SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

Commission file number 000-25959

Private Business, Inc.

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

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

Yes x No o

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

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

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PRIVATE BUSINESS, INC.

Form 10-Q

For Quarter Ended March 31, 2004

INDEX

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Part I — Financial Information

Item 1. Financial Statements

PRIVATE BUSINESS, INC. AND SUBSIDIARIES

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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
For the Three Months Ended March 31, 2004 and 2003

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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) — UNAUDITED
For the Three Months Ended March 31, 2004

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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Three Months Ended March 31, 2004 and 2003

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

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PRIVATE BUSINESS, INC.

A. Basis of Presentation

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

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

     These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.

B. Summary of Significant Accounting Policies

Principles of Consolidation

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

     Our significant accounting policies include revenue recognition and software development costs. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for a more detailed description of these accounting policies.

Stock-Based Compensation

     The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and does not utilize the fair value method.

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     The following table illustrates the effect on net income (loss) available to common shareholders and earnings (loss) per share if the fair value based method had been applied to all outstanding and unvested awards for the three-month periods ended March 31, 2004 and 2003, respectively.

C. Capital Event

     On January 20, 2004, the Company completed the sale of 20,000 shares of Series A non-convertible preferred stock and a warrant to purchase 16,000,000 shares of our common stock ($1.25 per share exercise price) for a total of $20 million (the “Lightyear Transaction”) to Lightyear Fund, L.P. (together with its affiliates, “Lightyear”). The preferred shares carry a cash dividend rate of 10% of an amount equal to the liquidation preference, payable quarterly in arrears, when and as declared by the Board of Directors. The Series A preferred stock has a liquidation preference superior to the common stock and to the extent required by the terms of the Series B preferred stock, in parity with the currently outstanding Series B preferred stock. The liquidation preference is equal to the original $20 million purchase price, plus all accrued but unpaid dividends. In addition, the Securityholders agreement between the Company and Lightyear PBI Holdings, LLC, executed in conjunction with the sale of the preferred stock and warrant, entitles Lightyear to an additional equity purchase right. The equity purchase right allows Lightyear, so long as Lightyear continues to hold any shares of Series A Preferred Stock, all or any portion of its rights under the warrant or any shares of common stock issued pursuant to an exercise of the warrant, the right to purchase its pro rata portion of all or any part of any new securities which the Company may, from time to time, propose to sell or issue. However, in the case of new security issuances resulting from the exercise of employee stock options which have an exercise price less than $1.25 per share, Lightyear must still pay $1.25 per share under this equity purchase right. To the extent that new security issuances resulting from the exercise of employee stock options occur which have an exercise price in excess of $1.25 per share, then Lightyear will be required, if they choose to exercise their equity purchase right, to pay the same price per share as the employee stock options being exercised.

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The net proceeds from the Lightyear Transaction are shown below (in thousands):

     The net proceeds above were allocated between the preferred stock, the common stock warrant and the additional common stock equity right based upon the estimated fair values of each instruments, resulting in $6.2 million being allocated to the preferred shares and $10.7 million being allocated to the common stock warrant and additional common stock equity right. The estimated fair value of the preferred stock was determined based on valuing the expected preferred stock dividend stream using expected yields ranging from 20.2% to 30.2%. These yield ranges were arrived at by comparison to other similar preferred issuances at companies with similar equity ratings. The estimated fair value of the common stock warrant and additional common stock equity right were determined by using the Black-Scholes model. The assumptions used in this valuation for the warrant included the exercise price of $1.25, the expected life of the warrant of ten years, an interest rate of 4.41% and volatility factors of between 51.9% and 64.3% determined based on selected comparable companies. The assumptions used in this valuation for the additional common stock equity right included exercise prices ranging from $1.25 to $42.64, expected lives between two and seven years, an interest rate of 4.0% and a volatility factor of 75%.

     Simultaneous with the closing of the Lightyear Transaction, the Company entered into the Bank of America Credit Facility. The Bank of America Credit Facility is an $11.0 million facility that includes a term loan in the amount of $5.0 million and a revolving line of credit of up to $6.0 million. The revolving line of credit includes a $1.0 million letter of credit sub-limit. As of March 31, 2004, $7.8 million was outstanding under the Bank of America Credit Facility.

     The Bank of America Credit Agreement expires on January 19, 2007. The revolving credit commitment reduces by $1.0 million on each of the first two anniversary dates of the credit facility.

     The term loan is repayable in twelve equal quarterly installments of $416,667, along with interest at the applicable margin. Interest is also due on the outstanding revolving line of credit quarterly at the applicable margin. The interest rates of the term loan and revolving loan are based on a pricing grid using the Company’s Funded Debt to EBITDA Ratio, as follows:

     The Bank of America Credit Agreement includes certain restrictive financial covenants relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charge coverage ratio.

     The Bank of America Credit Agreement prohibits the Company from declaring and paying any cash dividends on any class of stock except for the Series A and Series B preferred shares outstanding, provided, that no default, as defined in the Bank of America Credit Agreement, exists as of the date of payment and such payment will not cause a default.

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     The total net proceeds of both the Lightyear Transaction and the new credit agreement were used to extinguish the Company’s 1998 credit facility.

     As a result of the 1998 credit facility extinguishment, the Company recorded a charge of $780,000 to write-off the unamortized portion of debt issuance costs as of January 20, 2004. Also, the Lightyear Transaction required that the Company obtain directors and officers tail insurance coverage for periods prior to January 20, 2004. The premium for the tail directors and officers liability insurance coverage totaled approximately $900,000. The Company expensed the entire premium in January 2004. Therefore, first quarter 2004 other operating expense includes two unusual expense items totaling approximately $1.7 million.

D. Net Loss Per Share

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

     The following table represents information necessary to calculate earnings per share for the three-month periods ended March 31, 2004 and 2003:

     For the three months ended March 31, 2004 and 2003, approximately 14.9 million and 2.1 million employee stock options, convertible preferred shares and stock warrant were excluded from diluted loss per share calculations, as their effects were anti-dilutive.

E. Bank Covenants

     The Company’s new credit facility with Bank of America is secured by a pledge of all Company assets and imposes financial covenants and requirements and contains limitations on the Company’s ability to sell material assets, redeem capital stock and pay dividends, among other actions. As of March 31, 2004, the Company was in compliance with all such covenants.

F. Legal Proceedings

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

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In Re Towne Services, Inc./Securities Litigation

As previously disclosed, the Company reached a final settlement regarding the Towne Services, Inc. (“Towne”) securities class action lawsuit in 2003. On January 30, 2004, the Company entered into a settlement agreement requiring its insurance carrier to fund certain costs of defense incurred in connection with the Towne securities litigation, which amounts have been paid by its insurance carrier.

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

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

As previously disclosed, the Company is a party to a lawsuit involving Towne’s acquisition of Banking Solutions, Inc. (“BSI”) through a stock purchase made by its subsidiary, BSI Acquisition Corp. This lawsuit was filed in December 1998 in the District Court of Collin County, Texas. On July 15, 2002, the District Court of Collin County, Texas granted Towne’s motion for summary judgment on all claims. The Company continues to seek indemnification, pursuant to the BSI stock purchase agreement, from the BSI shareholders for its expenses in defending this action.

G. Segment Information

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

     The following table summarizes the financial information concerning the Company’s reportable segments from continuing operations for the three months ended March 31, 2004 and 2003.

H. New Accounting Pronouncements

     In January 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that guidance by requiring a variable interest entity, as defined, to be

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consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period ending after March 15, 2004. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted the provisions of FIN 46 effective March 31, 2004 which did not have any impact on the Company’s consolidated results of operations and financial position.

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PRIVATE BUSINESS, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2004 and 2003

Note Regarding Forward Looking Information

     This interim report contains several “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate” and words of similar importance. Such statements include statements concerning our operations, prospects, strategies and financial condition, including our future economic performance, intent, plans and objectives, and the likelihood of success in developing and expanding our business. These statements are based upon a number of assumptions and estimates which are subject to significant uncertainties, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. The Company assumes no obligation to update this information. Factors that could cause actual results to differ materially are discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2003, and include, among other factors, the timely development and market acceptance of products and technologies and competitive market conditions.

Overview

     We are a leading provider of solutions that enable community banks to manage accounts receivable financing provided to their small business customers. Our solution is called Business Manager, and is based on software, marketing, and online electronic transaction processing services. One element of Business Manager is our proprietary software, which enables our network of client banks to purchase accounts receivable from their small business customers. The banks then process, bill and track those receivables on an ongoing basis. As a major component of our program, we work with client banks to design, implement and manage the sale of Business Manager accounts receivable financing services to their small business customers. We also give our client banks the option of outsourcing to us their application hosting and transaction processing through secure Internet connections, allowing them to receive accounts receivable information and make funding decisions electronically.

     On January 20, 2004, we completed a capital restructuring event consisting of the sale of 20,000 shares of our Series A preferred stock and a warrant to purchase up to 16 million shares of our common stock at a price of $1.25 per share to Lightyear Fund, L.P. for a total purchase price of $20 million, as well as the execution of a new long-term credit facility with a bank that allows for total borrowings of up to $11 million. This process was initiated in April 2003 as a result of the ninth amendment to the then existing credit facility, which required that a Capital Event, as defined in the amendment, be pursued and completed by December 31, 2003. As a result, this process consumed a great deal of executive management resources during 2003, which hindered some of the core business initiatives outlined early in 2003. The completion of this Capital Event is a significant milestone in our Company’s history as it improves our capitalization and financial position.

     While we continue to market new products as part of our overall strategy, our primary focus in 2004 will be to return our core receivables financing business to a growth business. We believe that the market for this product is strong, particularly given the indications that an economic recovery is underway. The receivables financing market is strongly influenced by the United States economy, and as the U.S. economy has experienced two years of economic decline, our core business revenues have been negatively impacted. We believe that with an improving and growing economy and initiatives underway, that we can return our core receivables financing business to a growth mode.

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     In order to achieve this goal, we have undertaken several key initiatives. First, we intend to invest in our sales force by expanding our bank sales personnel, as well as our business development managers. During the last three years, our average number of sales personnel has declined each year. Now that we have addressed the financial uncertainty related to our high debt service obligations, which constrained our ability to invest in the sales force in prior years, we believe that increasing the size of our sales force is a top priority. Second, we intend to train our entire sales force more effectively in order to achieve higher productivity levels from all of our sales personnel. We have redesigned our sales training agenda for new sales personnel so that they receive more comprehensive training on the products they are expected to sell. Further, we have completed a process of re-training all of our existing sales personnel which took place in February and March of 2004. This training was a four-day session that covered all aspects of the Company’s products, operations, and technologies.

     We believe that successful execution of the sales force initiatives will result in growth of the core business. These initiatives, however, will take a considerable amount of time and effort to implement. We believe these initiatives will not impact our financial results until late 2004.

Critical Accounting Policies

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

     A “critical accounting policy” is one that is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:

     Revenue Recognition. We generate revenue from four main sources:

•		participation fees earned on client bank purchases of small business accounts receivable.
•		software license fees from new client banks.
•		retail planning services.
•		maintenance fees and other revenues, comprised primarily of fees received for insurance brokerage services, paper-based form sales, software maintenance, medical, and processing services.

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

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

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twelve-month service period subsequent to the activation of the license agreement. Revenue recognition rules for up front fees are complex and do require some interpretation and judgment on the part of management. Management has consistently followed the same revenue recognition practices for this type of revenue during all years presented. We believe that this practice most accurately portrays the economic reality of the transactions.

     Retail planning services revenue is generated from fees charged primarily for providing inventory merchandising and forecasting information for specialty retail stores and ancillary services related to these products. RMSA uses proprietary software to process sales and inventory transactions and provide the merchandising forecasting information. We recognize revenues as the transactions occur and merchandising and forecasting services are performed.

     Maintenance fees and other revenues include several ancillary products and services we provide to client banks. Annual software maintenance fees are generated from our client banks starting on the first anniversary date of the Business Manager license agreement and annually thereafter. These revenues are recognized ratably over a twelve-month period beginning on the first anniversary date of the agreement. Additionally, since 1995, we have brokered, through our Private Business Insurance subsidiary, credit and fraud insurance products from a national insurance company. We earn fees based on a percentage of the premium that is paid to the insurance company. These commission revenues are recognized at the time receivable fundings covered by credit and fraud insurance policies are purchased by our bank customers. We also provide a standard set of forms that client banks may purchase and use in the normal course of administering the Business Manager program. Revenues related to these forms are recognized in the period that they are shipped to the client bank. We also have some industry-focused applications for the medical and dental markets. Monthly transaction processing fees include charges for electronic processing, statement rendering and mailing, settling payments, recording account changes and new accounts, leasing and selling point of sale terminals, telephone and software support services, rental fees and collecting debts.

     Software Development Costs. Software development costs incurred in the research and development of new software products and enhancements to existing software products to be sold or marketed are expensed as incurred until technological feasibility has been established. After such time, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Also, the Company capitalizes the cost of internally used software when application development begins in accordance with AICPA SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This is generally defined as the point when research and development has been completed, the project feasibility established, and management has approved a development plan. Many of the costs capitalized for internally used software are related to upgrades or enhancements of existing systems. These costs are only capitalized if the development costs will result in specific additional functionality of the existing system, and are capitalized at the point that application development begins. Capitalized software development costs are amortized on a straight-line basis over their useful lives, generally three years. The key assumptions and estimates that must be made relative to this accounting policy center around determining when technological feasibility has been achieved and whether the project being undertaken is one that will be marketable or enhance the marketability of an existing product for externally marketed software and whether the project will result in additional functionality for internal use software projects. Management consults monthly with all project managers to ensure that the scope and expected results of each project are understood in order to make a judgment on whether it meets the requirements outlined in the authoritative accounting literature.

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Results of Operations

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

     Participation fees. Participation fees decreased 10.8% to $6.3 million for the first three months of 2004 compared to $7.1 million for the comparable period of 2003. The decreases were primarily due to a reduction in the total funding through our BusinessManager program to $909 million for the first three months of 2004, compared to $1.1 billion for the comparable period of 2003. The decrease in funding is due to a combination of two factors; fewer merchants funding through our BusinessManager program and lower funding levels at existing merchants due to the slower economy. As a percentage of total revenues, participation fees accounted for 64.0% for the three-month period ended March 31, 2004 compared to 63.8% for the comparable period of 2003.

     Software license. Software license fees decreased 30.3% to $53,000 for the first three months of 2004, compared to $76,000 for the comparable period of 2003. The decrease was due to a decrease in the number of new software license agreements sold during the first quarter of 2004 compared to 2003. This decline is primarily the result of fewer bank salesmen during the first quarter of 2004 as compared to 2003. Software license fees accounted for 0.5% of total revenues for the three months ended March 31, 2004 compared to 0.7% for the comparable period in 2003.

     Retail planning services. Retail planning services revenues declined 4.5% to $2.3 million during the three months ended March 31, 2004 as compared to $2.4 million for the first three months of 2003. The decline is due to fewer forecasting service clients as a result of the slower retail economy. As a percentage of total revenues, retail planning services accounted for 22.9% for the first three months of 2004 compared to 21.3% in the comparable period of 2003.

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     Maintenance and other. Maintenance and other fees decreased 20.9% to $1.2 million for the three-month period ended March 31, 2004 compared to $1.6 million for the comparable period for 2003. Maintenance and other fees consist primarily of software maintenance fees, credit and fraud risk insurance commissions earned from the sale of policies to our BusinessManager banks, commissions earned through our referrals of certain merchants to alternative financing companies and account verification services performed for some of our BusinessManager banks. The first three months of 2003 included $250,000 of other revenue resulting from a favorable legal settlement received by the Company. Also contributing to the decline was a decrease in our insurance revenues. Our insurance revenues decreased 9.5% to $637,000 for the first three months of 2004 compared to $704,000 for the comparable period in 2003. The decline in insurance revenues is due to the lower funding levels through the BusinessManager program as discussed above. Maintenance and other fees accounted for 12.6% of total revenues for the three month period ended March 31, 2004 compared to 14.2% for the comparable period in 2003.

     Total revenues. Total revenues for the first three months of 2004 decreased 11.1% to $9.8 million compared to $11.1 million for the first three months of 2003.

     General and administrative. General and administrative expenses decreased 23.5% to $4.3 million for the three-month period ended March 31, 2004 compared to $5.6 million for the comparable period in 2003. The decrease for the three months ended March 31, 2004 is primarily due to reductions in salary and benefits expense as a result of reduced headcount and lower depreciation expense due to lower capital spending during the last twelve months. General and administrative expenses include the cost of our executive, finance, human resources, information and support services, administrative functions and general operations. As a percentage of total revenue, general and administrative expenses decreased 7.1% to 43.8% for the three-month period ended March 31, 2004 compared to the same period in the prior year.

     Selling and marketing. Selling and marketing expenses decreased 6.2% for the three-month period ended March 31, 2004 to $4.4 million compared to $4.7 million for the three-month period ended March 31, 2003. The decrease for the three months ended March 31, 2004 compared to the same period in 2003 was primarily due to lower commissions expense, as a result of lower revenues, as well as, fewer sales personnel. This resulted in decreased compensation, training, and travel expenses. Selling and marketing expenses include the cost of wages and commissions paid to our dedicated business development and bank sales force, travel costs of our sales force, recruiting for new sales and marketing personnel and marketing fees associated with direct and telemarketing programs. As a percentage of total revenue, selling and marketing expenses increased 2.3% to 44.4% for the three-month period of 2004 compared to 42.1% for the comparable period in 2003.

     Research and development. Research and development expenses decreased 52.5% to $113,000 for the first quarter of 2004 compared to $238,000 for the year earlier period. These costs include the non-capitalizable direct costs associated with developing new versions of our system and other projects that have not yet reached technological feasibility. The decrease in costs for the first three months of 2004 was primarily due to more capitalized activity related to new projects meeting the requirements for capitalization, as well as, fewer total employees working in this area, as compared to the same period in 2003. As a percentage of total revenues, research and development expenses decreased to 1.2% for the three months of 2004 compared to 2.2% for the same period in the prior year.

     Amortization. Amortization expenses decreased 23.3% to $326,000 for the first three months of 2004 compared to $425,000 for the comparable period in 2003. These expenses include the cost of amortizing intangible assets including trademarks, software development costs and debt issuance costs (2003 only). The decrease was due to amortization of the Fleet debt issuance costs ceasing on January 20, 2004 as a result of the Capital Event described elsewhere in this document.

     Other operating expenses, net. Other operating expenses increased significantly to $1.7 million for the first quarter of 2004 compared to $44,000 in the same period in the prior year. Other operating expenses include

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property tax and other miscellaneous costs associated with providing support and services to our client banks. As previously disclosed, for the first quarter of 2004, two unusual charges occurred totaling approximately $1.7 million. As a result of the Capital Event that occurred January 20, 2004 the Company expensed $780,000 of unamortized debt issuance costs related to the extinguished Fleet debt facility. In addition, the Company was required to obtain tail coverage for Directors and Officers liability insurance, which cost the Company $896,000. In accordance with GAAP, the Company expensed the entire cost of this premium at the time of purchase.

     Operating income(loss). As a result of the above factors, we incurred an operating loss of $982,000 for the first quarter of 2004 compared to operating income of $60,000 for the first three months of 2003. As a percentage of total revenue, the operating loss was (10.0)% for the first three months of 2004 compared to operating income of 0.6% for the same period in 2003.

     Interest expense, net. Interest expense, net decreased 46.0% to $190,000 for the three months ended March 31, 2004 compared to $352,000 for the comparable period in 2003. The decrease was primarily due to the reduction of our debt balances in 2004 as a result of the capital event discussed elsewhere in this document.

     Income tax provision (benefit). The income tax benefit was approximately $457,000 for the three months ended March 31, 2004 compared to a tax benefit of $114,000 for the same period in 2003. As a percentage of income before taxes, the income tax rate was 39.0% for both 2004 and 2003.

Liquidity and Capital Resources

     Our primary sources of capital have historically been cash provided by operations, short-term and long-term debt, and investment from stockholders. During the first three months of 2004 our operating activities provided cash of approximately $427,000. We used approximately $195,000 in our investing activities, consisting of capital expenditures of $37,000 and $173,000 of software development costs, partially offset by a note receivable payment proceeds of $15,000. We currently estimate that total capital expenditures for 2004 will be approximately $500,000.

     Cash provided by financing activities totaled $285,000 for the first three months of 2004, which is the result of the closing of the Capital Event.

     The Company was the borrower under a credit agreement dated August 7, 1998 between the Company as borrower, and Fleet National Bank as administrative agent for a syndicate of other lenders (the “Fleet Credit Facility”). The Fleet Credit Facility was secured by a pledge of all of our assets and contained financial and non-financial covenants and contained negative covenants, which, among other things, limited our ability to sell material assets, redeem capital stock and pay cash dividends. The Fleet Credit Facility was paid in full on January 20, 2004 using the net proceeds received from the Lightyear transaction and the net proceeds from the Bank of America Credit Facility. As such, the Fleet covenants expired at the time of refinancing.

     The Company has entered into the Bank of America Credit Facility on January 19, 2004. The credit facility is secured by a pledge of all of the Company’s assets and contains financial and non-financial covenants. The new credit agreement includes a term loan in the amount of $5.0 million and a revolving line of credit of up to $6.0 million for a total facility of up to $11.0 million. The revolving line of credit includes a $1.0 million letter of credit sub-limit. As of March 31, 2004, $7.8 million was outstanding under the Bank of America Credit Facility.

     The Bank of America Credit Facility expires on January 19, 2007. The revolving credit commitment reduces by $1.0 million on each of the first two anniversary dates.

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     The term loan is repayable in twelve equal quarterly installments of $416,667, along with interest at the applicable margin. Interest is also due on the revolving loan quarterly at the applicable margin. The interest rates of the term loan and revolving loan are based on a pricing grid using the Company’s Funded Debt to Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) Ratio, as follows:

     As of March 31, 2004, the rate, calculated as Libor + 2.25%, was 3.36%.

     The credit agreement includes certain restrictive financial covenants, measured quarterly, relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charges coverage ratio, as defined in the credit agreement. The credit agreement also contains certain non-financial covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock, except for the Series A and Series B preferred shares outstanding, provided, that no default, as defined in the credit agreement, exists as of the date of payment and such payment will not cause a default. As of March 31, 2004, the Company was, and expects to be throughout 2004, in compliance with the credit agreement covenants.

     As of March 31, 2004, we had working capital of approximately $563,000 compared to a working capital deficit of approximately $2.0 million as of December 31, 2003. The change in working capital resulted primarily from a decrease in the amount of the current portion of long-term debt by $2.1 million, as well as a decrease in accounts payable and accrued liabilities of $624,000 and an increase in cash of $517,000 partially offset by a $541,000 decrease in prepaid and other current assets. The decrease in the current portion of long-term debt is a result closing the Capital Event transaction discussed above. The decreases in accounts payable and accrued liabilities are primarily attributable to lower overall operating expenses and continued payments of assumed liabilities from the Towne merger. We believe that our line of credit availability along with future operating cash flows will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.

     The following is a schedule of our obligations and commitments for future payments, excluding contractual interest payment obligations:

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

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effect on our business, financial condition or results of operations.

New Accounting Pronouncements

     In January 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period ending after March 15, 2004. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted the provisions of FIN 46 effective March 31, 2004 which did not have any impact on the Company’s consolidated results of operations and financial position.

Inflation

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

Risk Factors

     This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are discussed in other sections of this report. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

     Primary Dependence on One Product. We currently derive a significant portion of our revenues from receivables financing; the majority of which flows through Business Manager. Approximately 1% of our consolidated revenues derived from license fees from new agreements with client banks and approximately 65% derive from participation fees based on accounts receivables purchased by our bank clients from small businesses. We expect to continue to derive significant revenues from this product and related services. If total revenues derived from Business Manager decline, our other products or services may not be sufficient to replace that lost revenue, so any events that adversely impact Business Manager could adversely impact our business. We cannot be certain that we will be able to continue to successfully market and sell Business Manager to both banks and their small business customers or that problems will not develop with Business Manager that could materially impact our business.

     Potential Inability to Promote Business Manager to New and Existing Small Business Customers. Other than the initial contract fee and a small annual support fee, we do not generate any income from banks contracting to utilize Business Manager unless small businesses finance their accounts receivable through our client banks. If we and our client banks cannot retain existing clients and convince potential small business customers of the benefits of Business Manager, such businesses will not continue to use or initiate use of our products and services. Since small business customers of our client banks are the foundation of our business, their unwillingness to use Business Manager could have a material adverse effect on our business, operating results and financial condition.

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     Dependence on Banking Industry for Clients. Business Manager is used almost exclusively by banks, primarily community banks. Due to our dependence upon the banking industry, any events that adversely impact the industry in general and community banks in particular, such as changed or expanded bank regulations, could adversely affect the Company and its operations. The banking industry is subject to supervision by several federal and/or state governmental regulatory agencies. Regulation of banks, especially with respect to receivable services such as Business Manager, can indirectly affect our business. The use of Business Manager by banks is currently in compliance with or is not subject to banking regulations. These regulatory agencies, however, could change or impose new regulations on banks, including modifying the banks’ ability to offer products and services similar to ours to their small business customers. These new regulations, if any, could prevent or lessen the use of our services by banks.

     Lightyear Owns a Majority of the Company’s Stock and Therefore Effectively Controls the Company’s Management and Policies. The Lightyear Fund, L.P., an affiliate of Lightyear Capital (the “Lightyear Fund”), through its holdings of Company Series A Preferred Stock, and warrants convertible into common stock, beneficially owns, in the aggregate, approximately 53% of the Company’s common stock. As a result of the Lightyear Fund’s investment in the Company, the Company has agreed to use its best efforts to cause four Lightyear Fund nominees to serve on the Company’s Board of Directors, which would be composed of seven directors. Currently, Lightyear has identified three nominees that are currently serving on the Company’s Board and one vacancy remains. In addition, the Company is required to obtain the approval of holders of the Series A Preferred Stock prior to taking certain actions. The holders of the Series A Preferred Stock have certain pre-emptive rights to participate in future equity financings. In view of its large percentage of ownership and its rights as the holders of the Series A Preferred Stock, the Lightyear Fund effectively controls the Company’s management and policies, such as the appointment of new management and the approval of any other action requiring the approval of the stockholders, including any amendments to the Company’s certificate of incorporation, a sale of all or substantially all of the Company’s assets or a merger. In addition, the Lightyear fund has registration rights with respect to the shares of the Company common stock that it beneficially owns. These rights generally become exercisable after July 18, 2004. Any decision by the Lightyear Fund to exercise such registration rights and to sell a significant amount of its shares in the public market could have an adverse effect on the price of the Company’s common stock.

     Potential Inability to Successfully Market our Products and Services to New Client Banks or to Retain Current Client Banks. Our success depends to a large degree on our ability to convince prospective client banks to utilize Business Manager and offer it to small businesses. Failure to maintain market acceptance, retain clients or successfully expand our offered services could adversely affect our business, operating results and financial condition. We have spent, and will continue to spend, considerable resources educating potential customers about our products and services. However, even with these educational efforts, we may not be able to maintain market acceptance and client retention. In addition, as we continue to offer new products and expand our services, existing and potential client banks or their small business customers may be unwilling to accept the new products or services.

     Potential Inability to Attract, Hire, or Retain Enough Qualified Sales and Marketing Personnel. If we are unable to implement our growth plans and strategies, our business, operating results and financial condition could be adversely affected. An important part of our sales strategy is to attract, hire and retain qualified sales and marketing personnel in order to maintain our marketing capabilities in our current markets and expand the number of markets we serve. Since competition for experienced sales and marketing personnel is intense, we cannot be certain that we will be able to attract and retain enough qualified sales and marketing personnel or that those we do hire will be able to generate new business at the rate we currently expect. If the Company is unable to hire and retain enough qualified sales and marketing personnel or those we hire are not as productive as we expect, the Company may not be able to implement its sales plans.

     Potential Inability to Manage Growth of Business. Our business has the potential to grow in size and complexity. If our management is unable to manage growth effectively, our business, operating results and

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financial condition could be adversely affected. Any new sustained growth would be expected to place a significant strain on our management systems and operational resources. We anticipate that new sustained growth, if any, will require us to recruit, hire and retain new managerial, finance, sales, marketing and support personnel. We cannot be certain that we will be successful in recruiting, hiring or retaining such personnel. Our ability to compete effectively and to manage our future growth, if any, will depend on our ability to maintain and improve operational, financial, and management information systems on a timely basis and to expand, train, motivate and manage our work force. If we begin to grow, we cannot be certain that our personnel, systems, procedures, and controls will be adequate to support our operations. Also, one element of our growth strategy is to actively evaluate and pursue strategic alliances with businesses that are complementary to the Company’s business. We cannot be certain that we will be able to integrate fully any such alliances with our existing operations or otherwise implement our growth strategy.

     Intended Expansion of Offered Products and Services May Lower Our Overall Profit Margin and New Products may not be Successful. Part of our business strategy is to expand our offering of products and services. We believe that we can provide these services profitably, but such services may generate a lower profit margin than our current products and services. As a result, by offering additional products and services, we may lower our overall profit margin. Although gross revenues would likely increase, the lowering of our profit margin may be viewed negatively by the stock market, possibly resulting in a reduction in our stock price.

     As stated elsewhere in this filing, we are engaged in introducing several new products to our customer base. Although our research leads us to believe that markets and customers exist for this expansion, there can be no assurances that the introduction and sales of these new products will be sufficient for us to recover our investment in costs.

     Our Products and Services May Not be as Successful in a Slower Economy. Since the introduction of Business Manager in 1991, the United States economy generally has been relatively strong. If the United States economy weakens or enters into a recession or depression, our client banks and their small business customers may view the services and benefits provided by Business Manager differently and may be reluctant to use the products and services we provide. In addition, in an economic recession or depression, the customers of small businesses may reduce their purchases of goods and services, thus reducing accounts receivable eligible for our solution. This development could have a material adverse effect on our business, operating results and financial condition.

     Potential Inability to Compete in the Financial Services Market. The market for small business financial services is competitive, rapidly evolving, fragmented and highly sensitive to new product introductions and marketing efforts by industry participants. Fluctuations in interest rates and increased competition for services similar to Business Manager could lower our market share and negatively impact our business and stock price. The Company faces primary competition from a number of companies that offer to banks products similar to Business Manager. However, we believe that we are the largest of the companies offering these services in terms of revenues and number of client banks under contract.

     We also compete with banks that use their internal information technology departments to develop proprietary systems or purchase software from third parties to offer similar services to small businesses. In addition, we compete with traditional sources of financial services to small businesses such as lines of credit, amortizing loans and factoring. Many banks and other traditional providers of financing are much larger and more established than Private Business, have significantly greater resources, generate more revenues and have greater name recognition. We cannot be certain our competitors will not develop products and services comparable or superior to those that we have developed or adapt more quickly to new technologies, evolving industry trends or changing small business requirements. Most providers of traditional sources of financing have already established relationships with small businesses may be able to leverage these relationships to discourage these customers from purchasing the Business Manager solution or persuade them to replace our products with their products.

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     We expect that competition will increase as other established and emerging companies enter the accounts receivable financing market, as new products and technologies are introduced and as new competitors enter the market. In addition, as we develop new services, we may begin competing with companies with whom we have not previously competed. Increased competition may result in price reductions, lower profit margins and loss of our market share, any of which could have a material adverse effect on our business, operating results and financial condition.

     Dependence on Key Employees. Our future performance will also largely depend on the efforts and abilities of our executive officers, as well as our key employees and our ability to retain them. The loss of any of our executive officers or key employees could have a material adverse effect on our business, operating results and financial condition.

     Our Charter, Bylaws and Tennessee Law Contain Provisions that Could Discourage a Takeover. Our charter, bylaws and Tennessee law contain provisions that could make it more difficult for a third party to obtain control of the Company. For example, our charter provides for a staggered board of directors, restricts the ability of stockholders to call a special meeting and prohibits stockholder action by written consent. Our bylaws allow the board to expand its size and fill any vacancies without stockholder approval. In addition, the Tennessee Business Corporation Act contains provisions such as the Tennessee Business Combination Act and the Tennessee Greenmail Act, which impose restrictions on stockholder actions.

     Potential Inability to Adequately Protect Our Proprietary Technology. Our success and ability to compete are dependent largely upon our proprietary technology. Third party claims against our proprietary technology could negatively affect our business. We cannot be certain that we have taken adequate steps to deter misappropriation or independent third-party development of our technology. In addition, we cannot be certain that third parties will not assert infringement claims in the future or, if infringement claims are asserted, that such claims will be resolved in our favor. Although we are not currently subject to any dispute either protecting our proprietary technology or asserting a third party claim against our proprietary technology, any infringement claims resolved against us could have a material adverse effect on the Company’s business, operating results and financial condition.

     Failure of Our Network Infrastructure and Equipment Would Have a Material Effect on Our Business. Failure of our network infrastructure and equipment, upon which our business is greatly dependent, as well as the occurrence of significant 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, in particular, the application hosting and transaction processing services we offer to our client banks via secure Internet connections. The inability to supply these services to our customers could negatively affect our business, operating results and financial condition and may also harm our reputation.

     Private Business Relies on the Technological Infrastructure of its Client Banks and Their Individual Customers. The success of the products and services offered by Private Business depends, to a degree, on the technological infrastructure and equipment of its client banks and their small business customers. Private Business provides application hosting and transaction processing services to its client banks that require some level of integration with the client banks’ technological infrastructure. In addition, management services and access to information related to the Private Business products are offered to each client bank and their customers through the Private Business portal at BusinessManager.com. Proper technical integration between Private Business and its client banks, as well as continued accessibility of the BusinessManager.com portal is critical to the successful provision of services by Private Business. A failure of a client bank’s infrastructure or the inability to access BusinessManager.com for any reason could negatively affect the business, financial condition and results of Private Business’s operations.

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     Private Business’s Revenues Declined in 2003 and May Continue to Decline. Private Business’s revenues declined in 2003 as compared to 2002. Although the Company has previously shown increased revenue growth, Private Business’s revenue may not grow in the future. This could cause the financial results of the company to suffer and have a negative effect on the price of Private Business common stock.

     Private Business May Not be Able to Use the Tax Benefit from Towne’s Operating Losses. At December 31, 2003, Private Business Inc. had available federal net operating losses, or NOLs, of approximately $40.5 million that will expire beginning in 2011 if not used. These NOL’s were acquired in connection with the Company’s merger with Towne Services, Inc. The amount of these NOLs available to Private Business in any given year will be limited by Section 382 of the Internal Revenue Code. This limitation could be material and only permit Private Business to realize a small portion of the potential tax benefit of Towne’s pre-merger NOLs. Private Business estimates it will be able to realize approximately $6.2 million of these NOLs, which has been recorded as a $2.4 million deferred tax asset at December 31, 2003. To the extent that Private Business is not permitted to use these NOLs in future years, some NOLs will not be realized before they expire.

     Increased Fraud Committed by Small Businesses and Increased Uncollectible Accounts of Small Businesses May Adversely Affect our Business. Small business customers from time to time fraudulently submit artificial receivables to our client banks using our products and services. In addition, customers from time to time keep cash payments that are mistakenly remitted to the small business when those payments should actually be remitted directly to the client bank. Our client banks are also susceptible to uncollectible accounts from small business customers. Many of the banks purchase insurance through us to insure against these risks. If the number and amount of fraudulent or bad debt claims increase, our client banks may decide to reduce or terminate their use of our products and services, reducing our ability to attract and retain revenue producing client banks. Further, our insurance carrier providing coverage for the insurance products may increase rates or cancel coverage, reducing our ability to produce that revenue and reducing our margins on that business.

     Errors and Omissions by our Employees at the Private Business Service Center and any Problems with Systems or Software may Expose Private Business to Claims and Loss of Business. Private Business currently conducts processing services for certain client banks and may do so for future client banks. Acting as processor for client banks may expose Private Business to claims about the quality of those services. Private Business employees may make errors, or technical or other events beyond our control may occur. These errors or events may cause banks to reduce their participation in the program or leave the program entirely, negatively affecting our revenue.

     Access to Capital for Growth and New Product Introduction or Acquisitions. A significant part of our growth plans rest on the development of new products or the formation of certain strategic alliances. The execution of these plans may require that we have access to additional capital. Market conditions at the time we need this capital may preclude access to new capital of any kind. Any of these developments could significantly hinder our ability to add new products or services.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company is subject to market risk from exposure to changes in interest rates based on our financing and cash management activities. Our exposure relates primarily to our long-term debt obligations that expire in 2004 and 2006. In the event that interest rates associated with these debt obligations were to increase 100 basis points, the annual impact on future cash flows would be approximately $78,000.

Item 4. Controls and Procedures

     In an effort to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company’s

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principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2004. Based on such evaluation, such officers have concluded that, as of March 31, 2004, the Company’s disclosure controls and procedures were effective in timely alerting them to information relating to the Company required to be disclosed in the Company’s periodic reports filed with the SEC. There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — Other Information

Item 1. Legal Proceedings

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

In Re Towne Services, Inc./Securities Litigation

As previously disclosed, the Company reached a final settlement regarding the Towne Services, Inc. (“Towne”) securities class action lawsuit in 2003. On January 30, 2004, the Company entered into a settlement agreement requiring its insurance carrier to fund certain costs of defense incurred in connection with the Towne securities litigation, which amounts have been paid by its insurance carrier.

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

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

As previously disclosed, the Company is a party to a lawsuit involving Towne’s acquisition of Banking Solutions, Inc. (“BSI”) through a stock purchase made by its subsidiary, BSI Acquisition Corp. This lawsuit was filed in December 1998 in the District Court of Collin County, Texas. On July 15, 2002, the District Court of Collin County, Texas granted Towne’s motion for summary judgment on all claims. The Company continues to seek indemnification, pursuant to the BSI stock purchase agreement, from the BSI shareholders for its expenses in defending this action.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

     On January 20, 2004, the Company consummated the sale of 20,000 shares of its Series A preferred stock and a warrant to purchase up to 16 million shares of our common stock at an exercise price of $1.25 per share for a total purchase price of $20 million (the “Lightyear Transaction”). The Series A preferred stock and the warrant were sold to Lightyear Fund, L. P., an affiliate of Lightyear Capital. These securities were not registered pursuant to the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act, which relates to the sale of securities by an issuer not involving a public offering. The Series A preferred stock is non-convertible and carries a cash dividend rate of 10% of an amount equal to the liquidation preference, payable quarterly in arrears, when and as declared by the Board of Directors. The Series A preferred stock has a liquidation preference superior to the common stock and, to the extent required by the terms of the Company’s Series B preferred stock, on parity with the currently outstanding Series B preferred stock. The liquidation preference is equal to the original $20 million purchase price, plus all accrued but unpaid dividends. Each share of Series A preferred stock initially will be entitled to 800 votes per share, which will be proportionately reduced as any portion of the common stock warrant is exercised.

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

     A special meeting of shareholders was held on January 19, 2004. At the meeting, the Company’s shareholders were asked to approve the Lightyear Transaction, which approval was granted. No other matters were voted upon at the annual meeting.

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

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

     (b) Reports on Form 8-K

1.

A current report on Form 8-K was filed on January 22, 2004 to announce the sale of 20,000 shares of Series A preferred stock and a warrant to acquire 16,000,000 common shares for a total of $20,000,000 to Lightyear Fund, LP.

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Signatures

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

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