the terms of the agreement. Under the FNBO agreement, the Company bears
liability for all unfulfilled chargebacks. The Company either shares with its
other processing banks or bears fully the liability for any cardholder
chargebacks for which merchants solicited by PMT do not accept responsibility,
and PMT is fully liable for any losses caused by PMT's negligence or wrongful
acts. Each of the Company's processing agreements may be terminated by either
party in the event of default of obligations, insolvency or receivership, or
failure to make payments when due or to abide by the rules and regulations of
VISA and MasterCard.

   FNBO Agreement. The Company first entered into a direct marketing and service
relationship with FNBO in September 1989. PMT's current agreement was entered
into as of March 1, 1994, and is effective through 2002. FNBO is the primary
processing bank for which PMT, on a non-exclusive basis, solicits and services
merchants. At July 31, 1996, FNBO provided processing services for approximately
51.8% of the Company's total merchant base at that date.

   The agreement provides PMT the right, at any time upon giving notice, to
transfer merchant contracts to other processors.  In order to do so and
depending upon the status of the merchants, PMT must pay FNBO a termination fee
based on merchant transaction volume and/or the number of merchant locations
calculated at the time of termination.

   Other Processing Agreements.  At July 31, 1996 the Company's ten other
processing banks provided processing services for approximately 48.2% of the
Company's total merchant base at that date.  Under processing agreements with
four of such processing banks, PMT solicits, on a non-exclusive basis, merchants
to process transactions with the processing banks.  PMT has the unilateral right
to transfer merchants to other processors under arrangements with six of the ten
processing banks.

NETWORK SERVICES

   Networks provide an electronic connection or pathway between the merchant and
PMT's processing bank and are paid a fixed amount per transaction.  All
appropriate parties receive pertinent information from merchants via the
networks.  PMT's relationships with its processing banks enable it to negotiate
directly with network service providers to obtain volume discounts for network
services.  Currently, management believes that it is economically more
attractive to outsource network services than to develop and support these
services within the Company.

DISCOUNT RATE AND FEES

   The primary source of revenue for PMT is the discount rate paid by the
merchant for each credit card transaction processed for that merchant.  In
addition to revenues derived from the discount rate, the Company receives
periodic fees from most of its merchants for providing various services which
are reflected in the table below as "Average Fees per Transaction."  See
"Merchant Services."  The discount rate and fees are negotiated by the Company,
within the terms of the Company's processing agreements, with each of the
merchants to which the Company provides services.  PMT contracts with third
parties to provide a portion of the services to the merchant, including
communication networks, transaction processing and monthly preparation of
detailed merchant statements.  Additionally, PMT complies with the pricing
structures established by VISA and MasterCard associations for the interchange
fee paid to the retail consumers' card-issuing banks and the associations' fees.
The primary costs incurred by PMT in delivering its services to the merchants
are:  (i) an interchange fee paid to the card-issuing bank which is set by the
VISA and MasterCard associations and which is calculated as a percentage of the
transaction amount, (ii) a fee calculated as a percentage of the transaction
amount that is paid to the VISA or

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<PAGE>
 
MasterCard association which is established by the member banks of the VISA and
MasterCard associations, (iii) a fixed, per-transaction fee paid to the network
service provider which is negotiated between PMT and the network service
provider and (iv) a fixed, per-transaction fee paid to the processing bank which
is negotiated between PMT and the processing bank. Management believes, based on
information received from the Company's merchant customers, that the range of
discount rates offered by other service providers is approximately 1.4% to 4.0%.
The discount rates offered by the Company are within this range. The following
table illustrates a hypothetical $100 VISA or MasterCard transaction in which
the merchant discount rate is 2.0%.

<TABLE>
<CAPTION>
 
                                                          Method
                                    Allocation       of Determination         Established By
                                    -----------  -------------------------  -------------------
<S>                                 <C>          <C>                        <C>
 
Purchase Amount...................  $ 100.00
To Merchant.......................    (98.00)
                                      ------
Discount Rate.....................    $ 2.00     Percentage of Transaction   PMT/Processing Bank
Average Fees per Transaction......       .09     Various                     PMT/Processing Bank
                                      ------
PMT's Revenue.....................    $ 2.09
PMT's Cost of Revenue:
  To Card-Issuing Bank............     (1.33)    Percentage of Transaction   VISA/MasterCard
  To VISA/MasterCard Association..      (.09)    Per Transaction             VISA/MasterCard
  To Network Service Provider.....      (.08)    Per Transaction             PMT/Processing Bank
  To Processing Bank..............      (.05)    Per Transaction             PMT/Processing Bank
                                      ------
Gross Transaction Margin..........    $  .54
                                      ======

</TABLE>

   The Company's average VISA or MasterCard transaction size for the fiscal year
1996 was approximately $81.00.  Excluding the UMB acquisition, the average
transaction size for fiscal 1996 was $96.00.

   The Company recognizes as revenue in its statement of income the full
discount rate collected from the merchant (i.e., the $2.00 in the above example)
and various fees associated with servicing merchant accounts.  Also, the various
costs incurred by the Company listed above (i.e., amounts paid to the card-
issuing bank and network provider) are reflected as costs of revenues.  In most
cases, in accordance with PMT's contracts with its processing banks, the funds
collection and disbursement function for each of the items listed above is
performed on behalf of PMT by the processing bank.  At month end, the processing
bank collects the total discount rate and various fees from the merchants and
disburses to each of the service providers its fees, except for the interchange
fee paid to the card-issuing bank for which the disbursements are made daily.
Shortly after month end, the processing bank disburses to PMT the remainder of
the funds collected from the merchant (effectively, PMT's gross transaction
margin or the $0.54 in the above example).

   Although the Company's revenues reflect the full discount rate and various
fees collected, the cash flow statement is prepared using the "direct method" as
provided in Statement of Financial Accounting Standards No. 95, "Statement of
Cash Flows," and reflects cash received from merchants at the net amount
collected because the cash flows received by the Company from processing banks
are net of the amounts disbursed to the other parties described above (i.e., the
$0.54 in the above example).  The cash flow statement presentation follows the
actual flow of funds to the Company.

   Several factors can alter the profitability to PMT for merchant transactions.
Primarily, these include (i) improper use of the card reading terminal by the
merchant resulting in higher interchange fees paid to the card-issuing bank,
(ii) lower than anticipated average dollar sales of credit card transactions
thereby reducing the Company's gross transaction margin because many of the
transaction costs are fixed, (iii) losses incurred as a result of customer
chargebacks (PMT can be required to absorb the full retail purchase 


                                       10
<PAGE>

amount), (iv) the inability to collect the discount rate because of insufficient
funds in the merchant's bank account, (v) merchant fraud and (vi) excessive
volume of customer return transactions in which the Company again incurs all
transaction costs except interchange fees.


MERCHANT CLIENTS

   The Company serves a diverse portfolio of small merchant clients, primarily
in the automotive, restaurant and general retail industries.  Currently, no one
customer accounts for more than 7.0% of the Company's charge volume.  This
client diversification has contributed to the Company's growth despite the
varying economic conditions of the regions in which its merchants are located.
 
   Merchant attrition is an expected aspect of the credit card processing
business.  The rate of merchant attrition as measured by the Company's primary
processing bank, for the period January 1, 1995 through December 31, 1995
approximated 1.1% per month of total merchants' annual charge volume.
Historically, the Company's attrition has related to merchants going out of
business, merchants returning to local processing banks or merchants
transferring to competitors for rates the Company was unwilling to match.

   Merchant fraud is another expected aspect of the credit card processing
business.  Generally, the Company is responsible for fraudulent credit card
transactions of its merchants.  Examples of merchant fraud include inputting
false sales transactions or false credits.  The Company and its processing banks
monitor merchant charge volume, average charge and number of transactions, as
well as check for unusual patterns in the charges, returns and chargebacks
processed.  As part of its fraud avoidance policies, the Company generally will
not process for certain types of businesses which provide future services
wherein incidents of fraud have been common.  In fiscal year 1995 and fiscal
year 1996, the Company did not experience material losses related to merchant
fraud.  Generally, the Company is not responsible for cardholder fraud.  The
Company evaluates its risks and estimates the potential loss for chargebacks and
merchant fraud based on historical experience.  A provision for these estimated
losses is provided in the same period as the related revenue.  Subsequent actual
fraud losses are charged against the reserve.


MERCHANT SERVICES

   Management believes providing cost-effective, reliable and responsible
service is the most effective method of retaining merchant clients.  The Company
maintains personnel and systems necessary for providing such services directly
to merchants and has developed a comprehensive program involving consultative
problem solving and account management.  The Company maintains a department of
customer service personnel available 24-hours a day to respond to inquiries from
merchants regarding terminal, communication and training issues.  Service
personnel provide terminal application consultation by telephone and regularly
reprogram terminals via telephone lines to accommodate particular merchant needs
regarding program enhancements, terminal malfunctions and VISA and MasterCard
regulations.  In addition, merchants may obtain direct, personal assistance in
reconciling network and communications problems, including problems with network
outages and local phone company services.  The Company has an ongoing program to
further enhance the customer service it provides and to accommodate future
growth of the Company's merchant base.  In connection with upgrading the
Company's customer service information system, the Company will continue to
purchase new hardware and software.  In addition, the Company's commitment to
providing comprehensive services includes the expansion of check guarantee and
debit services to merchants as such technology continues to develop.


                                       11
<PAGE>
 
   The Company may sell or lease a credit card terminal to its merchant
customers.  The Company offers leases with an initial term of 12 months that are
automatically renewable on a month-to-month basis thereafter.  The Company's
terminals are "down-loadable," meaning additional services, such as
authorization or payment services for additional credit cards, can be installed
in the terminal electronically from the Company's offices without the necessity
of replacement equipment or an on-site installation visit.  Additionally,
peripheral equipment such as pin pads and printers can easily be forwarded to
the merchants upon request.  The Company also loans, tests and ships point-of-
sale terminals directly to merchant locations, and provides complete repair-or-
replacement services for malfunctioning terminals.  Generally, the Company can
arrange for delivery of replacement terminals by overnight courier.

COMPETITION

   The market for placing and maintaining electronic credit card authorization
and payment systems with retail merchants is highly competitive.  The Company
competes in this market on the basis of price, quality of customer service,
support and availability of additional features.  Management believes merchants
initially select a processing service provider primarily based on price and
elect to sustain the relationship based on a combination of service and price.
See "Marketing".

   Industry participants have elected to sell, merge or form strategic alliances
in recent years which has prompted many small independent service organizations
and other providers to examine these such options.

   The Company's principal competitors are local banks.  The Company also
competes with larger, vertically-integrated transaction processors as well as
numerous competitors that provide certain merchant services while using third
parties for network and other services.  In addition, the Company competes with
large regional and national banks that have internal sales forces and/or have
developed relationships with independent service organizations that are
competitors of the Company.  Management believes that by utilizing PMT's
Association relationships to focus its telemarketing solicitation efforts
supplemented by its field sales force, the Company has a competitive advantage
versus competitors relying solely on direct sales forces in establishing and
maintaining primary relationships with the underserved, small merchant segment
of the market.

   Larger, more fully integrated companies may penetrate PMT's segment of the
market.  Moreover, many of the Company's competitors have access to significant
capital, management, marketing and technological resources are greater than
those of the Company, and there can be no assurance the Company will continue to
be able to compete successfully with banks, other transaction processors and
merchant service providers.


EMPLOYEES

   As of July 31, 1996, the Company had approximately 330 full-time employees,
consisting of 43 telemarketers, nine new merchant sales support personnel, 174
customer service personnel, 38 management and administrative personnel, and 66
field sales representatives.  The internal growth of the Company's business will
depend upon its ability to attract productive telemarketing sales personnel and
sales representatives.


                                       12
<PAGE>

ITEM 2.  PROPERTIES

   In the second quarter of fiscal year 1995 the Company moved its office
facilities to provide adequate space and effective July 1, 1995 leased
additional space in this new office facility from Highwoods/Forsyth Limited
Partnership (Successor-in-interest to Eastpark, L.P.).  The lease agreement and
its amendments provide for a monthly rental of $34,898 through December 31,
1997, and $39,941 per month from January 1, 1998 through December 31, 2000.
Prior to the Highwoods/Forsyth lease agreement, the Company leased office space
from a partnership comprised of two of the Company's executive officers.  This
office space lease agreement terminated in 1995 when the Company relocated.

   Effective October 1, 1996 the Company has leased additional office space from
Centoff Realty Company, Inc., a Delaware Corporation.  The lease and its rider
provide for monthly rental of $24,056 from October 1, 1996 through September 30,
1997, $25,016 per month from October 1, 1997 through September 30, 1998, $26,016
per month from October 1, 1998 through September 30, 1999, $27,057 per month
from October 1, 1999 through September 30, 2000 and $28,140 per month from
October 1, 2000 through December 31, 2000.

   Management believes these arrangements and other available space are adequate
for the Company's current uses and anticipated growth.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is a defendant in a lawsuit styled Glenn Francis, et al. v.
BankCard America, Inc., PMT Services, Inc., d/b/a/ U.S. BankCard, et al., Docket
No. 93-C5510, which is pending in the U.S. District Court for the Northern
District of Illinois.

         The claim relates to the plaintiffs' relationship with defendant
BankCard America, Inc. The plaintiffs claim that they established certain
merchant accounts from which they were entitled to receive residual income.
BankCard America, Inc. ("BankCard") terminated its relationship with the
plaintiffs. The Company subsequently purchased a merchant portfolio from
BankCard that included the disputed merchant accounts. In connection with this
purchase, BankCard made various representations and warranties with respect to
its right to sell the portfolio and agreed to indemnify the Company for any
breach of those representations and warranties. This disputed purchase is one of
six purchases of portfolios made by the Company from BankCard or its affiliates
since 1989. A summary of the litigation to date is set forth below.

         The lawsuit was filed on September 9, 1993, against BankCard and
certain of its affiliates alleging, among other claims, violations of the
Racketeering Influenced and Corrupt Organizations Act (RICO). On November 3,
1994, the court dismissed the RICO counts with prejudice.

         The Company was initially named as a defendant on August 30, 1995.  The
lawsuit currently purports to allege acts of fraud, misappropriation and unjust
enrichment, but not RICO violations.  The plaintiffs claim actual damages in the
amount of $162,000 plus costs and attorneys' fees and punitive damages in the
amount of $500,000 against certain defendants other than the Company.  With
respect to the Company, the plaintiffs seek to void the sale of the merchant
accounts in dispute.

         On February 5, 1996, the U.S. District Court for the Northern District
of Illinois ruled against the principals of BankCard in a separate case
(BankCard America, Inc. v. Universal BankCard Systems, 


                                       13
<PAGE>
 
Inc., Docket No. 93-C-1969, U.S. District Court, Northern District of Illinois.)
In that case, which the plaintiffs now claim is related to the case pending
against the Company, a treble damages jury awarded in the amount of $6.69
million based on RICO violations was awarded against the individual defendants.
The Company was not a party to that lawsuit. The judgment is currently on
appeal.

         Based on their success in this other case, on March 15, 1996, the
plaintiffs requested permission to allege various violations of RICO.  The
plaintiffs now seek to name the Company as a defendant to the RICO claims.  If
permission is granted by the court, plaintiffs will seek actual damages of at
least $800,000 from all defendants.  If a violation under RICO is established, a
defendant could be subject to three times the amount of actual damages.  The
Company is awaiting a ruling from the court on its motion to dismiss all claims
asserted against it.

         Management believes that the Company has valid defenses to the RICO and
other claims made against it.  The Company intends to vigorously defend all
claims made against it.  Based on the status of the litigation to date and the
facts currently known to the Company, management does not believe that the
allegations in the lawsuit will have a material adverse effect on the business
or financial condition of the Company.


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

         No matter was submitted to a vote of shareholders during the fourth
         quarter of fiscal 1996.

                                       14
<PAGE>
 
                                    PART II

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

   The Company's Common Stock is quoted on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol PMTS.  The following
table sets forth the range of high and low sales prices on the Nasdaq National
Market for the period from August 12, 1994, through July 31, 1996, as reported
by the Nasdaq National Market:
<TABLE>
<CAPTION>
 
      1996                High    Low
      ----                ----    ---- 
<S>                      <C>     <C>
First Quarter..........  $ 9.25  $ 5.75
Second Quarter.........   13.42    8.46
Third Quarter..........   20.08   11.50
Fourth Quarter.........   28.75   17.50
 
      1995
      ----       
 
First Quarter..........   $3.75  $ 2.67
Second Quarter.........    3.50    2.58
Third Quarter..........    4.63    3.17
Fourth Quarter.........    6.58    4.42
</TABLE>

   The stock prices above have been adjusted to give retroactive effect to the
Company's stock splits.  The stock split for shareholders of record on December
14, 1995 was a two-for-one stock split effected in the form of a stock dividend.
The stock split for shareholders of record on May 28, 1996 was a three-for-two
stock split effected in the form of a stock dividend.

   Based on the distribution of the Company's search cards, as of October 8,
1996, there were approximately 8,100 shareholders of the Company's common stock
including, 210 record holders.

   The Company currently intends to retain all earnings to finance the
development and expansion of its operations and, therefore, does not anticipate
paying cash dividends or making any other cash distributions on its shares of
Common Stock in the foreseeable future.  The Company's future dividend policy
will be determined by its Board of Directors on the basis of various factors,
including the Company's results of operations, financial condition, business
opportunities and capital requirements.  The declaration of cash dividends is
currently prohibited by the Company's bank credit facility.

ITEM 6.   SELECTED FINANCIAL DATA

   The following table sets forth selected financial data which have been
derived from the Company's audited financial statements for each of the five
years in the period ended July 31, 1996.  The Company's financial statements as
of July 31, 1995 and 1996 and for each of the years in the three-year period
ended July 31, 1996 are included elsewhere herein.  The data set forth below
should be read in conjunction with the Financial Statements, the Notes thereto
and other financial information included elsewhere herein.

                                       15
<PAGE>
 
                                      Year Ended July 31,
                         ----------------------------------------------
                         (in thousands, except per share and other data)
<TABLE>
<CAPTION>
 
                                         1992      1993      1994      1995       1996
                                         ----      ----      ----      ----       ----
<S>                                     <C>       <C>       <C>       <C>       <C>    
 
STATEMENT OF OPERATIONS DATA:
  Revenues (1)........................  $29,524   $35,571   $61,196   $89,007   $149,840
  Cost of revenues....................   23,953    28,555    48,367    68,197    115,652
                                        -------   -------   -------   -------   --------
  Gross margin........................    5,571     7,016    12,829    20,810     34,188
  Selling, general & administrative
    expenses..........................    3,951     4,295     6,393    10,541     14,663
  Depreciation and amortization.......      472       512     1,648     3,518      7,509
  Provision for merchant losses.......       52       270       485       483        655
  Stock award compensation............      281       281       240       241          0
                                        -------   -------   -------   -------   --------
 
  Income from operations..............      815     1,658     4,063     6,027     11,361
  Interest expense, net...............      210       113       384       (46)    (1,741)
  Other income, net...................        0         0         0         0        704
                                        -------   -------   -------   -------   --------
  Income before provision for
    taxes, extraordinary item and
    change in accounting principle....      605     1,545     3,679     6,073     13,806
  Provision for income taxes..........      330       589     1,400     2,433      5,181
                                        -------   -------   -------   -------   --------
  Income before extraordinary item
    and change in accounting
    principle.........................      275       956     2,279     3,640      8,625
  Net income (2)......................  $   588   $ 1,545   $ 2,592   $ 3,640   $  8,625
 
PER SHARE INFORMATION:
  Income before extraordinary item
    and change in accounting
    principle.........................  $  0.02   $  0.07   $  0.18   $   0.17  $   0.30
  Extraordinary item - net operating
    loss carryforward.................     0.03      0.05      0.00       0.00      0.00
                                        -------   -------   -------   --------  --------                       
  Income before change in
    accounting principle..............     0.05      0.12      0.18       0.17      0.30
  Cumulative effect of change in
    accounting principle..............     0.00      0.00      0.02       0.00      0.00
                                        -------   -------   -------   --------   -------
  Net income per share................  $  0.05   $  0.12   $  0.20   $   0.17   $  0.30
                                        =======   =======   =======   ========   =======                          
  Weighted average shares
    outstanding.......................   12,725    12,808    13,008    20,940     28,539
 
 
                                                            July 31
                                                            -------
 
                                           1992      1993      1994      1995       1996
                                        -------   -------   -------   -------   --------
 
BALANCE SHEET DATA:
  Working capital                       $   183   $   198   $(8,926)  $  (634)  $106,728
   Total assets                           4,964     6,910    27,171    52,247    186,792
   Long-term debt, less current
      portion.........................    1,167       785     4,479    16,670        575
  Total shareholders' equity
    (deficit).........................   (2,432)     (737)    2,468    29,697    179,355
</TABLE>
__________________________
(1) Revenue increased for fiscal years 1992 through 1996 primarily from the
    purchase of merchant portfolios and, to a lesser extent, new merchant
    contracts generated by the Company and fee enhancements with existing
    merchants.
(2) Net income for fiscal years 1992 and 1993 has been increased through the
    utilization of net operating loss carryforwards of  $314,054 and $589,471,
    respectively, the benefits of which have substantially or completely offset
    the provision for income taxes.  For the fiscal year ended July 31, 1994,
    net income has been increased by $312,800 for a change in accounting
    principle relating to income taxes.

                                       16
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following is a discussion of certain factors affecting the
Company's results of operations for each of the three fiscal years in the period
ended July 31, 1996 and its liquidity and capital resources. This discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere herein.

Overview

         PMT Services, Inc. is an independent service organization which markets
and services electronic credit card authorization and payment systems to retail
merchants located throughout the United States. The Company's principal sources
of revenues are discount and merchant service fees. The remaining revenues
consist of rentals, commissions and sales relating to credit card processing
equipment and installation fees. The Company initiates the credit card
processing relationship with a merchant and negotiates a "discount rate" and
related fees, within the terms of the Company's agreements with processing
banks. The discount is a percentage of the dollar amount of each credit card
transaction.

         Revenues derived from the electronic processing of transactions are
recognized at the time the merchants' transactions are processed.  Revenues
related to the direct sale of credit card authorization equipment are recognized
when the equipment is shipped.  Fees related to both the direct sale and
marketing of this equipment are recognized when installation is completed.  Fees
received in advance of shipment or installation are deferred until realized.

Acquisitions and Mergers

         Since fiscal year 1991 through July 31, 1996 the Company has purchased
24 portfolios, ranging in size from approximately 100 to 15,000 merchant
accounts. The Company purchased five merchant portfolios in fiscal year 1994,
nine in fiscal 1995 and five merchant portfolios in fiscal year 1996.
Significant purchases are discussed further below.

         In April 1995, the Company purchased a merchant portfolio of
approximately 7,000 merchants from Bankcard America, Inc. ("ABC") for a purchase
price of $7.7 million. The Company paid $2.6 million in cash, issued a 3%
interest bearing note for $400,000 due May 1, 1995 and issued a $4.7 million
note bearing interest at 3% due July 1, 1995. The Company incurred direct costs
and expenses related to the purchase of the merchant portfolio of approximately
$1.3 million. The purchase agreement provided for additional consideration of
$2.5 million payable to the seller contingent upon the seller's ability to
negotiate the transfer of the merchant accounts, to the Company's primary
processing bank. In May 1995, an agreement was entered into providing for
transfer of the merchant accounts and pursuant to the terms of the purchase
agreement, the Company paid $2.5 million representing additional purchase price
for the merchant portfolio. Additionally, beginning June 1995, the Company's
amended processing agreement with its primary processing bank required a $1.5
million security deposit for a six month period as a result of the conversion of
other merchant portfolios to this processing bank. This deposit plus accrued
interest was returned to the Company in March 1996. A sum of $500,000 will


                                       17
<PAGE>

remain on deposit with this bank as long as the Company participates in the
bank's Association Marketing Agreement.
 
     In July 1995, the Company purchased two additional merchant portfolios of
approximately 10,500 merchant accounts for approximately $12.2 million.  The
Company purchased two portfolios, credit card equipment inventory, a merchant
lease portfolio and other office assets.

     The Company purchased a merchant portfolio from Imperial Bank consisting of
approximately 5,000 merchant accounts effective October 1, 1995.  The Company
paid approximately $8.7 million for the portfolio from proceeds of the Company's
second public offering.  In the third quarter of fiscal year 1996 the Company
purchased two merchant portfolios.  The Company purchased approximately 15,000
from UMB Bank, N.A. ("UMB") for a purchase price of $13.5 million effective
March 1, 1996.  Effective April 1, 1996 the Company purchased approximately
7,000 merchant accounts from Bankcard America, Inc. ("ABC") for a purchase price
of $6.3 million.

     In the fourth quarter of fiscal 1996 the Company acquired two merchant
portfolios consisting of approximately 7,500 merchant accounts.  The Company
accounted for the larger of these two acquisitions as a pooling of interests.
On July 1, 1996 the Company issued 594,019 shares of its common stock in
exchange for all of the outstanding common stock of Martin-Howe Associates, Inc.
("MHA").  The Company's consolidated financial statements have been restated to
include the accounts of MHA for all periods prior to the merger.

     The growth in the Company's revenues and profitability for fiscal years
1995 and 1996 has resulted largely from the purchase of merchant portfolios.
Future growth is dependent upon, among other factors, the Company's ability to
continue to consummate additional purchases of merchant portfolios.  See pro
forma operating results in Note 3 to the financial statements for information
relative to the potential effect of the acquisitions on the Company's
operations.  Management believes the pro forma operating results reflected in
Note 3 are not indicative of what would have occurred had the purchases been
made at the beginning of fiscal year 1994 or fiscal year 1995, or of results
which may occur in the future because the cost structures of the acquired
portfolios are not directly comparable to the Company's.


                                       18
<PAGE>
 

Results of Operations

     The following table presents, for the periods indicated, the percentage of
revenues represented by certain line items in the Company's statement of income:

<TABLE>
<CAPTION>
 
                                                                                      Period-to-Period Changes
                                                                                      ------------------------
                                                            Year ended July 31           Increase (Decrease)
                                                            ------------------        ------------------------
                                                                                      1995               1996
                                                                                       vs.                vs.
                                                        1994      1995       1996     1994               1995
       -------------------------------------------------------------------------------------------------------          
<S>                                                     <C>      <C>        <C>       <C>                <C>
       Revenues                                         100.0%   100.0%     100.0%    45.4%              68.3%
       Cost of revenues                                  79.0     76.6       77.2     41.0               69.6
                                                        -----    -----      -----
       Gross margin                                      21.0     23.4       22.8     62.2               64.3
       Selling, general and administrative expenses      10.5     11.8        9.8     64.9               39.1
       Depreciation and amortization                      2.7      4.0        5.0    113.5              113.5
       Provision for merchant losses                      0.8      0.5        0.4     (0.4)              35.5
       Stock award compensation                           0.4      0.3        0.0      0.8             (100.0)
                                                        -----    -----      -----
       Income from operations                             6.6      6.8        7.6     48.3               88.5
       Interest expense, (income) net                     0.6      0.0       (1.2)  (112.0)          (3,689.5)
       Other income, net                                  0.0      0.0        0.5      0.0              100.0
                                                        -----    -----      -----
       Income before provision for taxes and
        change in accounting  principle                   6.0      6.8        9.3     65.1              127.3
       Provision for income taxes                         2.3      2.7        3.5     73.8              113.0
                                                        -----    -----      -----
       Income  before change in accounting principle      3.7      4.1        5.8     59.7              137.0
       Cumulative effect of change in accounting
        principle                                         0.5      0.0        0.0   (100.0)               0.0
                                                        -----    -----      -----
       Net income                                         4.2%     4.1%       5.8%    40.4%             137.0%
                                                        =====    =====      =====
</TABLE>

Revenues

     Revenues increased from $61.2 million in fiscal year 1994 to $89.0 million
in fiscal year 1995 and $149.8 million in fiscal year 1996.  These increases
represent a 45.4% increase from fiscal year 1994 to fiscal year 1995 and a 68.3%
increase from fiscal year 1995 to fiscal year 1996.

     The increases in revenues for all periods presented resulted primarily from
the purchase of merchant portfolios and, to a lesser extent, new merchant
contracts generated through the company's telemarketing efforts and fee
enhancements with existing merchants.  The increases from fiscal year 1994 to
fiscal 1995 were primarily the result of the purchased merchant portfolios which
resulted in a 62.0% increase in revenues.  In fiscal year 1995, the Company
added approximately 21,000 merchant accounts through nine merchant portfolio
purchases and in fiscal 1996, the Company purchased five merchant portfolios
consisting of approximately 34,500 merchant accounts.  In July 1996, the Company
accounted for the purchase of approximately 6,000 merchant accounts as a pooling
of interests.  Acquisitions accounted for approximately 74.2% of the increase in
revenues in fiscal 1996.

Cost of Revenues

     Cost of revenues increased from $48.4 million in fiscal year 1994 to $68.2
million in fiscal year 1995 and $115.7 million in fiscal year 1996. These
increases represent a 41.0% increase from fiscal year 1994 to fiscal year 1995
and 69.6% increase from fiscal year 1995 to fiscal year 1996.


                                       19
<PAGE>
 
     The primary components of the Company's cost of revenues have generally
remained consistent as a percentage of revenues from fiscal year 1994 through
fiscal year 1996.  A majority of the Company's cost of revenues are fixed as a
percentage of each transaction amount, with the remaining costs being based on a
fixed rate applied to the number of transactions processed.  In fiscal year 1994
and fiscal year 1995 cost of revenues as a percentage of revenues decreased due
to the Company's increase in ancillary fee revenues received through merchant
portfolio purchases and merchant fee enhancements. In fiscal 1996, cost of
revenues increased as a percentage of revenues primarily due to significant
merchant acquisitions made late in fiscal 1996 which have a higher cost of
revenues as a percentage of revenues than those historically experienced by the
Company. This resulted from the Company assuming certain contractual obligations
which are less favorable than other existing agreements. In some cases, where
costs were initially higher than normal, the Company has been able to ultimately
lower the cost to deliver the services.

     The Company's cost of revenues as a percentage of revenues can be
significantly effected by the cost structures of acquired merchant portfolios.

     The remaining components of cost of revenues represent equipment sold and
rented, referral compensation paid to trade associations and other supplies and
service expenses. Referral compensation paid to associations, along with other
supplies and service expenses, increased in general proportion with the growth
in revenues from fiscal year 1994 through fiscal year 1996.

     From fiscal year 1993 to fiscal 1995 the cost of equipment sold and rented
declined as a percentage of total revenues from 1.3% to 0.8%.  This decrease was
the direct result of the growth in revenues, improved inventory management,
favorable pricing obtained through volume purchases and the decrease in rental
costs related to the purchase of rental terminals. Management does not expect
this trend of cost reduction to continue because cost reductions available from
inventory management have been substantially achieved.  Decreases in equipment
costs have been partially offset by higher costs incurred as a result of the
replacement of malfunctioning equipment in the early months of merchant
portfolio purchases and conversions.  Equipment costs as a percentage of total
revenues for fiscal 1996 remained consistent with fiscal 1995.

     Prior to December 1993, the Company's merchants rented terminals directly
from a processing bank and the Company received a commission on each rental
payment.  On December 31, 1993, the Company purchased these rental terminals and
related contracts from the processing bank, thereby improving gross margin.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses were $6.4 million in fiscal
year 1994 and $10.5 million in fiscal year 1995 and increased to $14.7 million
in fiscal year 1996.  This increase represents a 64.9% increase from fiscal year
1994 to fiscal year 1995 and a 39.1% increase from fiscal year 1995 to fiscal
year 1996.

     In fiscal year 1995, selling, general and administrative expenses increased
as a percentage of revenues when compared to fiscal year 1994.  In fiscal year
1995, the Company incurred 


                                       20
<PAGE>
 
operating costs related to the field sales force, merchant portfolio purchases
and a Visa/MasterCard sales solicitation program.

     The Company opened two field sales offices late in fiscal year 1994 and two
additional offices by January 1995, which increased payroll, rent, personnel
recruitment and office supplies expense.  In fiscal year 1995, the Company
purchased nine merchant portfolios and incurred operating expenses and
additional labor costs related to servicing the purchased merchant portfolios.

     The Visa/MasterCard sales solicitation program resulted in increased
selling, general and administrative costs in fiscal year 1995.  The Company's
policy is to recognize these costs when incurred; however, revenues generated by
the program were not realized until fiscal year 1996.   The Company incurred
approximately $325,000 of costs relating to the sales solicitation program
during fiscal year 1995.

     In fiscal 1996, selling, general and administrative expenses increased in
amount but decreased as a percentage of revenues.  The decrease in the
percentage continues to reflect the Company's overall improvement in utilization
of personnel and the addition of revenues from purchased merchant portfolios
which do not cause a proportionate increase in selling, general and
administrative expenses.

Depreciation and Amortization

     Depreciation and amortization expense increased from $1.6 million in fiscal
year 1994 to $3.5 million in fiscal year 1995 and $7.5 million in fiscal year
1996.  These increases represent a 113.5% increase from fiscal year 1994 to
fiscal year 1995 and a 113.5% increase from fiscal year 1995 to fiscal year
1996.

     Depreciation expense has increased in amount from fiscal year 1994 through
fiscal year 1996 but remained relatively consistent as a percentage of revenues
due to the significant increase in revenues.  The increase in depreciation
expense is a direct result of additional equipment and fixture purchases for
customer service and operations.

     Amortization expense has generally increased in amount and as a percentage
of revenues from fiscal year 1994 through fiscal year 1996.  Amortization
expense increases in periods when the Company purchases merchant portfolios.
The significant increases in fiscal years 1994 and 1995 are reflective of the
merchant portfolio purchases.  In fiscal 1996, the acquisitions made in the
fourth quarter of fiscal 1995 and the Imperial and UMB acquisitions contributed
to significant increases in fiscal 1996 amortization expense.

     In fiscal 1996, the Company entered into a merger with MHA which was
accounted for as a pooling of interests.  Additionally, the Company has
accounted for another small merger as a pooling of interests in the first
quarter of fiscal 1997.  There is no amortization expense related to these two
acquisitions, and to the extent that the Company should continue its growth
through significant acquisitions accounted for as a pooling of interests, the
amortization expense as a percentage of revenues could decline.


                                       21
<PAGE>
 
     Purchased merchant portfolios are evaluated by management for impairment at
each balance sheet date through review of actual attrition and projected cash
flows generated by each merchant portfolio in relation to the unamortized cost
of each merchant portfolio.  If, upon review, an impairment of the value of the
purchased merchant portfolio is indicated, amortization will be accelerated and
any required loss in value recognized immediately.  Subsequent to integration,
management anticipates merchant attrition rates for the portfolios acquired in
fiscal year 1996 to approximate normal rates historically experienced by the
Company's existing portfolios.

     In the fourth quarter of 1995, the Company expensed as additional
amortization all remaining deferred processing costs totaling approximately
$203,000 associated with the March 1994 ABC merchant portfolio purchase in
connection with the conversion of processing of this purchased merchant
portfolio to its primary processing bank.

Provision for Merchant Losses

     The provision for merchant losses decreased from $485,000 in fiscal year
1994 to $483,000 in fiscal year 1995 and increased to $655,000 in fiscal year
1996.  The decrease from fiscal year 1994 to 1995 represents a 0.4% decrease.
From fiscal year 1995 to fiscal year 1996, the provision for merchant losses
increased 35.5% but decreased as a percentage of total revenue.  In fiscal year
1995, the Company adjusted its provision to reflect more accurately recent
experience and historical trends.  In fiscal 1996, the Company increased its
provision for estimated chargebacks and merchant fraud to reflect the increase
in merchant accounts serviced while continuing to evaluate the Company's recent
experience and historical trends

Stock Award Compensation

     Stock award compensation increased from $240,000 in fiscal year 1994 to
$241,000 in fiscal year 1995.   The Company recognizes noncash compensation
expense based on the vesting of certain stock awards.  The vesting of awarded
shares accelerated upon completion of the initial public offering.  As a result,
in fiscal year 1995 the remaining unearned compensation expense of $241,000 was
recognized at the completion of the Company's initial public offering.

Interest Expense

     In fiscal 1994, the Company recognized net interest expense of $384,000.
In fiscal year 1995, net interest income increased from $46,000 to $1.7 million
in fiscal 1996.  This represents a 112.0% increase from fiscal year 1994 to
fiscal year 1995 and a 3,689.5% increase from fiscal year 1995 to fiscal year
1996.
 
     The Company consummated an initial public offering in August 1994, a second
public offering in October 1995 and a third public offering in April 1996.  The
Company received net proceeds from the initial, second and third public
offerings of approximately $15.9 million, $40.8 million and $100 million (after
deducting underwriting discounts and commissions and expenses of the offerings),
respectively.  With the first two offerings, the Company repaid all borrowings
outstanding under its credit facility.  The Company received interest income
from the investment of the remaining net proceeds from the initial and second
offerings and on the total net proceeds from the April 1996 offering.  To the
extent the Company should use the net proceeds from the third 


                                       22
<PAGE>
 
offering for acquisitions or working capital, management would not expect to
continue to recognize a significant amount of interest income.

Income Tax

     As a result of the Company's increased profitability in fiscal year 1996
income tax expense has increased.  Income tax expense increased from $1.4
million in fiscal year 1994 to $2.4 million in fiscal year 1995 and $5.2 million
in fiscal year 1996.  The Company's effective income tax rate for fiscal years
1994 through 1996 has remained relatively consistent.

     Effective August 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS 109) as required.  Under SFAS
109, the liability method is used in accounting for income taxes, whereby
deferred tax assets of approximately $312,800 were recognized in fiscal year
1994 as a benefit upon adoption for the expected future tax consequences of
events that had been recognized in the Company's financial statements or tax
returns.

Seasonality

     The Company's revenue volume is generated from consumer credit purchases.
However, the Company's revenues do not generally reflect the seasonal
fluctuations that are typically associated with traditional peaks in consumer
retail sales.  The Company's merchants are largely engaged in retail operations
which do not display these seasonal fluctuations in consumer spending. As a
result, the Company experiences a generally even distribution of revenues
throughout its fiscal year with the third quarter experiencing a slightly lower
percentage of annual revenues.

Quarterly Information

     The following table sets forth statements of income data for each of the
eight quarters in the two year period ended July 31, 1996.  This income data has
been restated for the MHA acquisition effective July 1, 1996 accounted for as a
pooling of interests.  This unaudited quarterly information has been prepared on
the same basis as the annual information presented elsewhere herein and, in
management's opinion, includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the selected
quarterly information when read in conjunction with the financial statements and
notes thereto.  The operating results for any quarter are not necessarily
indicative of results for the entire fiscal year or for any future period.


                                       23
<PAGE>
 


<TABLE>
<CAPTION>
 
 
                                               First   Second    Third   Fourth
                                              Quarter  Quarter  Quarter  Quarter   Total
                                              -------  -------  -------  -------  --------
                                                             (in thousands)
<S>                                           <C>      <C>      <C>      <C>      <C>
  1995
  ----                                     
  Revenues                                    $20,064  $20,790  $21,263  $26,890  $ 89,007
  Gross margin                                  4,292    4,826    5,009    6,683    20,810
  Income from operations                        1,095    1,808    1,156    1,968     6,027
  Income before provision for income taxes      1,090    1,883    1,247    1,853     6,073
  Net income                                      670    1,167      691    1,112     3,640
 
  1996
  ----                                        
  Revenues                                    $30,671  $32,301  $37,914  $48,954  $149,840
  Gross margin                                  7,152    7,908    8,695   10,433    34,188
  Income from operations                        2,400    2,828    2,931    3,202    11,361
  Income before provision for income taxes      2,277    3,076    3,198    5,255    13,806
  Net income                                    1,350    1,839    1,917    3,519     8,625
</TABLE>

     The quarterly variances shown above are generally indicative of those
discussed for the annual periods.  Specifically, the growth in revenues resulted
primarily from purchased merchant portfolios, revenue enhancement programs and
the growth from a Visa/MasterCard sales solicitation which contributed
progressively to quarterly profits.

     In fiscal year 1996, purchased merchant portfolios generated higher
revenues and, accordingly, a higher gross margin.  In the third and fourth
quarters of fiscal 1996, the Company made significant acquisitions late in
fiscal 1996 which have a higher cost of revenues as a percentage of revenues
than those historically experienced by the Company. In the first quarter of
fiscal year 1995 the Company recognized all remaining unearned compensation
relating to the vesting of certain awarded shares.  The shares vested in August
1994 at the completion of the Company's initial public offering.  Selling,
general and administrative expenses for the third quarter of fiscal year 1995
include operating expenses of approximately $325,000 relating to a
Visa/MasterCard sales solicitation program.  Revenues generated by the program
were not realized until fiscal year 1996.

     In all quarters of fiscal year 1996, and in all quarters of fiscal 1995
except the first, the Company reported net interest income.  Following the
Company's initial public offering in August 1994, the Company repaid all
borrowings outstanding under its principal revolving credit loan and bridge
loan.  The Company consummated a second public offering in October 1995 and a
third public offering in April 1996. The Company received interest income from
the investment of the remaining net proceeds from the first two offerings and
interest income on the total net proceeds from the third offering.
 
Liquidity and Capital Resources

     The Company recognizes as revenue in its statement of income the full
discount rate and related fees collected from the merchant.  The various costs
incurred by the Company, including amounts paid to the card-issuing bank, the
processing bank, and the network service provider, are reflected as costs of
revenues.  In accordance with the Company's contracts with its processing banks,
all of the funds collection and most of the disbursement function is performed
on behalf of the Company by the processing bank.  At month end the processing
bank collects the total discount 


                                       24
<PAGE>
 
rate and related fees from the merchants and disburses to each of the service
providers their fees, except disbursements for interchange fees paid to the 
card-issuing bank are made daily. Shortly after month end, the processing bank
disburses to the Company the remainder of the funds collected from the merchant
(which represents a significant portion of the Company's gross margin).

     Although the Company's revenues reflect the full discount rate and related
fees collected, the cash flow statement is prepared using the "direct method" as
provided in SFAS 95, "Statement of Cash Flows," and reflects cash received from
merchants at the net amount collected as the cash flows received by the Company
from processing banks are net of the amounts disbursed to the other parties
described above.  This presentation follows the actual flow of funds to the
Company.

     Several factors can alter the profitability to the Company of merchant
transactions. Primarily, these include (i) improper use of the card reading
terminal by the merchant resulting in higher interchange fees paid to the card-
issuing bank, (ii) lower than anticipated average dollar sales of credit card
transactions thereby reducing the discount rate collected because many of the
transaction costs are fixed, (iii) losses incurred as a result of customer
chargebacks (the Company can be required to absorb the full retail purchase
amount), (iv) the inability to collect the discount rate because of insufficient
funds in the merchant's bank account, (v) merchant fraud and (vi) excessive
volume of customer return transactions in which the Company again incurs all
costs except interchange fees.  Actual losses realized as a result of customer
chargebacks, merchant fraud and the Company's inability to collect the discount
rate as a result of insufficient merchant funds were approximately $399,000 and
$721,000 for fiscal year 1995 and fiscal year 1996, respectively. The Company's
actual losses as a percentage of total revenues realized remained consistent
from fiscal 1995 to fiscal 1996.  Management does not believe that the other
factors mentioned above have had a material effect on the Company's
profitability.

Working Capital

     Cash flow provided by operating activities was $3.7 million in fiscal year
1994 as compared to $4.4 million in fiscal year 1995 and $13.7 million in fiscal
year 1996.  The increase in cash flow from operating activities resulted from
increases in net income for each period which have been achieved principally
through purchases of merchant portfolios and internal generation of new merchant
accounts.  The effect of net income increases is partially offset by increases
in working capital needs.

     At July 31, 1996, the Company had working capital of $106.7 million, as
compared to negative working capital of $634,000 at July 31, 1995.  This
increase in working capital primarily reflects the net proceeds from the
Company's third public offering in April 1996.

     Accounts receivable increased $2,670,000 from July 31, 1995 to July 31,
1996.  This increase was the result of increases in the number of merchant
accounts acquired through purchases of merchant portfolios and, to a lesser
extent, the internal generation of new merchant accounts.  Additionally, at July
31, 1996 the Company had a current accounts receivable of $1.0 million for the
proceeds from a life insurance policy on the Company's former Chief Financial
Officer.


                                       25
<PAGE>
 
     Other assets, excluding non-competition agreements and deferred processing
costs, at July 31, 1995, increased from July 31, 1994 because of the restricted
cash balance of $500,000 required to be maintained in connection with an
acquisition.  Additionally, in June 1995 when certain acquired merchant accounts
were converted to the Company's primary processing bank, the bank required a
restricted cash balance of $1.5 million to be maintained for six months.  These
funds were released to the Company in fiscal year 1996.  Additionally, other
assets increased as a result of deferred financing costs incurred in fiscal year
1995 as a result of amendments to the Company's credit agreement.

     Accounts payable at July 31, 1996 increased $588,000 as compared to July
31, 1995, as a result of increased processing costs related to MHA's increase in
merchant accounts. Accrued liabilities increased $621,000 from July 31, 1995, to
July 31, 1996, primarily as a result of increased income and state franchise
taxes.

Capital Expenditures and Investing Activities

     Capital expenditures were approximately $1.8 million for fiscal year 1996
as compared to $1.9 million for fiscal year 1995 and $1.5 million for fiscal
year 1994.  The increase in capital expenditures was primarily the result of
additional expenditures related to the Company's management information system,
the purchase of additional credit card terminals, the Company's relocation of
its office facilities and the purchase of peripheral equipment for lease to
merchants.  In addition to the increase in capital expenditures, the Company
used $8.4 million, $24.6 million and $31.8 million for the purchase of merchant
portfolios in fiscal years 1994, 1995 and 1996, respectively. The Company
purchased five merchant portfolios in fiscal 1994, nine merchant portfolios in
fiscal year 1995 and five in fiscal year 1996.

Financing Activities

     The significant increase in cash provided by financing activities for
fiscal year 1995 resulted from the consummation of the Company's initial public
offering in August 1994.  Cash provided by financing activities for fiscal year
1995 was $20.7 million which reflects the net proceeds of the initial public
offering after retirement of the Company's outstanding indebtedness to First
Union National Bank of Tennessee and to ABC for the March 1994 ABC purchase.
Additionally, the Company issued $15.3 million of long-term debt in connection
with three of the nine merchant portfolios purchased in fiscal year 1995.

     The cash provided by financing activities for fiscal 1996 reflects the
Company's consummation of its second and third public offerings in October 1995
and April 1996, respectively.  Net cash provided by financing activities was
$124.8 million in fiscal 1996 which reflects the net proceeds from the offerings
after retirement of the Company's outstanding bank indebtedness.

Future Capital Needs

     Management believes that significant expenditures for the purchase of
additional merchant portfolios may be required for the Company to sustain its
growth in the future.  Management expects to fund such purchases primarily
through cash generated from operations and additional bank borrowings.
Management believes the combination of these sources will be sufficient to meet


                                       26
<PAGE>
 
the Company's anticipated liquidity needs and its growth plans through fiscal
year 1997.  The Company, however, may pursue additional expansion opportunities,
including purchases of additional merchant portfolios, which may require
additional capital, and the Company may incur, from time to time, additional
short-term and long-term indebtedness or issue, in public or private
transactions, equity or debt securities, the availability and terms of which
will depend upon then prevailing market and other conditions.

     The Company's revolving credit facility was amended and restated during
fiscal year 1995 to increase the line of credit to $17.5 million.  The Company
repaid all outstanding debt related to this credit facility with the proceeds
from its second public offering during fiscal year 1996. The amended agreement
expires November 1, 1996 with all amounts then outstanding under the agreement
due on November 1, 1996, unless the agreement is extended or the outstanding
amounts have been converted to a term loan requiring equal monthly payments for
48 months.

     Borrowings under the amended revolving credit facility are used to finance
purchases of merchant portfolios and equipment and for working capital purposes.
Borrowings are secured by substantially all the Company's assets and life
insurance policies on the lives of two of the Company's executive officers.

     This report contains certain forward-looking statements under Section 21E
of the Securities and Exchange Act of 1934.  Specifically, the forward-looking
statements relate to future growth through portfolio acquisitions and the
availability of capital to support such acquisitions.  Each forward-looking
statement is accompanied by specific, cautionary language indicating important
factors that could cause actual results to differ materially from those in the
forward-looking statements.  Results actually achieved thus may differ
materially from expected results included in such statements.


                                       27
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
 
                                                                                       PAGE
                                                                                       ---- 
<S>                                                                                  <C>
 
Report of Independent Auditors.....................................................     29
 
Consolidated Balance Sheets at July 31, 1995 and July 31, 1996.....................     30
 
Consolidated Statement of Income, each of the three years ended July 31, 1996......     31
 
Consolidated Statement of Changes in Shareholders' Equity, each of the three

  years ended July 31, 1996........................................................     32
 
Consolidated Statement of Cash Flows, each of the three years ended July 31, 1996..  33-34
 
Notes to Consolidated Financial Statements.........................................  35-51
 
</TABLE>


                                       28
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors
  and Shareholders of PMT Services, Inc.

 

     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
PMT Services, Inc. and its subsidiaries at July 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1996, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

     As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for incomes taxes in fiscal 1994.



PRICE WATERHOUSE LLP

Nashville, TN
September 13, 1996

                                       29
<PAGE>
 
                               PMT SERVICES, INC.

                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>

                                                                                           JULY 31,
                                                                                        -------------
                                                                                       1995          1996
                                                                                  ------------  -------------
<S>                                                                               <C>           <C>
 
     ASSETS
Current assets:
  Cash and  cash equivalents.........................                             $   475,145   $105,461,031
  Accounts receivable................................                               3,876,888      6,547,321
  Inventory..........................................                                 369,962        556,251
  Deferred income taxes..............................                                 262,966        265,661
  Other current assets...............................                                 235,318        759,909
                                                                                  -----------   ------------
   Total current assets..............................                               5,220,279    113,590,173
  Purchased merchant portfolios, net of accumulated
   amortization of 4,033,330 and $9,605,624..........                           $  36,801,599     61,404,794
  Property and equipment, net........................                               3,523,800      4,355,738
  Deferred income taxes..............................                                 588,578      1,347,588
  Intangible and other assets........................                               6,086,842      6,093,819
                                                                                  -----------   ------------
   Total assets......................................                             $52,221,098   $186,792,112
                                                                                  ===========   ============
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt..................                             $   185,336   $     40,000
  Accounts payable...................................                               3,034,235      3,622,019
  Accrued liabilities................................                               2,348,520      2,969,761
  Deferred revenues..................................                                 285,728        230,496
                                                                                  -----------   ------------
   Total current liabilities.........................                               5,853,819      6,862,276
  Long-term debt.....................................                              16,670,164        575,000
                                                                                  -----------   ------------
   Total liabilities.................................                              22,523,983      7,437,276
                                                                                  -----------   ------------
 
Shareholders' equity:
 Preferred stock, $0.01 par value, authorized:
    10,000,000 shares; no shares outstanding
 Common stock, $0.01 par value, authorized:
    40,000,000 shares; issued and outstanding:
    7,229,604 and 32,312,092 shares..................                                  72,296        323,121
 Additional paid-in capital..........................                              25,313,814    166,275,748
 Treasury stock......................................                                 (68,500)       (12,000)
 Accumulated earnings................................                               4,379,505     12,767,967
                                                                                  -----------   ------------
                                                                                   29,697,115    179,354,836
                                                                                  -----------   ------------
Commitments and contingent liabilities (Notes 3, 11
  and 14)
   Total liabilities and shareholders' equity........                             $52,221,098   $186,792,112
                                                                                  ===========   ============
 
</TABLE>
   The accompanying notes are an integral part of these financial statements.


                                       30
<PAGE>

                               PMT SERVICES, INC.
 
                        CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
 
                                                      YEAR ENDED JULY 31,
                                           -----------------------------------------
                                               1994          1995          1996
                                           ------------  ------------  -------------
<S>                                        <C>           <C>           <C>
 
 Revenues................................  $61,196,528   $89,007,061   $149,840,026
 Cost of revenues........................   48,367,317    68,196,712    115,651,792
                                           -----------   -----------   ------------
     Gross margin........................   12,829,211    20,810,349     34,188,234
                                           -----------   -----------   ------------
 
 Selling, general and administrative
     expenses............................    6,393,670    10,540,796     14,663,007
 Depreciation and amortization expense...    1,648,023     3,517,852      7,509,630
 Provision for merchant losses...........      484,993       483,245        654,705
 Stock award compensation................      239,659       241,477             --
                                           -----------   -----------   ------------
                                             8,766,345    14,783,370     22,827,342
                                           -----------   -----------   ------------
 Income from operations..................    4,062,866     6,026,979     11,360,892
 Interest income.........................       32,745       311,760      2,086,502
 Interest expense........................     (416,305)     (265,805)      (345,059)
 Other income, net.......................           --            --        703,896
                                           -----------   -----------   ------------
 Income before provision for income
     taxes and change in accounting
     principle...........................    3,679,306     6,072,934     13,806,231
 Provision for income taxes..............    1,399,662     2,432,779      5,180,855
                                           -----------   -----------   ------------
 Income before change in accounting
     principle...........................    2,279,644     3,640,155      8,625,376
 Cumulative effect of change in
     accounting principle................      312,800            --             --
                                           -----------   -----------   ------------
             Net income..................  $ 2,592,444   $ 3,640,155   $  8,625,376
                                           ===========   ===========   ============
 
 
 Per share data:
     Income before change in accounting
         principle.......................  $      0.18         $0.17          $0.30
     Cumulative effect of change in
         accounting principle............         0.02            --             --
                                           -----------   -----------   ------------
            Net income per share.........  $      0.20         $0.17          $0.30
                                           ===========   ===========   ============
 
</TABLE>

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




                                       31
<PAGE>

                               PMT SERVICES, INC.
 
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
                                              ADDITIONAL     ACCUMULATED                                   TOTAL
                                   COMMON       PAID-IN        EARNINGS      TREASURY     UNEARNED     SHAREHOLDERS'
                                    STOCK       CAPITAL       (DEFICIT)       STOCK     COMPENSATION       EQUITY
                                  ---------  -------------  --------------  ----------  -------------  --------------
<S>                               <C>        <C>            <C>             <C>         <C>            <C>
 
Balance at July 31, 1993........  $ 26,945   $  1,163,225    ($ 1,342,549)                 ($481,136)   ($   633,515)
 
  Stock awards earned...........                                                             239,659         239,659
  Shares issued.................       200         53,500                                                     53,700
  Stock warrants issued.........                  261,000                                                    261,000
  Purchase of treasury stock....                                             ($45,000)                       (45,000)
  Reissuance of treasury stock..                   (3,000)                      3,000                             --
  Net income for  the year......                                2,592,444                                  2,592,444
                                  --------   ------------   -------------   ---------   ------------    ------------
 
Balance at July 31, 1994........    27,145      1,474,725       1,249,895     (42,000)      (241,477)      2,468,288
 
  Stock awards vested...........                  926,597                                    241,477       1,168,074
  Shares issued.................    24,280     15,891,212                                                 15,915,492
  Expiration of put options on
      redeemable common stock...    19,224      6,502,083                                                  6,521,307
  Stock warrants exercised......     1,301        418,615                                                    419,916
  Stock options exercised.......       346        106,582                                                    106,928
  Acquire majority interest in..
     subsidiary.................                                 (510,545)                                  (510,545)
  Purchase of treasury stock....                                              (32,500)                       (32,500)
  Reissuance of treasury stock..                   (6,000)                      6,000                             --
  Net income for the year.......                                3,640,155                                  3,640,155
                                  --------    -----------   -------------   ---------   ------------   -------------
 
Balance at July 31, 1995........    72,296     25,313,814       4,379,505     (68,500)            --      29,697,115
 
  Shares issued.................    58,520    140,746,488                                                140,805,008
  Stock options exercised.......       448        475,803                                                    476,251
  Stock splits..................   191,857       (191,857)                                                        --
  Purchase of treasury stock....                                              (12,000)                       (12,000)
  Reissuance of treasury stock..                  (68,500)                     68,500                             --
  Minority shareholders'
     contribution...............                                  120,000                                    120,000
  Martin Howe fiscal year
     conversion.................                                 (356,914)                                  (356,914)
  Net income for the year.......                                8,625,376                                  8,625,376
                                  --------    -----------   -------------   ---------   ------------   -------------
  
Balance at July 31, 1996........  $323,121   $166,275,748   $  12,767,967    ($12,000)    $       --    $179,354,836
                                  ========   ============   =============   =========   ============   =============
 
</TABLE>



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




                                       32
<PAGE>
 

                               PMT SERVICES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
 
                                                                         YEAR ENDED JULY 31,
                                                             -------------------------------------------
                                                                 1994           1995           1996
                                                             -------------  -------------  -------------
<S>                                                          <C>            <C>            <C>
 
Cash flows from operating activities:
    Net cash received from merchants.......................  $ 19,657,687   $ 34,353,326   $ 67,313,124
    Cash paid to vendors and employees.....................   (14,758,040)   (28,467,472)   (49,128,150)
    Interest received......................................        22,262        310,136      1,672,714
    Interest paid..........................................      (268,586)      (198,485)      (505,856)
    Income taxes paid......................................     ( 994,969)    (1,600,405)    (5,630,881)
                                                             ------------   ------------   ------------
               Net cash  provided by operating activities       3,658,354      4,397,100     13,720,951
                                                             ------------   ------------   ------------
Cash flows from investing activities:
    Purchase of merchant portfolios........................    (8,415,055)   (24,576,426)   (31,787,725)
    Purchase of property and equipment.....................    (1,465,984)    (1,917,395)    (1,777,955)
                                                             ------------   ------------   ------------
               Net cash used in investing activities.......    (9,881,039)   (26,493,821)   (33,565,680)
                                                             ------------   ------------   ------------
Cash flows from financing activities:
    Proceeds from issuance of long-term debt...............     7,650,000     16,450,000        305,000
    Payments on long-term debt.............................    (1,163,170)   (12,828,503)   (16,545,500)
    Proceeds from issuance of common stock.................            --     17,098,894    140,963,115
    Payments to repurchase treasury stock..................       (45,000)       (32,500)       (12,000)
    Proceeds from minority shareholder contributions.......            --             --        120,000
                                                             ------------   ------------   ------------
               Net cash provided by financing activities...     6,441,830     20,687,891    124,830,615
                                                             ------------   ------------   ------------
 
Net increase (decrease) in cash and cash equivalents.......       219,145     (1,408,830)   104,985,886
Cash and cash equivalents at beginning of year.............     1,664,830      1,883,975        475,145
                                                             ------------   ------------   ------------
Cash and cash equivalents at end of year...................  $  1,883,975   $    475,145   $105,461,031
                                                             ============   ============   ============
 
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:

     In connection with the purchase of merchant portfolios in fiscal years 1994
and 1995, the Company issued promissory notes totaling $5,061,804 and $80,500,
respectively.

     The Company recognized a tax benefit of $318,517 for the year ended July
31, 1996 for the excess of the fair market value at the exercise date over that
at the award date for stock options exercised.

     In connection with the purchase of a merchant portfolio in March 1994,
the Company issued 312,500 shares of common stock.

     In connection with an agreement between the Company and a processing bank
entered into simultaneously with the purchase of a merchant portfolio in March
1994, the Company issued warrants to purchase 120,000 shares of common stock.





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




                                       33
<PAGE>

                              PMT SERVICES, INC.
 
               CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
 
                                                                         YEAR ENDED JULY 31,
                                                                         ------------------- 
                                                                1994              1995          1996
                                                                ----              ----          ----     
<S>                                                             <C>               <C>           <C>
Reconciliation of net income to net cash provided by
    operating activities:
    Net income........................................          $ 2,592,444   $ 3,640,155   $ 8,625,376
    Martin Howe fiscal year conversion................                   --            --      (356,914)
    Adjustments:
       Depreciation and amortization expense..........            1,648,023     3,517,852     7,509,630
       Provision for merchant losses..................              484,993       483,245       654,705
       Stock award compensation and other.............              239,659       241,477       120,395
       Deferred income taxes..........................             (453,658)       35,982      (761,705)
       Changes in assets and liabilities:
          Accounts receivable.........................           (1,562,961)   (1,459,799)   (2,125,510)
          Inventory...................................              (50,235)     (157,087)     (186,289)
          Other assets................................           (1,716,464)   (1,895,097)     (501,353)
          Accounts payable............................            1,557,611        44,106       587,784
          Accrued liabilities.........................              975,065      (223,411)      210,064
          Deferred revenues...........................              (56,123)      169,677       (55,232)
                                                                -----------   -----------   -----------
Net cash provided by operating activities.............          $ 3,658,354   $ 4,397,100   $13,720,951
                                                                ===========   ===========   ===========
 
</TABLE>



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





                                       34
<PAGE>
 

                               PMT SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Operations

     PMT Services, Inc. (the "Company") markets and services electronic credit
card authorization and payment systems to merchants.  The Company provides these
services to merchants pursuant to contracts between the Company and various
processing banks.  Generally the Company's agreements with the processing banks
contain certain aspects of both marketing and service.  Although the marketing
portion of the agreements is limited as to time, the service portion of
substantially all of these agreements is not.  The marketing aspects expire at
dates ranging from 1996 to 2002 unless extended by either party.

Basis of Consolidation

     The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries.  Interests in the majority-owned
subsidiaries are reported using the full consolidation method.  All material
intercompany balances and transactions are eliminated.

Basis of presentation

     Certain financial statement items have been reclassified to conform to the
current year's presentation.  The consolidated financial statements give
retroactive effect to the acquisition of Martin Howe Associates, Inc. ("MHA"),
which was accounted for as a pooling of interests (Note 3).

Management estimates

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

Revenue and cost recognition

     Revenues derived from the electronic processing of transactions (merchant
discount rate and related fees) on the credit card authorization equipment are
recognized at the time the merchants' transactions are processed.  Related
commissions and processing charges are also recognized at that time.




                                       35
<PAGE>
 
                               PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )

     Revenues related to the direct sale of credit card authorization equipment
are recognized when the equipment is shipped.  Installation fees related to both
the direct sale and the marketing of this equipment are recognized when
installation is completed. Fees received in advance of shipment or installation
are not recognized as revenue until earned.

     Cost of revenues includes interchange fees paid to the credit card-issuing
bank and fees paid to the network service provider, VISA and MasterCard and the
processing bank.  These costs are recognized at the time the merchants'
transactions are processed and the related revenue is recorded.

     The Company recognizes as revenue in its statement of income the full
discount rate and fees collected from the merchant.  The various costs incurred
by the Company, including amounts paid to the card-issuing bank, the processor
and network service provider, are reflected as costs of revenues.  In accordance
with the Company's contracts with its processing banks, all of the funds
collection and most of the disbursement function is performed on behalf of the
Company by the processing bank.  At month end, the processing bank collects the
total discount rate and fees from the merchants and disburses to each of the
service providers their fees.  Disbursements for the interchange fee paid to the
card-issuing bank are made daily.  Shortly after month end, the processing bank
disburses to the Company the remainder of the funds collected from the merchant
which represents a significant portion of the Company's gross margin.

     Although the Company's revenues reflect the full discount rate and fees
collected, the cash flow statement is prepared using the "direct method" as
provided in Statement of Financial Accounting Standards No. 95, "Statement of
Cash Flows," and reflects cash received from merchants at the net amount
collected as the cash flows received by the Company from processing banks are
net of the amounts disbursed to other parties described above. This presentation
follows the actual flow of funds to the Company.

Cash equivalents

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

Financial instruments

     The Company has various financial instruments, including cash, time
deposits, receivables, accounts payable, revolving credit facilities and accrued
liabilities.  Cash, time deposits, receivables, accounts payable and accrued
liabilities are settled within a year and are not subject to  market  rate
fluctuations.   Revolving  credit facilities are at variable market rates.




                                       36
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The carrying value of these financial instruments approximates their fair market
values at July 31, 1995 and 1996.

Accounts receivable

     Accounts receivable primarily comprise amounts due from processing banks
which represent the discount rate and fees earned, after related interchange
fees and other processing costs, on transactions processed during the month
ending on the balance sheet date.  Such balances are received from processing
banks approximately 20 days following the end of each month.

Inventory

     Inventory of credit card authorization equipment is stated at the lower of
cost or market, with cost being determined by specific identification.

Property and equipment

     Property and equipment are recorded at cost.  Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets ranging from 3 to 10 years.

Purchased merchant portfolios

     Purchased merchant portfolios are recorded at acquired cost.  Amortization
expense is recognized on a straight-line basis over 10 years.  Purchased
merchant portfolios are evaluated by management for impairment at each balance
sheet date through review of actual attrition and projected undiscounted cash
flows generated by each merchant portfolio in relation to the unamortized cost
of each merchant portfolio.  If, upon review, an impairment of the value of the
purchased merchant portfolio is indicated, amortization will be accelerated to
recognize the diminution in value.

Reserve for chargebacks and merchant fraud

     Disputes between a cardholder and a merchant periodically arise as a result
of cardholder dissatisfaction with merchandise quality or merchant services and
the disputes may not be resolved in the merchant's favor.  In these cases, the
transaction is "charged back" to the merchant and the purchase price is refunded
by the merchant.  If the merchant is unable to grant a refund, the Company or,
under limited circumstances, the Company and the processing bank, must bear the
credit risk for the  full  amount  of the transaction.  The Company evaluates
its risk




                                       37
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

and estimates its potential loss for chargebacks based on historical experience.
A provision for these estimated losses is provided in the same period as the
related revenues.

Income taxes

     On August 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109) as required.  Under SFAS 109,
the liability method is used in accounting for income taxes, whereby deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.  The tax benefit of deductible temporary differences
is reflected within the various components of deferred tax assets and recognized
if  the realization thereof is more likely than not (Note 13).  The Company
recognized a benefit of $312,800 for deductible temporary differences upon
adoption of SFAS 109.  This amount is presented as the cumulative effect of
change in accounting principle in the Company's statement of income for the year
ended July 31, 1994.
 
Net income per share

     Net income per share for the fiscal years 1994, 1995 and 1996 is calculated
based on weighted average shares of common stock outstanding of 13,007,916,
20,939,535 and 28,539,255, respectively.

Stock splits

     On May 13, 1994, the Board of Directors approved a stock split of four
shares of $0.01 par value common stock for one to be effected in the form of a
stock dividend.  The stock split was effective June 10, 1994.  On December 14,
1995 the Board of Directors approved a two-for-one stock split and on May 17,
1996 approved a three-for-two stock split, each to be effected in the form of a
stock dividend.  The stock splits for December 14, 1995 and May 17, 1996 were
effective for shareholders of record at the close of business on December 29,
1995 and May 28, 1996, respectively. All earnings per share information included
in the accompanying financial statements has been adjusted to give retroactive
effect to the stock splits for all periods presented.  Additionally, all share
information stated in Note 9 has been adjusted to give retroactive effect to the
stock splits.

NOTE 2 - STOCK OFFERINGS:

     In August 1994, the Company consummated an initial public offering of
3,565,000 shares of common stock, 2,315,000 shares of which were offered by the
Company (the "Offering").  In connection with the Offering, the Company received
net proceeds of approximately  $15.9  million,  after   deducting  underwriting
discounts  and  commissions  and




                                       38
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

expenses of the Offering.  The net proceeds were used to repay a $4.9 million
noninterest bearing note payable and all borrowings outstanding under the
Company's revolving line of credit and bridge loan.  The remainder of the net
proceeds were used to fund merchant purchases, upgrade the Company's information
systems and for working capital needs.

     Upon the effective date of the Offering, vesting of management stock awards
for 439,084 shares of common stock was accelerated and the remaining unearned
compensation of $241,000 was immediately recognized.  The Company received a tax
deduction in fiscal 1995 for the fair value of the vested stock on the effective
date of the Offering.  Compensation expense related to the stock awards was
recognized in the financial statements based upon the fair value of the common
stock at the date of the awards of $2.48 per share.  The tax benefit arising
from the excess of fair value at the vesting date over that at the award date of
approximately $927,000 is recognized as additional paid-in capital.

     Warrants for 130,060 shares of the Company's common stock were exercised
concurrent with the effective date of the Offering at a weighted average
exercise price of $3.23.  Additionally, the Company delivered 112,500 shares of
common stock to the seller in connection with the March 1994 purchase of a
merchant portfolio.

     In October 1995, the Company consummated a second public offering of
2,156,250 shares of common stock, 1,931,250 of which were offered by the
Company.  The Company received net proceeds of approximately $40.8 million,
after deducting underwriting discounts and commissions and expenses of the
offering, and repaid all borrowings outstanding under its revolving line of
credit.

     The Company offered 3,910,000 shares of its common stock in a third public
offering consummated in April 1996.  The Company received net proceeds of
approximately $100 million after deducting underwriting discounts and
commissions and estimated expenses of the offering.

NOTE 3 - MERGERS AND ACQUISITIONS:

Acquisitions

     The Company has purchased certain merchant portfolios which provide the
Company the right to service specific merchants under contract to processing
banks for electronic authorization and payment processing.  The Company
purchased five portfolios in fiscal year 1994 and nine portfolios in fiscal year
1995.  In fiscal year 1996, the Company purchased five merchant portfolios.  In
connection with the purchase of merchant portfolios, the Company may enter into
a  noncompetition agreement with the sellers of the portfolios.  In such cases,
a portion



                                       39
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

of the purchase price of each merchant portfolio is allocated to the related
noncompetition agreement (Note 5).  Amortization expense related to purchased
merchant portfolios was $947,278, $2,276,138 and $5,586,499 in fiscal years
1994, 1995 and 1996, respectively.

     Significant purchase transactions are as follows:

     CROWN CARD SERVICES - The Company acquired the merchant portfolio and
retained the sales force of Crown Card Services, Inc. ("Crown Card") on January
1, 1994.  The total purchase price for the merchant portfolio was $853,700, of
which $630,000 was paid in cash.  A noninterest bearing note payable for
$170,000 and 20,000 shares of common stock valued at $53,700 were issued to
Crown Card.

     ABC - The Company purchased a merchant portfolio from Bankcard America,
Inc. ("ABC") in April 1995 for a purchased price of $7,674,990.  The Company
paid $2,600,000 in cash, issued a $400,000 note payable with interest at 3%  due
May 1, 1995 and issued a $4,700,000 note payable with interest at 3% due July 1,
1995.  The Company incurred direct costs and expenses related to the purchase of
approximately $1,300,000.  The purchase agreement provided additional
consideration of $2,500,000 payable to the seller contingent upon the seller's
ability to negotiate the transfer of the merchant accounts from the current
processing bank to the Company's primary processing bank.  In May 1995, an
agreement was entered into providing for transfer of the merchant accounts and
the Company paid $2,500,000 representing additional purchase price for the
merchant portfolio.

     In connection with the purchase, the Company signed a guaranty for a
$1,000,000 note payable to the current processing bank by ABC expiring May 9,
1998.  The Company received a security interest in stock warrants to purchase
120,000 shares of the Company's common stock currently held by a shareholder of
ABC.  Additionally, beginning June 1995, the Company's primary processing bank
required a security deposit of $1,500,000 for a period of six months due to the
conversion of other merchant portfolios to this bank.  Approximately $1,000,000
plus accrued interest was returned to the Company in March, 1996.  A sum of
$500,000 will remain on deposit with this primary processing bank as long as the
Company participates in the bank's Association Marketing Agreement.  This amount
is reflected as other current assets on the Company's balance sheet at July 31,
1996.

     TERMNET AND CPS - In July 1995, the Company purchased two merchant
portfolios which were financed under the Company's credit facility.  The Company
paid $6,200,000 to TermNet Merchant Services, Inc. ("TermNet") for a merchant
portfolio and inventory.  The Company paid  $5,951,000 to Consumer Payment
Services, Inc. ("CPS") for the second purchase in July 1995.  In addition to the
CPS merchant portfolio, the Company also obtained a merchant terminal lease
portfolio, inventory and other office assets.



                                       40
<PAGE>
 

                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     IMPERIAL BANK - In October 1995, the Company purchased a merchant portfolio
from Imperial Bank ("Imperial") for $8,650,000 with a portion of the proceeds
from the Company's second public offering.  Operating results of the merchant
portfolio are included in the Company's financial statements beginning October
1, 1995, the effective date of the purchase.

     UMB - In March 1996, the Company purchased a merchant portfolio from UMB
Bank ("UMB") for $13,500,000 with a portion of the proceeds from the Company's
second public offering.  Additionally, the Company purchased merchant equipment
inventory from UMB in the transaction.  Operating results of the merchant
portfolio are included in the Company's financial statements beginning March 1,
1996, the effective date of the purchase.

     Unaudited pro forma operating results are presented below to provide
additional information relative to the potential effect upon the Company's
operations of significant acquisitions.  Pro forma information is provided only
for acquisitions meeting certain size and other requirements set forth by the
Securities and Exchange Commission.  Each of the above acquisitions meet these
requirements and are included in the unaudited pro forma summary for the periods
specified below.
<TABLE>
<CAPTION>
                           EFFECTIVE              INCLUDED IN
                            DATE OF             PRO FORMA RESULTS
                           PURCHASES         BEGINNING FISCAL YEAR
                           ---------         ---------------------
<S>                        <C>               <C> 
Crown Card              January 1, 1994                1994
ABC                      April 1, 1995                 1994
TermNet                  July 1, 1995                  1994
CPS                      July 1, 1995                  1994
Imperial                October 1, 1995                1995
UMB                      March 1, 1995                 1995

</TABLE>

     These unaudited pro forma results have been prepared for comparative
purposes and do not purport to be indicative of what would have occurred had the
purchases been made at the beginning of fiscal year  1994 or fiscal year 1995,
or of results which may occur in the future.  These amounts include the results
of MHA due to the restatement for the pooling of interests transaction.




                                       41
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
 
                                                PRO FORMA      PRO FORMA      PRO FORMA
                                               YEAR ENDED     YEAR ENDED     YEAR ENDED
                                              JULY 31, 1994  JULY 31, 1995  JULY 31, 1996
                                              -------------  -------------  -------------
<S>                                           <C>            <C>            <C>
 
Revenues                                       $104,242,012   $161,844,144   $170,171,357
Income before extraordinary item
   and change in accounting principle          $    733,146   $  2,084,082   $  8,720,687
Net income                                     $  1,045,946   $  2,084,082   $  8,720,687
 
Income per share before extraordinary
   item and change in accounting principle     $       0.06   $       0.10   $       0.31
Net income per share                           $       0.08   $       0.10   $       0.31

</TABLE>


Mergers

     On July 1, 1996, the Company issued 594,019 shares of its common stock in
exchange for all of the outstanding common stock of MHA.  The merger has been
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of MHA for all periods prior to the merger.

     MHA  had  a calendar year end and, accordingly, the MHA statements of
income for the years ended December 31, 1993, 1994 and 1995 have been combined
with the Company's statements of income for the fiscal years ended July 31,
1994, 1995, and 1996, respectively  In order to conform MHA's year end to the
Company's fiscal year end, results of operations of MHA for the six-month period
ended June 30, 1996 have been excluded from the consolidated statement of income
for the fiscal year ended July 31, 1996.  Accordingly, an adjustment has been
made in fiscal year 1996 to retained earnings for the exclusion of the net loss
of $356,914 for such six-month period.  MHA's results of operations for this
six-month period includes revenues of $10,743,645, expenses of $11,022,698 and
net loss before provision for income taxes of $279,053.

     Separate revenues, net income and changes in shareholders' equity amounts
of the merged entities for the periods prior to the merger are presented in the
following table:



                                       42
<PAGE>
 

                               PMT SERVICES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
 
                                                        YEAR ENDED    YEAR ENDED    UNAUDITED NINE
                                                         JULY 31,      JULY 31,      MONTHS ENDED
                                                           1994          1995       APRIL 30, 1996
                                                       ------------  -------------  ---------------
<S>                                                    <C>           <C>            <C>
Revenues
 PMT                                                   $53,506,857   $ 75,242,866     $ 87,299,482
 MHA                                                     7,689,671     13,764,195       13,585,887
                                                       -----------   ------------      -----------
                                                      $ 61,196,528   $ 89,007,061     $100,885,369
                                                      ============   ============     ============
Net Income (Loss)
 PMT                                                  $  2,492,514   $  4,032,000     $  5,432,934
 MHA                                                        99,930       (391,845)        (327,023)
                                                      ------------   ------------      -----------
                                                      $  2,592,444   $  3,640,155     $  5,105,911
                                                      ============   ============     ============
Other changes in
shareholders' equity
 PMT                                                  $    554,359   $ 24,131,717     $141,302,135
 MHA                                                       (45,000)      (543,045)         180,060
                                                       -----------   ------------      -----------
                                                      $    509,359   $ 23,588,672     $141,482,195
                                                      ============   ============     ============
</TABLE>

Subsequent mergers and acquisitions

     Subsequent to July 31, 1996, the Company consummated acquisitions of three
merchant portfolios.  On August 2, 1996, Data Transfer Associates, Inc. ("DTA")
was merged into the Company and was accounted for as an immaterial pooling of
interests.

     The other two merchant portfolio acquisitions in the first quarter of
fiscal year 1997 accounted for approximately 9,500 merchant accounts.  Operating
results of the merchant portfolios will be included in the Company's financial
statements beginning August 1, 1996, the effective date of the purchases.
 
NOTE 4 - PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>


                                                 JULY 31,
                                        --------------------------
                                            1995          1996
                                        ------------  ------------
<S>                                     <C>           <C>
Office equipment......................   $2,045,726   $ 3,340,024
Studio equipment......................      639,021       945,779
Credit card terminals held for lease..    1,310,416     1,632,023
Office furniture and fixtures.........      412,452       582,106
Leasehold improvements................       62,017       114,208
                                         ----------   -----------
                                          4,469,632     6,614,140
     Less:  accumulated depreciation..     (945,832)   (2,258,402)
                                         ----------   -----------
                                         $3,523,800   $ 4,355,738
                                         ==========   ===========
 
</TABLE>



                                       43
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

          The Company leases credit card terminals to merchants generally under
operating leases on a month-to-month basis.  Depreciation expense was $243,515,
$368,755 and $909,092 in fiscal years 1994, 1995 and 1996, respectively.
 
NOTE 5 - INTANGIBLE AND OTHER ASSETS:

<TABLE>
<CAPTION>

                                                 JULY 31,
                                         ------------------------
                                            1995         1996
                                         -----------  -----------
<S>                                      <C>          <C>
Noncompetition agreements..............   $3,148,016   $3,345,193
Restricted cash........................    2,515,235    2,305,377
Other..................................      423,591      443,249
                                          ----------   ----------
                                          $6,086,842   $6,093,819
                                          ==========   ==========
</TABLE>


     Intangible and other assets include noncompetition agreements with various
sellers of merchant portfolios purchased by the Company (Note 3).

     Amortization expense related to noncompetition agreements was $228,620,
$465,147 and $860,323 in fiscal years 1994, 1995 and 1996, respectively.
Accumulated amortization of noncompetition agreements was $843,357 and
$1,703,680 at July 31, 1995 and 1996, respectively.

     Restricted cash represents funds withheld by certain processing banks
pursuant to processing agreements to cover potential merchant losses.

 
NOTE 6 - ACCRUED LIABILITIES:

<TABLE>
<CAPTION>

                                             JULY 31,
                                      ----------------------
                                         1995        1996
                                      ----------  ----------
<S>                                   <C>         <C>
Income taxes payable................  $  779,329  $1,285,630
Compensation and payroll taxes......     625,791     417,916
Reserve for merchant losses.........     528,673     468,602
State franchise taxes payable.......          --     356,042
Sales and property taxes payable....      94,091      89,028
Interest payable on long-term debt..      67,320      83,270
Other...............................     253,316     269,273
                                      ----------  ----------
                                      $2,348,520  $2,969,761
                                      ==========  ==========
 
</TABLE>



                                       44
<PAGE>


                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 7 - LONG-TERM DEBT:

<TABLE>
<CAPTION>
              
                                                               JULY 31,
                                                          -----------------
                                                          1995         1996
                                                          ----         ----   
<S>                                                       <C>          <C>
Revolving line of credit, due November 1, 1996
   unless converted to a term loan with monthly
   installments due over 48 months, interest
   payable monthly at prime minus .25% (8.5%
   at July 31, 1995)................................  $15,293,000          --
 
Noninterest bearing notes payable with interest
   imputed at 8%, issued in connection with the
   Company's purchase of merchant portfolios;
   maturing at various dates through October 1996...       80,500    $ 40,000
 
Various lines of credit at 9% fixed rate initiated
   in 1994 and 1995; no repayment terms; debt
   serviced as funds allow..........................      225,000     570,000
 
Other debts repaid in 1996..........................    1,237,000          --
 
Other...............................................       20,000       5,000
                                                      -----------    --------
Total long-term debt................................   16,855,500     615,000
      Less:  current portion........................     (185,336)    (40,000)
                                                      -----------    --------
                                                      $16,670,164    $575,000
                                                      ===========    ========
</TABLE>

 
     The Company entered into an agreement on March 22, 1994 for a $12,500,000
revolving line of credit and $2,368,000 bridge loan.  This credit facility was
amended and restated on May 31, 1995 and July 18, 1995, increasing the revolving
line of credit to $17,500,000 and terminating the bridge loan.  The proceeds
from the loans were used to purchase merchant portfolios, to repay debt and for
general working capital purposes.  The revolving credit facility matures on
November 1, 1996 unless converted to a term loan payable in monthly installments
over four years.  Notes issued under the credit facility will bear interest at a
rate based on LIBOR, the bank's prime rate or at a fixed rate based on the bond
equivalent bid side yield of the U.S. Treasury Note.  Borrowings under the
agreement are secured by substantially all the Company's assets and life
insurance policies on the lives of two of the Company's executive officers.  The
agreement contains restrictive covenants which include, among other items,
maintenance of specified ratios of fixed charge coverage, debt to earnings
before interest, taxes, depreciation and amortization and to net worth.  The
covenants also include restrictions on  capital expenditures and prohibition of
new indebtedness and cash dividends.




                                       45
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 8 - SHAREHOLDERS' EQUITY;
     Changes in the shares of the Company's common stock are as follows:
<TABLE>
<CAPTION>
 
<S>                                   <C>
  Issued at July 31, 1993...........   2,694,535
  Shares issued.....................      20,000
                                      ----------
  Issued at July 31, 1994...........   2,714,535
  Shares issued.....................   2,428,013
  Exercise of  put options..........   1,922,372
  Exercise of options and warrants..     164,684
                                      ----------
  Issued at July 31, 1995...........   7,229,604
  Shares issued.....................   5,851,961
  Exercise of options...............      44,805
  Stock dividends...................  19,185,722
                                      ----------
  Outstanding at July 31, 1996......  32,312,092
                                      ==========
</TABLE>



NOTE 9 - STOCK OPTIONS AND WARRANTS:

     The Company has an incentive stock option plan, whereby the Company has
reserved for issuance upon exercise of stock options a maximum of 2,295,000
shares of the Company's common stock.  In addition to certain other provisions,
the plan provides for the option price of the shares to be determined by the
Board of Directors at the date of the grant provided, however, that in the case
of incentive stock options, the option price shall be no less than 100% of the
fair market value of the common stock on such date (110% in the case of an
individual who owns more than 10% of the total combined voting power of all
classes of stock of the Company).  In the case of nonstatutory stock options,
the option price shall be no less than 85% of the fair market value of the
common stock on the date of grant.

     The options expire at such times as determined by the Board of Directors at
the time of the grant, which shall be no later than ten years from the grant
date (five years in the case of an individual who owns more than 10% of the
total combined voting power of all classes of stock of the Company).  The
Company is authorized to loan, or guarantee loans for, the purchase price of
shares issuable upon exercise of options granted under the plan.

     In May 1994, the Company adopted an outside director stock option plan and
amended the plan at the December 1995 annual shareholders' meeting.  The plan
provides for the grant of non-qualified stock options to outside directors and
authorizes the issuance of up to 300,000 shares of common stock pursuant to
options having an exercise price equal to the fair market value of the common
stock on the date the options are granted.  Options were granted to each outside
director on the effective date of the Offering to purchase 30,000 shares of the
Company's



                                       46
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

common stock for a total of 120,000 shares (Note 2).  Options granted under the
plan are exercisable one-fourth each on the first, second, third and fourth
anniversaries of the grant date and expire ten years after the grant date.  The
status of options under the plan (reflecting all stock splits) is as follows:
<TABLE>
<CAPTION>
 
                                     NUMBER       EXERCISE
                                   OF OPTIONS       PRICE           EXPIRATION DATE
                                   -----------  -------------       ------------------
<S>                                <C>          <C>                 <C>
 
   Outstanding at July 31, 1993..     458,700
                                    ---------
   Outstanding at July 31, 1994..     458,700
     Granted.....................   1,361,724     $ 2.67            August 11-12, 2004
     Granted.....................      24,000     $ 2.83            December 15, 2002
     Granted.....................      15,000     $ 3.54            February 21, 2005   
     Terminated..................      (5,196)
     Exercised...................    (103,872)    $ 0.83 - $2.67
                                    ---------
   Outstanding at July 31, 1995..   1,750,356
     Granted.....................      69,000     $ 5.96            August 15, 2005
     Granted.....................      16,500     $ 9.17            November 9, 2005
     Granted.....................      84,000     $ 8.78            December 12, 2005
     Granted.....................     150,000     $10.29            December 12, 2005
     Granted.....................      24,000     $10.94            December 15, 2005
     Granted.....................     120,000     $10.00            December 28, 2005
     Granted.....................      48,000     $15.67            March 29, 2006
     Granted.....................      40,000     $22.25            July 16, 2006
     Terminated..................    (265,052)
     Exercised...................    (119,775)    $ 0.83 - $2.67
                                    ---------
   Outstanding at July 31, 1996..   1,917,029
                                    =========
 
   Exercisable at July 31, 1996..     558,175
                                    =========
</TABLE>


     Options for 740,772 and 550,324 shares were available for future grant
under the plan at July 31, 1995 and 1996, respectively.

     The Company has granted stock warrants which give the holder the right to
purchase 120,000 shares of the Company's common stock at an exercise price of
$1.25 per share.  These warrants expire March 22, 2004 (Note 3).

NOTE 10 - RETIREMENT PLANS:

     The Company initiated a 401(k) retirement plan, the PMT Services, Inc.
401(k)  Retirement Plan, in fiscal 1996.  Following the initial enrollment,
employees become eligible for participation in the plan on the semi-annual
enrollment date following the employee completing 12  consecutive  months  of
employment  and  1,000  hours  of  service  or  more.  The Company



                                       47
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

contributes an amount equal to 50% of employee voluntary contributions up to a
maximum of 6% of the employee's annual compensation.  The plan expense for
fiscal 1996 was $64,015.

     Prior to the merger with the Company, MHA's employees could participate in
the Martin-Howe 401(k) plan.  MHA matched 50% of the employee contributions up
to 6% of salary.  This plan was terminated subsequent to the merger with PMT
Services, Inc.  MHA employees became eligible for participation in the PMT
401(k) Plan effective with the merger.

NOTE 11 - LEASES:

     The Company leases equipment and office space under noncancellable
operating leases.  Rent expense approximated $182,694, $568,467 and $734,311
during fiscal years 1994, 1995 and 1996, respectively. Office space was leased
from a partnership comprising two of the Company's shareholders during fiscal
year 1994 and a portion of 1995. Rent expense paid to shareholders for office
space amounted to $113,000 and $54,000 during fiscal years 1994 and 1995,
respectively. This office space lease agreement terminated in 1995 and the
Company relocated. None of the Company's current office space is with a related
party. Subsequent to July 31, 1996, the Company entered into an agreement to
lease additional office space beginning October 1, 1996. Future minimum payments
under all noncancellable leases with terms greater than one year at July 31,
1996 are:

<TABLE>
<CAPTION>
 
                 FISCAL YEAR
                   ENDING
                   JULY 31
                 -----------         
                 <S>              <C>
                    1997               901,000
                    1998               933,000
                    1999               839,000
                    2000               802,000
                    2001               338,000
                 Thereafter                 --
</TABLE>

NOTE 12 - OTHER INCOME - NET:

     The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter
of fiscal year 1996 for the receipt of insurance proceeds on the life of the
former Chief Financial Officer of the Company.  Additionally, the Company has
included in this line item all non-recurring transaction costs related to
mergers, including MHA, which was accounted for as a pooling of interests.




                                       48
<PAGE>
 
                              PMT SERVICES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 13 - INCOME TAXES:

The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
 
                                                                                         YEAR ENDED JULY 31,
                                                                                -------------------------------------
                                                                                   1994         1995         1996
                                                                                -----------  -----------  -----------
<S>                                                                             <C>          <C>          <C>
 Current tax expense:
   Federal....................................................................  $1,289,529   $2,019,143   $5,016,005
   State......................................................................     240,620      377,654      926,555
                                                                                ----------   ----------   ----------
                                                                                 1,530,149    2,396,797    5,942,560
                                                                                ----------   ----------   ----------
 Deferred tax benefit:
   Federal....................................................................    (108,903)     (89,662)    (818,301)
   State......................................................................     (21,584)     (11,644)    (138,235)
                                                                                ----------   ----------   ----------
                                                                                  (130,487)    (101,306)    (956,536)
                                                                                ----------   ----------   ----------
 Increase in valuation
   allowance..................................................................          --      137,288      194,831
                                                                                ----------   ----------   ----------
                                                                                $1,399,662   $2,432,779   $5,180,855
                                                                                ==========   ==========   ==========


The Company's effective tax rate differs from the statutory rate as follows:
 
                                                                                           YEAR ENDED JULY 31,
                                                                                ------------------------------------
                                                                                   1994         1995         1996
                                                                                ----------   ----------   ----------
 Federal tax at statutory rate................................................     34.0%        34.0%        34.0%
 Increase in taxes resulting
  from:
   State income taxes (net
    of federal tax benefit)...................................................      3.9          4.0          3.9
   Minority interest..........................................................       --          1.3          0.8
   Valuation allowance........................................................       --          2.3          1.4
   Other......................................................................      0.1         (1.5)        (2.6)
                                                                                ----------   ----------   ----------
                                                                                   38.0%        40.1%        37.5%
                                                                                ==========   ==========   ==========
</TABLE>

     Deferred income taxes under SFAS 109 reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at July 31, 1995 and
1996 are as follows:




                                       49
<PAGE>
 
                               PMT SERVICES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
 
                                                 JULY 31,
                                          -----------------------
                                             1995        1996
                                          ----------  -----------
<S>                                       <C>         <C>
    Current tax assets:
      Compensation liabilities..........  $  24,321   $   30,897
      Loss reserves.....................    200,896      178,069
      Other.............................     37,749       56,695
                                          ---------   ----------
    Net current tax assets..............  $ 262,966   $  265,661
                                          =========   ==========
 
    Noncurrent tax assets:
      Merchant portfolio amortization...  $ 682,907   $1,586,194
      Net operating loss of subsidiary..    137,288      332,119
                                          ---------   ----------
                                            820,195    1,918,313
      Noncurrent tax liability:
      Depreciation......................    (94,329)    (238,606)
                                          ---------   ----------
     Net noncurrent tax assets..........    725,866    1,679,707
                                          ---------   ----------
     Valuation allowance................   (137,288)    (332,119)
                                          ---------   ----------
                                          $ 588,578   $1,347,588
                                          =========   ==========
</TABLE>


As of July 31, 1996, the Company has approximately $874,000 of federal and state
net operating loss carryforwards available to offset future taxable income of a
subsidiary of the Company.  A valuation allowance has been established for these
net operating losses.

NOTE 14 - COMMITMENTS AND CONTINGENCIES:

     In addition to the third-party debt guaranty and operating leases described
in Notes 3 and 9 above, the Company is subject to the following commitments and
contingencies described herein.

     The Company entered into an agreement in July 1995 to purchase the rights
to service merchant accounts to be generated by another independent sales and
service provider ("service provider") under a contract with the Company's
primary processing bank.  The Company's option to purchase may be exercised upon
the earlier of default by the service provider under its loan agreement with a
third party or December 1, 1997 and expires on January 31, 1998.  The purchase
price will be derived as a multiple of average monthly cash flow generated by
the merchant accounts for the three months immediately prior to the purchase.




                                       50
<PAGE>
 
                               PMT SERVICES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     The Company's agreement with its primary processing bank was amended to
require the Company to purchase the service provider's merchant accounts by
January 31, 1998. Additionally, the Company has indemnified the processing bank
for any losses incurred by the processing bank with respect to the service
provider's merchant accounts.  Additionally, the Company has indemnified the
processing bank for any losses incurred by the processing bank with respect to
the service provider's merchant accounts.

     In connection with the option agreement, the Company has guaranteed the
service provider's loan to a third party in the amount of $250,000.  The Company
has also entered into a service agreement whereby the Company will provide
customer service, processing equipment deployment and related services to the
service provider's merchant accounts for a monthly fee of $4.75 per merchant
account.    At July 31, 1996, the service provider was a newly developed entity
without significant merchant accounts generated.

     VISA and MasterCard require merchants accepting VISA and MasterCard credit
cards to contract directly with a processing bank that is a member bank of the
VISA or MasterCard associations.  The Company is not a party to the merchant
processing agreements and is therefore dependent upon its contractual
arrangements with its processing banks in order to continue to service its
merchant portfolio.  The Company has a contractual right to receive revenues
derived from the discount rate and fees earned on its merchant portfolio so long
as the merchant continues to process transactions on the processing bank's
system and the Company provides adequate service to the merchant and remains in
compliance under its agreement with the processing bank.  Under the terms of the
Company's agreement with its primary processing bank, the Company is permitted
to transfer merchants to another processing bank subject to time limitations and
termination fees.  This agreement provides mobility for substantially all of the
Company's merchant base.  However, in order to transfer merchant contracts, the
Company must pay the processing bank a fee determined by a formula related to
the annualized aggregate transaction volume of the merchants transferred.


                                       51
<PAGE>
 

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

            None.




                                       52
<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
 
EXECUTIVE OFFICERS
<S>                       <C>  <C>
 
            NAME          AGE  POSITION
------------------------  ---  -----------------------------------------------------
Richardson M. Roberts...   38  Chairman of the Board and Chief Executive Officer
Gregory S. Daily........   37  President, Treasurer and Director
Clay M. Whitson.........   38  Vice-President of Finance and Chief Financial Officer
Joseph T. Stewart, Jr...   56  Chief Operating Officer
Vickie G. Johnson.......   37  Chief Accounting Officer, Secretary and Controller
</TABLE>

     Mr. Roberts has served as Chief Executive Officer of the Company, Chairman
of the Board and a director since co-founding the Company in August 1984.  Mr.
Roberts also served as President of the Company from August 1984 to December
1995.  Mr. Roberts was previously employed with Comdata Network, Inc. as a
national sales representative.

     Mr. Daily has served as Treasurer and a director of the Company since co-
founding the Company in August 1984.  Mr. Daily also served as Vice-President
and Chief Operating Officer of the Company from August 1984 to December 1995,
and currently serves as President of the Company.  Mr. Daily was previously
employed with Comdata Network, Inc. as a telemarketing representative.

     Mr. Whitson has served as Vice-President of Finance of the Company since
joining the Company in January 1996 and currently serves as Chief Financial
Officer of the Company.  Mr. Whitson was previously employed as Chief Financial
Officer of the Gemala Group, a diversified conglomerate based in Indonesia.
Prior to joining the Gemala Group in 1990, Mr. Whitson was a Director in the
Mergers and Acquisitions Department at The Chase Manhattan Bank, N.A.

     Mr. Stewart has served as Chief Operating Officer of the Company since
joining the Company in January  1996.  Mr. Stewart was previously employed as
Executive Vice-President of the Electronic Funds Services unit of First Data
Corporation.

     Ms. Johnson has served as Controller of the Company since joining the
Company in October 1991.  Ms. Johnson also serves as Chief Accounting Officer
and Secretary of the Company.  Ms. Johnson was previously employed with Historic
Hotel Partners, Inc. as Regional Controller.

DIRECTORS

     Information with respect to the Company's directors is incorporated herein
by reference from the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on December 16, 1996.

COMPLIANCE WITH REPORTING REQUIREMENTS OF THE EXCHANGE ACT

     Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth in the Company's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on December 16, 1996, under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance."


                                       53
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

     This information is incorporated herein by reference from the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
December 16, 1996, except that the Comparative Performance Graph and the
Compensation Committee Report on Executive Compensation included in the Proxy
Statement are expressly not incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     This information is incorporated herein by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on December
16, 1996.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     This information is incorporated herein by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on December
16, 1996.


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

(a)  The following financial statements are included in Item 8 of Form 10-K:

<TABLE>
<CAPTION>
     <S>  <C>
     (1)  Financial Statements:
          
          Report of Independent Auditors
          Consolidated Balance Sheets as of July 31, 1996 and July 31, 1995
          Consolidated Statements of Income, each of the three years ended July 31, 1996
          Consolidated Statements of Changes in Shareholders' Equity, each of the three years ended July 31, 1996
          Consolidated Statement of Cash Flows, each of the three years ended July 31, 1996
          Notes to Consolidated Financial Statements

     (2)  Financial Statement Schedules:                                            Page

          Independent Auditors' Report on
             Financial Statement Schedule.............                               55
          Schedule II - Reserve for Merchant Losses...                               56

          The other schedules are omitted because the required information is
          either inapplicable or   has been disclosed in the consolidated financial
          statements and notes thereto.

     (3)  Exhibits
          
          The index to Exhibits is at page 57.

(b)  Reports on Form 8-K

</TABLE> 

     The Company has not filed any current reports during the fourth quarter of
fiscal year 1996.



                                       54
<PAGE>
 
                     REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULE


To the Board of Directors
 of PMT Services, Inc.



Our audits of the consolidated financial statements referred to in our report
dated September 13, 1996, appearing on page 29 of this From 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a) of this From
10-K.  In our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth herein when read in conjunction
with the related financial statements.



PRICE WATERHOUSE LLP


Nashville, TN
September 13, 1996

                                       55
<PAGE>
 
                                                                     SCHEDULE II



                              PMT SERVICES, INC.

                          RESERVE FOR MERCHANT LOSSES
<TABLE>
<CAPTION>
 
 
                              BALANCE AT                                   BALANCE AT
                               BEGINNING                                     END OF
                               OF PERIOD      ADDITIONS(1)  DEDUCTIONS(2)    PERIOD
                              ----------      -----------   ------------   ----------
<S>                           <C>             <C>           <C>            <C>
 
Fiscal Year   1994......       $168,660         $484,993       $208,894     $444,759
 
              1995......       $444,759         $483,245       $399,331     $528,673
 
              1996......       $528,673         $654,705       $720,500     $462,878
</TABLE>
______________________

(1)  Additions represent amounts charged to expense during the respective
     periods.

(2)  Deletions represent actual chargebacks incurred by the Company during the
     respective periods.

                                       56
<PAGE>
 
(3)  EXHIBITS


EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBITS

3.1       Amended and Restated Charter of the Registrant (1)

3.2       Bylaws of the Registrant (1)

4.1       Section 6 of the Restated Charter of the Registrant (included in
          Exhibit 3.1) (1)

4.2       Specimen of Common Stock certificate (1)

10.1(a)   Purchase Agreement, dated December 1, 1992, between the Registrant and
          ISO America, Inc. (1)

10.1(b)   Purchase Agreement, dated March 1, 1993, between the Registrant and
          Electronic Access, Inc. (1)

10.1(c)   Purchase Agreement, dated April 1, 1993, between the Registrant and
          Direct Referral Networks, Inc. (1)

10.1(d)   Purchase Agreement, dated April 1, 1993, between the Registrant and
          Bankcard Network, Inc. (1)

10.1(e)   Purchase Agreement, dated December 1, 1993, between the Registrant and
          Crown Card Services, Inc. (1)

10.1(f)   Purchase Agreement, dated December 16, 1993, between the Registrant
          and Credit-Link Card Services, Inc. (1)

10.1(g)   Purchase Agreement, dated March 22, 1994, between the Registrant and
          Bankcard America, Inc. (1)

10.1(h)   Purchase Agreement, dated April 28, 1995, between the Registrant,
          Bankcard America, Inc., and each of Paul L. Alperstein, Samuel
          Buchbinder and Sol Alperstein. (2)

10.1(i)   Purchase Agreement, dated July 7, 1995, between the Registrant and
          TermNet Merchant Services, Inc. (3)
 
10.1(j)   Purchase Agreement, dated July 18, 1995, between the Registrant and
          Consumer Payment Services, Inc. (4)

10.1(k)   Option Agreement, dated July 25, 1995, between the Registrant and
          Money Transfer Systems, Inc., Mel Ora and Greg Mohr. (7)
 
10.1(l)   Purchase Agreement, dated October 25, 1995, between the Registrant and
          Imperial Bank. (7)
 

                                       57
<PAGE>
 
 
10.1(m)   Purchase Agreement, dated March 12, 1996, between the Registrant and
          UMB Bank, n.a. (8)

10.1(n)   Agreement and Plant of Merger, dated June 28, 1996, by and among the
          Registrant, PMT Acquisition Corporation and Martin-Howe Associates,
          Inc.

10.1(o)   Agreement and Plan of Merger, dated July 25, 1996 by and among the
          Registrant, PMT Illinois Acquisition Corporation and Data Transfer
          Associates, Inc.

10.1(p)   Processing Agreement, dated March 1, 1994, between the Registrant and
          First National Bank of Omaha, relating to the processing of bankcard
          transactions.(1)

10.1(q)   Amendment to Processing Agreement, dated May 10, 1995, between the 
          Registrant and First National Bank of Omaha.(7)

10.1(r)   Amendment to Processing Agreement, dated July 18, 1995, between the 
          Registrant and First National Bank of Omaha.(7)

10.1(s)   Amendment to Processing Agreement, dated August 7, 1995, between the 
          Registrant and First National Bank of Omaha.(7)

10.1(t)   Amendment to Agreement, dated November 1, 1995 between the Registrant 
          and First National Bank of Omaha.

10.1(u)   Fifth Amendment to Processing Agreement, dated May 29, 1996, between 
          the Registrant and First National Bank of Omaha.

10.1(v)   Agreement Regarding Merchant Maintenance and Solicitation, dated March
          17, 1994, as amended March 24, 1994, between the registrant and Rocky
          Mountain Bankcard System, Inc., relating to the processing of bankcard
          transactions.(1)

10.1(w)   Independent Sales Organization, Sales Marketing and Service Agreement,
          dated December 10, 1993, between the Registrant and Bank of Boulder,
          relating to the processing of bankcard transactions.(1)

10.1(x)   Credit Card Processing Agreement, dated July 1, 1992, between the
          Registrant and First USA Merchant Services, Inc., relating to the
          processing of bankcard transactions.(1)

10.1(y)   Letter Agreement, dated March 31, 1994, relating to the processing of 
          bankcard transactions.(1)

10.1(z)   Service Agreement, dated April 1, 1994, relating to the processing of 
          bankcard transactions.(1)

10.1(aa)  Provider Agreement, dated June 15, 1995, between the Registrant and
          Harris Trust and Savings Bank Charge-it Division, relating to the
          processing of bankcard transactions.(7)


                                       58
<PAGE>
 
10.1(bb)  Acknowledgement and Consent, dated July 7, 1995, between the
          Registrant, TermNet Merchant Services, Inc. and Bank South, relating
          to the processing of bankcard transactions.(7)

10.1(cc)  Acknowledgment and Consent, dated July 18, 1995, between the 
          Registrant, Consumer Payment Services, Inc. and Republic Bank,
          relating to the processing of bankcard transactions.(7)

10.1(dd)  Acknowledgment and Consent, dated May 29, 1996, between Registrant,
          Consumer Payment Services, Inc. and Republic Bank, relating to the
          processing of bankcard transactions.
 
10.1(ee)  Processing Agreement, dated March 12, 1996, between the Registrant and
          UMB Bank, n.a., relating to the processing of bankcard
          transactions.(8)

10.1(ff)  Processing Agreement, dated October 1, 1995, between the Registrant
          and Imperial Bank, relating to the processing of bankcard
          transactions. (9)

10.1(gg)  Private-Label Credit Card Processing Agreement, dated March 12, 1996,
          between the Registrant and UMB Bank, n.a., relating to the processing
          of charge card transactions.(8)

10.1(hh)  Assignment and Assumption Agreement, dated March 12, 1996, between 
          Registrant and UMB Bank, n.a. (8)

10.1(ii)  Marketing Agreement, dated March 12, 1996, between the Registrant and 
          UMB Bank, n.a. (8)

10.1(jj)  Transaction Processing and Payment Agreement, dated July 21, 1992,
          between the Registrant and ENVOY Corporation, relating to the
          processing of bankcard transactions.(1)

10.1(kk)  ESP Extended Services Plan Agreement, dated May 3, 1994, between the
          Registrant and LDDS Communications, relating to the processing of
          bankcard transactions.(1)

10.1(ll)  Service Agreement, dated November 17, 1993, between the Registrant and
          Transaction Network Services, Inc.(1)

10.1(mm)  Agreement, dated April 11, 1994, between the Registrant and Ceridian 
          Corporation.(1)

10.1(nn)  Lease, dated August 31, 1994, between the Registrant and Eastpark, 
          L.P.(5)

10.1(oo)  First Amendment to Lease, dated September 30, 1994 between Registrant 
          and Eastpark, L.P.(7)

10.1(pp)  Second Amendment to Lease, dated May 11, 1995 between Registrant and 
          Eastpark, L.P.(7)

10.1(qq)  Third Amendment to Lease, dated March 1, 1996, between Registrant and 
          Eastpark, L.P.


                                       59
<PAGE>
 

10.1(rr)  Fourth Amendment to Lease, dated May 1, 1996, between Registrant and
          Highwoods/Forsyth Limited Partnership (Successor-in-Interest to
          Eastpark, L.P.)

10.1(ss)  Lease Agreement, dated July 31, 1996, between Registrant and Centoff 
          Realty Company, Inc.

10.2(a)   1994 Non-Employee Director Stock Option Plan. (1)
 
10.2(b)   Non-Employee Director Restricted Stock Award Plan.
 
10.2(c)   1994 Incentive Stock Plan. (1)
 
10.2(d)   PMT Services, Inc. 401(k) Retirement Plan. (6)
 
10.3(a)   Amended and Restated Loan Agreement, dated May 31, 1995, between the
          Registrant and First Union National Bank of Tennessee.(7)

10.3(b)   Amended and Restated Security Amendment, dated May 31, 1995, between 
          the Registrant and First Union National Bank of Tennessee.(7)

10.3(c)   First Amendment to Amended and Restated Loan Agreement, dated July 18,
          1995, between the Registrant and First Union National Bank of
          Tennessee.(7)

21.1      Subsidiaries of the Registrant.
 
23.1      Consent of Independent Accountants dated October 15, 1996.
 
27.1      Financial Data Schedule.

-------------------- 
(1)       Incorporated by reference to exhibits filed with the Registrant's 
          Registration Statement on Form S-1, Registration No. 33-79064.

(2)       Incorporated by reference to exhibits filed with the Registrant's
          Current Report on Form 8-K, filed on May 15, 1995, Commission 
          No. 0-24420.

(3)       Incorporated by reference to exhibits filed with the Registrant's
          Current Report on Form 8-K, filed on July 21, 1995, Commission 
          No. 0-24420.

(4)       Incorporated by reference to exhibits filed with the Registrant's
          Current Report on Form 8-K, filed on July 26, 1995, Commission 
          No. 0-24420.

(5)       Incorporated by reference to exhibits filed with the Registrant's 
          Annual Report on Form 10-K for the year ended July 31, 1994.

(6)       Incorporated by reference to exhibits filed with the Registrant's 
          Registration Statement on Form S-8, Registration No. 33-97000.



                                       60
<PAGE>
 
(7)       Incorporated by reference to exhibits filed with the Registrant's 
          Annual Report on Form 10-K for the year ended July 31, 1995.

(8)       Incorporated by reference to exhibits filed with the Registrant's
          Current Report on Form 8-K, filed on March 27, 1996, Commission 
          No. 0-24420.

(9)       Incorporated by reference to exhibits filed with the Registrant's
          Current Report on Form 8-K, filed on November 9, 1995, Commission 
          No. 0-24420.

                                       61
<PAGE>
 
                 EXECUTIVE COMPENSATION PLAN AND ARRANGEMENTS

   The following is a list of all executive compensation plans and arrangements
filed as exhibits to this Annual Report on form 10-K:

Exhibit
Number                        Exhibit

*10.2(a)  1994 Non-Employee Director Stock Option Plan.

 10.2(b)  Non-Employee Director Restricted Stock Award Plan.

*10.2(c)  1994 Incentive Stock Plan.

**10.2(d) PMT Services, Inc. 401(K) Retirement Plan.

-----------------
*   Incorporated by reference to exhibits filed with the Registrant's
    Registration Statement on Form S-1, Registration No. 33-79064.

**  Incorporated by reference to exhibits filed with the Registrant's
    Registration Statement on Form S-8, Registration No. 33-97000.

                                       62
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly cause this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on October 14, 1996.


                              PMT SERVICES, INC.


                              By:  /s/ Richardson M. Roberts
                              ------------------------------    
                                       Richardson M. Roberts
                                       Chairman of the Board and
                                       Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange 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>
 
           Name                        Title(s)                                  Date
           ----                        --------                                  ----                     
<S>                          <C>                                   <C>
 
/s/ Richardson M. Roberts    Chairman of the Board, Chief          October 14, 1996
---------------------------  Executive Officer and Director
Richardson M. Roberts        (principal executive officer) 
 
/s/ Gregory S. Daily         President, Treasurer and Director     October 14, 1996
--------------------------- 
Gregory S. Daily
 
/s/ Clay M. Whitson          Vice President of Finance and         October 14, 1996
---------------------------  Chief Financial Officer (principal
Clay M. Whitson              financial officer
 
/s/ Vickie G. Johnson        Chief Accounting Officer,             October 14, 1996
---------------------------  Secretary and Controller
Vickie G. Johnson            (principal accounting officer)
 
/s/ Leslie D. Coble          Director                              October 14, 1996
---------------------------
Leslie D. Coble
 
/s/ Charles R. Burtzloff     Director                              October 14, 1996
---------------------------
Charles R. Burtzloff
 
/s/ Robert C. Fisher, Jr.    Director                              October 14, 1996
---------------------------
Robert C. Fisher, Jr.
 
/s/ Harold L. Siebert        Director                              October 14, 1996
---------------------------
Harold L. Siebert
</TABLE>

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