TOWNE SERVICES INC, S-1, 1999-04-23

TOWNE SERVICES INC
S-1, 1999-04-23
COMPUTER PROCESSING & DATA PREPARATION

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<PAGE> 1

As filed with the Securities and Exchange Commission on April 22, 1999

Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TOWNE SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C> <C>
GEORGIA 7374 62-1618121
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>

3295 RIVER EXCHANGE DRIVE, SUITE 350, NORCROSS, GEORGIA 30092, (770) 734-2680,
(770) 582-8350 (FACSIMILE)
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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DREW W. EDWARDS
CHIEF EXECUTIVE OFFICER
TOWNE SERVICES, INC.
3295 RIVER EXCHANGE DRIVE
SUITE 350
NORCROSS, GEORGIA 30092
(770) 734-2680
(770) 582-8350 (FACSIMILE)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:

<TABLE>
<S> <C>
GLENN W. STURM, ESQ. DAVID A. STOCKTON, ESQ.
SUSAN L. SPENCER, ESQ. JAN M. DAVIDSON, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. KILPATRICK STOCKTON, LLP
FIRST UNION PLAZA, SUITE 1400 1100 PEACHTREE STREET
999 PEACHTREE STREET, N.E. SUITE 2800
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30309
(404) 817-6000 (404) 815-6500
(404) 817-6050 (FACSIMILE) (404) 815-6555 (FACSIMILE)
</TABLE>

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

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for any offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------------

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value........... 8,050,000 $10.50 $84,525,000 $23,500
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 1,050,000 shares which the Underwriters have an option to purchase
from Towne Services, Inc. to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED APRIL 22, 1999

7,000,000 SHARES

TOWNE SERVICES, INC.
[LOGO] COMMON STOCK

Towne Services, Inc. is offering 7,000,000 shares of its common stock.

Since our initial public offering in July 1998, our common stock has traded
on the Nasdaq National Market under the symbol "TWNE." As of April , 1999, the
price per share of our common stock was $ .

---------------------

INVESTING IN THE COMMON STOCK INVOLVES MANY RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................... $ $
Underwriting Discounts...................... $ $
Proceeds to Towne Services.................. $ $
</TABLE>

Towne Services has granted the underwriters a 30-day option to purchase up
to an additional 1,050,000 shares of common stock to cover any over-allotments.
If the underwriters exercise this right in full, the Public Offering Price will
total $ , the Underwriting Discounts will total $ and the
Proceeds to Towne Services will total $ . The underwriters expect to
deliver the shares of common stock to purchasers on , 1999.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

---------------------

FIRST UNION CAPITAL MARKETS CORP. HAMBRECHT & QUIST

J.C. BRADFORD & CO.

The date of this prospectus is , 1999.
<PAGE> 3

[Artwork for inside front cover]
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 7
Use of Proceeds............................................. 15
Price Range of Common Stock and Dividend Policy............. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Historical Financial Information................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 31
Management.................................................. 42
Certain Transactions........................................ 51
Principal Shareholders...................................... 53
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 59
Underwriting................................................ 61
Legal Matters............................................... 62
Experts..................................................... 62
Additional Information...................................... 62
Index to Financial Statements............................... F-1
</TABLE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
i
<PAGE> 5

SUMMARY

This summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all the information that may
be important to you. You should read the entire prospectus carefully, and you
should consider the information set forth under "Risk Factors" and in the
financial statements and related notes, before deciding to invest in shares of
our common stock. Unless we indicate otherwise, we have assumed that the
offering price per share of common stock will be $ and that the underwriters
will not exercise their over-allotment option.

TOWNE SERVICES, INC.

Towne Services provides transaction based online services and products to
small businesses and community banks in the United States. We deliver these
services and products via an electronic gateway that links our customers with us
and with other providers of business management tools. This electronic gateway
uses internet and telecommunications connections to provide small businesses and
banks access to our proprietary transaction processing systems. These systems
capture sales and payment information at the point of sale, process this
information and communicate the results to our customers. The primary business
capabilities we offer our customers include:

- a "virtual credit card" system that processes the in-house credit
transactions of small businesses in much the same way as credit card
transactions are processed;

- an automated receivables management system that allows banks to quickly
finance the working capital needs of their small business customers; and

- related billing, payment and presentment and debt collection services.

Our business has grown rapidly, with our revenues increasing from $722,000
in 1997 to $6.4 million in 1998. For more information about Towne, please see
the "Business" section beginning on page 31.

TOWNE'S MARKET

A variety of small and medium size retail merchants use our systems,
including hardware stores, clothing stores, florists, auto parts stores and
pharmacies. We also market our products and services to small commercial
businesses, such as furniture manufacturers, equipment distributors, plumbing
suppliers and other industry supply stores. We believe there are more than 5
million small and medium size retail merchants and 12 million small commercial
businesses in the United States. Our processing systems allow these small
businesses to automate many business management tasks that currently are
conducted manually. We believe that the market for our electronic processing
services and products is largely untapped, as most electronic payment processing
companies typically focus instead on larger businesses and on credit and debit
card transactions.
1
<PAGE> 6

TOWNE'S STRATEGIES

Our goal is to become one of the leading providers of online business
solutions to small and medium size businesses in the United States. We intend to
continue to develop and deliver the business and management tools that small
businesses need to compete in an electronic commerce marketplace. We will need
to continue to grow significantly to reach our goal, and we plan to do so by
implementing the following key business strategies:

- we intend to maximize our electronic gateway to cross-market and deliver
a variety of business services and products to our growing customer base;

- we plan to continue to enter into relationships with organizations that
can expand the types of business solutions we offer or the groups of
customers to which we offer our products and services;

- we plan to aggressively hire and train additional sales and marketing
personnel across the country;

- we will continue to attract new business and bank customers by leveraging
existing and future community bank relationships and the expertise of our
executive officers and directors; and

- we intend to identify and acquire businesses, products and services that
complement or expand our electronic commerce solutions and business
strategies.

RECENT DEVELOPMENTS -- THE FORSEON MERGER

On March 25, 1999 we entered into a merger agreement to acquire Forseon
Corporation, a company based in Riverside, California. Forseon provides products
and services that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports for retail businesses in the United States and Canada. These products
and services often improve small retail businesses' ability to compete with
larger chain retailers by providing automated processing and business management
capabilities similar to those used by these larger competitors. Forseon's
management reports assist these small business owners in developing and
implementing their merchandising strategies as well as receivables management
and marketing plans. Forseon's net revenues for the year ended December 31, 1998
were $11.8 million. See Forseon's financial statements and related notes
included later in this prospectus.

The merger agreement provides for the combination of Towne's and Forseon's
businesses through the merger of Forseon with a subsidiary of Towne. Towne will
issue a total of 2,075,345 shares of its common stock in exchange for all
outstanding stock and options to acquire stock in Forseon. Ten percent of the
Towne common stock will be held back in escrow to satisfy the indemnification
obligations of Forseon stockholders under the merger agreement. The merger will
be accounted for as a pooling of interests. There are many risks involved with
this merger and it may not actually occur for a variety of reasons. Please see
"Risk Factors -- The Forseon merger may not close if several conditions are not
satisfied" and other risk factors describing potential risks related to this
merger.
2
<PAGE> 7

THE OFFERING

Common Stock offered by Towne............... 7,000,000 shares

Common Stock offered by Towne
if the underwriters exercise their
over-allotment option..................... 8,050,000 shares

Common Stock to be outstanding
after the offering........................ 26,803,611 shares(1)

Assumed offering price per share............ $

Estimated net proceeds to Towne
(after deducting expenses
related to this offering)................. $

Use of proceeds............................. To fund the rapid growth in our
operations, make capital
expenditures, pay expenses of
the Forseon merger and provide
additional monies for general
corporate purposes, including
possible acquisitions of
complementary businesses or
technologies.

Nasdaq National Market symbol............... TWNE
- -------------------------

(1) Based on the number of shares of common stock outstanding on April 19, 1999.
This does not include an aggregate of 3,740,459 shares issuable upon the
exercise of stock options outstanding as of April 19, 1999. In addition,
this figure does not include 2,075,345 shares of our common stock related to
the Forseon merger.

TOWNE CREDIT(R) and TOWNE FINANCE(R) are registered marks of Towne
Services. CASHFLOW(SM) MANAGER is a service mark of Towne Services. This
prospectus also refers to the trademarks and trade names of other companies.

Our principal executive offices are located at 3295 River Exchange Drive,
Suite 350, Norcross, Georgia 30092, and our telephone number is (770) 734-2680.
3
<PAGE> 8

SUMMARY HISTORICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)

You should read the summary information set forth below in conjunction with
the financial and other information presented elsewhere in this prospectus,
including the consolidated financial statements and unaudited pro forma
consolidated financial statements beginning on page F-1. The pro forma
statements of operations and other operating data include the financial
information of Banking Solutions, Inc. and Forseon Corporation as if both
mergers were completed on January 1, 1998. The pro forma balance sheet data
includes the financial information of Forseon Corporation as if the merger was
completed on March 31, 1999. The pro forma information is based upon currently
available information and some assumptions that we believe are reasonable. It
does not necessarily represent what our financial position or results of
operations would have been if the events described had occurred on the dates
indicated. In addition, the pro forma information does not indicate what our
actual future financial position or results of operations may be.

<TABLE>
<CAPTION>
INCEPTION YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
PERIOD ENDED --------------------------------------- -------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1995 1996 1997 1998 1998 1998 1999 1999
------------ ------ ------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA; PRO FORMA AND THREE MONTH PERIODS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.................. $ 6 $ 105 $ 722 $ 6,398 $ 26,263 $ 548
Costs of processing,
servicing and support... 2 220 832 2,027 8,245 374
Research and
development............. 0 52 332 306 1,471 74
Sales and marketing....... 4 118 839 6,252 14,420 486
Stock compensation
expense(1).............. 0 10 0 6,268 6,268 5,972
Employee termination
costs(2)................ 0 0 0 2,291 2,291 0
General and
administrative.......... 19 358 1,140 3,859 9,033 1,347
------ ------ ------- -------- -------- -------- -------- --------
Total costs and
expenses................ 25 758 3,143 21,003 41,728 8,253
------ ------ ------- -------- -------- -------- -------- --------
Operating loss............ (19) (653) (2,421) (14,605) (15,465) (7,705)
------ ------ ------- -------- -------- -------- -------- --------
Net loss.................. $ (19) $ (662) $(2,516) $(15,135) $(16,038) $ (8,092) $ $
====== ====== ======= ======== ======== ======== ======== ========
Preferred stock
dividends............... 0 0 0 (5,108) (5,108) (5,108)
Net loss attributable to
common shareholders..... $ (19) $ (662) $(2,516) $(20,935) $(21,838) $(13,411) $ $
====== ====== ======= ======== ======== ======== ======== ========
Net loss per common
share................... $(0.00) $(0.10) $ (0.26) $ (1.35) $ (1.20) $ (1.11) $ $
====== ====== ======= ======== ======== ======== ======== ========
Weighted average common
shares outstanding...... 5,000 6,337 9,601 15,516 18,128 12,077
====== ====== ======= ======== ======== ======== ======== ========
OTHER OPERATING DATA AT
END OF PERIOD:
Number of sales people.... 0 2 15 99 157 33 --
Number of bank
contracts(3)............ 0 17 74 641 641 122 --
Number of business
customers............... 0 11 96 1,662 3,062 161 --
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------------------------
AS ADJUSTED FOR PRO FORMA
ACTUAL THIS OFFERING AS ADJUSTED
---------- --------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ $ $
Total assets................................................
Long-term debt, net of discounts............................
Shareholders' equity........................................
</TABLE>

4
<PAGE> 9

- ---------------
(1) During the year ended December 31, 1998, we sold shares of common stock and
issued options to acquire common stock to employees, officers, directors and
non-employees at what we believed to be the fair market value of the common
stock at that time. Based upon third-party sales, a valuation and the
initial public offering price, we subsequently valued the common stock at a
higher price. We recorded a one-time non-cash stock compensation charge for
the additional value.
(2) Represents costs associated with severance payments made in connection with
the consolidation of business operations after we acquired Banking
Solutions, Inc. in December 1998.
(3) Number of bank contracts includes each processing agreement executed with a
bank. In some cases, we enter into an agreement with a bank that has several
branches and the numbers presented above do not reflect the number of
branches operated by the bank. We also enter into contracts with bank
holding companies that are the parent of several different banks and may
count the contract as multiple contracts to represent the banks or
communities covered by the contract.
5
<PAGE> 10

FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES

We have made forward-looking statements in this prospectus. These
statements are subject to risks and uncertainties, and there can be no
guarantees that such statements will prove to be correct. Forward-looking
statements include assumptions as to how we may perform in the future. When we
use words like "believe," "expect," "anticipate," "predict," "potential,"
"continue," "will," "may," "could," "intend," "plan" and "estimate" or similar
expressions, we are making forward-looking statements. For those statements we
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995. You should understand
that the following important factors, in addition to those discussed elsewhere
in this prospectus, could affect the future results of our company and could
cause those results to differ materially from those expressed in our
forward-looking statements. These factors include:

- our limited operating history and whether we will be able to achieve
or maintain profitability;

- whether we can obtain, continue and manage growth or execute
agreements with new customers;

- whether we can enter new marketing alliances or attract and retain
sales and marketing personnel to grow our business;

- increased competition;

- termination of or any significant delay in the expected completion of
the merger with Forseon;

- whether we can successfully integrate the operations of companies we
acquire;

- the unknown effects of possible system failures, security breaches and
rapid changes in technology;

- adverse changes in economic conditions and in the markets we serve;

- regulatory, economic and other changes in the electronic commerce
industry generally; and

- changes in the law.

Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee that these expectations actually
will be achieved. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform those statements to
actual results. In evaluating these statements, you should consider various
factors, including the risks outlined under the "Risk Factors" section below.
You should also consider the cautionary statements contained in the reports we
have filed with the Securities and Exchange Commission. These factors may cause
our actual results, both before and after the proposed merger with Forseon, to
differ materially from any forward-looking statements.

In addition, we make no express or implied representation or warranty as to
the pro forma financial information set forth in this prospectus or as to the
accuracy or completeness of the assumptions from which such pro forma
information is derived. Projections or estimates of our future performance are
necessarily subject to a high degree of uncertainty and may vary materially from
actual results. You should read the particular discussions under "Risk Factors"
beginning on page 7 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 22.
6
<PAGE> 11

RISK FACTORS

You should carefully consider the risks described below before investing in
our common stock. If any of the following risks actually occur, our business,
financial condition or results of operations could be seriously harmed. In that
case, the trading price of our common stock would likely decline, and you may
lose all or part of your investment in our company.

The risks and uncertainties described below are not the only ones that may
impact our company. Additional risks and uncertainties that we do not know of at
this time could seriously harm our business and financial condition.

WE HAVE A LIMITED OPERATING HISTORY AND HAVE HAD SIGNIFICANT LOSSES, AND WE
CANNOT GUARANTEE WE WILL BECOME PROFITABLE.

We have only a limited operating history. We released our flagship TOWNE
CREDIT(SM) product and related services in June 1997. We have incurred
significant losses since we began operations. We had net losses of $660,000 in
1996, $2.5 million in 1997 and $15.1 million in 1998. We will continue to incur
net losses until we are able to attain sufficient revenues to support our
business and outweigh our expenses, which may never occur.

You should evaluate our company in light of the risks, expenses and
difficulties frequently encountered by companies in early stages of development
and in relatively new and changing markets. Our products and services are
relatively new. Businesses and banks may not accept these products and services
quickly or at all. Although we have increased our revenues in recent periods,
our costs and expenses have also grown substantially. We may not be able to
continue our revenue growth, control costs or become profitable. Our ability to
achieve and maintain profitability depends on a number of factors, including:

- gaining market acceptance for our current and future products and
services;

- increasing revenues while reducing costs;

- implementing our business strategies; and

- many other factors outside our control.

We cannot guarantee that we will succeed in achieving these goals, and our
failure to do so would have a material adverse effect on our business,
prospects, financial condition and operating results.

WE MAY NOT BE ABLE TO SUSTAIN OR MANAGE OUR GROWTH.

We have grown rapidly both internally and by acquisitions of other
businesses. We have had to recruit and hire more personnel, modify our
processing systems and otherwise expand our operations to accommodate our
growth. In addition, if we are unable to develop, deliver or sell new services
and products to our customers, it would have a material adverse effect on our
business, financial condition and results of operations. We may not be
successful in continuing or managing our growth. Further, our growth has placed,
and will continue to place, significant demands on all aspects of our business,
including our systems, management and personnel. We cannot guarantee that we
will be able to fund our growth, manage costs, adapt our operating systems,
respond to changing business conditions or otherwise achieve or manage our
growth.

7
<PAGE> 12

WE DEPEND ON INCREASING OUR SALES AND MARKETING FORCE AND FORMING NEW MARKETING
RELATIONSHIPS TO GROW OUR BUSINESS.

We must aggressively hire sales and marketing personnel and enter into new
marketing relationships to help gain access to large groups of potential bank
and business customers. Competition for experienced sales and marketing
personnel is intense, and we may not be able to retain existing personnel or
locate and attract additional qualified personnel in the future. In addition, we
have relationships with various organizations for the marketing, support and
endorsement of our products and services. We rely on these companies to market
our processing systems to their existing and future customer base of banks
across the country. If we were to lose any of these key marketing relationships
or fail to enter into new ones, it could prevent or delay our growth and have a
material adverse effect on our business, financial condition and operating
results.

OUR OPERATING RESULTS AND STOCK PRICE MAY FLUCTUATE DUE TO FACTORS BEYOND OUR
CONTROL.

Our operating results have varied in the past and are likely to vary
significantly in the future. This is in large part because the market for our
products and services is emerging and because our processing volume differs
substantially from customer to customer. Our stock price has also fluctuated
significantly and is likely to remain relatively volatile in the future. Our
future success depends on a number of factors, many of which are unpredictable
and beyond our control. These factors include:

- whether or not the market accepts our current and future products and
services;

- whether new competitors emerge or existing competitors gain market
share faster than us;

- whether new technologies are developed which make our systems outdated
or obsolete;

- whether costs of doing business increase as a result of higher wages,
sales commissions, taxes, competitors' pricing and other factors;

- whether we can identify and locate good businesses to acquire and
integrate the businesses we acquire in a cost-effective manner;

- whether seasonal trends in consumer purchasing impact the volume of
transactions processed;

- general economic factors and market conditions that impact our
customers and industry; and

- the impact of future acquisitions on our operations.

Due to all of these factors, historical results cannot be relied upon to
indicate future results, and it is likely that in some future period our results
of operations will fall below market expectations. This would likely cause the
price of our common stock to drop substantially.

BECAUSE IT IS NOT DIFFICULT TO ENTER OUR INDUSTRY, WE EXPECT INCREASED
COMPETITION WHICH COULD HARM OUR BUSINESS.

Our industry is very competitive. Increased competition is likely from both
existing competitors and new entrants into our existing or future markets. We
believe it is not very

8
<PAGE> 13

difficult to enter into business in our industry. Our competitors have
significant advantages, and future competitors may also have advantages,
including:

- established products and services;

- substantially greater resources and market presence;

- better customer service and technological expertise;

- additional personnel;

- the ability to adapt quickly to new technologies and changes in
customer demands;

- the ability to devote greater resources to marketing;

- longer operating histories; and

- larger and more established customer bases and operations.

WE RELY UPON SIGNIFICANT NEW CUSTOMERS TO GENERATE SET-UP FEES.

We rely upon and will continue to rely upon significant new customers or
large numbers of new customers for the set-up fees that are a substantial
portion of our revenues. The amount of revenues derived from any given customer
during a given period of time may vary significantly, and we expect that the
identity of customers accounting for large portions of revenues will change from
quarter to quarter and year to year.

ACQUISITIONS AND STOCK SALES MAY SUBJECT US TO ADDITIONAL RISKS AND MAY DILUTE
YOUR OWNERSHIP.

An inability to identify, acquire and integrate businesses, products or
services that complement our business may negatively affect our financial
results and our ability to grow. We cannot guarantee that we will be able to
identify and acquire suitable candidates on acceptable terms. We also cannot
promise that we will be able to arrange adequate financing, complete any
transaction or successfully integrate the acquired business. We may issue more
shares of our stock in future acquisitions or in sales of our stock, which would
dilute the shares you own. Acquisitions and stock offerings may also distract
management and result in dilution to current shareholders, additional debt, loss
of key employees, integration costs, expenses related to goodwill and other
intangible assets and unforeseen liabilities, all of which could have a material
adverse effect on our business and financial condition. In addition, we may not
be able to successfully compete with other companies for acquisition candidates.

IF WE DO NOT INTEGRATE OUR BUSINESS WITH FORSEON SUCCESSFULLY OR IMPROVE
FORSEON'S PERFORMANCE, WE MAY NOT BENEFIT FROM THE FORSEON MERGER.

In order to achieve the benefits of the Forseon merger, we must
successfully combine our businesses and operations. We must make Forseon's
technologies, products, services and personnel operate together with our
technologies, products, services and personnel in a cost-effective manner. We
may need to replace or convert some of Forseon's computer systems in order to
work with our computer systems. In addition, we must improve Forseon's
performance. Forseon's revenues did not grow in the last fiscal year, and have
not grown significantly in recent years. It is possible that Forseon's business
will not grow in the future, or that its costs and expenses will increase. If it
is not profitable, or if it does not increase its revenues or control its
expenses, Forseon could become a drain on our financial performance, or on the
price of our common stock.

9
<PAGE> 14

THE FORSEON MERGER MAY NOT CLOSE IF SEVERAL CONDITIONS ARE NOT SATISFIED.

The Forseon merger may not close unless several conditions are satisfied,
including:

- the merger agreement and related matters must be approved by holders
of 90% of the outstanding Forseon common stock and we cannot guarantee
this approval will be obtained;

- the shares we will issue in the Forseon merger must be registered with
the Securities and Exchange Commission;

- Forseon must have instituted proceedings to correct problems with its
employee benefit plans;

- our continued investigation of Forseon's business and operations must
not reveal any material breaches by Forseon of the representations and
agreements it made in the merger agreement;

- many other events specified in the merger agreement must occur, or not
occur, prior to closing; and

- the other conditions set forth in the merger agreement must be
satisfied or waived.

We cannot assure you that the conditions to the merger will be satisfied or
waived in a timely manner or at all. In that case, the merger will be delayed or
may not occur at all, and some or all of the potential benefits of the merger
may be lost.

IF THE FORSEON MERGER DOES NOT CLOSE OR IS DELAYED, OUR BUSINESS WOULD BE
HARMED.

If the Forseon merger does not close or is delayed, our business will be
greatly harmed because the announcement of the merger and our efforts to close
the merger will:

- deplete our cash;

- disrupt our sales and marketing efforts;

- likely increase employee turnover; and

- distract our management from our business plan and strategies.

We currently estimate that the Forseon merger will result in transaction
costs of approximately $1.5 million. This is an estimate and the actual
transaction costs may be much larger, especially if the merger is delayed. Many
of these costs have been incurred already. If the merger is not consummated, we
will have incurred significant costs but will receive no benefits.

WE MAY LOSE CUSTOMERS WITH LITTLE NOTICE AND BECAUSE OF THE FORSEON MERGER.

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

As a result of the Forseon merger, some of our customers may not continue
to do business with us or may decide to purchase products and services from our
competitors. Our customers

10
<PAGE> 15

might cancel agreements if we experience difficulties in integrating Forseon's
business into our operations. Cancellations or failures to renew our customer
contracts, both before and after the merger, could seriously harm our business
and operating results.

IF WE CANNOT ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL, IT WILL HARM OUR
BUSINESS.

If we cannot attract and retain key management personnel, it will harm our
business. Our ability to successfully operate and grow our business depends in
large part on retaining our senior officers and other key personnel. If members
of management become unable or unwilling to continue in their present positions,
our business, financial condition and results of operations could be negatively
affected. Competition for qualified management, technical, sales and marketing
employees in our industry is intense. Employees, including senior officers,
might leave our company and go to work for competitors. We cannot assure you
that we will be able to attract, retain and integrate employees to develop and
continue our business and strategies.

WE WILL HAVE BROAD DISCRETION TO SPEND A LARGE PORTION OF THE NET PROCEEDS FROM
THIS OFFERING.

We estimate that the net proceeds from the sale of the 7,000,000 shares of
common stock offered by us will be approximately $ million, after
deducting estimated underwriting discounts and estimated offering expenses. We
intend to use a substantial portion of the net proceeds:

- to fund the rapid growth in our operations, including to fund expansion
of our sales and marketing and development of additional products and
services;

- to fund capital expenditures and costs of moving to new operating
facilities; and

- for acquisitions and other general corporate purposes.

We have not determined specific uses for over 90% of the offering proceeds.
Consequently, our board of directors and management may apply much of the net
proceeds of this offering to uses you may not consider desirable. The failure of
management to apply these funds effectively could have a material adverse effect
on our business, financial condition and operating results. For more
information, see "Use of Proceeds."

FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK
PRICE.

If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
securities in the future at a time and price that we deem appropriate. After
this offering, we will have 26,803,611 shares of common stock outstanding. Also,
there are options and warrants to acquire another 3,740,459 shares outstanding
at this time. Upon completion of this offering, approximately shares,
including the 7,000,000 shares being offered in this offering, will be freely
tradeable by people who are not affiliates of our company. In addition, if we
complete the Forseon merger, there will be another 2,075,345 shares of common
stock registered for public sale.

Because the Forseon merger will be accounted for as a pooling of interests,
the directors, executive officers and holders of more than 10% of the shares of
each of Forseon and Towne are not permitted to sell shares of our common stock
for a period of time beginning 30 days prior to completion of the merger and
ending when we announce operating results which include 30 days of activities of
the combined company. The underwriters will not receive separate agreements that
restrict any shareholder's ability to sell shares in connection with this
offering. As a result, if

11
<PAGE> 16

the Forseon merger is terminated, our affiliates will not be restricted from
selling their shares, except as provided under the securities laws. See "Shares
Eligible for Future Sale."

NEW TECHNOLOGY COULD MAKE OUR PRODUCTS OBSOLETE.

Other companies may develop new technologies or introduce new products that
are more effective than our products and services. This may make the products
and services we offer obsolete or less attractive to potential customers.

WE RELY ON BANK CUSTOMERS THAT OPERATE IN A REGULATED INDUSTRY.

Many of our customers are banks. The banking industry is highly regulated
and subject to supervision by several federal and state governmental regulatory
agencies. If bank regulations change or if new regulations are adopted to
regulate the financing of small business accounts receivable, our business,
financial condition and results of operations could be materially adversely
affected.

WE MAY BE LIABLE FOR ANY PROBLEMS WITH OUR PRODUCT.

Many of our products are connected to our customers' operating systems, and
we may be liable if the use of any of our products causes damage to our
customers' businesses. We also may be required to recall certain of our products
if they become damaged or unable to perform their intended functions. We have
not experienced any product liability judgments or claims. However, a product
liability judgment or claim could negatively affect our business, financial
condition and results of operations.

FAILURE OF OUR NETWORK INFRASTRUCTURE AND EQUIPMENT WOULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

Our operations depend on our ability to protect our network infrastructure
and equipment. Damage to this equipment may be caused by human error, natural
disasters, power and telecommunications failures, intentional acts of vandalism
and similar events. Despite precautions we have taken, the occurrence of human
error, a natural disaster or other unanticipated problems could halt our
services, damage network equipment and result in substantial expense to repair
or replace damaged equipment. In addition, the failure of our telecommunications
providers to supply the necessary services could also interrupt our business.
The inability to supply services to our customers could negatively affect our
business, financial condition and results of operations and may also harm our
reputation.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS.

We believe that our technologies, trademarks and other proprietary rights
are important to our success. We attempt to protect our rights through a
combination of copyright law, trademark and trade secret laws, employee and
third party confidentiality agreements and other methods. However, unauthorized
parties may attempt to copy aspects of our technology, products and services or
to otherwise obtain and use information that we regard as proprietary, despite
our efforts to protect them. Third parties may claim that our current or future
products and services infringe the patent, copyright or trademark rights of such
third parties. We cannot guarantee that, if such actions or claims are brought,
we will ultimately prevail. Any such claims, whether with or without merit,
could be costly and time consuming, cause delays in introducing new or improved
products and services, require us to enter royalty or licensing agreements or
discontinue

12
<PAGE> 17

using the challenged technology and otherwise could have a material adverse
effect on our business, financial condition and results of operations.

WE MAY NOT BE ABLE TO USE OUR OPERATING LOSSES TO OUR TAX BENEFIT AND MAY FACE
OTHER TAX ISSUES.

At December 31, 1998, we had available net operating losses, or NOLs, of
approximately $17.6 million, which will expire beginning in 2011 if not used. If
our taxable income in future years is less than the NOLs it is permitted to use,
some NOLs will not be realized. Once these NOLs are used or expire, our
projected effective tax rate will increase, which will adversely affect our
operating results and financial condition. In addition, we may become subject to
state taxation of fees charged for our transaction processing products and
services. This may decrease our profits, if any, and may have a negative impact
on our financial condition and results of operations.

A FEW PEOPLE CONTROL A LARGE PORTION OF OUR STOCK.

Our executive officers and directors beneficially own 41.1% of the
outstanding common stock. After this offering, these people will continue to own
31.4% of our stock. Accordingly, they control our company to a great extent and
have the power to influence the election of a majority of the directors, the
appointment of management and the approval of actions requiring a majority vote
of our shareholders. They also have the ability to keep some transactions from
happening even if the transactions might be favorable to other shareholders. The
interests of senior management could conflict with the interests of our other
shareholders.

THE BOOK VALUE OF THE SHARES YOU PURCHASE IN THIS OFFERING WILL BE SIGNIFICANTLY
DILUTED.

The public offering price per share will exceed our net tangible book value
per share. Accordingly, purchasers of common stock sold in this offering will
experience immediate and substantial dilution of $ per share in their
investment, while the value of shares held by current shareholders will
increase. See "Dilution."

OUR CORPORATE ORGANIZATIONAL DOCUMENTS AND SOME OF OUR EMPLOYMENT AGREEMENTS
CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.

Some provisions of our articles of incorporation and bylaws could make it
more difficult for a third party to acquire control of our company, even if such
change in control would be beneficial to shareholders. Some of our executive
officers also have employment agreements that contain change in control
provisions. These provisions also may discourage or prevent a tender offer,
proxy contest or other attempted takeover.

PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS.

13
<PAGE> 18

Year 2000 problem, our ability to provide services to our customers may be
materially adversely affected.

We supply point of sale terminals and other products needed to run our
processing systems to our customers and have not tested any other products or
systems used in our customers' businesses. If our customers do not successfully
address Year 2000 issues in their operations and, as a result, experience
temporary or permanent interruptions in their businesses, we may lose revenues
from these customers, which could have a material adverse effect on our
business, financial condition and results of operations. We believe that many
financial institutions and small businesses, including our customers, are still
in the preliminary stages of analyzing their systems for Year 2000 issues. It is
impossible to estimate the potential expenses involved or delays which may
result from the failure of these institutions and third parties to resolve their
Year 2000 issues in a timely manner, and we cannot guarantee that such expenses,
failures or delays will not have a material adverse effect on our business,
financial condition or results of operations. In addition, we have no
contingency plan in place to address any large-scale problems our customers,
vendors or other persons with whom we conduct business may face related to Year
2000 issues.

BECAUSE OUR BUSINESS INVOLVES THE ELECTRONIC STORAGE AND TRANSMISSION OF DATA,
WE COULD BE ADVERSELY AFFECTED BY SECURITY BREACHES.

The difficulty of securely storing confidential information electronically
has been a significant barrier to conducting electronic commerce. We may be
required to spend significant capital and other resources to protect against the
threat of security breaches or to alleviate problems caused by breaches. To the
extent that our activities or the activities of our customers involve the
storage and transmission of confidential information, such as banking records or
credit information, security breaches could expose us to claims, litigation or
other possible liabilities. Our inability to prevent security breaches would
have a material adverse effect on our business, financial condition and
operating results.

14
<PAGE> 19

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the 7,000,000
shares of common stock will be $ after deducting the estimated
underwriting discounts and other estimated offering expenses of approximately
$ payable by us.

The principal purposes and uses of proceeds from this offering are to:

- fund the rapid growth in our operations needed to achieve our goals,
including to fund expansion of our sales and marketing efforts and the
development of our online transaction based services and products;

- fund a total of approximately $3.5 million in capital expenditures
related to the additional development of our electronic processing and
customer management systems and for moving our operating facilities to a
new location;

- pay estimated expenses of $1.5 million we currently expect to incur in
connection with the Forseon merger;

- fund possible acquisitions and for other general corporate purposes;

- increase our equity capital; and

- increase our visibility in the marketplace.

We have not identified specific uses for a large portion of the offering
proceeds, and management will have significant discretion over their use and
investment. We intend to seek acquisitions that could provide additional
products, personnel and technologies, and a portion of the net proceeds may be
used for those acquisitions. While we discuss potential acquisitions from time
to time and have recently entered into a merger agreement with Forseon, we
currently have no commitments or agreements for any other acquisitions. Further,
we cannot guarantee that we will complete the Forseon merger or any future
acquisitions. Pending these uses, we intend to invest the net proceeds from this
offering in investment-grade, interest-bearing instruments. See "Risk
Factors -- We will have broad discretion to spend a large portion of the net
proceeds from this offering."

15
<PAGE> 20

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Since our initial public offering became effective in July 1998, our common
stock has traded on the Nasdaq National Market under the symbol TWNE. As of
April 5, 1999, we had approximately 1,800 beneficial holders of our common
stock. Of this total, approximately 365 were shareholders of record.

The following table sets forth the high and low sales price information for
our common stock, as reported by Nasdaq, since it began trading publicly:

<TABLE>
<CAPTION>
STOCK PRICE
-------------
HIGH LOW
------ -----
<S> <C> <C>
Third Quarter 1998.......................................... $ 8.25 $4.63
Fourth Quarter 1998......................................... 8.50 4.38
First Quarter 1999.......................................... 10.63 5.38
</TABLE>

On April , 1999, the last reported sales price of the common stock as
reported by the Nasdaq National Market was $ per share.

We have never paid any cash dividends on our common stock, and we
anticipate that for the foreseeable future we will continue to retain any
earnings for use in the operation of our business.

16
<PAGE> 21

CAPITALIZATION

The following table describes our capitalization at March 31, 1999 (1) on
an actual basis, (2) as adjusted to reflect our sale of 7,000,000 shares of
common stock offered by this prospectus and the application of the estimated net
proceeds from the offering, and (3) on a pro forma basis giving effect to this
offering and the Forseon merger as if it occurred on January 1, 1999. See
"Selected Historical Financial Information" and "Use of Proceeds."

You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and related notes and the other financial information
appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------
AS ADJUSTED FOR PRO FORMA
ACTUAL THIS OFFERING AS ADJUSTED
------------ --------------- ---------------
(UNAUDITED; IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current maturities, net of
original issue discount...........................
Warrants with redemption feature....................
Shareholders' equity:
Preferred stock, 20,000,000 shares authorized; none
issued and outstanding............................
Common stock, 50,000,000 shares authorized,
19,803,611 shares issued and outstanding, actual;
26,803,611 shares issued and outstanding, as
adjusted; and 28,878,956 shares issued and
outstanding on a pro forma, as adjusted basis.....
Warrants outstanding to purchase common stock.......
Accumulated deficit.................................
Total shareholders' equity.....................
Total capitalization...........................
</TABLE>

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 1999 and does not
include:

- 1,050,000 shares that are issuable pursuant to the underwriters'
over-allotment option;

- 3,740,459 shares subject to options and warrants outstanding as of March
31, 1999 at a weighted average exercise price of $ per share; and

- 2,075,345 shares related to the Forseon merger, except for the pro forma
information, which includes these shares.

17
<PAGE> 22

DILUTION

Our net tangible book value as of March 31, 1999 was $ , or
$ per share of common stock. The formula for calculating net tangible
book value per share is the amount by which our net tangible assets exceed our
total liabilities divided by the fully diluted number of shares of common stock
outstanding. After giving effect to the sale of 7,000,000 shares of common stock
in this offering and the application of the estimated net proceeds as set forth
under "Use of Proceeds," our pro forma net tangible book value as of March 31,
1999 would have been $ , or $ per share. This amount represents
an immediate increase of $ in net tangible book value per share to
existing shareholders and an immediate dilution of $ in net tangible book
value per share to new investors. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price............................... $
Net tangible book value before this offering.............. $
Increase attributable to the sale of shares offered
hereby.................................................
Pro forma net tangible book value after this offering.......
-----
Dilution in net tangible book value to new investors........ $
=====
</TABLE>

The following table summarizes the number of shares of common stock
purchased from Towne, the total consideration and the average price per share
paid by existing shareholders and to be paid by new investors in this offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders..................
New investors..........................
---------- ----- ----------- -----

Total..................................
========== ===== =========== =====
</TABLE>

If the underwriters exercise their over-allotment option in full, the
number of shares of common stock held by existing shareholders will be
, representing a decrease to %, and the number of shares to be
held by new investors will increase to %, of the total shares of common
stock to be outstanding after this offering. See "Principal Shareholders" and
"Description of Capital Stock."

The above computations exclude 3,740,459 shares of common stock issuable
upon the exercise of options or warrants outstanding as of March 31, 1999 at a
weighted average exercise price of $ per share. To the extent any of
these options and warrants are exercised, new investors will incur further
dilution. See "Management -- 1998 Stock Option Plan," "-- 1996 Stock Option
Plan" and Note 8 of the notes to our consolidated financial statements.

18
<PAGE> 23

SELECTED HISTORICAL FINANCIAL INFORMATION

The following selected historical consolidated financial information is
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes and other financial
information included elsewhere in this prospectus. In addition, you should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These results may not be indicative of our future results.

Our selected consolidated statements of operations data, for the inception
period ended December 31, 1995 and for each of the three years ended December
31, 1998, and our balance sheet data as of December 31, 1996, 1997 and 1998,
were derived from our consolidated financial statements, which have been audited
by Arthur Andersen LLP, Towne's independent public accountants. Our selected
consolidated statement of operations data for the three months ended March 31,
1998 and 1999, and the consolidated balance sheet data as of December 31, 1995
and March 31, 1998 and were derived from unaudited financial statements which,
in the opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of our financial condition
and results of operations.

On March 25, 1999, we entered into a merger agreement to acquire Forseon
Corporation. The transaction will be accounted for as a pooling of interests.
The maximum number of shares of Towne common stock to be issued in the merger is
2,075,345. See "Business -- Acquisitions of Complementary Companies and
Products -- Proposed Acquisition -- The Forseon Merger." Management believes
that, as a consequence of this merger, Towne's future financial results will not
be comparable to its historical financial results. See the unaudited pro forma
combined condensed financial statements beginning on page F-46.

19
<PAGE> 24

<TABLE>
<CAPTION>
INCEPTION THREE MONTHS ENDED
PERIOD ENDED YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ---------------------------------------- ------------------------------
1995(1) 1996 1997 1998 1998 1999
--------------- --------- ---------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER OPERATING DATA; THREE MONTH PERIODS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES........................ $ 6 $ 105 $ 722 $ 6,398 $ 548 $
COSTS AND EXPENSES:
Costs of processing, servicing
and support................. 2 220 832 2,027 374
Research and development...... 0 52 332 306 74
Sales and marketing........... 4 118 839 6,252 486
Stock compensation
expense(2).................. 0 10 0 6,268 5,972
Employee termination
costs(3).................... 0 0 0 2,291 0
General and administrative.... 19 358 1,140 3,859 1,347
------ ------ ------- -------- -------- -------
Total costs and
expenses............. 25 758 3,143 21,003 8,253
------ ------ ------- -------- -------- -------
OPERATING LOSS.................. (19) (653) (2,421) (14,605) (7,705)
------ ------ ------- -------- -------- -------
OTHER EXPENSES:
Interest expense (income),
net......................... 0 6 96 (263) 64
Other expense (income)........ 0 3 (1) (6) 0
Financing costs for stock
issued to nonemployees(2)... 0 0 0 323 323
------ ------ ------- -------- -------- -------
Total other expenses... 0 9 95 54 387
------ ------ ------- -------- -------- -------
Loss before extraordinary loss
on early extinguishment of
debt........................ (19) (662) (2,516) (14,659) (8,092)
Extraordinary loss on early
extinguishment of debt...... 0 0 0 476 0
Benefit from income taxes..... -- -- -- -- -- --
------ ------ ------- -------- -------- -------
NET LOSS........................ $ (19) $ (662) $(2,516) $(15,135) $ (8,092) $
====== ====== ======= ======== ======== =======
PREFERRED STOCK DIVIDENDS(4).... 0 0 0 (5,108) (5,108)
ACCRETION OF WARRANTS WITH
REDEMPTION FEATURE(4)......... 0 0 0 (692) (211)
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS BEFORE
EXTRAORDINARY LOSS............ $ (19) $ (662) $(2,516) $(20,459) $(13,411) $
====== ====== ======= ======== ======== =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE
BEFORE EXTRAORDINARY LOSS
Basic......................... $(0.00) $(0.10) $ (0.26) $ (1.32) $ (1.11) $
====== ====== ======= ======== ======== =======
Diluted....................... $(0.00) $(0.10) $ (0.26) $ (1.32) $ (1.11) $
====== ====== ======= ======== ======== =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.................. $ (19) $ (662) $(2,516) $(20,935) $(13,411) $
====== ====== ======= ======== ======== =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE
Basic......................... $(0.00) $(0.10) $ (0.26) $ (1.35) $ (1.11) $
====== ====== ======= ======== ======== =======
Diluted....................... $(0.00) $(0.10) $ (0.26) $ (1.35) $ (1.11) $
====== ====== ======= ======== ======== =======
Weighted average common shares
outstanding(5)................ 5,000 6,337 9,601 15,516(6) 12,077
====== ====== ======= ======== ======== =======
</TABLE>

20
<PAGE> 25

<TABLE>
<CAPTION>
AT MARCH 31, 1999
AT DECEMBER 31, --------------------------
-------------------------------------------------------- AS ADJUSTED FOR
1995 1996 1997 1998 ACTUAL THIS OFFERING
----------- ----------- ----------- ----------- ------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $18 $ 2 $1,946 $ 9,884 $ $
Total assets............................. 28 367 3,586 35,420
Long-term debt, net of current portion... 30 90 1,290 0
Shareholders' (deficit) equity(6)........ (3) 119 1,262 28,272
</TABLE>

- ---------------

(1) Towne was incorporated on October 23, 1995. The Inception Period is from
that date to December 31, 1995.
(2) During the year ended December 31, 1998, we sold shares of common stock and
issued options to acquire common stock to employees, officers, directors and
non-employees at what management believed to be the fair market value of the
common stock at that time. Based upon third-party sales, a valuation and the
initial public offering price, we subsequently valued the common stock at a
higher price. We recorded a one-time non-cash compensation charge or
financing cost, under the appropriate items shown above, for the additional
value.
(3) Represents costs associated with severance payments made in connection with
the consolidation of business operations after we acquired Banking
Solutions, Inc. in December 1998.
(4) Dividends have been recorded with respect to convertible preferred stock
issued on March 13, 1998 for the difference between the estimated fair
market value of the common stock on that date and the conversion price of
the preferred stock. Accretion has been recorded with respect to warrants
with a redemption feature which were issued on December 18, 1997 based upon
the estimated fair market value of the common stock issuable upon exercise
of the warrants. See note (2) above and Note 7 of the notes to our
consolidated financial statements.
(5) See Note 2 of the notes to our consolidated financial statements for a
description of the method used to determine the share calculations.
(6) In August 1998, we completed an initial public offering of common stock. The
total proceeds of the offering, net of underwriting discounts and offering
expenses, were approximately $27.0 million. We issued 3,850,000 shares at an
offering price of $8.00 per share. Subsequent to the offering, we converted
all outstanding shares of Series A preferred stock to 1,217,903 shares of
common stock and warrants for 308,982 shares of common stock were exercised.
(7) Number of bank contracts includes each processing agreement executed with a
bank. In some cases, we enter into an agreement with a bank that has several
branches and the numbers presented above do not reflect the number of
branches operated by the bank. We also enter into contracts with bank
holding companies that are the parent of several different banks and may
count the contract as multiple contracts to represent the banks or
communities covered by the contract.

21
<PAGE> 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We establish an electronic gateway that links our business and bank
customers with us and other providers of products and services. We currently
generate our revenues through the deployment and use of three primary products
and ancillary services: TOWNE CREDIT, TOWNE FINANCE, and CASHFLOW MANAGER. With
each of these products, we generate initial set-up fees, discount fees and
monthly transaction processing fees. Management believes the prices charged for
both the initial set-up fees and the recurring transaction fees are based upon
the relative fair value of the related services provided. Accordingly, we
recognize these fees as the related services are provided.

Set-up fees include charges for installation, implementation and training
of our bank and business customers. We recognize revenues related to our set-up
fees upon execution of the related contract or, if appropriate, upon settlement
of any contract contingencies. Set-up fees charged to each bank vary depending
on the asset size of the bank and the number of communities served. We also
charge set-up fees to our business customers based either upon a flat rate or
upon the expected transaction volume. Revenues are deferred for contracts that
contain certain cancellation clauses or return guarantees until the cancellation
or guarantee period has expired.

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

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

Research and development expenses consist of salary and related personnel
costs, including costs for employee benefits, computer equipment and support
services, used in product and technology development. We believe that our
research and development expenditures, which aid in the design of new products
and product enhancements to respond to changes in customer demand, are essential
for obtaining and retaining a leadership position in our marketplace. Most
research and development expenditures are expensed as incurred; however, we have
capitalized certain development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86 when the products reached technological feasibility.

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

On July 30, 1998 our initial public offering was declared effective by the
Securities and Exchange Commission. We sold 3,850,000 shares of common stock at
$8.00 per share and received proceeds of $27.0 million, after deducting
underwriting discounts and other expenses related to the offering.

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<PAGE> 27

In December 1998, we acquired the outstanding capital stock of Banking
Solutions, Inc., for approximately $14.9 million in cash and stock. Banking
Solutions is a developer and provider of a transaction processing system,
CASHFLOW MANAGER, an accounts receivable financing program similar to the TOWNE
FINANCE product. In connection with the acquisition of Banking Solutions, we
issued 744,431 shares of common stock at $6.73 per share. The remainder of the
purchase price was paid in cash. We recorded this transaction using the purchase
method of accounting. We have recorded goodwill in the amount of $14.6 million
as a result of this merger, which is being amortized over a period of 25 years.

For the years ended December 31, 1997 and 1998, we had net losses of
approximately $2.5 million and $15.1 million, respectively. As of December 31,
1997, we had an accumulated deficit of $3.2 million. As of December 31, 1998,
this accumulated deficit was $24.1 million. Approximately $12.9 million of this
accumulated deficit resulted from one-time non-cash charges, and $2.3 million of
this accumulated deficit resulted from a one-time charge relating to employee
termination agreements subsequent to the purchase of Banking Solutions, Inc. in
December 1998.

Our business has grown rapidly with total revenues increasing from $722,000
for 1997 to $6.4 million in 1998. However, we have experienced net losses in
each of these periods and expect to continue to incur losses for the foreseeable
future. The number of our employees increased from 25 at December 31, 1997 to
169 at December 31, 1998. We currently intend to expand our sales and marketing
operations, to invest more in product research and development, to pursue
strategic acquisitions and to improve our internal operating and financial
infrastructure, all of which will increase our operating expenses.

Because of our limited operating history, management believes that period
to period comparisons of our operating results are not meaningful. Although we
have experienced significant revenue growth recently, there can be no assurance
that such growth rates are sustainable, and they should not be relied upon as
indicators of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stage of development and relatively new and changing markets. There can be
no assurance that we will be successful in addressing such risks and
difficulties or that we will achieve profitability in the future.

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<PAGE> 28

RESULTS OF OPERATIONS

The following table sets forth our condensed historical operating
information, in dollars and as a percentage of total revenues, for the periods
indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1996 1997 1998 1998 1999
----- ------- -------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 105 $ 722 $ 6,398 $ 548
Costs of processing, servicing and support...... 220 832 2,027 374
Research and development........................ 52 332 306 74
Sales and marketing............................. 118 839 6,252 486
Stock compensation expense...................... 10 0 6,268 5,972
Employee termination costs...................... 0 0 2,291 0
General and administrative...................... 358 1,140 3,859 1,347
----- ------- -------- -------- --------
Total costs and expenses............... 758 3,143 21,003 8,253
----- ------- -------- -------- --------
Operating loss.................................. (653) (2,421) (14,605) (7,705)
----- ------- -------- -------- --------
Interest expense (income), net.................. 6 96 (263) 64
Other expense (income).......................... 3 (1) (6) 0
Financing costs for stock issued to
nonemployees.................................. 0 0 323 323
----- ------- -------- -------- --------
Total other expenses................... 9 95 54 387
----- ------- -------- -------- --------
Net loss before extraordinary loss on early
extinguishment of debt........................ $(662) $(2,516) $(14,659) $ (8,092)
===== ======= ======== ======== ========
Net loss........................................ $(662) $(2,516) $(15,135) $ (8,092)
===== ======= ======== ======== ========
Net loss attributable to common shareholders.... $(662) $(2,516) $(20,935) $(13,411)
===== ======= ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1996 1997 1998 1998 1999
----- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ 100% 100% 100% 100%
Costs of processing, servicing and support...... 209 115 32 68
Research and development........................ 49 46 5 14
Sales and marketing............................. 112 116 98 89
Stock compensation expense...................... 10 0 98 1,090
Employee termination costs...................... 0 0 36 0
General and administrative...................... 340 158 60 246
----- ------- -------- -------- --------
Total costs and expenses............... 720 435 328 1,506
----- ------- -------- -------- --------
Operating loss.................................. (620) (335) (228) (1,406)
----- ------- -------- -------- --------
Interest expense (income), net.................. 6 13 (4) 12
Other expense (income).......................... 3 0 0 0
Financing costs for stock issued to
nonemployees.................................. 0 0 5 59
----- ------- -------- -------- --------
Total other expenses................... 9 13 1 71
----- ------- -------- -------- --------
Net loss before extraordinary loss on early
extinguishment of debt........................ (629)% (348)% (229)% (1,477)%
===== ======= ======== ======== ========
Net loss........................................ (629)% (348)% (237)% (1,477)%
===== ======= ======== ======== ========
Net loss attributable to common shareholders.... (629)% (348)% (327)% (2,477)%
===== ======= ======== ======== ========
</TABLE>

24
<PAGE> 29

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1999

Revenues.

Costs of Processing, Servicing and Support.

Research and Development.

Sales and Marketing.

Stock Compensation Expense.

General and Administrative.

Interest (Income) Expense, Net.

Income Taxes.

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998

Revenues. Our revenues increased from $722,000 in 1997 to $6.4 million in
1998. During these two periods, set-up fees accounted for approximately 53% and
51% of total revenues, respectively. Recurring revenues accounted for
approximately 18% and 35% of total revenues, respectively. The increase in
revenues during these periods resulted primarily from an increase in the number
of customers, including as a result of the acquisition of Banking Solutions in
December 1998, and higher set-up fees and transaction processing fees charged to
new customers. The increase in set-up fee revenues resulted primarily from an
increase in the number of customers and higher set-up fees charged to new
customers. The percentage of recurring revenues increased as a result of a
larger number of merchants using our online transaction processing services.

Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $832,000 in 1997 to $2.0 million in 1998. These costs
were approximately 115% and 32% of total revenues, respectively, for these two
periods. The dollar amount of costs of processing, servicing and support
increased as a result of the addition of new customers and additional services
and support functions necessary to support our growth. We anticipate that these
costs will continue to increase as new customers are added. Costs of processing,
servicing

25
<PAGE> 30

and support decreased as a percentage of revenue as a result of substantially
increased revenues and improved operating efficiencies.

Research and Development. Our research and development expenses decreased
from $332,000 in 1997 to $306,000 in 1998. Research and development expenses
represented approximately 46% and 5% of total revenues, respectively, during
these two periods. We expect that the dollar amount of research and development
expenses will increase as we recruit and hire additional experienced programmers
and develop new products and services. We do not expect to incur significant
costs to make our products year 2000 compliant because we believe our products
are currently designed to properly function through and beyond the year 2000.
See "-- Effects of the Year 2000."

Sales and Marketing. Sales and marketing expenses increased from $839,000
in 1997 to $6.3 million in 1998. Sales and marketing expenses were approximately
116% and 98% of total revenues, respectively, during these two periods. The
increase in these expenses is primarily the result of significant increases in
the number of sales personnel in remote locations, related travel expenses and
costs for marketing materials used to recruit potential bank and business
customers. We anticipate that sales and marketing expenses will continue to
increase as we continue to expand our direct sales and marketing force and hire
additional personnel to promote our indirect sales channels.

Stock Compensation Expense. Stock compensation expense was $6.3 million
for the year ended December 31, 1998. In the first quarter of 1998, we sold
shares of common stock and issued options to acquire common stock at what
management believed to be the fair market value of the common stock at that
time. Based upon outside sales to third parties, a valuation and the initial
public offering price at the time, we subsequently valued the stock at a higher
price and recorded a one time non-cash charge for the additional value.

Employee Termination Costs. We have recorded a $1.1 million intangible
asset for the purchase of Banking Solutions' customer list, which is being
amortized over a period of 5 years. We also recognized a one time charge in the
amount of $2.3 million in December 1998, related to employee terminations which
were not identified at the date of purchase.

General and Administrative. General and administrative expenses increased
from $1.1 million in 1997 to $3.9 million in 1998. These costs represented
approximately 158% and 60% of total revenues, respectively, for these two
periods. The increase in the dollar amount of these expenses was primarily the
result of increases in the number of executive and administrative employees and
the costs associated with executive and administrative expenses related to our
growth. Also, we incurred additional costs related to being a public company,
including annual and other public reporting costs, directors' and officers'
liability insurance, investor relations programs and professional services fees.
We anticipate that general and administrative expenses will continue to increase
in the near future as we upgrade internal and financial reporting systems to
enhance management's ability to obtain and analyze information about our
operations.

Interest (Income) Expense, Net. We reported net interest expense of
$96,000 in 1997 and net interest income of $264,000 in 1998. Interest expense
decreased as a result of the repayment of debt obligations and interest income
increased as a result of earnings on investments of cash proceeds received from
the initial public offering.

Extraordinary Loss. We reported an extraordinary loss during 1998
resulting from the early extinguishment of debt in the amount of $476,000. The
extraordinary loss was comprised of

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<PAGE> 31

$218,000 unamortized discount on a promissory note and $258,000 deferred debt
issuance costs. See note 5 of notes to our consolidated financial statements.

Income Taxes. As of December 31, 1998, we had net operating losses, or
NOLs, of approximately $17.6 million for federal tax purposes which will expire
if not utilized beginning in 2011. We have not recognized any benefit from the
future use of such NOLs because management's assumptions of future profitable
operations contain risks that do not provide sufficient assurance to recognize
such tax benefits currently.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997

Revenues. Our revenues increased from $105,000 in 1996 to $722,000 in
1997. Set-up fees accounted for approximately 44% and 53% of total revenues in
1996 and 1997, respectively. Recurring revenues accounted for approximately 5%
and 18% of total revenues in 1996 and 1997, respectively. The increases in the
dollar amount of revenues during this period resulted primarily from an increase
in the number of customers and higher set-up and transaction processing fees
charged to new customers. The increase in recurring revenues as a percentage of
revenues resulted primarily from an increase in the monthly transaction
processing revenues that generate recurring revenues.

Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $220,000 in 1996 to $832,000 in 1997. The costs were
approximately 209% and 115% of total revenues, respectively, for these two
periods. The dollar amount of costs of processing, servicing and support
increased as a result of the addition of new customers, additional servicing and
increased support functions required to support our growth.

Research and Development. Towne increased its research and development
expenses from $52,000 in 1996 to $332,000 in 1997. Research and development
expenses represented approximately 49% and 46% of total revenues, respectively,
during these two periods. The increase in dollar amounts was due primarily to
the continued development of TOWNE CREDIT and TOWNE FINANCE.

Sales and Marketing. Sales and marketing expenses increased from $118,000
in 1996 to $839,000 in 1997. Sales and marketing expenses were approximately
112% and 116% of total revenues, respectively, during these two periods. The
increase in dollar amount was primarily the result of a significant increase in
the number of sales personnel in remote locations, related travel expenses and
increased costs for marketing materials used to recruit potential bank and
business customers.

General and Administrative. General and administrative expenses increased
from $359,000 in 1996 to $1.1 million in 1997. These costs were approximately
341% and 158% of total revenues, respectively, for these two periods. The
increase in dollar amounts was primarily the result of increases in the number
of administrative and operational employees, and the costs associated with
administrative expenses and building infrastructure to support our growth.

Interest (Income) Expense, Net. Interest expense increased from $6,000 in
1996 to $96,000 in 1997, primarily as a result of a loan facility obtained in
late 1997.

Income Taxes. As of December 31, 1997, we had NOLs of approximately $3.0
million for federal tax purposes which will expire if not utilized by 2011 and
2012. We have not recognized any benefit from the future use of such NOLs
because management's assumptions of future profitable operations contain risks
that do not provide sufficient assurance to recognize such tax benefits
currently.

27
<PAGE> 32

During our short history, our operating results have varied significantly
and are likely to fluctuate significantly in the future as a result of a
combination of factors. These factors include:

- whether or not the market accepts current and future products and
services;

- whether new competitors emerge or existing competitors gain market share
faster than we do;

- whether new technologies are developed which make our systems outdated or
obsolete;

- whether costs of doing business increase as a result of higher wages,
sales commissions, taxes and other operating costs;

- whether seasonal trends in consumer purchasing impact the volume of
transactions processed; and

- general economic factors and the impact of potential acquisitions to our
operations.

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

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily through
sales of equity securities in private placements, our initial public offering
and through credit facilities. Through December 1997, we received aggregate net
proceeds of $4.3 million from the sale of common stock. In March 1998, we
received net proceeds of $1.5 million from the sale of Series A preferred stock
in a private placement. In July 1998, we received net proceeds of $27.0 million
from the initial public offering.

In August 1998, we paid off all then existing current and long term debt
obligations, which consisted of a $1.5 million term note and several lines of
credit, with proceeds received from the initial public offering. The early
extinguishment of some of these debt obligations resulted in an extraordinary
loss of $476,000, which is comprised of $218,000 in unamortized discounts on the
$1.5 million term note and $258,000 in deferred debt issuance costs.

In December 1998, we borrowed $5.0 million on a short-term line of credit
from First Union National Bank. The line of credit has a term of one year with
an interest rate of LIBOR plus 2.0%, or 7.1% at December 31, 1998. It is secured
by a deposit account we maintain with the lender. The line of credit was paid in
full in January 1999. We will continue to negotiate with certain other financial
institutions to establish a credit facility for future working capital and
acquisition financing, but there can be no assurance that such negotiations will
be successful.

Net cash used in operating activities was approximately $2.1 million for
1997 and $10.2 million for 1998. Net cash used in operating activities during
1997 represents a $2.5 million net loss, a $120,000 increase in accounts
receivable and a $260,000 increase in prepaid expenses and other assets
partially offset by a $599,000 increase in accounts payable and accrued
expenses. Net cash used in operating activities during 1998 primarily represents
a $15.1 million net loss and $3.0 million increase in accounts receivable
partially offset by $6.3 million in non-cash compensation expense and $1.0
million in accrued expenses.

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<PAGE> 33

Net cash used in investing activities was approximately $531,000 for 1997
and $12.9 million for 1998. Net cash used in investing activities during 1997
represents $452,000 for the purchase of computer equipment used in conducting
our business and $79,000 of notes receivable due from a shareholder. Net cash
used in investing activities during 1998 represents $10.4 million to acquire
Banking Solutions, Inc., $1.9 million for the purchase of computer equipment and
other capital equipment used in conducting our business, $510,000 to acquire
some of the assets and liabilities of Credit Collection Solutions, Inc. and
$170,000 in notes due from shareholders.

Net cash provided by financing activities was $5.0 million for 1997 and
$33.7 million for 1998, which consisted primarily of $27.0 million of net
proceeds received from our initial public offering, $1.5 million from the
issuance of preferred stock, $584,000 from the exercise of stock options and
$4.6 million of net proceeds from the issuance of other securities and payment
of all outstanding debt obligations.

EFFECTS OF THE YEAR 2000

Our business and customer relationships rely on computer software programs,
internal operating systems and telephone and other network communications
connections. If any of these programs, systems or network connections are not
programmed to recognize and properly process dates after December 31, 1999 (the
"Year 2000" issue), significant system failures or errors may result which could
have a material adverse effect on the business, financial condition, or results
of operations of both our company and the affected customers. We have conducted
tests on our proprietary point of sale terminals, network connections and
transaction processing software and believe that our TOWNE CREDIT, TOWNE FINANCE
and CASHFLOW MANAGER products and network connections we maintain are able to
process dates after December 31, 1999. For our internal accounting and operating
systems and network communications, we use software and other products provided
by third parties and we have received warranties or other assurances that these
products are programmed to address the Year 2000 issue. Our personnel will
continue to test our network connections to help ensure that these programs and
systems continue to address the Year 2000 issue. We intend to modify or replace
any products or systems that are unable to properly function as a result of the
Year 2000 issue and currently believe we will be able to do so without incurring
costs or delays which would have a material adverse effect on our financial
condition.

We supply point of sale terminals and other products needed to run our
processing systems to our customers and have not tested any other products or
systems used in our customers' businesses. If our customers do not successfully
address Year 2000 issues in their operations and, as a result, experience
temporary or permanent interruptions in their businesses, we may lose revenues
from these customers, which could have a material adverse effect on its
business, financial condition and results of operations. We believe that many
financial institutions and small businesses, including our customers, are still
in the preliminary stages of analyzing their systems for Year 2000 issues. It is
impossible to estimate the potential expenses involved or delays which may
result from the failure of these institutions and third parties to resolve their
Year 2000 issues in a timely manner and there can be no assurance that such
expenses, failures or delays will not have a material adverse effect on our
business, financial condition or results of operations.

EFFECTS OF ACCOUNTING STANDARDS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components

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<PAGE> 34

in a full set of general purpose financial statements. This statement is
effective for periods beginning after December 15, 1997. Towne adopted SFAS No.
130 on January 1, 1998. The adoption of SFAS 130 did not have a material impact
on Towne's financial statements as comprehensive income did not differ from the
reported net loss for all periods presented.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 did not have an impact on our financial
statements, as we operate in one business segment, electronic transaction
processing. Our operating business segments provide electronic transaction
processing for small business in-house accounts. The segments use our central
administrative offices for customer support, centralized processing and sales
support. In addition, our sales force markets all products within their assigned
markets. We consequently consider all of our products as one reportable segment
under the definitions in SFAS No. 131.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. A company may also implement SFAS No. 133 as of
the beginning of any fiscal quarter after issuance, that is, fiscal quarters
beginning June 16, 1988 and thereafter. SFAS No. 133 cannot be applied
retroactively; it must be applied to (1) derivative instruments and (2) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. The adoption of SFAS No. 133
will not have a material impact on our financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates. Our $5.0 million credit facility has an
interest rate which is based, at our election, upon the lender's prime rate. As
of March 31, 1999, no amounts were outstanding under this credit facility and,
therefore, we do not believe it has a significant risk due to potential
fluctuations in interest rates at this time. Changes in interest rates which
dramatically increase the interest rate on the credit facility would make it
more costly to borrow proceeds under that facility and may impede our
acquisition and growth strategies if management determines that the costs
associated with borrowing funds are too high to implement these strategies.

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<PAGE> 35

BUSINESS

GENERAL

Towne Services provides transaction based online services and products to
small businesses and community banks in the United States. We deliver these
services and products via an electronic gateway that links our business and bank
customers with us and other providers of products and services that can benefit
these customers. We use this gateway to deliver a variety of business and
management solutions using internet and telecommunications connections. Our
primary business capabilities include a "virtual credit card" system that
processes the in-house credit transactions of small businesses and an automated
receivables management system that allows banks to quickly finance the working
capital needs of their small businesses customers.

Traditionally, the in-house credit transactions of small businesses have
been recorded and processed manually and then billed to the customer at a later
date. Because of the paperwork and delays involved with this manual process,
banks have been reluctant to finance these business credit transactions. To
automate, expedite and support funding for this process, we offer three main
processing systems, TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER. These
systems capture sales and payment information at the point of sale. We then
record and process this information electronically and communicate the results
to our business customers and their banks, often the same day.

Through the use of our online services and products, our business customers
are able to:

- automate their records and reduce paperwork;

- accelerate cash flow;

- improve customer services;

- shift other administrative burdens to Towne; and

- utilize the internet to conduct business electronically.

Our systems also benefit our bank customers who can:

- receive secure, reliable and prompt information;

- closely monitor customer accounts;

- generate status reports;

- finance the accounts receivable of their small business customers;
and

- generate fee income and potential new customers.

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

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<PAGE> 36

TOWNE'S MARKET

We provide our products and services to retail merchants and small
commercial businesses that extend in-house credit to their customers and to the
banks these businesses use. We believe there are more than 5 million small and
medium size retail merchants and 12 million small commercial businesses in the
United States. The electronic transaction processing industry generally has not
offered these businesses a way to process their in-house credit transactions
electronically, focusing instead on credit and debit card transactions.

Based on our current customer base, we believe many of these merchants
process more than half of their sales using in-house credit, and use manual
labor-intensive processes and products to run their businesses. These credit
receivables are generally collected by the merchant manually through a month-end
billing process. We believe that the manual billing and collections process
utilized by many small merchants is highly inefficient, causing these merchants
to carry excess receivables and bad debts. Our processing systems allow small
merchants to automate many of their manual business tasks including the
processing of in-house accounts, payment processing and bad debt collections. In
addition, because of the difficulties in tracking and managing receivables from
this manual process, banks have been reluctant to finance these businesses based
on their receivables.

A variety of small and medium size retail merchants use the TOWNE CREDIT
system, including hardware stores, clothing stores, florists, auto parts stores
and pharmacies. We market the TOWNE FINANCE and CASHFLOW MANAGER products and
services to small commercial businesses, such as furniture manufacturers,
equipment distributors, plumbing suppliers and other industry supply stores.

TOWNE'S STRATEGIES

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

Maximize Electronic Gateway to Customers

When a business customer installs TOWNE CREDIT and TOWNE FINANCE, it
establishes an electronic gateway that links it with Towne, the business' bank
and other companies that provide products and services that can benefit its
business. We intend to maximize this distribution channel by developing,
acquiring and implementing the business and management tools that small
businesses need to succeed in an electronic commerce marketplace. We believe
that the cross-marketing of a variety of online services and products to our
customers will allow us to develop and maintain long-term relationships.

Enter New Relationships For Marketing and Product Enhancements

We have established marketing and other business relationships that enhance
our services and products and channels of distribution. We have agreements with
several companies, which provide complementary services to the TOWNE CREDIT,
TOWNE FINANCE and CASHFLOW MANAGER systems. For example, we recently entered
into an agreement with Princeton eCom Corporation for them to make available
internet bill payment and presentment services to our customers. We also have
agreements with entities that have banks or small businesses as their customers,
such as bankers bank organizations and the Midwest Hardware Association, under
which these organizations encourage their customers to use our systems. We
intend to enter into

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<PAGE> 37

more relationships with companies that can expand the number of our products and
services, complement our existing and future systems and provide access to large
groups of banks and small businesses.

Expand Direct Sales and Marketing Efforts Nationwide

During 1998, we expanded our direct sales and marketing force from 15
persons in 7 states to 99 persons in 35 states. Of this total, 34 persons are
dedicated to developing bank customer relationships and 65 persons are focused
on developing small business customers. We intend to continue aggressively
hiring sales and marketing personnel nationwide and increase our participation
in seminars and trade programs to strengthen our direct marketing efforts,
increase our customer base and expand into new markets.

Continue to Leverage Bank Relationships

Our executive officers and directors have an average of over 15 years
experience in the electronic processing and financial services industries, and
all 12 members of the board of directors have experience in the management of
banks or companies that have banks as customers. Through these relationships, we
believe we attract customers that would be difficult to reach through
traditional marketing methods. In addition, we intend to provide new products
and services that may allow banks to attract new customers for both the banks
and our company, as well as sign additional agreements with existing bank
customers.

Acquire Complementary Companies and Products

We intend to acquire providers of complementary products and services that
may enhance and expand our operations, product and service offerings, market
share or geographic presence. For more information on our proposed and completed
acquisitions, please see "-- Acquisitions of Complementary Companies and
Products."

PRODUCTS AND SERVICES

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

Towne Credit

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

Step 1: The participating business sells goods or services on an
in-house account. No money changes hands and no credit cards are used.

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

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When a customer makes a purchase on account, a store clerk records the
transaction on a point of sale terminal. The PC-based terminal stores names
and addresses of customers, account balances and payment activity, which
the business owner can retrieve quickly at the point of sale. The TOWNE
CREDIT system captures the transaction data, including dollar amount and
customer information, for use in billing, tracking inventory and generating
sales and tax reports.

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

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

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

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

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

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

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

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

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Through TOWNE CREDIT, businesses receive accelerated funding for in-house
charge accounts and eliminate costly and inefficient manual processing. Sales
also may be enhanced by the business' ability to offer finance options, such as
sales on account, to its customers. The bank that serves the business generates
fee income in the form of transaction discounts and may profit from
interest-bearing consumer credit accounts. If the bank elects not to fund the
business' accounts receivable, the system still functions as an automated
billing and collection system, and the bank generates fee income. In both cases,
the TOWNE CREDIT processing system provides us with fee income.

Towne Finance

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

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

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

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

CashFlow Manager

The CASHFLOW MANAGER system is an asset management system that also
addresses business-to-business credit transactions. The software program enables
the community banks that service commercial businesses to better manage and
control assets that fluctuate in value so they

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can make lending decisions with respect to these assets. CASHFLOW MANAGER
transaction processing occurs in much the same way as TOWNE FINANCE processing,
except that the commercial business manually transmits the information for
processing.

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

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

SUPPORTING SERVICES AND NEW PRODUCTS

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

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

Internet Bill Payments and Presentment. To provide small business
customers the ease and convenience of receiving bills and making their payments
via the internet, we have an agreement with Princeton eCom Corporation for
internet bill payment and presentment services.

Marketing Programs and Materials. Our primary marketing tool is our direct
sales force. However, we also offer a number of services designed to allow
community banks to target businesses in their communities. We provide
advertising, marketing brochures and inserts and direct mail to increase market
penetration for our bank customers.

We plan to design and develop new and improved products and services that
small business customers can access through our electronic gateway to help
automate their businesses and provide better service to their clients. We also
plan to enter new agreements and relationships with other companies and
organizations to give our customers access to a variety of other business
management tools.

ACQUISITIONS OF COMPLEMENTARY COMPANIES AND PRODUCTS

We intend to pursue acquisitions of providers of complementary products and
services that may enhance and expand our operations, product and service
offerings, marketing and sales forces, market share and geographic presence.

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Proposed Acquisition -- The Forseon Merger

On March 25, 1999, we entered into a merger agreement to acquire Forseon
Corporation. Forseon provides products and services that process inventory,
accounts receivable and point of sale transaction information and generate
merchandise forecasts and management reports for retail businesses in the United
States and Canada. Forseon's management reports assist its customers in
developing and implementing their merchandising strategies as well as
receivables management and marketing plans. Forseon's business was founded in
1955. It operates using Retail Merchandising Service Automation, or RMSA, as a
trade name. Forseon's business did not grow in its last fiscal year and has not
grown significantly in recent years. Revenues for the 12 months ended December
31, 1998 were $11.8 million, 87.0% of which were recurring revenues. See
Forseon's financial statements and related notes included later in this
prospectus.

Forseon targets small to mid-sized independent specialty retail businesses,
such as men's and women's apparel stores, sporting goods stores, golf pro shops,
shoe stores and college bookstores throughout the United States. These
businesses typically have annual revenues of less than $10 million. We believe
that Forseon's products and services often improve its business customers'
ability to compete with larger chain retailers by providing automated processing
and business management capabilities similar to those used by larger
competitors.

The merger agreement provides for the combination of Towne's and Forseon's
businesses through the merger of Forseon with a subsidiary of Towne. We will
issue a total of 2,075,345 shares of our common stock in exchange for all
outstanding stock and options to acquire stock in Forseon. Ten percent of the
Towne common stock will be held back in escrow to satisfy the indemnification
obligations of Forseon stockholders under the merger agreement. The merger will
be accounted for as a pooling of interests. While we believe Forseon's business
and customer base offers an attractive acquisition opportunity which is
consistent with our strategies, the Forseon merger may not be completed. See
"Risk Factors -- The Forseon merger may not close if several conditions are not
satisfied" and the other risk factors related to the Forseon merger beginning on
page 9.

Completed Acquisitions

In December 1998 we acquired Banking Solutions, Inc., a Texas-based
provider of accounts receivable financing products to banks and their commercial
customers under the name CASHFLOW MANAGER. We paid $14.9 million in cash and
common stock for this acquisition. With the addition of Banking Solutions' sales
force, we added to our sales and marketing forces over 20 people who specialize
primarily in larger merchants and commercial receivables. Through this
acquisition, we more than doubled our merchant customer base, added more than
200 bank relationships, gained a sales team with an average of five years
experience in selling commercial financing products and increased our market
presence into seven new states.

In addition, in June 1998, we acquired some of the assets and liabilities
of Credit Collection Solutions, Inc. Credit Collection has developed computer
software for processing payments and tracking collections including COLLECTION
WORKS(SM), an operating system developed to address the debt collection needs of
banks and collection agencies. Pursuant to this acquisition, we paid $510,000
and agreed to issue up to 100,000 shares of our common stock if certain
financial results are achieved from the acquired assets including COLLECTION
WORKS. Our management believes the 1998 acquisitions advanced our growth
strategies by adding complementary technology solutions and greatly increasing
our customer base.

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SALES AND MARKETING

We employ two distinct sales forces to market our products and services.
The bank sales force focuses on developing relationships with banks through
which TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER are marketed to business
customers. Our business representatives call on small business customers of
banks that have contracted with us, as well as other merchants who might use our
products.

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

In addition to direct sales, we also market TOWNE CREDIT, TOWNE FINANCE and
CASHFLOW MANAGER through several companies that have merchants and community
banks across the United States as their customers or members. In addition, we
have agreements with Datamatx Inc., Wallace and de Mayo P.C., Cash Management
Services, Inc. and Princeton eCom Corporation to incorporate their products into
our systems. These alliances enable us to reach and provide services to large
groups of community banks and small businesses in new geographic markets. We
will continue to pursue additional alliances with companies and organizations
that will provide us access to large groups of banks and small businesses
nationwide such as bankers banks, trade associations and merchant franchise
operations.

RECRUITING AND TRAINING

We hire sales personnel who are experienced in marketing products and
services to community banks and small businesses. In recruiting experienced
sales personnel, we focus on hiring people who have established relationships
with banks and small businesses in a particular market. We have developed and
implemented an intensive four-week training program for our sales force led by
our training, sales and operations managers. The first week of training focuses
on overviews of our policies and procedures as well as an introduction to all of
our products. Instruction is also presented this first week on pricing of the
products to customer banks and merchants. During the second week, sales
representatives are sent to a field location and travel with a seasoned sales
representative to observe sales calls and presentations. During the third week
sales representatives return to our headquarters and discuss what they observed
in the field with others in their training class. Based on these discussions,
training techniques such as mock sales calls, role playing and formal
presentations are utilized to enhance our training efforts. At the completion of
the third week of training, the new sales representatives return to their
respective territories and travel another week with an experienced sales
representative or their sales manager calling on banks and merchants in that
area, at which point they return to their assigned territories qualified to
represent us and our products.

TECHNOLOGY

Our automated electronic processing systems involve communicating data to
and from remote customer locations and our computer processing center. We use
our proprietary technologies together with third party telecommunications
networks to transmit and process transaction data for our customers.
Transactions are interactively processed and returned to the

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sending system. Our systems can use telephone lines, internet connections,
satellite linkages and bank automated teller machine communication lines to
transport transaction data. This system architecture allows us to access
customers located across the country.

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

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

We designed our systems using software and hardware capable of interacting
with the variety of operating platforms used by our customers, including
client/server and mainframe operating systems. We have developed software to
support a wide range of operating systems used by our customers. Our transaction
reporting software is not hardware dependent, which allows us to change our
equipment to take advantage of the most recent technologies in our operations.
This could include a complete change-over of operating systems and/or hardware.
The CASHFLOW MANAGER system is single- or multi-user capable and runs in Windows
95.

Our computer processing system stores data redundantly at both the customer
terminal location and at our processing center and in a secure environment.
Potential service interruptions are minimized by hosting the client's data on
multiple servers and locations so that no single hardware failure would result
in service interruption. In addition, we keep mirror servers on location, create
daily digital backup tapes and store them in fireproof safes and maintain a full
"hot-site" backup processing center at another location separate from our main
processing center. We believe that our system configuration and disaster
recovery measures adequately protect us against system failures that may occur
due to destruction of our processing center, natural disasters, bomb threats or
other loss or impairment of our network capabilities.

CUSTOMERS

As of December 31, 1998, we provided processing services to a diverse
customer base of 1,662 small and medium size retail merchants and small
commercial businesses located in 33 states. A variety of small and medium size
retail merchants use the TOWNE CREDIT system, including hardware stores,
clothing stores, florists, auto parts stores and pharmacies. TOWNE CREDIT
merchant customers typically have $1 million or less in annual revenues. TOWNE
FINANCE and CASHFLOW MANAGER products and services are marketed to small
commercial businesses with $5 million or less in revenues, such as furniture
manufacturers, equipment distributors, plumbing suppliers and agricultural
supply stores.

As of December 31, 1998, we had executed 641 contracts with banks in 33
states. Most of our current bank customers have asset sizes of $2 billion or
less. These bank customers market our products and services to small businesses
in their communities. There are over 10,000 financial institutions in the United
States that we consider to be potential bank customers.

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The majority of our contracts with our customers are cancelable at will or
on short notice or provide for renewal at frequent periodic intervals, and,
accordingly, we may have to rebid or modify such contracts on a frequent basis.
No single small business customer accounted for more than 0.5% of our total
revenues in 1998. No single bank customer accounted for more than 3.5% of our
total revenues in 1998. We anticipate that one or more new customers will
continue to account for large portions of the revenues generated for the
particular quarter in which the underlying bank contract is signed. We believe
that the identity of bank customers accounting for large portions of revenues
will change from quarter to quarter and year to year.

CUSTOMER SERVICE

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

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

COMPETITION

There are numerous other providers of online processing products and
services. In addition, many other companies market business-to-business software
and marketing support to banks that allows the banks to track and finance the
in-house charge accounts of their customers similar to a factoring operation.
Most of these competitors do not offer a point of sale system, but rather
require merchants to forward paper invoices to the banks where bank personnel
input the invoices onto the software purchased by the banks. One such company
has a system similar to TOWNE FINANCE but acts as the lender instead of
marketing the system to community banks.

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

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TRADEMARKS AND OTHER PROPRIETARY RIGHTS

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

EMPLOYEES

At December 31, 1998, we had 169 full-time employees, of which 109 were in
sales and marketing, 44 were in operations and 16 were corporate and general
administrative employees. Of these employees, 67 were based in Norcross,
Georgia, and 102 were based in 34 other states. Management believes that our
relationship with our employees is satisfactory.

SEASONALITY

The electronic transaction processing industry is prone to seasonal
fluctuations in purchase activity. Although we generally experience seasonality
in our business, fluctuations are less pronounced than in the industry, due in
part to our diverse customer base. We expect our revenues will be higher in the
third and fourth calendar quarters and lower in the first calendar quarter of
each year. The decline in retail activity following the holiday season typically
results in lower first quarter revenues.

PROPERTY AND FACILITIES

Our principal executive offices are located at 3295 River Exchange Drive,
Suite 350, Norcross, Georgia 30092, and our telephone number is (770) 734-2680.
We lease our principal executive offices in Norcross, Georgia and maintain an
office in McKinney, Texas. We believe that our current facilities will be
adequate to support our operations at least until mid - 1999 and we recently
signed a lease to relocate our headquarters to a 41,000 square foot facility in
Suwanee, Georgia.

LEGAL PROCEEDINGS

We may be involved from time to time in legal proceedings arising in the
normal course of our business and otherwise. We are not a party to any pending
legal proceedings which we believe are material.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers and their ages and terms of office as
of April 5, 1999 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
- ---- --- ------------------------
<S> <C> <C>
Drew W. Edwards.............................. 34 Chief Executive Officer and Chairman of the Board
of Directors
Henry M. Baroco.............................. 55 President, Chief Operating Officer and Director
Bruce F. Lowthers, Jr........................ 34 Senior Vice President and Chief Financial Officer
Cleve B. Shultz.............................. 31 Executive Vice President and Secretary
G. Lynn Boggs................................ 43 Director
Frank W. Brown............................... 45 Director
John W. Collins.............................. 51 Director
J. Stanley Mackin............................ 66 Director
Joe M. Rodgers............................... 65 Director
John D. Schneider, Jr........................ 45 Director
J. Daniel Speight, Jr........................ 42 Director
Glenn W. Sturm............................... 45 Director
J. Stephen Turner............................ 52 Director
Bahram Yusefzadeh............................ 53 Director
</TABLE>

DREW W. EDWARDS is a co-founder and has been Chief Executive Officer and
Chairman of the Board of Directors of Towne since its formation. From 1990 until
forming Towne Services, Mr. Edwards served in various marketing and management
positions with The Bankers Bank which is headquartered in Atlanta, Georgia, most
recently as its Senior Vice President and Director of Sales and Marketing. The
Bankers Bank is a leading provider of correspondent banking services in the
southeastern United States. From 1987 to 1990, Mr. Edwards worked for the
Federal Reserve Bank of Atlanta. Mr. Edwards' term as a director expires in
2001.

HENRY M. BAROCO has been President, Chief Operating Officer and a director
of Towne since 1996. Mr. Baroco has over 30 years of experience with various
credit, leasing and lending organizations. Before joining Towne Services, Mr.
Baroco had been Senior Vice President and General Manager of the vendor finance
division of The CIT Group, Inc. since September 1995. From November 1993 to
September 1995, he served as Senior Vice President of Sales and Marketing for
Norwest Equipment Finance. From April 1991 to November 1993, Mr. Baroco was
Senior Vice President and General Manager of Sales and Marketing for LB Credit
Corporation. Mr. Baroco also worked in various capacities for GE
Capital -- Vendor Financial Services for over 18 years. Mr. Baroco's term as a
director expires in 2000.

BRUCE F. LOWTHERS, JR. has been Senior Vice President and Chief Financial
Officer of Towne since November 1997. Prior to joining Towne Services, Mr.
Lowthers had been Chief Financial Officer and Treasurer of Quest Group
International, Inc., a telecommunications company, since September 1994. From
June 1992 to September 1994, he was an audit manager with Ernst & Young, L.L.P.
Mr. Lowthers is a certified public accountant.

CLEVE B. SHULTZ has been Executive Vice President of Towne since April
1998. He served as the Company's Senior Vice President from January 1996 to
April 1998. Prior to joining Towne

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Services, Mr. Shultz had been Vice President -- Marketing at The Bankers Bank
which is headquartered in Georgia since August 1993. Before joining The Bankers
Bank, Mr. Shultz served as campaign director for Representative John Linder's
successful 1992 campaign for the U.S. House of Representatives, 4th
Congressional District of Georgia.

G. LYNN BOGGS is a co-founder and has been a director of Towne since its
formation. Mr. Boggs recently became a Senior Vice President of Investments for
The Bankers Bank which is headquartered in Georgia. Bankers Bank. Prior to this
time, he served as the Senior Vice President and branch manager of Vining-Sparks
Investment Banking Group, L.P., a fixed income broker-dealer to financial
institutions in Nashville, Tennessee, since June 1996. Mr. Boggs has been in the
securities industry for the past 15 years. From October 1994 to June 1996, he
was Senior Vice President -- Investments at PaineWebber, Inc. in Nashville,
Tennessee. From March 1993 to October 1994, he was Senior Vice
President -- Investments for Prudential Securities Incorporated in Nashville.
From 1989 to March 1993, he was Senior Vice President of Vining-Sparks. Mr.
Boggs is on the Advisory Board of Directors of The Bank of Green Hills in
Nashville. Mr. Boggs' term as a director expires in 2001.

FRANK W. BROWN has been a director of Towne since March 1998. Mr. Brown has
been a principal with Brown, Burke Capital Partners, Inc. since 1991. Brown,
Burke Capital Partners provides financial advisory services to
community-oriented financial institutions and middle market corporations in
connection with mergers and acquisitions and financing. He is also the managing
member of the managing general partner of Capital Appreciation Partners, L.P.,
an Atlanta-based merchant banking fund, members of which are shareholders of
Towne. From 1977 to 1991, Mr. Brown worked in various corporate finance and
investment banking positions with Bankers Trust Company, The First Boston
Corporation and The Robinson-Humphrey Company. Mr. Brown's term as a director
expires in 1999.

JOHN W. COLLINS has been a director of Towne since its formation. Mr.
Collins is currently the Chairman of the Board of Directors and Chief Executive
Officer of The InterCept Group, Inc., a publicly-traded provider of
fully-integrated electronic commerce products and services for community
financial institutions. Mr. Collins has over 25 years of experience in multiple
areas of electronic commerce for community financial institutions. Prior to
co-founding The InterCept Group in 1996, he had served as a director and
executive officer of several of its predecessor companies and subsidiaries since
1986. Mr. Collins' term as a director expires in 2001.

J. STANLEY MACKIN has been a director of Towne since June 1998. Mr. Mackin
has been the Chairman of the Board of Directors of Regions Financial Corporation
since 1990 and served as its Chief Executive Officer from August 1990 to January
1998. Prior to joining Regions Financial as its President and Chief Operating
Officer in January 1990, Mr. Mackin had worked for Regions Bank since 1966. He
served as Chairman and Chief Executive Officer of Regions Bank from 1986 to
1990, as President and Chief Executive Officer from 1983 to 1986, and as head of
the commercial loan division from 1971 to 1983. Mr. Mackin's term as a director
expires in 1999.

JOE M. RODGERS has been a director of Towne since May 1998. He has been
Chairman of Rodgers Capital Group, L.P. a private investment company
specializing in merchant and investment banking, since February 1993. Mr.
Rodgers served as Chairman of the Board of Directors and Chief Executive Officer
of Berlitz International, Inc., a foreign language services company, from
December 1991 to February 1993. From 1985 to 1989, Mr. Rodgers served as United
States Ambassador to France. Mr. Rodgers is also a director of AMR
Corporation/American Airlines, Inc.; American Constructors, Inc.; Gaylord
Entertainment Company;

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<PAGE> 48

Gryphon Holdings, Inc.; Lafarge Corporation; SunTrust Bank, Nashville, N.A.;
Thomas Nelson, Inc.; Tractor Supply Company; and Willis Corroon Group, PLC. Mr.
Rodgers' term as a director expires in 2000.

JOHN D. SCHNEIDER, JR., has been a director of Towne since November 1998.
For the past 12 years, Mr. Schneider has served as a director, President and
Chief Executive Officer of Bankers Bancorp Inc., a bank holding company. He is a
director, President and Chief Executive Officer of Independent Bankers Bank and
Chairman of Bankers Bank Service Corporation, subsidiaries of Bankers Bancorp
Inc., in Springfield, Illinois. Mr. Schneider is also a director of Sullivan
Bancshares, Inc., First National Bank of Sullivan and Community Bank Mortgage
Corp. Mr. Schneider's term as a director expires in 1999.

J. DANIEL SPEIGHT, JR. has been a director of Towne since its formation.
Mr. Speight is the President, Chief Executive Officer and a director of FLAG
Financial Corporation, a bank holding company. He served as Chief Executive
Officer and a director of Middle Georgia Bankshares, Inc. from 1989 until its
merger with FLAG Financial in March 1998. He has been President, Chief Executive
Officer and a director of Citizens Bank, a subsidiary of FLAG Financial in
Vienna, Georgia, since 1984. Mr. Speight is currently vice-chairman of The
Bankers Bank and a member of the State Bar of Georgia. He is past Chairman of
the Georgia Bankers Association Community Banking Committee, past President of
The Community Bankers Association of Georgia and past director of the
Independent Bankers Association of America. Mr. Speight's term as a director
expires in 1999.

GLENN W. STURM has been a director of Towne since 1996. Mr. Sturm has been
a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P. since
1992, where he serves as Corporate Chairman and as a member of the executive
committee. Since 1996, Mr. Sturm has been a director of Phoenix International
Ltd., Inc., a publicly-held provider of client/server retail banking software to
financial institutions in the United States and abroad. He also has been a
director of The InterCept Group since 1997. Mr. Sturm's term as a director
expires in 2000.

J. STEPHEN TURNER has been a director of Towne since 1997. He has been the
Chairman of the Board of Directors and Chief Executive Officer of FNB Financial
Corp., a bank holding company, since 1990. Mr. Turner is also a director of
Farmers National Bank in Scottsville, Kentucky. He has also been the President
and Chief Executive Officer of Allen Realty Corporation in Nashville, Tennessee
since 1988. Mr. Turner's term as a director expires in 2000.

BAHRAM YUSEFZADEH has been a director of Towne since 1997. Mr. Yusefzadeh
has been Chairman of the Board of Directors and Chief Executive Officer of
Phoenix International Ltd., Inc. since its formation in 1993. Mr. Yusefzadeh has
over 28 years of experience in the banking software industry. He was a
co-founder of Nu-Comp Systems, Inc., where he developed the Liberty Banking
System and served as Nu-Comp's President and Chief Executive Officer from 1969
to 1986. Mr. Yusefzadeh also served as Chairman of the Board of Directors of
Broadway & Seymour, Inc. during 1986 and in various executive capacities for The
Kirchman Corporation from 1986 to 1992. Mr. Yusefzadeh's term as a director
expires in 1999.

Executive officers are appointed by the board of directors and other
officers are appointed by the executive officers. Officers serve at the pleasure
of the board of directors or the executive officer authorized to make the
appointment until their successors are chosen and qualified or until their
earlier resignation or removal.

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<PAGE> 49

COMMITTEES OF THE BOARD OF DIRECTORS AND NOMINATIONS BY SHAREHOLDERS

We maintain three committees, an Audit Committee, a Compensation and Stock
Option Committee and an Executive Committee. The Audit Committee consists of
Messrs. Speight, Sturm, Turner and Yusefzadeh. The Compensation and Stock Option
Committee consists of Messrs. Boggs, Brown, Speight, Turner and Yusefzadeh. The
Executive Committee consists of Messrs. Boggs, Brown, Collins, Edwards, Sturm
and Yusefzadeh. At least two members of each of the audit and compensation
committees are non-employee independent directors.

We do not have a standing nominating committee. The board of directors
nominates candidates to stand for election as directors. Under our bylaws,
shareholders may make nominations for directors, but only if nominations are
delivered in writing to the Secretary no less than 60 and no more than 90 days
before the first anniversary of the previous year's annual meeting. Nominations
must also include the identity of the nominee and certain other information.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the cash and non-cash
compensation during 1998 and 1997 earned by or awarded to the Chief Executive
Officer and to the other three executive officers whose combined salary and
bonus exceeded $100,000 during 1998. These four officers are the "named
executive officers" of our Company.

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
OTHER UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ---------------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Drew W. Edwards.......................... 1998 $150,000 $342,000 $ 7,380 170,000
Chief Executive Officer and 1997 $ 62,000 $100,000 $ 5,400 --
Chairman of the Board
Henry M. Baroco.......................... 1998 $150,000 $274,000 $10,272 170,000
President and 1997 $100,000 $ 50,000 $ 5,400 --
Chief Operating Officer
Bruce F. Lowthers, Jr.................... 1998 $125,000 $168,700 $ 5,400 120,000
Senior Vice President and 1997 $ 16,666 -- -- 300,000
Chief Financial Officer
Cleve B. Shultz.......................... 1998 $ 90,000 $114,000 $ 5,880 85,000
Executive Vice President 1997 $ 60,000 -- -- --
and Secretary
</TABLE>

- ---------------

(1) Represents automobile lease payments.

45
<PAGE> 50

OPTION GRANTS AND EXERCISES DURING 1998

The following table sets forth information with respect to grants of stock
options to each of the named executive officers during 1998.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE GRANT EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR PRICE DATE DATE 5% 10%
---- ---------- ------------ -------- ----- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Drew W. Edwards............. 170,000 20.7% $7.20 5/98 5/03 $338,169 $ 747,264
Henry M. Baroco............. 170,000 20.7% $7.20 5/98 5/08 $869,455 $2,617,436
Bruce F. Lowthers, Jr....... 120,000 14.6% $7.20 5/98 5/08 $613,200 $1,848,000
Cleve B. Shultz............. 85,000 10.4% $7.20 5/98 5/08 $434,350 $1,309,000
</TABLE>

- ---------------

(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. We cannot
guarantee that the actual stock price appreciation over the term will be
assumed 5% and 10% levels or at any other defined level. Unless the market
price of the common stock appreciates over the option term, no value will be
realized from the option grants made to the executive officers.

During 1998, three of the named executive officers exercised 275,000 stock
options. The following table sets forth information with respect to each of the
named executive officers concerning the value of all unexercised options held by
such individuals at December 31, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Drew W. Edwards............... 100,000 $412,500 350,923 50,000 $1,170,047 $325,000
Henry M. Baroco............... 100,000 $412,500 1,205,923 50,000 $6,878,547 $325,000
Bruce F. Lowthers, Jr......... 75,000 $337,500 195,000 150,000 $ 450,000 $900,000
Cleve B. Shultz............... -- -- 365,923 50,000 $1,820,047 $325,000
</TABLE>

- ---------------

(1) Represents the difference between the exercise price per share and the $7.00
per share market value of the common stock at December 31, 1998 as reported
on the Nasdaq National Market.

1998 STOCK OPTION PLAN

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

Awards under the plan can be incentive stock options, non-qualified stock
options or restricted stock. These awards are granted by the Compensation and
Stock Option Committee of the board of directors. This committee must have at
least two non-employee independent directors. This committee generally has
discretion to determine the terms of an option grant, within limitations,
including the following:

- the number of shares subject to options granted to a person in a
year may not exceed 500,000 shares;

46
<PAGE> 51

- if an award is intended to be an incentive stock option and is
granted to a shareholder holding more than 10% of the combined
voting power of all classes of stock, the option price per share may
not be less than 110% of the fair market value of such share at the
time of grant; and

- the term of an incentive stock option may not exceed 10 years, or 5
years if granted to a shareholder owning more than 10% of the total
combined voting power of all classes of stock.

When it was adopted, the 1998 plan provided that no more than 2,000,000
shares may be subject to outstanding options. This number automatically
increases on January 1 of each year by the lesser of three percent of the number
of shares outstanding on the preceding trading day or 500,000 shares.
Accordingly, as of January 1, 1999, there are 2,500,000 shares available for
grant under the 1998 plan.

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

- increases the total number of shares issuable pursuant to incentive
stock options;

- changes the class of employees eligible to receive incentive stock
options that may participate; or

- otherwise materially increases the benefits to recipients of
incentive stock options.

1996 STOCK OPTION PLAN

In November 1996, we adopted the Towne Services, Inc. 1996 Stock Option
Plan. As of June 15, 1998, options to acquire 2,090,000 shares had been
authorized for issuance and options to acquire 1,728,400 shares were
outstanding. All of these options were issued at the fair market value of the
common stock as determined by the board of directors. Effective May 19, 1998, we
decided not to issue any additional options under this plan.

MANAGEMENT BONUS PLAN

Our compensation committee has discussed and approved a 1999 management
bonus plan. This plan creates a bonus pool of $750,000 which may be adjusted
from time to time by the compensation committee or board of directors. All
non-commission employees are eligible for a percentage of the pool based on
their seniority level, length of employment and overall performance. If the 1999
revenue goal is exceeded, the bonus pool will increase by $0.078 for every $1.00
beyond the budgeted revenue goal, provided that the corresponding margins are in
line with the budget.

If the bonuses are paid, executive officers will receive the following
percentages of the total bonus pool: Mr. Edwards, 20%; Mr. Baroco, 20%; Mr.
Lowthers, 13.5%; and Mr. Shultz, 13.5%. Bonuses are payable as follows: 12.5% of
the pool is payable following the end of each quarter if we meet our goals for
that quarter, and the remaining 50% of the pool is payable following the end of
the fiscal year if we have met our goals for the entire year. In addition, Mr.
Edwards and Mr. Baroco will each receive $50,000 in additional bonus for 1999.

47
<PAGE> 52

EMPLOYMENT AGREEMENTS

Our four executive officers have entered into employment agreements with
us. The current principal terms of these agreements are summarized below.

Drew W. Edwards

- serves as Chairman of the Board and Chief Executive Officer;

- current base salary: $200,000, which may be increased periodically;

- term of three years, which renews daily for each day served;

- incentive compensation based upon achievement of criteria established by
board of directors;

- participates in stock option plans, receives health insurance, club dues,
automobile allowance and other benefits;

- Towne may terminate the agreement upon death or disability or for cause;

- the executive may terminate the agreement for any reason, including after
a change in control;

- if the agreement is terminated by either party after a change in control,
other than for cause:

- the executive receives accrued compensation and bonus, and 1/12 of
his annual base salary and bonus each month for 36 months, and Towne
must continue his insurance benefits until death; and

- options held by the executive vest and become immediately
exercisable; and

- if the agreement is terminated for any reason, the executive has the
right to demand that we register his shares.

Henry M. Baroco

- serves as President and Chief Operating Officer;

- current base salary: $200,000, which may be increased periodically;

- term of two years, which renews daily for each day served;

- incentive compensation based upon achievement of criteria established by
board of directors;

- participates in stock option plans, receives health insurance, club dues,
automobile allowance and other benefits;

- Towne may terminate the agreement upon death or disability or for cause;

- the executive may terminate the agreement for any reason, including after
a change in control; and

- if terminated by either party after a change in control, other than for
cause:

- the executive receives accrued compensation and bonus, and 1/12 of
his annual base salary and bonus each month for 24 months, and Towne
must continue his insurance benefits until death; and

48
<PAGE> 53

- options held by the executive vest and become immediately
exercisable.

Bruce F. Lowthers, Jr.

- serves as Chief Financial Officer;

- current base salary: at least $140,000, which may be increased
periodically;

- term of one year, which renews daily for each day served;

- Towne may terminate the agreement upon death or disability, without cause
if determined by the board of directors, or for cause;

- the executive may terminate the agreement if the company breaches the
agreement, if he is forced to relocate outside of the Atlanta
metropolitan area or at any time upon 30 days notice; and

- if the agreement is terminated by the executive prior to a change in
control for any reason other than Towne's material breach of the
agreement, Towne may repurchase all stock options owned by executive at
the greater of the price paid or the current fair market value.

Cleve B. Shultz

- serves as Executive Vice President;

- current base salary: at least $140,000, which may be increased
periodically;

- term of one year, which renews daily for each day served;

- Towne may terminate the agreement upon death or disability or for cause;

- if the agreement is terminated by the executive prior to a change in
control for any reason other than Towne's material breach of the
agreement, Towne may repurchase all stock options owned by the executive
at the greater of the price paid or the current fair market value.

DIRECTOR COMPENSATION

Historically, upon initial election to the board of directors, each
non-employee director has received options to acquire 30,000 shares of common
stock. All of these options vested immediately. In addition, non-employee
directors were granted 20,000 options each in March 1998 and 2,500 options each
in December 1998. Directors are also paid $1,000 for attending meetings of board
committees and may be reimbursed for other expenses incurred in their capacity
as directors. Our board of directors is planning to present to the shareholders
for approval in May 1999 an option plan for non-employee directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

On December 11, 1996, we entered into a $250,000 line of credit with
Citizens Bank, Vienna, Georgia, to fund our working capital needs. J. Daniel
Speight, Jr., a director, is the president and chief executive officer of
Citizens Bank. The interest rate for any borrowings under the line of credit was
9.25% per year, but no money was drawn on this line of credit. Drew W. Edwards,
Henry M. Baroco, Cleve B. Shultz, Thomas M. Bryan, G. Lynn Boggs, John W.
Collins and Glenn W. Sturm guaranteed this line of credit. In consideration of
their guarantees, we issued each of these directors and officers options to
acquire 71,400 shares of common stock

49
<PAGE> 54

at an exercise price of $0.50 per share. This loan matured in December 1997 and
was not renewed.

On June 3, 1997, we entered into a $250,000 line of credit with First
Federal Savings Bank of LaGrange, Georgia, to fund our working capital needs.
Mr. Speight is the president and chief executive officer and a director of FLAG
Financial Corporation, the holding company for First Federal Savings Bank of
LaGrange. The interest rate for this loan was the lender's prime rate, and there
were no borrowings under this line of credit. Messrs. Edwards, Baroco, Shultz,
Bryan, Boggs, Collins and Sturm personally guaranteed this loan. In
consideration of their guaranties, we issued each of these directors and
officers options to acquire 59,523 shares of common stock at an exercise price
of $0.60 per share. FLAG Financial Corporation is the bank holding company for
several of our customer banks and is one of our shareholders.

During 1998, Towne billed FLAG Financial Corporation $207,000 for set-up
fees and related processing related to FLAG's use of the TOWNE CREDIT and TOWNE
FINANCE systems.

On June 5, 1998, we entered into a loan with Citizens Bank borrowing
$500,000 to fund our acquisition of assets and liabilities from Credit
Collection Solutions, Inc. The loan was repaid in August 1998 using proceeds of
our initial public offering. We have from time to time obtained financing from
Citizens Bank for the purchase of specific furniture and equipment. The total
amount borrowed under these term loans was $90,000 and interest rates for these
loans range from 9.25% to 12.0% per year.

On March 13, 1998, we entered into a Stock Purchase Agreement with Capital
Appreciation Partners, L.P. under which Capital Appreciation Partners purchased
15,000 shares of Series A preferred stock for $1.5 million. These preferred
shares were automatically converted into 1,217,903 shares of common stock upon
completion of our initial public offering. We granted registration rights with
respect to these shares. See "Shares Eligible for Future Sale." Frank W. Brown,
a director, is the managing member of the general partner of Capital
Appreciation Partners, and became a director as a result of the stock purchase.
In addition, Brown Burke Capital Partners, of which Mr. Brown is a partner,
purchased 100,000 shares of common stock at a price of $1.00 per share in
October 1997 and 50,000 shares of common stock upon the exercise of options at
an exercise price of $1.25 per share in March 1998. In 1998, we paid Brown,
Burke Capital Partners $112,500 for financial advisory services relating to the
acquisition of Banking Solutions, Inc.

We entered into a General Marketing Agent Agreement with Phoenix
International Ltd., Inc., dated as of June 5, 1998, under which Phoenix
International agrees to market our products and services to its bank customers.
Bahram Yusefzadeh, a director, is the Chairman of the Board and Chief Executive
Officer of Phoenix International and Glenn W. Sturm, a director and member of
our Compensation and Stock Option Committee and our Audit Committee, is also a
director of Phoenix International. During 1998, we invoiced Phoenix for $585,000
pursuant to this agreement and paid Phoenix $21,000 for commissions related to
sales of our products.

From November 1, 1995 through May 1, 1996 we borrowed $45,000 from each of
Mr. Boggs, a director and principal shareholder, and Mr. Bryan, a principal
shareholder. We executed promissory notes and loan agreements to evidence these
loans. Each of these loans accrued interest at the rate of 7% per year, and had
principal payments due on October 31, 1998, 1999 and 2000. Messrs. Boggs and
Bryan agreed to subordinate our obligations under these loans to our obligations
to our other creditors. As of December 1997, these loans were paid in full.

50
<PAGE> 55

Thomas A. Bryan, who served as the chairman of the compensation committee
during 1997, served without compensation as our Treasurer and Secretary from our
inception in October 1995 until 1996.

On March 31, 1997, we loaned $450,000 to J. Stephen Turner, a director, to
fund the purchase of 450,000 shares of common stock. Interest accrued at 6.0%
per year until May 31, 1997 and 8.0% per year thereafter until paid. Mr. Turner
pledged the shares of common stock received upon this purchase as collateral for
the loan. Mr. Turner paid this note in full prior to May 31, 1997.

CERTAIN TRANSACTIONS

The information provided below summarizes certain transactions and
relationships during the past three years among Towne and its directors,
executive officers and shareholders owning more than 10% of our common stock.

LOAN FACILITIES

On December 18, 1997, we entered into a loan facility and issued a stock
purchase warrant to Sirrom Investments, Inc. Pursuant to this warrant, Messrs.
Edwards, Baroco and Shultz agreed, with certain exceptions, not to sell any of
their shares of common stock in Towne without first offering Sirrom Investments
the right to sell stock on the same terms. These co-sale rights terminated upon
completion of our initial public offering.

CERTAIN ISSUANCES OF STOCK AND WARRANTS

On October 21, 1997, we issued warrants to purchase a total of 75,000
shares of common stock at an exercise price of $1.00 per share to Joe M.
Rodgers, a director of Towne, and three other individuals who are principals of
Rodgers Capital Group, L.P. in consideration of professional services provided
by these individuals to us in connection with certain marketing efforts. As part
of such issuance, Mr. Rodgers received a warrant to purchase 21,648 shares of
common stock. Rodgers Capital Group also purchased 200,000 shares of Towne
common stock in October in 1997 at a price of $1.00 per share. In addition, we
paid Rodgers Capital a total of $220,000 as compensation for services provided
by Rodgers Capital during 1997 in connection with obtaining equity investments
for us. In connection with the Forseon merger, we have agreed to pay Rodgers
Capital a total of $300,000 for rendering advisory services and a fairness
opinion. We have also retained Rodgers Capital for advisory services related to
possible future acquisitions and have agreed to pay them $4,000 per month plus
costs and expenses for these services.

MANAGEMENT LOANS

In October 1998, we loaned our Chief Executive Officer, Drew W. Edwards,
$50,000 to exercise options to acquire 100,000 shares of our common stock. The
promissory note is full recourse and accrues interest at the rate of 8.5% per
year. The note matures on the earlier of February 2000 or the date on which Mr.
Edwards sells the common stock purchased with proceeds of the note.

In September 1997, we loaned our President and Chief Operating Officer,
Henry M. Baroco, $78,990 to exercise options to acquire 263,300 shares of our
common stock. In October 1998, we loaned Mr. Baroco an additional $30,000 to
exercise options to acquire 100,000 shares

51
<PAGE> 56

of our common stock. The promissory notes are full recourse and accrue interest
at the rate of 8.5% per year. The 1997 note matures on the earlier of September
8, 1999 or the date that Mr. Baroco sells the common stock purchased with
proceeds of the note. The 1998 promissory note matures on the earlier of
February 2000 or the date on which Mr. Baroco sells the common stock purchased
with proceeds of the note. Mr. Baroco pledged the shares of common stock
received upon exercise of these options and other personal assets as collateral
for the loans.

In April 1998, we loaned our Chief Financial Officer, Bruce F. Lowthers,
Jr., $75,000 to exercise options to acquire 75,000 shares of our common stock.
This note is also full recourse and accrues interest at the rate of 8.75% per
year. The note matures on the earlier of December 31, 1999 or the date on which
Mr. Lowthers sells the common stock purchased with proceeds of the note. Mr.
Lowthers pledged the shares of common stock received upon this exercise and
other personal assets as collateral for the loan.

OTHER TRANSACTIONS AND RELATIONSHIPS

During the year ended December 31, 1997, we incurred costs of $37,000 for
rent on office space leased from ProVesa, Inc., a subsidiary of The InterCept
Group. We also paid approximately $25,000 for utilities and accounting services
provided by The InterCept Group. During 1998, we incurred costs of $121,000 for
communications services provided by InterCept Communications Technologies, Inc.,
a subsidiary of The InterCept Group, Inc. Mr. Collins, a director, is the Chief
Executive Officer and Chairman of the Board of Directors of The InterCept Group
and Mr. Sturm, a Towne director, is also a director of The InterCept Group. On
June 23, 1998, Towne and The InterCept Group entered into a strategic marketing
agreement under which the parties agreed to jointly offer certain on-line
services to Towne's business customers.

Certain transactions with our officers, directors and principal
shareholders may be on terms more favorable to such persons than they could
obtain in a transaction with an unaffiliated party. Since our initial public
offering, we require that all material transactions with our officers, directors
and other affiliates be on terms no less favorable to us than could be obtained
from unaffiliated third parties and must be approved by both a majority of the
board and a majority of the disinterested directors.

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<PAGE> 57

PRINCIPAL SHAREHOLDERS

The following table provides information, as of April 5, 1999, concerning
the beneficial ownership of common stock by: (1) each person or entity known by
Towne to beneficially own more than 5% of the outstanding common stock; (2) each
director; (3) each Named Executive Officer; and (4) all directors and executive
officers as a group. The information in the table is based on information from
the named persons regarding their ownership of common stock. Unless otherwise
indicated, each of the shareholders has sole voting and investment power with
respect to the shares shown as beneficially owned by them.

<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NATURE OF COMMON
BENEFICIAL STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OUTSTANDING
--------------------------------------- ------------ -----------
<S> <C> <C>
Drew W. Edwards(3).......................................... 2,033,830 10.1%
Henry M. Baroco(4).......................................... 1,761,133 8.4
Bruce F. Lowthers, Jr.(5)................................... 346,893 1.7
Cleve B. Shultz(6).......................................... 677,935 3.4
G. Lynn Boggs(7)............................................ 1,713,423 8.6
Frank W. Brown(8)........................................... 395,833 2.0
John W. Collins(9).......................................... 515,123 2.6
J. Stanley Mackin(10)....................................... 52,500 *
Joe M. Rodgers(11).......................................... 274,148 1.4
John D. Schneider, Jr.(12).................................. 37,500 *
J. Daniel Speight, Jr.(13).................................. 454,200 2.3
Glenn W. Sturm(14).......................................... 357,404 1.8
J. Stephen Turner(15)....................................... 555,000 2.8
Bahram Yusefzadeh(16)....................................... 105,000 *
Thomas A. Bryan(17)......................................... 1,697,598 8.5
SAFECO Asset Management Company(18)......................... 953,000 4.8
SAFECO Corporation(19)...................................... 1,055,000 5.3
All directors and executive officers as a group(14
persons).................................................. 9,279,922 41.1
</TABLE>

- ---------------

* Less than one percent.
(1) Unless otherwise indicated below, the address of the beneficial owners of
more than 5% of our common stock is in care of Towne Services, Inc., 3295
River Exchange Drive, Suite 350, Norcross, Georgia 30092.
(2) The percentage of shares beneficially owned includes common stock of which
the person has the right to acquire beneficial ownership within 60 days of
April 5, 1999, including but not limited to by exercise of an option;
however, this common stock is not deemed outstanding for the purpose of
computing the percentage owned by any other person.
(3) Includes currently exercisable options to purchase 350,923 shares of common
stock and 5,500 shares owned by Mr. Edwards' spouse. Mr. Edwards disclaims
beneficial ownership of his spouse's shares.
(4) Includes currently exercisable options to purchase 1,205,923 shares of
common stock.
(5) Includes currently exercisable options to purchase 195,000 shares of common
stock.
(6) Includes currently exercisable options to purchase 365,923 shares of common
stock.
(7) Includes currently exercisable options to purchase 203,423 shares of common
stock.
(8) Includes (a) 150,000 shares of common stock held by Brown, Burke Capital
Partners, Inc., of which Mr. Brown is a principal, (b) 25,047 shares of
common stock held by Capital Appreciation Partners, L.P. of which Mr. Brown
is the managing member of the managing general partner and (c) options to
acquire 2,500 shares of common stock.

53
<PAGE> 58

(9) Includes (a) 331,700 shares of common stock held by Mr. Collins, (b) 50,000
shares of common stock held by The Intercept Group, Inc., of which Mr.
Collins is Chief Executive Officer, Chairman of the Board and a significant
shareholder, and (c) options to acquire 133,423 shares of common stock held
by Mr. Collins. Mr. Collins disclaims beneficial ownership with respect to
the shares held by The Intercept Group, Inc.
(10) Includes options to acquire 52,500 shares of common stock.
(11) Includes (a) options to acquire 52,500 shares of common stock, (b) 200,000
shares of common stock held by Rodgers Capital Group, L.P., of which Mr.
Rodgers is a partner, and (c) warrants to acquire 21,648 shares of common
stock.
(12) Includes currently exercisable options to purchase 37,500 shares of common
stock.
(13) Includes 361,700 shares of common stock held by FLAG Financial Corporation,
of which Mr. Speight is Chief Executive Officer, President and a director
and options to acquire 92,500 shares of common stock.
(14) Includes currently exercisable options to purchase 2,500 shares of common
stock.
(15) Includes currently exercisable options to purchase 55,000 shares of common
stock.
(16) Includes (a) 50,000 shares owned by the Yusefzadeh Family Limited
Partnership, for which Mr. Yusefzadeh is the general partner, (b) 38,400
shares owned by Mr. Yusefzadeh's children, and (c) options to acquire 2,500
shares of common stock.
(17) Includes 24,000 shares owned by Mr. Bryan's minor children and currently
exercisable options to purchase 132,598 shares of common stock. Mr. Bryan
is a co-founder and served as a director from 1995 to 1998.
(18) As reported by SAFECO Asset Management Company in a Statement on Schedule
13G filed with the Securities and Exchange Commission as of December 31,
1998. In its Statement on Schedule 13G, SAFECO Asset Management Company
reports that it is an investment advisor registered under Section 203 of
the Investment Advisers Act of 1940 to several registered investment
companies. SAFECO Asset Management Company's address is 601 Union Street,
Suite 2500, Seattle, WA 98101.
(19) As reported by SAFECO Corporation in a Statement on Schedule 13G filed with
the Commission as of December 31, 1998. In its Statement on Schedule 13G,
SAFECO Corporation reports that it is a parent holding company in
accordance with Rule 13d-1(b)(ii)(G) to a subsidiary which serves an
investment advisor to several registered investment companies. SAFECO
Corporation's address is SAFECO Plaza, Seattle, WA 98185.

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<PAGE> 59

DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock is only a summary and is
subject to the provisions of our articles of incorporation and bylaws and the
provisions of applicable law. Our articles and bylaws are included as exhibits
to the registration statement of which this prospectus forms a part.

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

Our authorized capital stock consists of 50,000,000 shares of common stock,
no par value per share, and 20,000,000 shares of preferred stock, no par value
per share. As of April 19, 1999, there were 19,803,611 shares of common stock
outstanding and no shares of preferred stock outstanding.

COMMON STOCK

The holders of common stock are entitled to receive dividends that are
legally declared by the board of directors. Each shareholder is entitled to one
vote per share on all matters to be voted upon. Shareholders are not entitled to
cumulate votes for the election of directors. Holders of common stock do not
have preemptive, redemption or conversion rights and, upon our liquidation,
dissolution or winding up, will be entitled to share ratably in our net assets
available for distribution to common shareholders. All shares outstanding prior
to this offering are, and all shares to be issued in this offering will be,
validly issued, fully paid and non-assessable.

PREFERRED STOCK

Our board of directors can issue, without further action or vote by the
holders of the common stock, shares of preferred stock in one or more series and
to fix any preferences, conversion and other rights, voting powers,
restrictions, limitations, qualifications and terms and conditions of redemption
as adopted by the board of directors. Articles of amendment must be filed with
the Georgia Secretary of State before the issuance of any shares of preferred
stock of the applicable series. Any preferred stock issued may rank senior to
the common stock in the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, this preferred stock may have
class or series voting rights. Issuances of preferred stock, while providing us
with flexibility for general corporate purposes, may have an adverse effect on
the rights of holders of common stock. In addition, the issuance of preferred
stock could make it more difficult for a third party to acquire a majority of
our outstanding voting stock or the effect of decreasing the market price of our
common stock. We have no present plan to issue any shares of preferred stock.

CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND GEORGIA LAW

Classified Board of Directors

Our articles of incorporation provide that we shall have not less than 5
nor more than 12 directors. The board of directors has approved an amendment to
the articles increasing the maximum size of the board to 15 and has recommended
the amendment to the shareholders for approval. The board of directors is
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the board of directors is elected at each
annual meeting of our shareholders. The classification of directors, together
with other provisions in the articles and bylaws that limit the removal of
directors and permit the remaining directors

55
<PAGE> 60

to fill any vacancies on the board of directors, make it more difficult for
shareholders to change the composition of the board of directors. As a result,
at least two annual meetings of shareholders may be required for the
shareholders to change a majority of the directors, whether or not the change in
the board of directors would be beneficial to us and our shareholders and
whether or not a majority of our shareholders believes that the change would be
desirable. We believe, however, that the longer time required to elect a
majority of a classified board of directors will help to ensure the continuity
and stability of our management and policies. Currently, the terms of Class I
directors expire in 1999, the terms of Class II directors expire in 2000 and the
terms of Class III directors expire in 2001.

Removal of Directors and Filling Vacancies

Our bylaws provide that, unless the board of directors otherwise
determines, any vacancies, including vacancies resulting from an increase in the
number of directors, will be filled by the affirmative vote of a majority of the
remaining directors, even if it is less than a quorum. A director may be removed
only with cause by the vote of the holders of 66 2/3% of the shares entitled to
vote for the election of directors at a meeting of shareholders called to remove
that director.

Advance Notice Provisions for Shareholder Nominations and Shareholder Proposals

Our bylaws provide that at an annual meeting of shareholders, nominations
of persons for election to the board of directors and the proposal of business
to be considered by shareholders may be made only by or at the direction of the
board of directors, the Chairman of the board of directors or the President, or
by a shareholder who has complied with the advance notice procedures set forth
in the bylaws.

One purpose of requiring shareholders to give us advance notice of
nominations and other business is to give the board of directors a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business. If the board of directors considers
it necessary or advisable, these provisions provide our board the opportunity to
inform shareholders and make recommendations about the qualifications or
business, and to provide a more orderly procedure for conducting meetings of
shareholders. The bylaws do not give the board of directors any power to
disapprove timely shareholder nominations for the election of directors or
proposals for action. However, the provisions may preclude a contest for the
election of directors or the consideration of shareholder proposals if the
proper procedures are not followed. These provisions may also discourage or
deter a third party from conducting a solicitation of proxies to elect its own
slate of directors or to approve its own proposal.

Special Meetings

Our bylaws provide that, if we have more than 100 beneficial owners of our
shares under Georgia law, special meetings of the shareholders may be called by
shareholders only if those shareholders hold outstanding shares representing a
majority of all votes entitled to be cast on any issue proposed to be considered
at the special meeting. If we have less than 100 beneficial owners, the holders
of shares representing 25% or more of the votes entitled to be cast may call a
special meeting.

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<PAGE> 61

DIRECTOR LIABILITY AND INDEMNIFICATION

Our articles of incorporation eliminate, with some exceptions, the personal
liability of a director to our company or our shareholders for monetary damage
for breaches of the director's duty of care or other duties as a director. This
elimination of liability does not apply to:

- any appropriation, in violation of the director's duties, of any of our
business opportunities;

- acts or omissions that involve intentional misconduct or a knowing
violation of law;

- unlawful corporate distributions; or

- any transaction from which the director derived an improper personal
benefit.

Our articles also provide that if the Georgia law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director will be eliminated or limited to the
fullest extent permitted by the amended law, without further action by the
shareholders. These provisions of the articles will limit the remedies available
to a shareholder in the event of breaches of any director's duties to a
shareholder or us.

Our bylaws require us to indemnify and hold harmless any director who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding whether civil, criminal, administrative
or investigative, including any action or suit by or in our right, because he or
she is or was our director, officer, employee or agent. The bylaws require
indemnification against expenses, including attorney's fees and disbursements,
court costs and expert witness fees, judgments, fines, penalties, and amounts
paid in settlement incurred by him or her from the action, suit or proceeding.
Indemnification would be disallowed under any circumstances where
indemnification may not be authorized by action of the board of directors, the
shareholders, or otherwise.

We have entered into separate indemnification agreements with each of our
directors and executive officers in which we agreed, among other things, to
provide for indemnification and advancement of expenses with similar terms and
conditions to those in the bylaws. These agreements also provide that we
purchase and maintain liability insurance for the benefit of our directors and
executive officers. The shareholders cannot change these agreements. There is no
pending litigation or proceeding involving any of our directors, officers,
employees or other agent where indemnification is being sought. We are not aware
of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.

ANTI-TAKEOVER PROVISIONS AND GEORGIA LAW

Our articles of incorporation require the affirmative vote of at least
66 2/3% of our directors for the following actions to be submitted to a vote of
the shareholders:

- a sale of all or substantially all assets;

- a liquidation or dissolution;

- a merger, consolidation or reorganization, unless the shareholders
immediately prior to the transaction will own at least a majority of
the combined voting power of the company resulting from the merger,
consolidation or reorganization; or

- any increase in the number of directors above 12 directors.

In addition, the affirmative vote of 66 2/3% of the holders of the common
stock is required for shareholder approval of any of these actions.

57
<PAGE> 62

Our board of directors has the power to issue preferred stock, in one or
more classes or series and with such rights and preferences as determined by the
board of directors, all without shareholder approval. Because the board of
directors has the power to establish the preferences and rights of each class or
series of preferred stock, it may allow the holders of any series of preferred
stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of common stock. The board of directors has no present plans to issue
any additional shares of preferred stock.

Georgia law generally restricts a company from entering into certain
business combinations with an interested shareholder, which is defined as any
person or entity that is the beneficial owner of at least 10% of the company's
voting stock, or its affiliates for a period of five years after the date on
which the shareholder became an interested shareholder, unless:

- the transaction is approved by the board of directors prior to the
date the person became an interested shareholder;

- the interested shareholder acquires 90% of the company's voting stock
in the same transaction in which it exceeds 10%; or

- subsequent to becoming an interested shareholder, the shareholder
acquires 90% of the company's voting stock and the business
combination is approved by the holders of a majority of the voting
stock entitled to vote on the matter.

Georgia law provides that these restrictions will not apply unless the
bylaws of the corporation specifically provide that these provisions of Georgia
law are applicable to the corporation. We have not elected to be covered by such
statute, but it could do so by action of the board of directors at any time.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is First Union
National Bank.

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<PAGE> 63

SHARES ELIGIBLE FOR FUTURE SALE

When we complete this offering, we will have 26,803,611 shares of common
stock outstanding. Of these shares, approximately shares, including
the 7,000,000 shares sold in this offering, will be freely tradable without
restriction by persons other than affiliates of our company. We also have
options and warrants to purchase 3,740,459 shares of common stock outstanding.
In addition, we plan to register 2,075,345 shares in connection with the
proposed Forseon merger, and these shares will also be freely tradeable except
by affiliates of Forseon.

Outstanding shares of common stock that are not yet freely tradable are
"restricted" securities within the meaning of Rule 144. These restricted shares
may not be sold in the absence of registration under the Securities Act of 1933
unless an exemption from registration is available, such as the exemptions
contained in Rule 144 and Rule 701.

In general, under Rule 144, a person who has beneficially owned shares for
at least one year can sell within any 90-day period a number of shares that does
not exceed the greater of (a) 1% of the outstanding shares of common stock and
(b) the average weekly trading volume during the four calendar weeks preceding
each such sale. Sales under Rule 144 are also governed by manner of sale
provisions, notice requirements and the availability of current public
information about Towne. A person who has not been an affiliate of ours for at
least three months and who has beneficially owned shares for at least two years
could sell his or her shares under Rule 144(k) without regard to the limitations
described above. Rule 144 defines an "affiliate" of a company as a person that
directly or indirectly controls, is controlled by or is under common control
with that company. Affiliates of a company generally include its directors,
executive officers and principal shareholders.

Any employee or consultant of ours who purchased his or her shares pursuant
to a written compensatory plan or contract can rely on the resale provisions of
Rule 701, which permit nonaffiliates to sell their Rule 701 shares without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and which permit affiliates to sell their Rule
701 shares without having to comply with the Rule 144 holding period
restrictions. There are approximately shares that will be eligible for
immediate sale under Rule 144 and Rule 701.

We have registered 5,246,900 shares of common stock issuable upon the
exercise of options granted or to be granted under our stock option and
compensation plans. Upon exercise of these options, these shares will be
eligible for resale in the public market without restriction by persons who are
not affiliates of Towne and, to the extent they are held by affiliates, pursuant
to Rule 144 without observance of the holding period requirement.

We have granted our chief executive officer, Drew W. Edwards, piggyback
registration rights and, after termination of his employment for any reason,
demand registration rights with regard to all shares of common stock he owns. We
have also granted piggyback and demand registration

59
<PAGE> 64

rights to Capital Appreciation Partners, L.P. for the shares of common stock
that are held by it and some of its affiliates. Capital Appreciation Partners
has agreed not to exercise its registration rights in connection with this
offering. In general, the demand registration rights require us to register the
shares of common stock subject to the registration rights upon request of the
holder. The piggyback registration rights held by Mr. Edwards and Capital
Appreciation Partners permit them to sell the shares of common stock subject to
the registration rights in any registration of our common stock, with certain
exceptions. The registration rights held by Capital Appreciation Partners and
Sirrom are terminated when the shares of common stock subject to those rights
can be resold under Rule 144 with no volume restriction. We generally are
required to bear the expenses of the sale of the shareholders' shares of common
stock under these registration rights, except for underwriting discounts and
commissions and, in certain cases, the fees and expenses of the shareholders'
counsel and filing fees related to the registration statement. We also are
obligated to indemnify the shareholders whose shares are included in any of our
registrations against some types of losses and liabilities, including
liabilities under the Securities Act of 1933 and state securities laws.

We cannot predict the effect that the sale of shares or the availability of
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market,
or the perception that substantial amounts of common stock are available for
sale, could adversely affect prevailing market prices and our ability to raise
equity capital in the future.

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<PAGE> 65

UNDERWRITING

The underwriters named below, acting through their representatives, First
Union Capital Markets Corp., Hambrecht & Quist LLC and J.C. Bradford & Co. have
each agreed with us, subject to the terms of the underwriting agreement to
purchase from us the number of shares of common stock listed opposite their
names below. The underwriters are committed to purchase and pay for all such
shares, if any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
First Union Capital Markets Corp........................
Hambrecht & Quist LLC...................................
J.C. Bradford & Co......................................
Total........................................
</TABLE>

The representatives have advised us that they propose to offer the shares
of common stock to the public at the offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession of not
more than $ per share, of which $ may be reallowed to other
dealers. After the completion of the offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. Any
reduction will not affect the amount of proceeds received by us.

We have granted the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 1,050,000 additional
shares of common stock at the public offering price. To the extent that the
underwriters exercise such option, each of them will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the 7,000,000 shares offered by this prospectus.
If purchased, the underwriters will sell those additional shares on the same
terms as those on which the 7,000,000 shares are being sold.

The following table summarizes the compensation to be paid by us to the
underwriters in connection with the offering.

<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH FULL
PER OVER-ALLOTMENT OVER-ALLOTMENT
SHARE EXERCISE EXERCISE
----- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts................................. $ $ $
</TABLE>

We estimate that the total expenses of the offering, excluding underwriting
discounts, will be approximately $ .

The underwriting agreement contains covenants of indemnity among the
underwriters and Towne against certain civil liabilities. These include
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement. Towne
has also agreed to contribute to payments that the underwriters may be required
to make under the underwriting agreement as a result of these liabilities.

The representatives have advised us that, according to the Securities and
Exchange Commission, persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or

61
<PAGE> 66

the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member is repurchased by
the representatives in syndicate covering transactions, in stabilizing
transactions or otherwise. The representatives have advised us that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
begun, may be discontinued at any time.

The representatives have informed us that the underwriters do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of common stock offered by this prospectus.

LEGAL MATTERS

The validity of the common stock offered under this prospectus will be
passed upon for Towne by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta,
Georgia. Glenn W. Sturm, a partner of Nelson Mullins, is one of our directors.
At April 19, 1999, members of Nelson Mullins Riley & Scarborough, L.L.P.
beneficially owned an aggregate of 459,621 shares of common stock. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Kilpatrick Stockton, LLP, Atlanta, Georgia.

EXPERTS

The consolidated financial statements of Towne Services, Inc. as of
December 31, 1996, 1997, and 1998 and for the period from inception (October 23,
1995) to December 31, 1995 and for each of the three years in the period ended
December 31, 1998 included or incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

The financial statements of Banking Solutions, Inc. as of December 31, 1996
and 1997 and for each of the years then ended included or incorporated by
reference in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

The financial statements of Forseon Corporation as of June 30, 1997 and
1998 and for each of the years in the three-year period ended June 30, 1998,
have been included in this document and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this prospectus, and upon the authority of said firm as
experts in accounting and auditing.

ADDITIONAL INFORMATION

We are subject to the information requirements of the Securities Exchange
Act of 1934, which means that we are required to file reports, proxy statements
and other information at the

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<PAGE> 67

Public Reference Section of the Securities and Exchange Commission at Room 1024,
450 Fifth Street, NW, Washington, D.C. 20549, and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
You may also obtain copies of the reports, proxy statements and other
information from the Public Reference Section of the SEC, Washington, D.C.
20549, at prescribed rates. The SEC maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements, and registration statements and other information regarding
registrants that file electronically with the SEC through the EDGAR system. Our
common stock is traded on the Nasdaq National Market under the symbol TWNE, and
reports, proxy statements and other information may also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.

We filed a registration statement on Form S-1 to register with the SEC the
common stock to be issued in this offering. This prospectus is a part of that
registration statement and constitutes a prospectus of Towne. As allowed by the
SEC's rules, this prospectus does not contain all of the information you can
find in the registration statement or the exhibits to the registration
statement. This prospectus summarizes some of the documents that are exhibits to
the registration statement, and you should refer to the exhibits for a more
complete description of the matters covered by those documents.

63
<PAGE> 68

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TOWNE SERVICES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
BANKING SOLUTIONS, INC.
Report of Independent Public Accountants.................... F-23
Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998........................................ F-24
Statements of Operations for the Years Ended December 31,
1996 and 1997 and for the Nine Months Ended September 30,
1998...................................................... F-25
Statements of Shareholders' Deficit for the Years Ended
December 31, 1996 and 1997 and for the Nine Months Ended
September 30, 1998........................................ F-26
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997 and for the Nine Months Ended September 30,
1998...................................................... F-27
Notes to Financial Statements............................... F-28
FORSEON CORPORATION
Independent Auditors' Report................................ F-33
Consolidated Balance Sheets as of June 30, 1997 and 1998.... F-34
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997 and 1998.............................. F-35
Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 1996, 1997 and 1998.................. F-36
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998.............................. F-37
Notes to Consolidated Financial Statements.................. F-38
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ F-46
Unaudited Pro Forma Combined Condensed Balance Sheet as of
December 31, 1998......................................... F-47
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1998........... F-48
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1997........... F-49
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1996........... F-50
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements................................................ F-51
</TABLE>

F-1
<PAGE> 69

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Towne Services, Inc.:

We have audited the accompanying consolidated balance sheets of TOWNE
SERVICES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997
and 1998 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Towne Services, Inc. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

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

/s/ Arthur Andersen LLP

Atlanta, Georgia
February 12, 1999

F-2
<PAGE> 70

TOWNE SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,536,439 $ 13,081,284
Accounts receivable, net of allowance for uncollectible
accounts of $25,000 and $347,065 in 1997 and 1998,
respectively........................................... 121,566 3,552,478
Note receivable........................................... 0 167,305
Other..................................................... 68,273 229,732
----------- ------------
Total current assets.............................. 2,726,278 17,030,799
PROPERTY AND EQUIPMENT, net................................. 489,849 2,116,987
NOTES RECEIVABLE............................................ 78,990 81,565
DEBT ISSUANCE COSTS, net.................................... 288,815 0
GOODWILL, net............................................... 0 14,955,414
OTHER INTANGIBLES, net...................................... 0 1,134,614
OTHER ASSETS, net........................................... 2,500 100,249
----------- ------------
$ 3,586,432 $ 35,419,628
=========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 297,937 $ 125,763
Accrued liabilities....................................... 215,109 1,273,148
Accrued compensation...................................... 220,300 250,391
Accrued termination costs................................. 0 497,910
Current portion of long-term debt......................... 46,757 5,000,000
----------- ------------
Total current liabilities......................... 780,103 7,147,212
----------- ------------
LONG TERM DEBT, net of discount of $249,500 and $0 in 1997
and 1998, respectively.................................... 1,289,666 0
----------- ------------
COMMITMENTS AND CONTINGENCIES
WARRANTS WITH REDEMPTION FEATURE............................ 255,000 0
----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value; 20,000,000 shares
authorized, 0 issued and outstanding in 1997 and 1998,
respectively........................................... 0 0
Common stock, no par value; 50,000,000 shares authorized,
11,706,766 and 19,651,390 issued and outstanding in
1997 and 1998, respectively............................ 4,417,696 52,363,084
Warrants outstanding...................................... 41,000 41,000
Accumulated deficit....................................... (3,197,033) (24,131,668)
----------- ------------
Total shareholders' equity........................ 1,261,663 28,272,416
----------- ------------
$ 3,586,432 $ 35,419,628
=========== ============
</TABLE>

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

F-3
<PAGE> 71

TOWNE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ------------
<S> <C> <C> <C>
REVENUES................................................ $ 105,285 $ 722,364 $ 6,397,628
---------- ----------- ------------
COSTS AND EXPENSES:
Costs of processing, servicing and support............ 219,621 832,102 2,027,160
Research and development.............................. 51,871 332,470 306,482
Sales and marketing................................... 118,163 839,323 6,251,564
Stock compensation expense............................ 10,020 0 6,267,497
Employee termination costs............................ 0 0 2,291,102
General and administrative............................ 358,606 1,139,642 3,858,564
---------- ----------- ------------
Total costs and expenses...................... 758,281 3,143,537 21,002,369
---------- ----------- ------------
OPERATING LOSS.......................................... (652,996) (2,421,173) (14,604,741)
---------- ----------- ------------
OTHER EXPENSES:
Interest expense (income), net........................ 5,802 95,946 (263,503)
Other expense (income)................................ 3,509 (1,018) (5,814)
Financing costs for stock issued to nonemployees...... 0 0 323,000
---------- ----------- ------------
Total other expenses.......................... 9,311 94,928 53,683
---------- ----------- ------------
Loss before extraordinary loss on early extinguishment
of debt............................................... (662,307) (2,516,101) (14,658,424)
Extraordinary loss on early extinguishment of debt...... 0 0 476,239
---------- ----------- ------------
NET LOSS................................................ $ (662,307) $(2,516,101) $(15,134,663)
========== =========== ============
PREFERRED STOCK DIVIDENDS............................... 0 0 (5,108,000)
ACCRETION OF WARRANTS WITH REDEMPTION FEATURE........... 0 0 (691,972)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS BEFORE
EXTRAORDINARY LOSS.................................... $ (662,307) $(2,516,101) $(20,458,396)
========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON
SHARE BEFORE EXTRAORDINARY LOSS:
Basic................................................... $ (0.10) $ (0.26) $ (1.32)
========== =========== ============
Diluted................................................. $ (0.10) $ (0.26) $ (1.32)
========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS............ $ (662,307) $(2,516,101) $(20,934,635)
========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON
SHARE:
Basic................................................... $ (0.10) $ (0.26) $ (1.35)
========== =========== ============
Diluted................................................. $ (0.10) $ (0.26) $ (1.35)
========== =========== ============
Weighted Average Common Shares Outstanding.............. 6,337,356 9,600,592 15,516,170
========== =========== ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 72

TOWNE SERVICES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
-------------------- ------------------------ WARRANTS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT OUTSTANDING DEFICIT EQUITY
------- ---------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995......... -- -- 5,000,000 $ 15,750 -- $ (18,625) $ (2,875)
------- ---------- ---------- ----------- ------- ------------ ------------
Issuance of common stock........... -- -- 2,905,700 720,150 -- -- 720,150
Fair value of stock options
granted.......................... -- -- -- 64,124 -- -- 64,124
Net loss........................... -- -- -- -- -- (662,307) (662,307)
------- ---------- ---------- ----------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1996......... -- -- 7,905,700 800,024 -- (680,932) 119,092
------- ---------- ---------- ----------- ------- ------------ ------------
Issuance of common stock........... -- -- 3,537,766 3,471,099 -- -- 3,471,099
Issuance of warrants............... -- -- -- -- 41,000 -- 41,000
Exercise of stock options.......... -- -- 263,300 78,990 -- -- 78,990
Fair value of stock options
granted.......................... -- -- -- 67,583 -- -- 67,583
Net loss........................... -- -- -- -- -- (2,516,101) (2,516,101)
------- ---------- ---------- ----------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1997......... -- -- 11,706,766 4,417,696 41,000 (3,197,033) 1,261,663
------- ---------- ---------- ----------- ------- ------------ ------------
Issuance of preferred stock........ 15,000 $1,500,000 -- -- -- -- 1,500,000
Issuance of common stock........... -- -- 1,052,308 5,532,500 -- -- 5,532,500
Preferred stock dividend (Note
8)............................... -- -- -- 5,100,000 -- (5,108,000) (8,000)
Exercise of stock options.......... -- -- 771,000 583,500 -- -- 583,500
Employee compensation expense for
stock options granted or
amended.......................... -- -- -- 2,275,266 -- -- 2,275,266
Accretion of warrants with
redemption feature............... -- -- -- 691,972 -- (691,972) --
Conversion of preferred stock...... (15,000) (1,500,000) 1,217,903 1,508,000 -- -- 8,000
Conversion of outstanding
warrants......................... -- -- 308,982 255,000 -- -- 255,000
Initial public offering
transactions, net (Note 3)....... -- -- 3,850,000 26,989,129 -- -- 26,989,129
Issuance of common shares in
connection with the purchase of
Banking Solutions, Inc........... -- -- 744,431 5,010,021 -- -- 5,010,021
Net loss........................... -- -- -- -- -- (15,134,663) (15,134,663)
------- ---------- ---------- ----------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1998......... -- -- 19,651,390 $52,363,084 $41,000 $(24,131,668) $ 28,272,416
------- ---------- ---------- ----------- ------- ------------ ------------
</TABLE>

The accompanying notes are an integral part of these statements

F-5
<PAGE> 73

TOWNE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.............................................. $(662,307) $(2,516,101) $(15,134,663)
--------- ----------- ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation expense recognized for stock option
grants........................................... 10,020 0 6,267,497
Financing costs for stock issued to nonemployees... 0 0 323,000
Issuance of warrants............................... 0 41,000 0
Loss on disposal of property and equipment......... 7,234 0 0
Extraordinary loss from early extinguishment of
debt............................................. 0 0 476,239
Depreciation....................................... 12,895 103,629 285,354
Amortization of goodwill and other intangibles..... 0 0 113,337
Amortization of debt financing fees................ 0 39,423 13,496
Amortization of debt discount...................... 0 5,500 33,025
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.............................. (1,596) (119,970) (2,969,117)
Prepaid & other assets........................... (8,713) (259,209) (265,166)
Accounts payable................................. 39,487 257,836 (401,993)
Accrued liabilities.............................. 94,022 200,922 993,439
Accrued compensation............................. 0 139,977 30,092
Deferred revenue................................. 23,103 (23,103) 0
--------- ----------- ------------
Total adjustments............................. 176,452 386,005 4,899,203
--------- ----------- ------------
Net cash used in operating activities......... (485,855) (2,130,096) (10,235,460)
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from shareholders..................... 0 (78,990) (169,880)
Purchase of Credit Collection Solutions, Inc., net of
cash acquired...................................... 0 0 (510,000)
Purchase of Banking Solutions, Inc., net of cash
acquired........................................... 0 0 (10,351,129)
Purchase of property and equipment, net............... (151,813) (451,569) (1,870,672)
--------- ----------- ------------
Net cash used in investing activities......... (151,813) (530,559) (12,901,681)
--------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options............... 0 78,990 583,500
Repayment of debt..................................... 0 (318,702) (2,236,761)
Proceeds from Sirrom Capital loan..................... 0 1,500,000 0
Proceeds from short/long-term borrowings.............. 60,000 314,625 5,628,849
Proceeds from issuance of preferred stock............. 0 0 1,500,000
Proceeds from issuance of common stock................ 710,130 3,471,099 28,206,398
--------- ----------- ------------
Net cash provided by financing activities..... 770,130 5,046,012 33,681,986
--------- ----------- ------------
NET INCREASE IN CASH.................................... 132,462 2,385,357 10,544,845
CASH AND CASH EQUIVALENTS, beginning of period.......... 18,620 151,082 2,536,439
--------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period................ $ 151,082 $ 2,536,439 $ 13,081,284
========= =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes.............................. $ 0 $ 0 $ 0
========= =========== ============
Cash paid for interest.................................. 0 $ 15,900 $ 235,030
========= =========== ============
Fair value of stock options granted..................... $ 64,124 $ 67,583 $ 0
========= =========== ============
ACQUISITION OF BSI:
Fair value of assets acquired......................... $ 0 $ 0 $ 413,534
Liabilities assumed................................... 0 0 (1,285,120)
Value of common shares issued......................... 0 0 (4,517,230)
</TABLE>

The accompanying notes are an integral part of these statements.
F-6
<PAGE> 74

TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BACKGROUND

Towne Services, Inc. ("Towne Services" or the "Company") designs, develops
and markets products and services that convert the in-house credit transactions
of small businesses into automated accounts which are processed electronically
in much the same way as credit card transactions are processed. Usually,
in-house credit transactions are completed without a credit card or cash, are
recorded and processed manually and then billed to the customer at a later date.
To automate this process, Towne Services offers the following electronic
processing systems, TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER, which
process small business' in-house credit transactions in much the same way as
credit card transactions are processed.

The TOWNE CREDIT system electronically processes in-house consumer credit
transactions of small and medium size retail merchants. The TOWNE FINANCE
system, a commercial version of TOWNE CREDIT, is an automated asset management
and financing system that processes business-to-business credit transactions for
small commercial businesses. The CASHFLOW MANAGER system is an accounts
receivable financing program similar to the TOWNE FINANCE product. Through the
use of the Company's products and services, small businesses can automate
certain manual processes, accelerate cash flow, provide better customer service,
reduce paperwork and shift many other administrative burdens to Towne Services.
In addition, the Company provides complementing products and services to banks
that enable them to generate interest-bearing revolving credit accounts by
financing the accounts receivable of these small businesses. Through the use of
the Company's products, banks can monitor customers' accounts receivable and
generate detailed status reports, and may attract new business customers who, in
turn, may become customers of Towne Services.

Incorporated on October 23, 1995, Towne Services had no significant
operations until it released its TOWNE CREDIT product and related services in
June 1997. Accordingly, the Company has only a limited operating history. The
Company has incurred significant losses in each quarter since it commenced
operations. Towne Services had net losses of $662,000, $2.5 million and $15.1
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
Company expects that it will continue to incur net losses until it is able to
attain sufficient revenues to support its business. The Company can provide no
assurances as to when, if ever, this may occur.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPALS OF CONSOLIDATION

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

USE OF ESTIMATES

F-7
<PAGE> 75
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company functions as a service bureau whereby customers process
transactions utilizing the Company's software on an outsourced basis. The
Company's revenues are generated primarily through initial set-up fees and
recurring monthly transaction processing fees. Revenues related to the initial
set-up fee are recognized upon execution of the related contract. Revenues are
deferred for contracts that contain certain cancellation clauses and/or return
guarantees until the guarantee period is expired. Transaction fees are
recognized on a monthly basis as earned. The Company also leases point of sale
terminal equipment to certain customers under month-to-month operating leases.
Such operating lease revenues are recognized on a monthly basis as earned.

CASH AND CASH EQUIVALENTS

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

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed as incurred.
Depreciation is provided using the straight-line method for financial reporting.
The detail of property and equipment at December 31, 1997 and 1998 is as
follows:

<TABLE>
<CAPTION>
1997 1998 USEFUL LIVES
--------- ---------- ------------
<S> <C> <C> <C>
Furniture and fixtures............................ $ 114,841 $ 280,144 Seven years
Automobiles....................................... 18,406 18,406 Three years
Computers and equipment........................... 219,328 651,740 Five years
Point-of-sale equipment........................... 193,843 1,279,644 Three years
Leasehold improvements............................ 9,337 32,267 Five years
Computer software................................. 0 162,653 Five years
Software development costs........................ 47,000 59,500 Three years
--------- ----------
602,755 2,484,354
Less accumulated depreciation..................... (112,906) (367,367)
--------- ----------
$ 489,849 $2,116,987
========= ==========
</TABLE>

LONG-LIVED ASSETS

The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment, to determine whether any impairments are other
than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.

F-8
<PAGE> 76
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GOODWILL AND OTHER INTANGIBLES

In connection with the purchase of Credit Collection Solutions, Inc.
("CCS") (Note 4), the Company has recorded goodwill in the amount of $440,000,
which is being amortized over a period of 5 years.

In connection with the purchase of Banking Solutions, Inc. ("BSI") (Note
4), the Company has recorded goodwill in the amount of $14.6 million, which is
being amortized over a period of 25 years. The Company has allocated $1.1
million to BSI's customer list, which is being amortized over a period of 5
years.

OFFICERS' LIFE INSURANCE

The Company carries life insurance policies on four key executives. The
aggregate face value of these policies is $4,250,000, and the Company is
entitled to receive any proceeds as the beneficiary. The Company had no cash
surrender value in these policies at December 31, 1997 and 1998.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist of salary related personnel
costs, including costs for employee benefits, computer equipment and support
services used in products necessary to deliver the Company's services. The
Company's policy is to capitalize research and development costs upon
establishing technological feasibility, subject to a periodic assessment of
recoverability based on expected future revenues. The Company had capitalized
approximately $47,000, and $60,000 of software development costs at December 31,
1997 and 1998, respectively.

NET LOSS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective
for fiscal years ending after December 15, 1997. The Company adopted the new
guidelines for the calculation and presentation of earnings per share, and all
prior periods have been restated. Basic loss per share is based on the weighted
average number of shares outstanding. Diluted loss per share is based on the
weighted average number of shares outstanding, and the dilutive effect of common
stock equivalent shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). All common stock equivalents have been
excluded, as their effect would be anti-dilutive. Therefore, the weighted
average shares used for basic and diluted earnings per share are the same.

INCOME TAXES

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

F-9
<PAGE> 77
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

RISK OF POSSIBLE SYSTEM FAILURE

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

LOSS OF CUSTOMERS

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

PRODUCT RISKS

Towne Services may be liable if the use of any of its products causes
damage to its customers' businesses. Towne Services also may be required to
recall certain of its products if they become damaged or unable to perform their
intended functions. Towne Services has not experienced any product recalls or
product liability judgments or claims. However, a product recall or product
liability judgment against Towne Services could negatively affect its business
and financial results.

TRADEMARKS AND OTHER PROPRIETARY RIGHTS

Towne Services believes that its technologies, trademarks and other
proprietary rights are important to its success. The Company attempts to protect
itself through a combination of copyright law, trademark and trade secret laws,
employee and third party confidentiality

F-10
<PAGE> 78
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general purpose financial statements. This statement is effective for
periods beginning after December 15, 1997. The Company adopted SFAS No. 130
effective March 31, 1998. The adoption of SFAS No. 130 did not have a material
impact on the Company's financial statements, as comprehensive income did not
differ from the reported net loss.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company's
operating business segments provide electronic transaction processing for small
business in-house accounts. The product lines offered by the Company use the
Company's central administrative offices for customer support, centralized
processing and sales support. In addition, the Company's sales force markets all
products within their assigned markets. Consequently, the Company considers all
of its products as one reportable segment under the definitions in SFAS No. 131.

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

F-11
<PAGE> 79
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issued, acquired, or substantively modified after December 31, 1997. The
adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial statements.

3. INITIAL PUBLIC OFFERING

In August 1998 the Company completed an initial public offering ("IPO") of
its common stock. The total proceeds of the IPO, net of underwriting discounts
and offering expenses, were approximately $27.0 million. The Company issued
3,850,000 shares at an offering price at $8.00 per share. Subsequent to the IPO,
the Company converted all outstanding shares of Series A Preferred Stock to
1,217,903 shares of common stock and warrants for 308,982 shares of common stock
were exercised.

4. ACQUISITIONS

In June 1998, the Company acquired certain assets and liabilities of Credit
Collection Solutions, Inc. ("CCS") for approximately $510,000 cash and the
issuance of up to 100,000 shares of the Company's common stock if certain
financial results are achieved. CCS is a developer of computer software for
processing payments and tracking collections. In connection with the purchase of
CCS, the Company has recorded goodwill in the amount of $440,000, which is being
amortized over a period of 5 years. This amount includes $200,000 which was
originally recognized as purchased in-process development at the time of the
acquisition.

In December 1998, the Company acquired the outstanding stock of Banking
Solutions, Inc. ("BSI") for approximately $14.9 million in cash and stock. In
connection with the acquisition of Banking Solutions, the Company issued 744,431
shares of Towne's common stock at $6.73 per share. The remainder of the purchase
price was paid in cash. Towne also agreed to pay former officers of Banking
Solutions amounts of money which are contingent upon future performance
criteria. BSI is a developer and provider of a transaction processing system,
CASHFLOW MANAGER, an accounts receivable financing program similar to the TOWNE
FINANCE product. The Company recorded this transaction using the purchase method
of accounting. The Company has allocated goodwill in the amount of $14.6
million, which is being amortized over a period of 25 years. The Company has
recorded $1.1 million to an intangible asset for BSI's customer list, which is
being amortized over a period of 5 years. The Company recognized a one-time
charge in the amount of $2.3 million in December 1998 related to employee
terminations which were not identified at the date of purchase.

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

<TABLE>
<CAPTION>
1997 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES................................................... $ 8,808,177 $ 14,510,777
NET LOSS BEFORE EXTRAORDINARY ITEM......................... (3,484,053) (15,429,602)
NET LOSS................................................... (3,484,053) (15,905,842)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS............... $(3,484,053) $(21,705,813)
=========== ============
NET LOSS ATTRIBUTABLE PER COMMON SHARE..................... $ (0.34) $ (1.35)
----------- ------------
</TABLE>

F-12
<PAGE> 80
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT

Long-term debt consists of the following at December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Note payable to First Union Bank, interest at LIBOR+2.0%
(7.1% at December 31, 1998)............................... $ 0 $ 5,000,000
Note payable to Sirrom Investments, Inc. ("Sirrom") (the
"Sirrom Note"), interest at 14%, $1,500,000 due December
2002, secured by certain assets of the Company and all
shares owned by the Company's principal shareholders...... 1,500,000 0
Notes payable to Citizens Bank, interest ranging from 9.25%
to 12%, payable monthly through 2000, secured by
equipment................................................. 85,923 0
---------- -----------
1,585,923 5,000,000
Less current portion........................................ (46,757) (5,000,000)
---------- -----------
1,539,166 0
Less original issue discount................................ (249,500) 0
---------- -----------
$1,289,666 $ 0
========== ===========
</TABLE>

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

In January 1999, the Company paid in full the First Union National Bank
note of $5,000,000.

6. INCOME TAXES

The following is a reconciliation of income taxes at the federal statutory
rate with income taxes recorded by the Company for the years ended December 31,
1996, 1997 and 1998:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Income tax benefit computed
at the federal statutory rate.................... $ 225,184 $ 843,568 $ 5,145,786
State income tax benefit,
net of federal income tax benefit................ 30,220 96,136 605,387
Other, net......................................... (2,784) (16,193) (49,994)
Change in valuation allowance...................... (252,620) (923,511) (5,701,179)
--------- --------- -----------
$ 0 $ 0 $ 0
========= ========= ===========
</TABLE>

F-13
<PAGE> 81
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax assets and liabilities for 1996, 1997 and 1998 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences that give rise to deferred tax assets and liabilities at December
31, 1996, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation.......................... $ 30,523 $ 38,000 $ 76,114
Accounts receivable reserves................... 0 7,980 131,885
Other.......................................... 10,837 16,068 70,300
Net operating loss carryforwards............... 211,129 1,134,584 6,693,044
--------- ----------- -----------
Deferred tax assets.................... 252,489 1,196,632 6,971,343
Deferred tax liability:
Depreciation................................... (131) (20,501) (94,033)
--------- ----------- -----------
252,358 1,176,131 6,877,310
Valuation allowance.............................. (252,358) (1,176,131) (6,877,310)
--------- ----------- -----------
Net deferred tax asset................. $ 0 $ 0 $ 0
========= =========== ===========
</TABLE>

Due to the Company's current year operating loss position and projected
losses for the fiscal year ending December 31, 1999, no benefit for income taxes
for the year ended December 31, 1998 has been provided in the accompanying
financial statements as management has not determined it is more likely than not
that such benefits will be realized.

At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") of approximately $17.6 million which will expire if not utilized
beginning in 2011. Due to changes in the Company's ownership structure, the
Company's use of its NOLs as of October 1, 1997 of approximately $2.5 million
will be limited to approximately $550,000 in any given year to offset future
taxes. If the Company does not realize taxable income in excess of the
limitation in future years, certain NOLs will be unrealizable. NOLs generated
after October 1, 1997 may be further limited as a result of any future sales of
stock by the Company. Once these net operating loss carryforwards are utilized
or expire, the Company's projected effective tax rate will increase which will
adversely affect the Company's operating results and financial condition.

7. WARRANTS WITH REDEMPTION FEATURE

In connection with the issuance of the Sirrom Note, the Company issued
warrants to purchase 308,982 shares of common stock at a price of $0.01 per
share. Upon completion of the IPO (Note 3), warrants for 308,982 shares of
common stock were exercised. The value assigned to these warrants was $255,000.
The excess of the redemption value over the carrying value was accrued by
periodic charges to retained earnings over the redemption period. As the
redemption feature expired upon the IPO, the total amount of $946,972 charged to
retained earnings was transferred to permanent equity subsequent to the IPO.

F-14
<PAGE> 82
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. SHAREHOLDERS' EQUITY

PREFERRED STOCK

In January 1998, the Company authorized 20,000,000 shares of Series A
preferred Stock ("Preferred Stock") with a stated value of $100 per share. The
board of directors has the authority to issue these shares and to establish
dividends, voting and conversion rights, redemption provisions, liquidation
preferences, and other rights and restrictions. In March 1998, the Company sold
15,000 shares of Preferred Stock to Capital Appreciation Partners, L.P. for
$1,500,000. These shares were converted into common stock at a conversion price
of $1.25 per share at the completion of the Company's IPO (Note 3).

The Company recorded $5.1 million as a preferred stock dividend for the
difference between the estimated fair market value of the common stock at the
date of the issuance and the conversion price.

In July 1998 the IPO was declared effective by the Securities and Exchange
Commission (Note 3) and all outstanding shares of Series A Preferred Stock were
converted to 1,217,903 shares of common stock.

COMMON STOCK

During 1996 the Company issued 2,872,300 shares of common stock at prices
ranging from approximately $.04 to $.30 per share. In addition, the Company
granted 33,400 shares to an employee in the form of a bonus. The Company
recorded compensation expense related to these shares at $.30 per share which
represented management's estimate of the fair value of the common stock on the
date of issuance.

In January 1997, the Company effected a 100-for-1 stock split. All
references in the accompanying financial statements to number of shares and per
share amounts of the Company's common stock have been retroactively restated to
reflect the increased number of shares outstanding of common stock.

In an attempt to raise a minimum of $500,000 to serve as bridge financing
for the Company, the Company offered to sell shares of common stock for $1.00
per share to accredited investors as defined by Rule 501(a) under the Federal
Securities Act of 1933. The private placement began in late March 1997 and ended
October 17, 1997. Through this private placement and certain other issuances of
common stock, the Company raised $3.4 million.

In February 1998, the Company sold 76,000 shares of common stock to third
parties at $1.25 per share. The Company recorded $323,000 as financing costs for
stock issued to nonemployees for the difference between the sale price to these
third parties and the estimated fair market value on the date of sale.

In October 1998, the Company issued 33,225 shares of common stock at $5.625
per share as an incentive compensation to employees for achieving performance
expectations established in the second quarter of 1998.

In connection with the acquisition of BSI (Note 4), Towne issued 744,431
shares of restricted common stock of the Company at $6.73 per share. The
restricted stock award grantees

F-15
<PAGE> 83
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

may not sell, transfer, assign, pledge or otherwise encumber or dispose of these
restricted shares until June 30, 2000.

STOCK SALE TO EMPLOYEES

In February 1998, the board of directors authorized the sale of the
Company's common stock to all employees of the Company for approximately $1.19
per share. The stock sale was available through March 6, 1998 and 943,083 shares
were purchased by employees. The Company recorded $3.8 million as compensation
expense for the difference between the sales price to employees and the
estimated fair market value at the date of sale.

OPTIONS

The Company has a stock option plan for key employees of the Company (the
"Plan") which provides for the issuance of options to purchase up to 2,090,000
shares of the Company's common stock. Options are granted at an exercise price
which is not less than fair value as determined by a committee appointed by the
board of directors and generally vest over a period not to exceed five years.
Options granted under the Plan generally expire ten years from the date of
grant. At December 31, 1998, options to purchase 1,652,000 shares of common
stock were available for future grant under the Plan.

In September 1996, the board of directors granted options to purchase
1,118,300 shares of common stock outside the Plan to the president of the
Company. These options vested immediately and have an exercise price of $.30 per
share. No compensation expense was recorded for these options, as the option
price was made at the estimated fair market value of the common stock at the
date of grant.

In September 1997, the board of directors granted options to purchase
100,000 shares of common stock outside the Plan to a member of the board of
directors. These options vested immediately and have an exercise price of $1.00
per share. No compensation expense was recorded for these options, as the option
price was established at the estimated fair market value of the common stock at
the date of grant.

The Company granted options to purchase 111,000 and 60,000 shares of common
stock under the Plan at $1.25 per share to key employees in January 1998 and
February 1998, respectively. These options vest 20% per year beginning upon the
first anniversary of the date of grant. The Company will record $726,750
($145,350 per year) of compensation expense over the five year period of the
options for the difference between the exercise price and the estimated fair
market value on the date of grant.

In February 1998, the board of directors approved an amendment to the
vesting period for options to purchase 397,000 shares of common stock granted
during 1996 and 1997 to nonemployee directors from a five year vesting period to
immediate vesting. As of the date of the amendment, options to purchase 150,000
of these shares were already vested. As this change in vesting period created a
new measurement date, the Company recorded compensation expense of $1,188,750
for the difference between the original exercise price and the estimated fair
market value on the date the options were amended.

F-16
<PAGE> 84
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In February 1998, the board of directors granted options to purchase 20,000
shares of common stock to each nonemployee director, and options to purchase
30,000 shares of common stock to a new nonemployee director. These options vest
immediately and have an exercise price of $1.25 per share. The Company has
recorded $977,500 as compensation expense for the difference between the
exercise price and the estimated fair market value on the date of grant.

In May 1998, the board of directors granted options to certain board
members and key employees to purchase 595,000 shares of common stock. These
options vest immediately and have an option price of $7.20 per share. Options to
purchase 170,000 shares expire on May 2003 and the remaining options to purchase
425,000 share expire in May 2008. All of these options vest immediately. The
Company did not record any compensation expense related to these grants as the
option price represented the estimated fair value of the Company's common stock
at the date of grant.

Stock option activity for the years ended December 31, 1996, 1997 and 1998
is as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
SUBJECT TO EXERCISE PRICE
OPTIONS PER SHARE
---------------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1995............... 0 $0.00
Granted.............................................. 2,601,500 0.42
Canceled............................................. 0 0.00
Exercised............................................ 0 0.00
--------- -----
Options outstanding at December 31, 1996............... 2,601,500 0.42
Granted.............................................. 1,020,161 0.83
Canceled............................................. 0 0.00
Exercised............................................ (263,300) 0.30
--------- -----
Options outstanding at December 31, 1997............... 3,358,361 0.55
Granted.............................................. 1,212,675 5.23
Canceled............................................. (29,000) 1.22
Exercised............................................ (771,000) 0.76
--------- -----
Options outstanding at December 31, 1998............... 3,771,036 $2.00
========= =====
Exercisable at December 31, 1997..................... 2,157,361
=========
Exercisable at December 31, 1998..................... 3,088,561
=========
</TABLE>

The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date at December 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
OPTIONS OUTSTANDING AVERAGE OPTIONS EXERCISABLE
------------------------------------------- REMAINING -------------------------
RANGE OF NUMBER WEIGHTED CONTRACTUAL NUMBER WEIGHTED
EXERCISE PRICES OF SHARES AVERAGE PRICE LIFE OF SHARES AVERAGE PRICE
--------------- --------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
$0.30-$0.50.. 1,938,200 $0.42 5.82 1,763,200 $0.41
$0.60....... 436,661 0.60 8.07 421,661 0.60
$1.00-$1.25.. 584,500 1.11 8.92 223,700 1.11
$6.50-$8.00.. 811,675 7.20 9.47 680,000 7.22
--------- ---------
Total.. 3,771,036 $2.00 7.27 3,088,561 $1.99
========= =========
</TABLE>

F-17
<PAGE> 85
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1997 using the minimum
value option pricing model as prescribed by SFAS No. 123 as the Company was
privately held. For options issued in 1998, the Company has determined the fair
value using the Black-Scholes pricing method. The Company used the following
weighted average assumptions for grants in 1996, 1997 and 1998:

<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate...................... 5.9% to 6.7% 6.3% to 6.7% 4.6% to 5.6%
Expected dividend yield...................... 0.0% 0.0% 0.0%
Expected lives............................... Five years Five years Five years
Expected volatility.......................... 0.0% 0.0% 55%
</TABLE>

The total value of the options granted during the years ended December 31,
1996, 1997 and 1998 were computed as approximately $199,000, $356,000 and $3.1
million, respectively, which would be amortized over the vesting period of the
options. If the Company had accounted for these options in accordance with SFAS
No. 123, the Company's reported pro forma net loss and pro forma net loss per
share for the years ended December 31, 1997 and 1998 would have increased to the
following pro forma amounts:

<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Net loss attributable to common shareholders:
As reported................................... $(662,307) $(2,516,101) $(20,934,635)
Pro forma..................................... (669,307) (2,548,527) $(23,277,560)
Basic:
As reported................................... $ (.10) $ (.26) $ (1.35)
Pro forma..................................... (.11) (.27) (1.50)
Diluted:
As reported................................... (.10) (.26) (1.35)
Pro forma..................................... (.11) (.27) (1.50)
</TABLE>

WARRANTS

In October 1997, the Company issued warrants to certain principals of
Rodgers Capital Corporation in connection with services performed by Rodgers
Capital Corporation to assist the Company in securing a marketing agreement with
a third party. These warrants allow the holders to purchase 75,000 shares of
common stock for $1.00 per share. The warrants vest immediately and expire in
2002. The Company has recorded $41,000, the estimated fair value of these
warrants at the date of issuance using the minimum value method under SFAS No.
123, as warrants outstanding on the accompanying balance sheet.

F-18
<PAGE> 86
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES

LEASES

For the year ended December 31, 1997, the Company incurred approximately
$37,000 in rent expense for leased office space from ProVesa, Inc., a subsidiary
of The InterCept Group, Inc. ("InterCept"), a company for which a director of
Towne serves as Chairman and Chief Executive Officer. The Company was also
allocated costs for utilities and accounting services from ProVesa, Inc. based
on usage by the Company. In February 1998, the Company began leasing office
space under a noncancelable operating lease agreement with a nonrelated third
party expiring in January 2003. For the year ended December 31, 1998, the
Company incurred approximately $210,000 in rent expense for this leased office
space. Future minimum rental payments for this noncancelable lease are as
follows:

EMPLOYEE LEASING

Effective March 1998, the Company began leasing all personnel from an
independent personnel leasing company. Under the lease agreement, the Company
paid a percentage of compensation per leased employee (in addition to
compensation costs) to the employee leasing company to cover payroll processing,
unemployment insurance and workers' compensation. This employment lease
agreement was terminated in November 1998.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with certain executive
officers of the Company. The agreements, which are substantially similar,
provide for compensation to the officers in the form of annual base salaries and
bonuses based on earnings of the Company. The employment agreements also provide
for severance benefits upon the occurrence of certain events, including a change
in control, as defined.

10. RELATED-PARTY TRANSACTIONS

In September 1997, the Company loaned the President of the Company $78,990
to exercise stock options. The full recourse loan is secured by the underlying
common stock and personal assets of the president, bears interest at 8.5% per
annum, and is due in full in September 1999, as amended.

On April 1, 1998, the Company loaned its Chief Financial Officer $75,000
pursuant to a full recourse promissory note to fund the exercise of options to
acquire 75,000 shares of its common stock. This full recourse note accrues
interest at the rate of 8.75% per year and matures on the earlier of (i)
December 31, 1999 or (ii) the date on which the common stock purchased is sold.

F-19
<PAGE> 87
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All shares of common stock received upon this exercise as well as other personal
assets of the executive were pledged as collateral for the loan.

In October 1998, the Company loaned the President of the Company $30,000 to
fund the exercise of options to acquire 100,000 shares of the Company's common
stock. The full recourse loan bears interest at 8.5% per annum, and is due in
full in February 2000.

In October 1998, the Company loaned the Chief Executive Officer of the
Company $50,000 to fund the exercise of options to acquire 100,000 shares of the
Company's common stock. The full recourse loan bears interest at 8.5% per annum,
and is due in full in February 2000.

During the years ended December 31, 1996, 1997 and 1998, the Company
incurred fees of approximately $37,000, $55,000 and $1.0 million, respectively,
for legal services to a law firm in which a director and shareholder of the
Company is a partner. As of December 31, 1997 and 1998, approximately $42,000
and $185,000 respectively, of such fees are included in accounts payable in the
accompanying balance sheets.

During the years ended December 31, 1996, 1997 and 1998, the Company
incurred costs of approximately $4,000, $15,000, and $121,000, respectively, for
communication services from InterCept. As of December 31, 1998, approximately
$30,000 of such fees is included in the accrued accounts payable in the
accompanying balance sheets.

In October 1997, Rodgers Capital Group purchased 200,000 shares of common
stock from the Company at a price of $1.00 per share. In addition, the Company
paid Rodgers Capital a total of $220,000 and $217,000 as compensation for
services provided by Rodgers Capital in connection with obtaining equity
investments for the Company during 1997 and 1998, respectively.

During 1998, the Company incurred costs of approximately $21,000 from
Phoenix International for commission fees related to sales of the Company's
products. Phoenix International has a strategic marketing alliance with the
Company and its Chairman and Chief Executive Officer is a director and
shareholder of the Company. The Company also invoiced Phoenix International
approximately $585,000 for marketing-related services of the Company's products.

During 1998, the Company incurred costs of approximately $113,000 from
Brown Burke Capital Partners, Inc. for merger and acquisition advisory services
in connection with the purchase of BSI (Note 4). One of the principals of this
corporation is a director and shareholder of the Company.

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

11. QUARTERLY DATA (UNAUDITED)

Amounts for the quarter ended June 30, 1998 have been restated to reflect
reallocation of the purchase price of CCS (Note 4).

F-20
<PAGE> 88
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
FISCAL 1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUE............................................ $ 548 $ 875 $ 1,715 $ 3,260
COSTS AND EXPENSES:
Costs of processing, servicing and support......... 374 403 544 706
Research and development........................... 74 102 117 13
Sales and marketing................................ 486 1,140 1,971 2,656
Stock compensation expense......................... 5,972 223 36 36
Employee termination costs......................... 0 0 0 2,291
General and administrative......................... 1,347 729 645 1,138
-------- ------- ------- -------
Total costs and expenses................. 8,253 2,597 3,313 6,840
-------- ------- ------- -------
OPERATING LOSS..................................... (7,705) (1,722) (1,598) (3,580)
-------- ------- ------- -------
OTHER EXPENSES (INCOME):
Interest expense (income), net..................... 64 68 (158) (238)
Other expense (income), net........................ 0 4 (9)
Financing costs for stock issued to nonemployees... 323 0 0 0
-------- ------- ------- -------
Total other expenses............................... 387 68 (154) (247)
-------- ------- ------- -------
Loss before extraordinary loss on early
extinguishment of debt........................... $ (8,092) (1,790) $(1,444) $(3,333)
-------- ------- ------- -------
Extraordinary loss on early extinguishment of
debt............................................. $ 0 $ 0 $ 476 $ 0
-------- ------- ------- -------
NET LOSS........................................... $ (8,092) $(1,790) $(1,920) $(3,333)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS....... $(13,411) $(2,074) $(2,117) $(3,333)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
Basic.............................................. $ (1.11) $ (0.16) $ (0.12) $ (0.17)
======== ======= ======= =======
Diluted............................................ $ (1.11) $ (0.16) $ (0.12) $ (0.17)
======== ======= ======= =======
Weighted Average Common Shares Outstanding......... 12,077 13,297 16,997 19,155
======== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
FISCAL 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES............................................. $ 97 $ 88 $ 198 $ 340
COSTS AND EXPENSES:
Costs of processing, servicing, and support.......... 103 150 222 357
Research and development............................. 11 34 114 173
Sales and marketing.................................. 94 118 207 421
General and administrative........................... 170 181 268 521
------ ------ ------ -------
Total costs and expenses............................. 378 483 811 1,472
------ ------ ------ -------
OPERATING LOSS....................................... (282) (395) (613) (1,132)
------ ------ ------ -------
</TABLE>

F-21
<PAGE> 89
TOWNE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
FISCAL 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OTHER EXPENSES (INCOME):
Interest expense (income), net....................... 19 26 29 22
Other expense (income), net.......................... (1) 0 0 0
Financing costs for stock issued to nonemployees..... 0 0 0 0
------ ------ ------ -------
Total other expenses................................. 18 26 29 22
------ ------ ------ -------
NET LOSS............................................. $ (300) $ (421) $ (642) $(1,154)
====== ====== ====== =======
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS:........ $ (300) $ (421) $ (642) $(1,154)
====== ====== ====== =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
Basic................................................ $(0.04) $(0.05) $(0.07) $ (0.10)
====== ====== ====== =======
Diluted.............................................. $(0.04) $(0.05) $(0.07) $ (0.10)
====== ====== ====== =======
Weighted Average Common Shares Outstanding........... 8,077 9,101 9,684 11,912
====== ====== ====== =======
</TABLE>

F-22
<PAGE> 90

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Banking Solutions, Inc.:

We have audited the accompanying balance sheets of BANKING SOLUTIONS, INC.
(a Texas corporation) as of December 31, 1996 and 1997 and the related
statements of operations, shareholders' deficit, and cash flows for each of the
years then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Banking Solutions, Inc. as
of December 31, 1996 and 1997 and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 15, 1999

F-23
<PAGE> 91

BANKING SOLUTIONS, INC.

BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 0 $ 0 $ 0
Trade accounts receivable, net of allowance for
uncollectible accounts of $20,000 in 1996, $50,000
in 1997, and $100,000 in 1998...................... 386,217 384,540 484,061
----------- ----------- -----------
Total current assets.......................... 386,217 384,540 484,061
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET............................. 116,995 214,332 190,873
----------- ----------- -----------
OTHER ASSETS............................................ 10,756 9,506 9,506
----------- ----------- -----------
Total assets.................................. $ 513,968 $ 608,378 $ 684,440
=========== =========== ===========

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable...................................... $ 192,019 $ 235,483 $ 268,373
Accrued liabilities................................... 296,387 287,942 302,533
Current portion of long-term debt..................... 26,422 163,956 100,993
Deferred revenue...................................... 1,439,867 1,518,223 1,453,069
----------- ----------- -----------
Total current liabilities..................... 1,954,695 2,205,604 2,124,968
----------- ----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION.................... 6,071 29,110 221,526
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' DEFICIT:
Common stock, no par value; 1,000,000 shares
authorized, issued, and outstanding in 1996, 1997,
and 1998........................................... 1,000 1,000 1,000
Accumulated deficit................................... (1,447,798) (1,627,336) (1,663,054)
----------- ----------- -----------
Total shareholders' deficit................... (1,446,798) (1,626,336) (1,662,054)
----------- ----------- -----------
Total liabilities and shareholders' deficit... $ 513,968 $ 608,378 $ 684,440
=========== =========== ===========
</TABLE>

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

F-24
<PAGE> 92

BANKING SOLUTIONS, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................................ $5,791,265 $8,085,813 $6,638,031
---------- ---------- ----------
COSTS AND EXPENSES:
Costs of processing, servicing, and support........... 2,994,431 3,867,946 3,225,843
Research and development.............................. 228,122 266,322 351,538
Sales and marketing................................... 282,501 459,774 844,068
General and administrative............................ 2,429,837 3,665,590 2,239,434
---------- ---------- ----------
Total costs and expenses...................... 5,934,891 8,259,632 6,660,883
---------- ---------- ----------
OPERATING LOSS.......................................... (143,626) (173,819) (22,852)
---------- ---------- ----------
INTEREST EXPENSE, NET................................... 3,268 5,719 12,866
---------- ---------- ----------
LOSS BEFORE INCOME TAXES................................ (146,894) (179,538) (35,718)
---------- ---------- ----------
PROVISION FOR INCOME TAXES (NOTE 4)..................... 0 0 0
---------- ---------- ----------
NET LOSS................................................ $ (146,894) $ (179,538) $ (35,718)
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-25
<PAGE> 93

BANKING SOLUTIONS, INC.

STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
COMMON STOCK
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ------ ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........................ 1,000,000 $1,000 $(1,300,904) $(1,299,904)
Net loss.......................................... 0 0 (146,894) (146,894)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1996........................ 1,000,000 1,000 (1,447,798) (1,446,798)
Net loss.......................................... 0 0 (179,538) (179,538)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1997........................ 1,000,000 1,000 (1,627,336) (1,626,336)
Net loss.......................................... 0 0 (35,718) (35,718)
--------- ------ ----------- -----------
BALANCE, SEPTEMBER 30, 1998
(unaudited)..................................... 1,000,000 $1,000 $(1,663,054) $(1,662,054)
========= ====== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-26
<PAGE> 94

BANKING SOLUTIONS, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(146,894) $(179,538) $ (35,718)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation........................................ 32,906 35,415 51,302
Changes in operating assets and liabilities:
Accounts receivable............................... (163,310) 1,677 (99,521)
Other assets...................................... (10,756) 1,250 0
Accounts payable.................................. 31,325 43,464 32,890
Accrued liabilities............................... 43,547 (8,445) 14,591
Deferred revenue.................................. 267,738 78,356 (65,154)
--------- --------- ---------
Net cash provided by (used in) operating
activities................................... 54,556 (27,821) (101,610)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, net............................. (54,876) (132,752) (27,843)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt...................................... (11,911) (79,427) (185,758)
Proceeds from long-term borrowings..................... 0 240,000 315,211
--------- --------- ---------
Net cash (used in) provided by financing
activities................................... (11,911) 160,573 129,453
--------- --------- ---------
NET DECREASE IN CASH..................................... (12,231) 0 0
CASH, BEGINNING OF PERIOD................................ 12,231 0 0
--------- --------- ---------
CASH, END OF PERIOD...................................... $ 0 $ 0 $ 0
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................. $ 3,268 $ 9,586 $ 16,434
========= ========= =========
Cash paid for taxes.................................... $ 159,855 $ 0 $ 0
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-27
<PAGE> 95

BANKING SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BACKGROUND

Banking Solutions, Inc., (the "Company") is a Texas corporation
incorporated on July 1, 1993. The Company designs, develops, and markets
products to community banks that enable the banks to generate interest-bearing
revolving credit accounts by financing the accounts receivable of small and
medium-size retail merchants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF 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.

UNAUDITED INTERIM FINANCIAL INFORMATION

The accompanying financial statements and footnote data as of September 30,
1998 and for the nine-month period ended September 30, 1998 are unaudited. In
the opinion of the management of the Company, these financial statements reflect
all adjustments, consisting only of normal and recurring adjustments, necessary
for a fair presentation of the financial statements. The results of operations
for the nine-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the full year.

REVENUE RECOGNITION

DEFERRED REVENUE

Deferred revenue on the accompanying balance sheets represents deferred
initial license fees. Because support and upgrades are free with the initial
license fee, the Company recognizes the license fee ratably over the life of the
contract (usually five years). For contracts with a refund period, the license
fee is recognized ratably over the remaining life of the contract once this
refund period has expired.

CASH AND CASH EQUIVALENTS

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

F-28
<PAGE> 96
BANKING SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
USEFUL
1996 1997 LIVES
-------- -------- -------------------
<S> <C> <C> <C>
Furniture and fixtures......................... $ 31,502 $112,046 Five years
Computers and equipment........................ 83,974 125,690 Three to five years
Vehicles....................................... 67,226 77,718 Five years
-------- --------
182,702 315,454
Less accumulated depreciation.................. (65,707) (101,122)
-------- --------
$116,995 $214,332
======== ========
</TABLE>

LONG-LIVED ASSETS

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

Research and development costs consist principally of compensation and
benefits paid to the Company's employees. All research and development costs are
expensed as incurred.

The Company's policy is to capitalize software development costs once a
working model is achieved, subject to a periodic assessment of recoverability
based upon expected future revenues. The Company has not capitalized any
software development costs in the accompanying financial statements, as all
costs incurred subsequent to the achievement of a working model were immaterial.

INCOME TAXES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

F-29
<PAGE> 97
BANKING SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ACCOUNTS PAYABLE

Accounts payable includes book overdrafts created by outstanding checks. At
December 31, 1996 and 1997, book overdrafts totaled $41,305 and $3,747,
respectively.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to credit risk
consist principally of cash and accounts receivable. The Company's trade
accounts receivable are mainly with customers in the banking industry, dispersed
across a wide geographic area within the United States. The Company extends
credit to customers in the ordinary course of business and periodically reviews
the credit levels extended to customers.

3. NOTES PAYABLE

At December 31, 1996 and 1997, notes payable consisted of the following:

<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Note payable to City National Bank, interest at 6.72%, due
in monthly installments of $12,977 including interest,
maturing June 1998........................................ $ 0 $ 50,836
Line of credit to City National Bank, interest at the prime
rate (8.5% at December 31, 1997) due in full March 1998,
guaranteed by a shareholder............................... 0 100,000
Note payable to City National Bank, interest at 10.75%, due
in monthly installments of $652 including interest, paid
in full June 1997......................................... 19,353 0
Note payable to City National Bank, interest at 8.75%, due
in monthly installments of $652 including interest,
maturing September 1998, secured by a vehicle............. 13,140 6,072
Note payable to City National Bank, interest at 8.50%, due
in monthly installments of $821 including interest,
maturing May 2002, secured by a vehicle................... 0 36,158
-------- ---------
32,493 193,066
Less current portion........................................ (26,422) (163,956)
-------- ---------
$ 6,071 $ 29,110
======== =========
</TABLE>

At December 31, 1997, aggregate maturities of long-term debt are as
follows:

F-30
<PAGE> 98
BANKING SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES

The following is a reconciliation of income taxes at the federal statutory
rate with income taxes recorded by the Company for the years ended December 31,
1996 and 1997:

<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Income tax benefit computed at the federal statutory
rate................................................... $ (49,944) $(61,043)
Other, net................................................ 5,795 3,465
Change in valuation allowance............................. 44,149 57,578
--------- --------
$ 0 $ 0
========= ========
</TABLE>

The tax effects of significant temporary differences representing deferred
tax assets (liabilities) at December 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts payable.......................................... $ 65,286 $ 80,064
Accrued liabilities....................................... 100,772 97,900
Deferred revenue.......................................... 489,555 516,196
Net operating loss carryforwards.......................... 0 18,460
--------- ---------
655,613 712,620
Deferred tax liabilities.................................... (131,314) (130,743)
--------- ---------
Net deferred tax asset...................................... 524,299 581,877
Valuation allowance......................................... (524,299) (581,877)
--------- ---------
$ 0 $ 0
========= =========
</TABLE>

The Company has recorded a valuation allowance to offset the Company's net
deferred tax asset due to the uncertainty of the realizability. At December 31,
1997, the Company has net operating loss carryforwards of approximately $54,000
which will expire if not utilized by 2012.

5. COMMITMENTS AND CONTINGENCIES

The Company leases office space and equipment under operating lease
agreements expiring on various dates through 2002. At December 31, 1997, future
minimum rental payments were as follows:

Total rent expense under operating leases was $43,859 and $126,707 for the
years ended December 31, 1996 and 1997, respectively.

F-31
<PAGE> 99
BANKING SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INDEPENDENT CONTRACTORS

The Company sells its product through the use of independent contractors
who are not employees of the Company. The Company does not pay or withhold
federal or state employment taxes with respect to these independent contractors.
The use of independent contractors as salesmen allows the Company to control
costs. In the event the Company was required to treat these salesmen as its
employees, the Company could become responsible for the taxes required to be
withheld and could incur additional costs associated with employee benefits and
other employee costs.

6. SUBSEQUENT EVENT

On November 30, 1998, Towne Services, Inc. purchased all of the outstanding
common stock of the Company for $10.6 million in cash, 536,084 shares of Towne
Services common stock, plus certain contingent payment amounts based on future
performance.

F-32
<PAGE> 100

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Forseon Corporation:

We have audited the accompanying consolidated balance sheets of Forseon
Corporation as of June 30, 1997 and 1998 and the related consolidated statements
of operations, shareholders' equity and cash flows for the three years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forseon
Corporation as of June 30, 1997 and 1998 and the results of their operations and
their cash flows for the three years then ended in conformity with generally
accepted accounting principles.

/s/ KPMG LLP

September 18, 1998
Los Angeles, California

F-33
<PAGE> 101

FORSEON CORPORATION

CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,213,000 $ 932,000
Accounts receivable, less allowance for doubtful accounts
of $41,000 and $34,000 in 1997 and 1998,
respectively........................................... 942,000 786,000
Deferred income taxes (note 4)............................ 104,000 69,000
Income tax receivable..................................... -- 59,000
Other current assets...................................... 85,000 88,000
---------- ----------
Total current assets.............................. 2,344,000 1,934,000
Deferred income taxes (note 4).............................. 10,000 63,000
Land, building and equipment, net (note 3).................. 1,441,000 1,374,000
---------- ----------
$3,795,000 $3,371,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5)................ $ 255,000 $ 273,000
Accounts payable.......................................... 182,000 178,000
Accrued commissions payable............................... 498,000 456,000
Accrued wages and fringe benefits......................... 455,000 495,000
Accrued expenses.......................................... 96,000 99,000
Income taxes payable (note 4)............................. 55,000 2,000
---------- ----------
Total current liabilities......................... 1,541,000 1,503,000
---------- ----------
Long-term debt, excluding current portion (note 5).......... 461,000 187,000
---------- ----------
Redeemable common stock (note 7)............................ 249,000 548,000

Net shareholders' equity (notes 6 and 7):
Common stock, $.01 par value. Authorized 5,000,000 shares;
issued and outstanding 640,919 and 651,113 shares in
1997 and 1998, respectively............................ 6,000 7,000
Capital in excess of par value............................ 1,350,000 1,137,000
Retained earnings (accumulated deficit)................... 188,000 (11,000)
---------- ----------
Total net shareholders' equity.................... 1,544,000 1,133,000
Commitments and contingencies (note 8)
---------- ----------
$3,795,000 $3,371,000
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-34
<PAGE> 102

FORSEON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $11,670,000 $12,051,000 $12,004,000
Costs and Expenses:
Costs of processing............................... 2,375,000 2,620,000 2,311,000
Research and development.......................... 783,000 620,000 801,000
Sales, servicing and marketing.................... 6,519,000 6,829,000 7,310,000
Employee stock ownership plan..................... 102,000 -- --
General and administrative........................ 1,346,000 1,395,000 1,746,000
----------- ----------- -----------
Total costs and expenses.................. 11,125,000 11,464,000 12,168,000
Operating profit (loss)........................... 545,000 587,000 (164,000)
Other Expenses -- Interest Expense.................. 67,000 44,000 48,000
----------- ----------- -----------
Income (loss) before income tax provision
(benefit)............................... 478,000 543,000 (212,000)
Income tax provision (benefit) (note 4)............. 233,000 241,000 (34,000)
----------- ----------- -----------
Net income (loss)......................... $ 245,000 $ 302,000 $ (178,000)
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-35
<PAGE> 103

FORSEON CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
CAPITAL IN RETAINED
COMMON STOCK EXCESS OF EARNINGS
------------------ PAR (ACCUMULATED
SHARES AMOUNT VALUE DEFICIT) TOTAL
-------- ------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995................ 752,920 $ 8,000 $ 410,000 $ 604,000 $1,022,000
Net income for the year................. -- -- -- 245,000 245,000
Stock options exercised................. 1,000 -- 4,000 -- 4,000
Stock bonus awarded..................... 26,667 -- 105,000 -- 105,000
Contribution of newly issued shares of
ESOP.................................. 17,000 -- 102,000 -- 102,000
Repurchase of common stock.............. (23,561) -- -- (137,000) (137,000)
Change in value of redeemable common
stock (note 7)........................ -- -- (22,000) -- (22,000)
-------- ------- ---------- --------- ----------
BALANCE AT JUNE 30, 1996................ 774,026 8,000 599,000 712,000 1,319,000
Net income for the year................. -- -- -- 302,000 302,000
Repurchase of common stock (note 7)..... (133,107) (2,000) -- (826,000) (828,000)
Change in value of redeemable common
stock (note 7)........................ -- -- 751,000 -- 751,000
-------- ------- ---------- --------- ----------
BALANCE AT JUNE 30, 1997................ 640,919 6,000 1,350,000 188,000 1,544,000
Net loss for the year................... -- -- -- (178,000) (178,000)
Repurchase of common stock (note 7)..... (3,096) -- -- (21,000) (21,000)
Shares redeemed......................... (1,000) -- -- -- --
Issuance of common stock................ 14,290 1,000 86,000 -- 87,000
Change in value of redeemable common
stock (note 7)........................ -- -- (299,000) -- (299,000)
-------- ------- ---------- --------- ----------
BALANCE AT JUNE 30, 1998................ 651,113 $ 7,000 $1,137,000 $ (11,000) $1,133,000
======== ======= ========== ========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-36
<PAGE> 104

FORSEON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 245,000 $ 302,000 $ (178,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 157,000 171,000 173,000
Provisions for doubtful accounts.................... 66,000 62,000 48,000
Compensation expense on issuance of common stock.... -- -- 87,000
Deferred income taxes............................... 194,000 153,000 (18,000)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable....... (48,000) (86,000) 108,000
Increase in income tax receivable................ -- -- (59,000)
(Increase) decrease in other current assets...... (36,000) 22,000 (3,000)
Increase (decrease) in accounts payable.......... 108,000 (142,000) (4,000)
Increase (decrease) in accrued expenses.......... (390,000) 122,000 1,000
Increase (decrease) in income taxes payable...... (31,000) 54,000 (53,000)
---------- ---------- ----------
Cash provided by operating activities....... 265,000 658,000 102,000
---------- ---------- ----------
Cash used in investing activities -- capital
expenditures............................................. (266,000) (264,000) (106,000)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of long-term debt............................... 55,000 733,000 --
Principal payments on long-term debt..................... (376,000) (413,000) (256,000)
Issuance of common stock................................. 211,000 -- --
Repurchase of common stock............................... (137,000) (828,000) (21,000)
---------- ---------- ----------
Cash used in financing activities........... (247,000) (508,000) (277,000)
---------- ---------- ----------
Net decrease in cash and cash equivalents... (248,000) (114,000) (281,000)
Cash and cash equivalents at beginning of year............. 1,575,000 1,327,000 1,213,000
---------- ---------- ----------
Cash and cash equivalents at end of year................... $1,327,000 $1,213,000 $ 932,000
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash and cash equivalents paid during the year for:
Interest............................................ $ 50,000 $ 43,000 $ 48,000
Income taxes........................................ $ 72,000 $ 32,000 $ 96,000
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-37
<PAGE> 105

FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Forseon Corporation (Forseon or the Company) provides merchandise
forecasting and related services to independent specially retail stores
throughout the United States. In addition, accounts receivable billing,
point-of-sale data collection, and sales and inventory analysis services are
offered by Charter Data Systems, Inc. (CDS), a wholly owned subsidiary. Through
January 1996, the Company was named Retail Merchandising Service Automation,
Inc. and continues to use Retail Merchandising Service Automation (RMSA) as a
trade name.

(A) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions are eliminated in consolidation.

(B) RECOGNITION OF REVENUE

Generally, revenues for services are recorded as services are provided and
costs are expensed as incurred. The percentage-of-completion method is used for
the recognition of revenue associated with software conversion and installation
contracts. Revenue from the licensing, in perpetuity, of software is recognized
upon acceptance by the client. Revenues from contracts subject to discretionary
acceptance by the client are recognized when the product is unconditionally
accepted. Revenues from software support and maintenance services are recognized
equally over the related support and maintenance period.

Land, building and equipment are stated at cost. Depreciation is computed
using accelerated methods over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed using an accelerated method
over the estimated useful lives of the improvements, which are less than the
anticipated period of occupancy of the leasehold premises, including anticipated
lease renewals.

(D) CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Certain costs related to the development of software for licensing to
customers may be capitalized and amortized over the expected useful life of the
software. Capitalization begins upon the establishment of technological
feasibility of the project, including the completion of a detailed program
design or a working model. Capitalization ends upon the general release of the
software to customers. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain external
factors including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technologies. No software development costs were capitalized in fiscal
years 1996, 1997 and 1998.

F-38
<PAGE> 106
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(E) INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes. Under that method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.

(F) CASH EQUIVALENTS

All highly liquid securities purchased with an original maturity of three
months or less are considered cash equivalents. Cash and cash equivalents
included cash of $580,000, $523,000 and $536,000 and commercial paper of
$747,000, $690,000 and $396,000 at June 30, 1996, 1997 and 1998, respectively.

(G) USE OF ESTIMATES

The preparation of the financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 fiscal
year. Actual results could differ from those estimates.

(H) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. No impairment adjustment
was recorded during fiscal 1996, 1997 and 1998.

(I) STOCK OPTION PLAN

The Company accounts for its stock options under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25 and provide pro forma net income (loss)
disclosures for employee stock option grants made in fiscal year 1997 and 1998
as if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provision of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

F-39
<PAGE> 107
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(J) NEW ACCOUNTING PRONOUNCEMENTS

COMPREHENSIVE INCOME

On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. There is no difference between net income (loss) and
comprehensive income loss for the Company.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim and annual financial reports issued to shareholders. SFAS
No. 131 is effective for financial statements issued for periods beginning after
December 15, 1997. The Company operates principally in one business segment;
accordingly, the adoption of SFAS No. 131 will not have an impact on the
consolidated financial statements.

STARTUP ACTIVITIES

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Startup
Activities." This SOP No. 98-5 requires that costs incurred during startup
activities, including organization costs, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Initial application of the SOP No. 98-5 should be as of the beginning of
the fiscal year in which the SOP is first adopted and should be reported as a
cumulative effect of a change in accounting principles. Adoption of SOP No. 98-5
will not have a material impact on the consolidated financial statements.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In 1998, the FASB issued Statement of Financial Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
modifies the accounting for derivative and hedging activities and is effective
for fiscal years beginning after December 15, 1999. Adoption of SFAS No. 133
will not have a material impact on the consolidated financial statements.

SOFTWARE REVENUE RECOGNITION

SOP No. 97-2, "Software Revenue Recognition" was issued in October 1997 and
addresses software revenue recognition matters. The SOP No. 97-2 supersedes SOP
No. 91-1 and is effective for transactions entered into for fiscal years
beginning after December 15, 1997. Based upon its reading and interpretation of
SOP No. 97-2 the Company believes its current revenue recognition policies and
practices are materially consistent with the SOP No. 97-2. However,

F-40
<PAGE> 108
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

implementation guidelines for this standard have not yet been issued and a wide
range of potential interpretations are being discussed by the accounting
profession. Once available, such implementation guidance could lead to
unanticipated changes in the Company's current revenue accounting practices, and
such changes could materially adversely affect the Company's future revenue and
earnings. Such implementation guidance may necessitate substantial changes in
the Company's business practices in order for the Company to continue to
recognize a substantial portion of its license fee revenue upon delivery of its
software products. Such changes may reduce demand, extend sales cycles, increase
administrative costs and otherwise adversely affect operations.

2. EMPLOYEE STOCK OWNERSHIP PLAN AND 401(K) PLAN

The Company has adopted an employee stock ownership plan (the ESOP)
covering all employees with more than one year of service. Contributions are
allocated to individual employee accounts and are invested principally in the
Company's common stock. Generally, employees will receive distributions from the
plan only upon separation from service, retirement, death or permanent
disability.

The Company's policy is to make discretionary contributions to the plan. In
fiscal 1996, the Company contributed 17,000 newly issued shares to the ESOP,
representing an expense of $102,000. In fiscal years 1997 and 1998, the Company
made no contributions to the Plan.

The ESOP is administered by a committee, which is comprised of four
employees appointed by the Board of Directors. All ESOP assets are held by a
non-independent trustee.

Effective January 1, 1997, the Company adopted a 401(k) plan generally
covering all employees over age 21 and more than six months of service. Employee
contributions may range between 2% and 15% of compensation, not to exceed
$10,000 per year. The Company matches 25% of employee contributions up to 6% of
compensation, representing an expense of $33,000 in fiscal year 1997 and $73,000
in fiscal year 1998. Generally, employees will receive distributions from the
plan only upon separation from service, retirement, death or permanent
disability.

3. LAND, BUILDING AND EQUIPMENT:

Land, building and equipment consist of:

<TABLE>
<CAPTION>
JUNE 30, RANGE OF
----------------------- LIVES IN
1997 1998 YEARS
---------- ---------- --------------
<S> <C> <C> <C>
Land.............................................. $ 404,000 $ 404,000 --
Building.......................................... 931,000 931,000 30
Data processing equipment......................... 1,102,000 1,174,000 3 to 7
Furniture and fixtures............................ 276,000 265,000 5 to 7
Automobiles....................................... 26,000 26,000 5
Leasehold improvements............................ 143,000 151,000 7 to 19
---------- ----------
2,882,000 2,951,000
Less accumulated depreciation and amortization.... 1,441,000 1,577,000
---------- ----------
$1,441,000 $1,374,000
========== ==========
</TABLE>

F-41
<PAGE> 109
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES

The income tax provision (benefit) is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ 41,000 $(40,000)
State................................................ 39,000 48,000 24,000
Deferred:
Federal.............................................. 162,000 130,000 (18,000)
State................................................ 32,000 22,000 --
-------- -------- --------
$233,000 $241,000 $(34,000)
======== ======== ========
</TABLE>

The income tax provision (benefit) differs from the amounts computed by
applying the U.S. Federal tax rate of 34% to the income before income tax
provision. A reconciliation of this difference is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income tax provision (benefit) calculated at
statutory rate....................................... $163,000 $184,000 $(72,000)
Effect of graduated tax rates.......................... -- -- 7,000
State income tax provision, net of Federal tax
benefit.............................................. 47,000 46,000 15,000
Other, net............................................. 23,000 11,000 16,000
-------- -------- --------
$233,000 $241,000 $(34,000)
======== ======== ========
</TABLE>

The tax effect of temporary differences that give rise to significant
portions of the Company's deferred income tax benefits at June 30, 1997 and 1998
are as follows:

<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued costs not deductible until following tax year..... $ 67,000 $ 48,000
Deferred revenue taxable in current year.................. 20,000 11,000
Direct write-off method for doubtful accounts............. 17,000 14,000
Tax returns versus financial statement depreciation....... 10,000 3,000
Net operating loss carryforwards.......................... -- 45,000
Other..................................................... -- 15,000
-------- --------
114,000 136,000
Deferred tax liability............................ -- 4,000
-------- --------
Net deferred tax assets........................... $114,000 $132,000
======== ========
</TABLE>

Management believes it is more likely than not that the Company will
realize the $132,000 in net deferred tax assets at June 30, 1998 as the
temporary differences become available to reduce future taxable income and,
accordingly, has not recorded a valuation allowance as of June 30, 1998.

F-42
<PAGE> 110
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At June 30, 1998, the Company had net operating loss carryforwards of
approximately $111,000 and $148,000 for Federal and state income tax purposes,
respectively. If not used to offset future taxable income, the net operating
loss carryforwards will expire between June 30, 2003 and June 30, 2013.

The income tax receivable at June 30, 1998 results from the overpayment of
income taxes in fiscal 1998.

5. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Promissory note for purchase of 105,000 shares of common
stock from Mr. Vernon Rossi (note 7) annual principal and
interest payments of $248,000, interest rate of 8.25%, due
December 31, 1999......................................... $557,000 $347,000
Notes payable to former ESOP participants (note 7), annual
principal payments of approximately $46,000, average
interest rate of 7%, due from 1998 to 2002................ 159,000 113,000
Note payable to bank........................................ -- --
-------- --------
716,000 460,000
Current portion............................................. 255,000 273,000
-------- --------
Long-term debt.................................... $461,000 $187,000
======== ========
</TABLE>

The note payable to the bank was repaid in 1997.

The aggregate annual maturities for long-term debt in fiscal years
subsequent to June 30, 1998 are as follows:

<TABLE>
<S> <C>
Fiscal year:
1999........................................................ $273,000
2000........................................................ 159,000
2001........................................................ 21,000
2002........................................................ 7,000
</TABLE>

6. STOCK OPTION AND STOCK BONUS PLANS

The Company has two stock option plans. The Company's 1997 stock option
plan, which expires as to the grant of new stock options on November 7, 2007,
provides that stock options for a maximum of 100,000 shares of common stock may
be granted to directors, employees or consultants of the Company. The exercise
price of options granted must be equal to or greater than 85% of the stock's
fair market value at the date of grant. The option may be exercised up to ten
years after the option is granted. Options which are exercised, canceled or are
not exercised are available for subsequent reissuance.

The Company's 1987 stock option plan provides that stock options for a
maximum of 130,000 shares of common stock may be granted to directors or
employees of the Company. New stock options may not be granted under this plan
after September 16, 1997. Previously

F-43
<PAGE> 111
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

granted stock options will continue until they are canceled, exercised or
otherwise expire, in accordance with the terms of the specific stock option
grant. The exercise price of options granted must be equal to or greater than
the stock's fair market value at the date of grant. The option may be exercised
up to ten years after the option is granted.

Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at beginning
of year........................ 120,500 $4.19 118,850 $4.27 120,200 $4.38
Options granted.................. 6,600 6.00 7,000 6.75 13,400 4.90
Options exercised................ (1,000) 4.00 -- -- (14,290) 4.20
Options canceled................. 7,250) 4.60 (2,150) 6.00 (19,710) 4.20
Options expired.................. -- -- (3,500) 4.57 (8,175) 4.78
------- ----- ------- ----- ------- -----
Shares under option at end of
year........................... 118,850 $4.27 120,200 $4.38 91,425 $4.48
======= ===== ======= ===== ======= =====
</TABLE>

The number of shares available for future grants was 8,800 and 86,000 at
June 30, 1997 and 1998, respectively. As of June 30, 1996, 112,500 shares were
exercisable, at exercise prices ranging from $3.85 to $4.60 per share and a
weighted average exercise price of $4.17. As of June 30, 1997, 113,200 shares
were exercisable, at exercised prices ranging from $3.85 to $6.00 per share and
a weighted average exercise price of $4.23. As of June 30, 1998, 87,210 shares
were exercisable, at exercise prices ranging from $3.85 to $6.75 per share, a
weighted average exercise price of $4.37 and a weighted average remaining
contract life of 5.5 years.

The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $2.87, $3.13 and $4.16, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: fiscal year 1996 -- expected dividend yield 0%, risk interest rate
of 6.63%, volatility assumed to be 0, and an expected life of ten years; fiscal
year 1997 -- expected dividend yield 0%, risk-free interest rate of 6.33%,
volatility assumed to be 0, and an expected life of ten years; fiscal year
1998 -- expected dividend yield 0%, risk-free interest rate of 5.9% and 5.83%,
volatility factor assumed to be 0, and expected life of ten years.

The Company applies APB Opinion No. 25 in accounting for its stock options
plans, and, accordingly, recognized compensation expense for stock options
granted in fiscal years 1997 and 1998 of $0 and $87,000, respectively. Had the
Company determined compensation expense based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income (loss)
would have been reduced (increased) to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported......................................... $245,000 $302,000 $(178,000)
Pro forma........................................... 227,000 292,000 (247,000)
</TABLE>

F-44
<PAGE> 112
FORSEON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. REDEEMABLE COMMON STOCK

The Company may be required to repurchase common stock distributed to
separated ESOP participants. Generally, the Company must repurchase this stock
at its most recent appraised value, as determined annually by an independent
valuation. The Company may, at its option, pay for the repurchased stock through
equal annual installments over five years, plus interest, or in a lump sum. In
fiscal years 1996, 1997 and 1998, the Company purchased $137,000, $172,000, and
$21,000, respectively, in common stock as a result of this requirement. At June
30, 1997, and 1998, the Company could be required to repurchase a maximum of
$90,000, and $259,000 in common stock, if all separated ESOP participants
exercised their rights to have the Company repurchase their stock.

The Company may also be required to repurchase up to 25% of the common
stock in the accounts of certain ESOP participants, to provide these
participants an opportunity to diversify their ESOP investments. This common
stock must be repurchased at its most recent appraised value. At June 30, 1997,
and 1998, the Company could be required to repurchase a maximum of $159,000, and
$190,000 in common stock if all eligible ESOP participants exercised these
rights.

Through March 18, 2000, the Company may be required to repurchase common
stock owned by two former directors of the Company. The Company must repurchase
this stock at its most recent appraised value, as determined annually by an
independent valuation. At June 30, 1998, the Company could be required to
repurchase approximately $99,000 in common stock as a result of this commitment.
The Company may, at its option, pay for the repurchased stock through equal,
monthly installments over twenty-four months, plus interest, or in a lump sum.

In January 1997, the Company purchased 105,000 shares of common stock from
the retired founder of the Company as a result of an option granted in 1988. In
accordance with the terms of the option, the $6.25 per share purchase price was
equal to the appraised value of the Company's common stock as of June 30, 1996,
as determined by the ESOP's independent valuation consultant.

As certain shareholders have the right to require the Company to repurchase
outstanding shares of common stock as discussed above, the Company has
classified this value as redeemable common stock on the consolidated balance
sheet.

8. COMMITMENTS AND CONTINGENCIES

The Company leases certain office facilities under operating leases which
are, for the most part, renewable. The future minimum rental obligations under
noncancelable lease agreements at June 30, 1998 totaled $134,000, payable
$47,000, $34,000, $26,000, $17,000 and $10,000 in fiscal years 1999 through
2003, respectively. Total rental expense for all operating leases was $169,000,
$171,000 and $164,000 for fiscal years 1996, 1997 and 1998, respectively.

The Company is party to various legal action which arose in the normal
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations.

F-45
<PAGE> 113

UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements
give effect to both the proposed merger between Towne Services, Inc. and Forseon
Corporation, which is accounted for on a pooling of interests basis, and the
purchase of Banking Solutions, Inc. The information is based on each company's
respective historical consolidated financial statements and notes thereto. The
pro forma combined condensed balance sheet assumes the Forseon transaction
occurred on December 31, 1998. Banking Solutions, Inc. is included in the
historical consolidated balance sheet of Towne Services as of December 31, 1998.
The pro forma combined condensed statements of operations assume the Forseon
transaction occurred at the beginning of the earliest year presented. The pro
forma combined condensed statement of operations for the year ended December 31,
1998 has been prepared to reflect adjustments to Towne Services' historical
results of operations to give effect to the purchase of Banking Solutions, Inc.
as if it had occurred at the beginning of the year. The pro forma financial
statements should be read in conjunction with the accompanying notes and with
each companies' historical financial statements and related notes.

The results of operations of Towne for the years ended December 31, 1996,
1997 and 1998 and the financial position as of December 31, 1998 have been
derived from its historical consolidated financial statements which have been
audited by Arthur Andersen LLP. Forseon has historically reported its operating
results on the basis of a fiscal year ended June 30. The results of operations
of Forseon for the twelve months ended December 31, 1996, 1997 and 1998 and the
financial position as of December 31, 1998 are unaudited. The results of
operations of Forseon for the periods presented have been derived from Forseon's
historical consolidated financial statements. The results of operations for
Banking Solutions, Inc. for the 11-month period before the acquisition are
unaudited. In the opinion of the respective companies' management, the unaudited
financial information includes all adjustments consisting only of normal
recurring accruals, that are considered necessary for a fair presentation of the
results of operations for such periods.

The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the earliest period presented, nor is it necessarily indicative of future
operating results or financial position.

F-46
<PAGE> 114

UNAUDITED PRO FORMA

COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
TOWNE SERVICES FORSEON ADJUSTMENTS PRO FORMA
----------------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 13,081 $ 979 $ 0 $ 14,060
Accounts receivable, net.............. 3,553 786 0 4,339
Note receivable....................... 167 0 0 167
Other................................. 230 119 0 349
-------- ------ ------- --------
Total current assets.......... 17,031 1,884 0 18,915
PROPERTY AND EQUIPMENT, net............. 2,117 1,336 0 3,453
NOTES RECEIVABLE........................ 82 0 0 82
GOODWILL, net........................... 14,955 0 0 14,955
OTHER INTANGIBLES, net.................. 1,135 0 0 1,135
OTHER ASSETS, net....................... 100 63 0 163
-------- ------ ------- --------
$ 35,420 $3,283 $ 0 $ 38,703
======== ====== ======= ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable...................... $ 126 $ 96 $ 0 $ 222
Accrued liabilities................... 1,273 110 1,500(1) 2,883
Accrued compensation.................. 251 948 0 1,199
Deferred revenue...................... 0 146 0 146
Accrued termination costs............. 498 0 0 498
Current portion of long-term debt..... 5,000 274 0 5,274
-------- ------ ------- --------
Total current liabilities..... 7,148 1,574 1,500 10,222
-------- ------ ------- --------
LONG-TERM DEBT.......................... 0 55 0 55
-------- ------ ------- --------
REDEEMABLE COMMON STOCK................. 0 534 0 534
-------- ------ ------- --------
SHAREHOLDERS' EQUITY:
Common stock............................ 52,363 1,157 0 53,520
Warrants outstanding.................... 41 0 0 41
Accumulated deficit..................... (24,132) (37) (1,500)(1) (25,669)
-------- ------ ------- --------
Total shareholders' equity.... 28,272 1,120 (1,500) 27,892
-------- ------ ------- --------
$ 35,420 $3,283 $ 0 $ 38,703
======== ====== ======= ========
</TABLE>

F-47
<PAGE> 115

UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL HISTORICAL BANKING PRO FORMA
TOWNE SERVICES FORSEON SOLUTIONS, INC. ADJUSTMENTS PRO FORMA
-------------- ---------- --------------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES......................... $ 6,398 $11,752 $8,113 $ 0 $ 26,263
COST AND EXPENSES:
Costs of processing, servicing
and support................. 2,027 2,275 3,943 0 8,245
Research & development......... 306 735 430 0 1,471
Sales and marketing............ 6,252 7,137 1,031 0 14,420
Stock compensation expense..... 6,268 0 0 0 6,268
Employee termination costs..... 2,291 0 0 0 2,291
General and administrative..... 3,859 1,710 2,737 727(2) 9,033
---------- ------- ------ ----- ----------
Total costs and
expenses............. 21,003 11,857 8,141 727 41,728
---------- ------- ------ ----- ----------
OPERATING LOSS................... (14,605) (105) (28) (727) (15,465)
OTHER (INCOME) EXPENSES:
Interest (income) expense,
net......................... (263) 38 16 0 (209)
Other income................... (6) 0 0 0 (6)
Financing costs for stock
issued to nonemployees...... 323 0 0 0 323
---------- ------- ------ ----- ----------
Total other (income)
expenses............. 54 38 16 0 108
Loss before extraordinary loss
and benefit from income
taxes.......................... (14,659) (143) (44) (727) (15,573)
Extraordinary loss on early
extinguishment of debt......... 476 0 0 0 476
---------- ------- ------ ----- ----------
Benefit from income taxes........ 0 (11) 0 0 (11)
---------- ------- ------ ----- ----------
NET LOSS......................... (15,135) (132) (44) (727) (16,038)
PREFERRED STOCK DIVIDENDS........ (5,108) 0 0 0 (5,108)
ACCRETION OF WARRANTS WITH
REDEMPTION FEATURE............. (692) 0 0 0 (692)
---------- ------- ------ ----- ----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS................... $ (20,935) $ (132) $ (44) $(727) $ (21,838)
========== ======= ====== ===== ==========
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE--
BASIC AND DILUTED.............. $ (1.35) $ (1.20)(3)
========== ==========
Weighted Average Common Shares
Outstanding -- basic and
diluted........................ 15,516,170 18,127,599(3)
========== ==========
</TABLE>

F-48
<PAGE> 116

UNAUDITED PRO FORMA

COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
HISTORICAL
TOWNE HISTORICAL
SERVICES FORSEON PRO FORMA
---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES............................................... $ 722 $12,174 $ 12,896
COST AND EXPENSES
Costs of processing, servicing, and support.......... 832 2,557 3,389
Research and development............................. 332 635 967
Sales and marketing.................................. 839 7,150 7,989
Stock compensation expense........................... 0 0 0
Employee termination costs........................... 0 0 0
General and administrative........................... 1,140 1,539 2,679
---------- ------- -----------
Total costs and expenses.......................... 3,143 11,881 15,024
---------- ------- -----------
OPERATING (LOSS) INCOME................................ (2,421) 293 (2,128)
OTHER (INCOME) EXPENSES:
Interest expense, net................................ 96 59 155
Other income......................................... (1) 0 (1)
---------- ------- -----------
Total other (income) expenses..................... 95 59 154
---------- ------- -----------
(Loss) income before income taxes...................... (2,516) 234 (2,282)
Provision for income taxes............................. 0 104 104
---------- ------- -----------
NET (LOSS) INCOME...................................... $ (2,516) $ 130 $ (2,386)
========== ======= ===========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED......... $ (0.26) $ (0.20)(3)
========== ===========
Weighted Average Common Shares Outstanding -- basic and
diluted.............................................. 9,600,592 11,675,937(3)
========== ===========
</TABLE>

F-49
<PAGE> 117

UNAUDITED PRO FORMA

COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
TOWNE SERVICES FORSEON PRO FORMA
-------------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES............................................... $ 105 $11,827 $ 11,932
COST AND EXPENSES:
Costs of processing, servicing, and support.......... 220 2,472 2,692
Research and development............................. 52 805 857
Sales and marketing.................................. 118 6,673 6,791
Stock compensation expense........................... 10 102 112
Employee termination costs........................... 0 0 0
General and administrative........................... 358 1,317 1,675
---------- ------- ----------
Total costs and expenses.......................... 758 11,369 12,127
---------- ------- ----------
OPERATING (LOSS) INCOME................................ (653) 458 (195)
OTHER EXPENSES:
Interest expense, net................................ 6 47 53
Other expense........................................ 3 0 3
---------- ------- ----------
Total other expenses.............................. 9 47 56
---------- ------- ----------
(Loss) income before income taxes...................... (662) 411 (251)
Provision for income taxes............................. 0 182 182
---------- ------- ----------
NET (LOSS) INCOME...................................... $ (662) $ 229 $ (433)
========== ======= ==========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED......... $ (0.10) $ (0.05)(3)
========== ==========
Weighted Average Common Shares Outstanding -- basic and
diluted.............................................. 6,337,356 8,412,701(3)
========== ==========
</TABLE>

F-50
<PAGE> 118

NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS

1. TRANSACTION COSTS AND MERGER RELATED EXPENSES

Towne and Forseon estimate that they will incur direct transaction costs of
approximately $1.5 million associated with the merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon completion of the merger.

Towne and Forseon also expect that following the merger, the combined
company will incur an additional significant charge to operations, which is not
currently reasonably estimable, to reflect costs associated with integrating the
two companies. This additional significant charge has not been reflected in the
pro forma combined condensed balance sheet or the pro forma combined condensed
statements of operations. There can be no assurance that Towne and Forseon will
not incur additional charges to reflect costs associated with the merger or that
management will be successful in its efforts to integrate the operations of the
two companies.

The unaudited pro forma combined condensed balance sheet gives effect to
the estimated direct transaction costs as if such costs and expenses had been
incurred as of December 31, 1998. These costs and expenses are assumed to be
nondeductible for income tax purposes. These costs and expenses are not
reflected in the unaudited pro forma combined condensed statements of
operations.

2. AMORTIZATION OF GOODWILL AND INTANGIBLES

Represents amortization of goodwill associated with the purchase of Banking
Solutions, Inc. which is being amortized over a period of 25 years and the
amortization of intangible assets associated with Banking Solutions, Inc.'s
customer list which is being amortized over a period of 5 years.

3. UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE

The unaudited pro forma combined net loss per share -- basic and diluted is
based on the weighted average common shares outstanding of Towne, and the
issuance of 2,075,345 shares of Towne common stock in exchange for Forseon's
outstanding common stock as part of the merger. The net loss attributable to
common shareholders per common share -- basic and diluted for the year ended
December 31, 1998 assumes the issuance of 536,084 shares associated with the
acquisition of Banking Solutions, Inc. as of January 1, 1998.

F-51
<PAGE> 119

TOWNE SERVICES, INC.
[LOGO]
<PAGE> 120

PART II.

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses in connection with the Offering
described in the Registration Statement. All amounts are estimates except the
SEC Registration Fee, the NASD fees and the Nasdaq fees:

<TABLE>
<S> <C>
SEC Registration Fee.................................... $ 23,500
NASD fees............................................... 8,953
Nasdaq fees.............................................
Blue Sky Fees and Expenses..............................
Printing and Engraving..................................
Legal Fees and Expenses.................................
Accounting Fees and Expenses............................
Transfer Agent Fees.....................................
Miscellaneous Expenses..................................
--------
Total........................................ $
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Towne's Articles of Incorporation eliminate, subject to certain limited
exceptions, the personal liability of a director to Towne Services or its
shareholders for monetary damage for any breach of duty as a director. There is
no elimination of liability for (i) a breach of duty involving appropriation of
a business opportunity of Towne; (ii) an act or omission which involves
intentional misconduct or a knowing violation of law; (iii) any transaction from
which the director derives an improper personal benefit or (iv) as to any
payments of a dividend or any other type of distribution that is illegal under
Section 14-2-832 of the Georgia Business Corporation Code (the "Code"). In
addition, if at any time the Code is amended to authorize further elimination or
limitation of the personal liability of a director, then the liability of each
director of Towne shall be eliminated or limited to the fullest extent permitted
by the provisions, as so amended, without further action by the shareholders,
unless the provisions of the Code require this action. The provision does not
limit the right of Towne or its shareholders to seek injunctive or other
equitable relief not involving payments in the nature of monetary damages.

Towne's Bylaws contain certain provisions which provide indemnification to
directors of Towne that is broader than the protection expressly mandated in
Section 14-2-852 and 14-2-857 of the Code. To the extent that a director or
officer of Towne has been successful, on the merits or otherwise, in the defense
of any action or proceeding brought by reason of the fact that the person was a
director or officer of Towne, Sections 14-2-852 and 14-2-857 of the Code would
require Towne to indemnify such persons against expenses (including attorney's
fees) actually and reasonably incurred in connection with the defense of the
action. The Code expressly allows Towne to provide for greater indemnification
rights to its officers and directors, subject to shareholder approval.

The indemnification provisions in Towne Bylaws require Towne to indemnify
and hold harmless any director who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative (including any action
or suit by or in the right of Towne) because he or she
II-1
<PAGE> 121

is or was a director of Towne, against expenses (including, but not limited to,
attorney's fees and disbursements, court costs and expert witness fees), and
against judgments, fines, penalties and amounts paid in settlement incurred by
him or her in connection with the action, suit or proceeding. Indemnification
would be disallowed under any circumstances where indemnification may not be
authorized by action of the board of directors, the shareholders or otherwise.
The board of directors of Towne also has the authority to extend to officers,
employees and agents the same indemnification rights held by directors, subject
to all the accompanying conditions and obligations. Indemnified persons would
also be entitled to have Towne advance expenses prior to the final disposition
of the proceeding. If it is ultimately determined that they are not entitled to
indemnification, however, these amounts would be repaid. Insofar as
indemnification for liability arising under the Securities Act of 1933 may be
permitted to officers and directors of Towne pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable.

Towne has entered into separate indemnification agreements with each of its
directors and executive officers whereby Towne agreed, among other things, to
provide for indemnification and advancement of expenses in a manner and subject
to terms and conditions similar to those set forth in the Bylaws. These
agreements also provide that Towne shall purchase and maintain liability
insurance for the benefit of its directors and executive officers. These
agreements may not be abrogated by action of the shareholders. There is no
pending litigation or proceeding involving a director, officer, employee or
other agent of Towne as to which indemnification is being sought, nor is Towne
aware of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

No securities which were not registered under the Securities Act of 1933
have been sold by Towne within the past three years except for those indicated
below. Share numbers reflect the 100-for-1 stock split with respect to Towne's
common stock effected in January 1997.

(i) In connection with the acquisition of Banking Solutions, Inc. in
December 1998, Towne issued 744,431 shares of restricted common stock.

(ii) In connection with its formation in October 1995, Towne issued a total
of 5,000,000 shares of common stock to its four initial shareholders in exchange
for $16,000 in the aggregate.

(iii) From August to October 1996, Towne issued 2,258,700 shares of common
stock at a price of $0.30 per share to certain officers, directors and other
investors. Towne also issued 647,000 shares of common stock and options to
purchase 983,400 shares of common stock to certain executive officers,
directors, employees, consultants and advisors of Towne at prices ranging from
$0.30 to $.30 per share during 1996.

(iv) In connection with his employment, Towne granted its President and
Chief Operating Officer options to purchase 1,118,300 shares of common stock at
an exercise price of $0.30 per share in September 1996. In addition, in
consideration of their guaranties of a $250,000 line of credit, in December 1996
Towne granted options to purchase 71,400 shares of common stock at an exercise
price of $.50 per share to seven of its directors and executive officers.

II-2
<PAGE> 122

(v) In January and February 1997, Towne sold 166,666 shares of common stock
at a price of $0.60 per share to a director and a related party investor. In
January 1997, Towne granted seven directors options to acquire 59,523 shares of
common stock at $0.60 per share each in exchange for their personal guaranty of
a new $250,000 credit facility for Towne.

(vi) Towne issued 350,500 shares of common stock and granted options to
acquire 206,000 shares of common stock to certain employees and advisors of
Towne at prices of either $0.60 or $1.00 per share during 1997. In connection
with his employment, Towne granted options to acquire 300,000 shares of common
stock to its Chief Financial Officer, effective as of November 1997, at $1.00
per share. In addition, Towne granted options to acquire 32,500 share of common
stock to each of its three new directors in September 1997 at a price of $1.00
per share.

(vii) Between the end of March and the middle of October 1997, Towne issued
3,020,600 shares of common stock at a price of $1.00 per share to certain
officers, directors, accredited investors and a limited number of other
investors.

(viii) Between January and March 1998, Towne issued, 1,019,083 shares of
common stock and options to acquire 401,000 shares of common stock to officers,
directors, employees, customers, advisors and consultants at a purchase or
exercise price of either $1.19 per share or $1.25 per share (employees received
a 5% discount off the estimated fair market value of the securities).

(ix) On March 13, 1998, Towne sold 15,000 shares of its Series A
Convertible Preferred Stock for $1,500,000 to an accredited investor. The terms
of the stock purchase agreement provided for conversion of the preferred stock
into common stock at conversion price of $1.25 per share, subject to adjustment.

(x) In May 1998, Towne granted options to acquire 595,000 shares of common
stock to a new director and four senior officers at an exercise price of $7.20
per share. In June 1998, Towne granted options to acquire 50,000 shares of
common stock to a new director.

The issuances of securities described above were made in reliance on one or
more of the exemptions from registration, including those provided for by
Section 4(2), Regulation D and Rule 701 of the Securities Act of 1933. The
recipients of the securities in the above transactions represented their
intention to acquire the securities for investment purposes only and not with a
view to or for the sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. The recipients of these securities had adequate access, through
their relationship with Towne, to information about Towne.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement among Towne Services, Inc.
and First Union Capital Markets Corp., Hambrecht & Quist LLC
and J.C. Bradford & Co. as representatives of the several
underwriters (to be filed by amendment).
2.1 -- Agreement and Plan of Merger by and among Towne Services,
Inc., TSI Acquisition One, Inc., Forseon Corporation and
certain of the stockholders of Forseon Corporation dated as
of March 25, 1999. **
</TABLE>

II-3
<PAGE> 123

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.2 -- Form of Escrow Agreement to be entered into by and among
Towne Services, Inc., Dan Paul and Allen Merrill, each in
their capacity as a Stockholder Representative, and First
Union National Bank. **
2.3 -- Asset Purchase Agreement by and between Towne Services, Inc.
and Credit Collection Solutions, Inc., and Burton W. Crapps
and Robert M. Ragsdale dated as of June 11, 1998.*
2.4 -- Stock Purchase Agreement dated November 30, 1998 by and
between Towne Services, Inc., BSI Acquisition Corp., Banking
Solutions, Inc. ("BSI"), and certain shareholders of BSI
(incorporated by reference to Exhibit 2.1 of the Company's
Report on Form 8-K filed on December 15, 1998).
3.1 -- Amended and Restated Articles of Incorporation of Towne
Services, Inc., as filed with the Secretary of State of the
State of Georgia on July 29, 1998.*
3.2 -- Amended and Restated Bylaws of Towne Services, Inc.,
effective May 19, 1998.*
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of common stock of
the Company.
5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P. (to be
filed by amendment).
10.1 -- 1996 Stock Option Plan (including form of Stock Option
Agreement.*
10.2 -- 1998 Stock Option Plan (including form of Stock Option
Agreement).*
10.3 -- Form of Non-Qualified Stock Option Agreement.*
10.4 -- Lease by and among River Exchange Associates Limited
Partnership and Towne Services, Inc. dated January 12,
1998.*
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Drew W. Edwards dated as of October 15, 1995.*
10.6 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997.*
10.7 -- Amended and Restated Employment Agreement by and between
Towne Services, Inc. and Bruce Lowthers dated as of May 18,
1998.*
10.8 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Shultz dated as of May 19, 1998.*
10.9 -- Form of TOWNE CREDIT Bank Marketing Agreement.*
10.10 -- Form of TOWNE FINANCE Bank Marketing Agreement.*
10.11 -- Form of TOWNE CREDIT Merchant Processing Agreement.*
10.12 -- Form of TOWNE FINANCE Client Processing Agreement.*
10.13 -- Form of CASHFLOW MANAGER Merchant Services Agreement.+
10.14 -- Form of CASHFLOW MANAGER License Agreement.+
10.15 -- Form of Independent Bankers Bank General Marketing Agent
Agreement.+
10.16 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.17 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.18 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*
10.19 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.*
10.20 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Drew W. Edwards.+
10.21 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco.+
</TABLE>

II-4
<PAGE> 124

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.22 -- Form of General Marketing Agent Agreement.*
10.23 -- Promissory Note by the Company to the order of First Union
National Bank dated December 31, 1998.+
21.1 -- Subsidiaries of Towne Services, Inc.**
23.1 -- Consent of Arthur Andersen, LLP.
23.2 -- Consent of KPMG LLP.
24.1 -- Power of Attorney (contained on the signature page hereof).
27.1 -- Financial Data Schedule for the periods ending December 31,
1997 and 1998 (for SEC use only).+
</TABLE>

- ---------------

* Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-53341) as declared effective by the Securities
and Exchange Commission on July 30, 1998.
** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-4 (No. 333-76493) filed on April 16, 1999.
+ Incorporated by reference to the exhibits to the Company's Report on Form
10-K filed on March 26, 1999.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements, management's discussion and analysis or notes thereto.

(b) Financial Statement Schedules

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS SCHEDULE

<TABLE>
<CAPTION>
TOWNE SERVICES, INC.
---------------------------------------------
BEGINNING CHARGED TO ENDING
DESCRIPTION BALANCE EXPENSE DEDUCTIONS BALANCE
- ----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1995 Allowance for Doubtful Accounts...... 0 0 0 0
December 31, 1996 Allowance for Doubtful Accounts...... 0 0 0 0
December 31, 1997 Allowance for Doubtful Accounts...... 0 25,000 0 25,000
December 31, 1998 Allowance for Doubtful Accounts...... 25,000 322,065 0 347,065
</TABLE>

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of Towne
pursuant to the foregoing provisions, or otherwise, Towne has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Towne of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, Towne will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

Towne hereby undertakes that:

II-5
<PAGE> 125

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Towne pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-6
<PAGE> 126

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on this 22nd day of April, 1999.

TOWNE SERVICES, INC.

By: /s/ DREW W. EDWARDS
------------------------------------
Drew W. Edwards
Chairman and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each of the undersigned officers
and directors of Towne Services, Inc., a Georgia corporation, for himself and
not for one another, does hereby constitute and appoint Drew W. Edwards and
Bruce F. Lowthers, and each of them, his true and lawful attorney-in-fact and
agent with full power of substitution, for him and in his name, place and stead,
in any and all capacities, to sign his name to any and all amendments, including
post-effective amendments, to this registration statement, and to sign any
registration statement for the same offering covered by this registration
statement that is to be effective upon filing pursuant to Section 462(b) of the
Securities Act of 1933, and all post-effective amendments thereto, and to cause
the same (together with all Exhibits thereto and all documents in connection
therewith) to be filed with the Securities and Exchange Commission, granting
unto said attorneys and each of them full power and authority to do and perform
each and every act and thing necessary and proper to be done in and about the
premises, as fully to all intents and purposes as the undersigned could do if
personally present, and each of the undersigned for himself hereby ratifies and
confirms all that said attorneys-in-fact and agents or any one of them, or his
or their substitute or substitutes, shall lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities listed and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ DREW W. EDWARDS Chairman of the Board and April 22, 1999
- ----------------------------------------------------- Chief Executive Officer
Drew W. Edwards (principal executive
officer)

/s/ HENRY M. BAROCO President, Chief Operating April 22, 1999
- ----------------------------------------------------- Officer and Director
Henry M. Baroco

/s/ BRUCE F. LOWTHERS Chief Financial Officer April 22, 1999
- ----------------------------------------------------- (principal financial and
Bruce F. Lowthers accounting officer)

/s/ G. LYNN BOGGS Director April 22, 1999
- -----------------------------------------------------
G. Lynn Boggs
</TABLE>

II-7
<PAGE> 127

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ FRANK W. BROWN Director April 22, 1999
- -----------------------------------------------------
Frank W. Brown

/s/ JOHN W. COLLINS Director April 22, 1999
- -----------------------------------------------------
John W. Collins

/s/ J. STANLEY MACKIN Director April 22, 1999
- -----------------------------------------------------
J. Stanley Mackin

Director April 22, 1999
- -----------------------------------------------------
Joe M. Rodgers

/s/ JOHN D. SCHNEIDER, JR. Director April 22, 1999
- -----------------------------------------------------
John D. Schneider, Jr.

Director April 22, 1999
- -----------------------------------------------------
J. Daniel Speight, Jr.

/s/ GLENN W. STURM Director April 22, 1999
- -----------------------------------------------------
Glenn W. Sturm

/s/ J. STEPHEN TURNER Director April 22, 1999
- -----------------------------------------------------
J. Stephen Turner

/s/ BAHRAM YUSEFZADEH Director April 22, 1999
- -----------------------------------------------------
Bahram Yusefzadeh
</TABLE>

II-8
<PAGE> 128

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement among Towne Services, Inc.
and First Union Capital Markets Corp., Hambrecht & Quist LLC
and J.C. Bradford & Co. as representatives of the several
underwriters (to be filed by amendment).
2.1 -- Agreement and Plan of Merger by and among Towne Services,
Inc., TSI Acquisition One, Inc., Forseon Corporation and
certain of the stockholders of Forseon Corporation dated as
of March 25, 1999.**
2.2 -- Form of Escrow Agreement to be entered into by and among
Towne Services, Inc., Dan Paul and Allen Merrill, each in
their capacity as a Stockholder Representative, and First
Union National Bank.**
2.3 -- Asset Purchase Agreement by and between Towne Services, Inc.
and Credit Collection Solutions, Inc., and Burton W. Crapps
and Robert M. Ragsdale dated as of June 11, 1998.*
2.4 -- Stock Purchase Agreement dated November 30, 1998 by and
between Towne Services, Inc., BSI Acquisition Corp., Banking
Solutions, Inc. ("BSI"), and certain shareholders of BSI
(incorporated by reference to Exhibit 2.1 of the Company's
Report on Form 8-K filed on December 15, 1998).
3.1 -- Amended and Restated Articles of Incorporation of Towne
Services, Inc., as filed with the Secretary of State of the
State of Georgia on July 29, 1998.*
3.2 -- Amended and Restated Bylaws of Towne Services, Inc.,
effective May 19, 1998.*
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of common stock of
the Company.
5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P. (to be
filed by amendment).
10.1 -- 1996 Stock Option Plan (including form of Stock Option
Agreement.*
10.2 -- 1998 Stock Option Plan (including form of Stock Option
Agreement).*
10.3 -- Form of Non-Qualified Stock Option Agreement.*
10.4 -- Lease by and among River Exchange Associates Limited
Partnership and Towne Services, Inc. dated January 12,
1998.*
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Drew W. Edwards dated as of October 15, 1995.*
10.6 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997.*
10.7 -- Amended and Restated Employment Agreement by and between
Towne Services, Inc. and Bruce Lowthers dated as of May 18,
1998.*
10.8 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Shultz dated as of May 19, 1998.*
10.9 -- Form of TOWNE CREDIT Bank Marketing Agreement.*
10.10 -- Form of TOWNE FINANCE Bank Marketing Agreement.*
10.11 -- Form of TOWNE CREDIT Merchant Processing Agreement.*
10.12 -- Form of TOWNE FINANCE Client Processing Agreement.*
10.13 -- Form of CASHFLOW MANAGER Merchant Services Agreement.+
</TABLE>
<PAGE> 129

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
10.14 -- Form of CASHFLOW MANAGER License Agreement.+
10.15 -- Form of Independent Bankers Bank General Marketing Agent
Agreement.+
10.16 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.17 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.18 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*
10.19 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.*
10.20 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Drew W. Edwards.+
10.21 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco.+
10.22 -- Form of General Marketing Agent Agreement.*
10.23 -- Promissory Note by the Company to the order of First Union
National Bank dated December 31, 1998.+
21.1 -- Subsidiaries of Towne Services, Inc.**
23.1 -- Consent of Arthur Andersen, LLP.
23.2 -- Consent of KPMG LLP.
24.1 -- Power of Attorney (contained on the signature page hereof).
27.1 -- Financial Data Schedule for the periods ending December 31,
1997 and 1998 (for SEC use only).+
</TABLE>

- ---------------

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and of all references to our Firm) included in or made a part of this
registration statement.

ARTHUR ANDERSEN LLP

/s/ Arthur Andersen LLP

Atlanta, Georgia
April 22, 1999

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT ACCOUNTANTS' CONSENT

The Board of Directors
Forseon Corporation:

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

/s/ KPMG LLP
Los Angeles, California
April 22, 1999