<PAGE>   1
===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999.

                                       Or

[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________,
    19____ .

                       Commission file number : 000-24695
                                                ---------


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


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

<TABLE>
<S>                                                                <C>
                           Georgia                                               62-1618121
(State or other jurisdiction of incorporation or organization)     (I.R.S. Employer Identification No.)
</TABLE>

           3950 Johns Creek Court, Suite 100, Suwanee, Georgia 30024
             (Address of principal executive offices and zip code)

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

                                      N/A
              (Former name, former address and former fiscal year,
                         if changed since last report)


         Indicate by check mark whether the registrant: 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 has been subject to such
filing requirements for the past 90 days Yes [X] No [ ].

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 27,197,322 shares
outstanding at November 12, 1999.

===============================================================================


<PAGE>   2

                              TOWNE SERVICES, INC.
                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                                             PAGE
                                                                                             ----

<S>               <C>                                                                        <C>
PART I            CONDENSED CONSOLIDATED FINANCIAL
                  INFORMATION

 Item 1.          Condensed Consolidated Financial Statements

                  Condensed Consolidated Balance Sheets as of
                  December 31, 1998 and September 30, 1999                                     3

                  Condensed Consolidated Statements of Operations for the Three
                  Months and Nine Months ended September 30, 1998 and 1999                     4

                  Condensed Consolidated Statements of Cash Flows for the Nine
                  Months ended September 30, 1998 and 1999                                     5

                  Notes to Condensed Consolidated Financial Statements                         6

 Item 2.          Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                   10

 Item 3.          Quantitative and Qualitative Disclosure About
                  Market Risk                                                                 20

PART II           OTHER INFORMATION

 Item 1.          Legal Proceedings                                                           22

 Item 2.          Changes in Securities and Use of Proceeds                                   22

 Item 3.          Defaults upon Senior Securities                                             22

 Item 4.          Submission of Matters to a Vote of Security Holders                         22

 Item 5.          Other Information                                                           22

 Item 6.          Exhibits and Reports on Form 8-K                                            23
</TABLE>


<PAGE>   3

                                    PART I.
                  CONDENSED CONSOLIDATED FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND SEPTEMBER 30,
1999

                              TOWNE SERVICES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,        SEPTEMBER 30,
                                                                                                   1998               1999
                                                                                             -----------------------------------
                                                                                                         (UNAUDITED)
                                     ASSETS
<S>                                                                                            <C>                 <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                                    $14,060,284         $26,159,535
  Investments                                                                                           --             850,000
  Accounts receivable, net of allowance
     for uncollectible accounts of $415,065 and $593,549
     at December 31, 1998 and September 30, 1999, respectively                                   4,338,478           6,355,447
  Notes receivable from employees                                                                  167,305             263,928
  Other                                                                                            393,732           1,190,805
                                                                                               -----------         -----------
       Total current assets                                                                     18,959,799          34,819,715
                                                                                               -----------         -----------

PROPERTY AND EQUIPMENT, net                                                                      3,452,987           9,782,841
NOTES RECEIVABLE FROM EMPLOYEES                                                                     81,565             752,030
GOODWILL, net                                                                                   14,955,414          16,127,470
OTHER INTANGIBLES, net                                                                           1,134,614           1,055,698
OTHER ASSETS, net                                                                                  100,249              86,855
                                                                                               -----------         -----------
                                                                                               $38,684,628         $62,624,609
                                                                                               ===========         ===========


                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                                             $   221,763         $ 1,760,232
  Accrued liabilities                                                                            1,511,148           1,948,299
  Accrued compensation                                                                           1,198,391           1,459,125
  Accrued termination costs                                                                        497,910             292,819
  Current portion of long-term debt                                                              5,274,000             226,573
                                                                                               -----------         -----------
     Total current liabilities                                                                   8,703,212           5,687,048
                                                                                               -----------         -----------

LONG TERM DEBT                                                                                      55,000           1,089,441

REDEEMABLE COMMON STOCK                                                                            534,000                  --

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value; 20,000,000 shares authorized, 0 and 20,000
    issued and outstanding at December 31, 1998 and September 30, 1999, respectively                    --           1,880,000
  Common stock, no par value; 50,000,000 shares authorized, 19,651,390 and
     27,197,322 issued and outstanding December 31, 1998 and September 30,
     1999, respectively                                                                         53,520,084          87,475,520
  Warrants outstanding                                                                              41,000             161,000
  Accumulated deficit                                                                          (24,168,668)        (33,668,400)
                                                                                               -----------         -----------
     Total shareholders' equity                                                                 29,392,416          55,848,120
                                                                                               -----------         -----------
                                                                                               $38,684,628         $62,624,609
                                                                                               ===========         ===========
</TABLE>

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


                                       3
<PAGE>   4


      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
                       ENDED SEPTEMBER 30, 1998 AND 1999


                              TOWNE SERVICES, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                           FOR THE THREE                     FOR THE NINE
                                                                           MONTHS ENDED                      MONTHS ENDED
                                                                           SEPTEMBER 30,                     SEPTEMBER 30,
                                                                    ------------------------------------------------------------
                                                                        1998            1999            1998            1999
                                                                    ----------------------------    ----------------------------
                                                                             (UNAUDITED)                     (UNAUDITED)

<S>                                                                 <C>             <C>             <C>             <C>
REVENUES                                                            $  4,587,330    $  7,250,689    $ 11,993,865    $ 22,678,117

COSTS AND EXPENSES:
  Costs of processing, servicing and support                           1,109,741       2,094,957       3,040,576       5,210,813
  Research and development                                               300,068          79,784         843,079         535,993
  Sales and marketing                                                  3,661,355       5,158,645       8,982,783      15,407,199
  Stock compensation expense                                              36,338          36,339       6,044,267         109,017
  Employee severance expense                                                  --       1,325,193              --       1,325,193
  Acquisition expense                                                         --              --              --       2,343,316
  General and administrative                                           1,047,412       3,273,682       4,048,602       7,972,221
                                                                    ------------    ------------    ------------    ------------
     Total costs and expenses                                          6,154,914      11,968,600      22,959,307      32,903,752
                                                                    ------------    ------------    ------------    ------------
OPERATING LOSS                                                        (1,567,584)     (4,717,911)    (10,965,442)    (10,225,635)
                                                                    ------------    ------------    ------------    ------------

OTHER EXPENSES:
  Interest (income) expense, net                                        (149,155)       (322,438)          3,877        (435,179)
  Other expense (income)                                                   3,990           3,711           4,242           3,711
  Financing costs for stock issued to nonemployees                            --              --         323,000              --
                                                                    ------------    ------------    ------------    ------------
     Total other expenses                                               (145,165)       (318,727)        331,119        (431,468)
                                                                    ------------    ------------    ------------    ------------

Loss before extraordinary loss and provision (benefit) from
  income taxes                                                        (1,422,419)     (4,399,184)    (11,296,561)     (9,794,167)
                                                                    ------------    ------------    ------------    ------------

Extraordinary loss                                                       476,239              --         476,239              --

Provision (benefit) for income taxes                                      15,000              --         (19,000)       (354,000)

NET LOSS                                                            $ (1,913,658)   $ (4,399,184)   $(11,753,800)   $ (9,440,167)
                                                                    ============    ============    ============    ============

PREFERRED STOCK DIVIDENDS                                                     --              --      (5,108,000)             --

ACCRETION OF WARRANTS WITH REDEMPTION FEATURE                           (196,975)             --        (691,972)             --


                                                                    ------------    ------------    ------------    ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                        $ (2,110,633)   $ (4,399,184)   $(17,553,772)   $ (9,440,167)
                                                                    ============    ============    ============    ============

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
     PER COMMON SHARE:
Basic                                                               $      (0.11)   $      (0.16)   $      (1.07)   $      (0.40)
                                                                    ============    ============    ============    ============
Diluted                                                             $      (0.11)   $      (0.16)   $      (1.07)   $      (0.40)
                                                                    ============    ============    ============    ============

Weighted average common shares outstanding                            19,072,350      27,015,545      16,385,188      23,635,577
                                                                    ============    ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       4

<PAGE>   5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999


                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

<TABLE>
<CAPTION>

                                                                                               FOR THE NINE MONTHS
                                                                                               ENDED SEPTEMBER 30,
                                                                                    ----------------------------------------
                                                                                        1998                        1999
                                                                                    ----------------------------------------
                                                                                                   (UNAUDITED)
<S>                                                                                 <C>                         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                          $(11,753,800)               $ (9,440,167)
                                                                                    ------------                ------------
  Adjustments to reconcile net loss to net cash used in operating activities:
      Compensation expense recognized for stock option grants                          6,130,267                     378,174
      Financing costs for stock issued to nonemployees                                   323,000                          --
      Extraordinary loss                                                                 476,239                          --
      Depreciation                                                                       304,986                     937,651
      Amortization of intangibles and goodwill                                                --                   1,304,878
      Amortization of deferred financing fees                                             13,496                          --
      Amortization of debt discount                                                       33,025                          --
      Provision for doubtful accounts                                                     37,000                     564,639
      Changes in operating assets and liabilities, net of assets acquired:
           Short-term investments                                                                                   (850,000)
           Accounts receivable                                                        (1,563,380)                 (2,581,608)
           Prepaid & other assets                                                       (177,130)                   (798,181)
           Stock subscriptions receivable                                                427,500                          --
           Accounts payable                                                              171,041                   1,080,407
           Accrued liabilities                                                           950,830                     350,107
           Accrued compensation                                                         (943,297)                    219,734
           Accrued termination costs                                                          --                    (144,257)
                                                                                    ------------                ------------
                   Total adjustments                                                   6,183,577                     461,544
                                                                                    ------------                ------------
                   Net cash used in operating activities                              (5,570,223)                 (8,978,623)
                                                                                    ------------                ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net change in notes receivable from employees                                          (84,995)                   (767,088)
  Acquisitions, net of cash acquired                                                    (510,000)                 (2,281,035)
  Purchase of property and equipment, net                                             (1,156,040)                 (6,002,091)
                                                                                    ------------                ------------
                     Net cash used in investing activities                            (1,751,035)                 (9,050,214)
                                                                                    ------------                ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of stock options                                                     --                      66,270
  Repayment of debt                                                                   (2,438,761)                 (5,373,174)
  Proceeds from long-term borrowings                                                     632,849                          --
  Proceeds from issuance of preferred stock                                            1,500,000                   2,000,000
  Proceeds from issuance of common stock                                              28,471,632                  33,434,992
  Repurchase of common stock                                                                  --                          --
                                                                                    ------------                ------------
                      Net cash provided by (used in) financing activities             28,165,720                  30,128,088
                                                                                    ------------                ------------
NET (DECREASE) INCREASE IN CASH                                                       20,844,462                  12,099,251
CASH AND CASH EQUIVALENTS, beginning of period                                         3,643,439                  14,060,284
                                                                                    ------------                ------------
CASH AND CASH EQUIVALENTS, end of period                                            $ 24,487,901                $ 26,159,535
                                                                                    ============                ============

SUPPLEMENTAL CASH FLOW INFORMATION:
                                                                                    ============                ============
Cash paid for interest                                                              $    234,058                $     29,273
                                                                                    ============                ============
Acquisitions of property and equipment through capital leases                       $         --                $  1,360,188
                                                                                    ============                ============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       5
<PAGE>   6

                              TOWNE SERVICES, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION AND BACKGROUND

         Towne Services, Inc. ("Towne Services" or the "Company") provides
services and products that process sales and payment information and related
financing transactions for small businesses and community banks in the United
States. The Company delivers these services and products online via an
electronic hub, or gateway, that links business and bank customers with the
Company and other providers of products and services that can benefit these
customers. The Company uses this electronic gateway to deliver a variety of
business and management solutions using internet and telecommunication
connections. The primary business capabilities we offer our customers include a
virtual credit card system and a merchandise forecasting system.

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

         The Company's automated asset management systems are TOWNE CREDIT(R),
which processes consumer credit transactions for small and medium size retail
merchants, TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which process
business-to-business credit transactions for small commercial businesses, and
RMSA Forecast System, which processes sales and inventory transactions and
provides merchandising information for small specialty retail stores. 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.

2.       BASIS OF PRESENTATION

UNAUDITED INTERIM FINANCIAL INFORMATION

         The accompanying consolidated financial statements for the three and
nine months ended September 30, 1998 and 1999 are unaudited. The historical
financial information has been restated for the effects of the acquisition of
Forseon Corporation ("Forseon") which was accounted for as a pooling of
interests. In the opinion of the management of the Company, these financial
statements reflect all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the financial statements.
Certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The results of operations for the three and



                                       6
<PAGE>   7

nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999 or for any
other future periods.

3.       NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to
have a material impact on the Company's financial statements.

4.       PUBLIC OFFERING

         In June 1999, the Company completed a secondary public offering of
4,500,000 shares of common stock at an offering price to the public of $7.125
per share and on July 20, 1999, 675,000 shares of common stock were issued and
sold by the Company pursuant to an underwriters' over-allotment provision in
connection with this public offering. The total proceeds from the public
offering, net of underwriting discounts and offering expenses, were
approximately $33.0 million.

1.       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,
recurring monthly transaction processing fees and software license fees.
Revenues related to the initial set-up fees 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. Revenues
related to software license fees are recognized in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2,
"Software Revenue Recognition," ("SOP 97-2"), as amended. The Company also
leases point of sale terminal equipment to certain customers under
month-to-month operating leases. Such operating lease revenues are recognized
on a monthly basis as earned.


                                       7
<PAGE>   8

6.       ACQUISITIONS

         In June 1999, the Company acquired Forseon, a company based in
Riverside, California. Forseon provides products and services for retail
businesses that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports. Towne issued a total of 2,075,345 shares of its common stock in
exchange for all outstanding stock and options to acquire stock in Forseon. The
merger was accounted for as a pooling of interests. Ten percent of the Towne
common stock has been held back in escrow to satisfy the indemnification
obligations of Forseon stockholders under the merger agreement. The Company
incurred approximately $2.3 million in expenses related to the acquisition of
Forseon.

         On July 20, 1999, the Company acquired all of the issued and
outstanding stock of Imaging Institute, Inc. ("III"), a Bloomington,
Minnesota-based company, for approximately $1.0 million cash and the issuance
of up to 81,016 shares of the Company's common stock. III's main products
include AUGUSTA and EzVIEW VAULT(TM), which offer unique and functional
document imaging and archiving solutions tailored for small to medium size
businesses. In connection with the purchase of III, the company has recorded
goodwill in the amount of $1.9 million, which will be amortized over a
five-year period.

7.       LONG TERM DEBT OBLIGATIONS

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

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

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

8.       SHAREHOLDERS' EQUITY

         In June 1999, the Company sold 20,000 shares of Series B Preferred
Stock and issued a warrant to purchase 30,000 shares of the Company's common
stock to Synovus Financial


                                       8
<PAGE>   9

Corporation for $2,000,000. The shares are convertible into common stock at a
conversion price equal to $9.08. The Series B Preferred Stock is redeemable at
any time on or after June 30, 2002 at the option of the Company for cash, in
whole or part, on at least 10 business days but not more than 90 calendar days'
notice. The Company allocated $1,880,000 to the preferred stock based on the
relative fair value at the date of issuance.

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

         The warrant allows Synovus to purchase 30,000 shares of the Company's
common stock for $9.08 per share and is exercisable beginning 12 months after
the issue date. The term of the warrant is 5 years. The Company allocated
$120,000 to the warrant based on the relative fair value of the warrant using
the Black-Scholes pricing method.

         In September 1999, we recognized approximately $270,000 for severance
benefits relating to the early vesting of previously unvested stock options
issued and outstanding for two former key employees.

9.       RELATED PARTY TRANSACTIONS

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

         In July 1999, the Company loaned the Chief Executive Officer (former
Chief Operating Officer) of the Company $300,000. The full recourse loan bears
interest at 8.00% per annum, and is due in full in July 2002.

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

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

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


                                       9
<PAGE>   10

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION

We have rounded some of the numbers in this presentation. You should read the
following discussion in connection with our financial statements and related
notes. This Report contains several "forward-looking statements" concerning
Towne Services' operations, performance, prospects, strategies and financial
condition, including its future economic performance, intent, plans and
objectives and the likelihood of success in developing and expanding its
business. These statements are based upon a number of assumptions and estimates
which are subject to significant uncertainties, many of which are beyond the
control of Towne Services. Words such as "may," "would," could," "will,"
"expect," "anticipate," "believe," "intend," "plan," and "estimate" are meant
to identify such forward-looking statements. Actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to:

-        Towne's limited operating history and whether it will be able to
                  achieve or maintain profitability or repeat past periods of
                  revenue growth;
-        whether Towne can successfully integrate the operations of companies
                  it acquires, including those of Forseon and Imaging Institute
                  Inc.;
-        whether Towne can attract and retain sales and marketing personnel or
                  enter new marketing alliances to grow its business;
-        whether Towne can successfully transition its management and retain
                  key members of management;
-        whether Towne can continue to grow and manage our growth;
-        whether Towne can cultivate new business relationships and execute
                  agreements with new customers;
-        whether the market will accept new products and enhancements from
                  Towne, including those acquired as a result of the Forseon
                  Corporation and Imaging Institute Inc. transactions;
-        increased competition;
-        the unknown effects of possible system failures, especially any
                  failures relating to the Year 2000 issue, and rapid changes
                  in technology; and
-        other factors discussed in this report and in Towne's registration
                  statements on Form S-1 (No. 333-76859) as declared effective
                  by the Securities and Exchange Commission on June 23, 1999
                  and Form S-4 (No. 333-76493) as declared effective by the
                  Securities and Exchange Commission on June 10, 1999,
                  including the "Risk Factors" sections contained therein.

OVERVIEW

         Towne establishes an electronic gateway that links its business and
bank customers with Towne and other providers of products and services. We
currently generate revenues through the deployment and use of four primary
products: TOWNE CREDIT(R), TOWNE FINANCE(R), CASHFLOW MANAGER(SM), and RMSA
Forecast System, and ancillary services related to


                                      10
<PAGE>   11

these products. With each of these products, we generate initial set-up fees,
discount fees and recurring monthly transaction processing fees. Management
believes the prices charged for both the initial set-up fees and the recurring
transaction fees are based upon the relative fair value of the related services
provided. 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.
Set-up fees are also charged 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, telephone and software support services, rental fees and collecting
debts.

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

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

         Research and development expenses consist of salary and related
personnel costs, including costs for employee benefits, computer equipment and
support services used in product and technology development. Most research and
development expenditures are expensed as incurred; however, we 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.

         In June 1999, we completed a secondary public offering of 4,500,000
shares of common stock at an offering price to the public of $7.125 per share
and on July 20, 1999, 675,000 shares of common stock were issued and sold
pursuant to an underwriters' over-allotment provision in connection with this
public offering. The total proceeds to Towne from the public offering, net of


                                      11
<PAGE>   12

underwriting discounts and offering expenses, were approximately $33.0 million.

         In June 1999, we acquired Forseon Corporation ("Forseon"), a company
based in Riverside, California. Forseon provides products and services for
retail businesses that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports. We issued a total of 2,075,345 shares of our common stock in exchange
for all outstanding stock and options to acquire stock in Forseon. The merger
was accounted for as a pooling of interests. Ten percent of the Towne common
stock has been held back in escrow to satisfy the indemnification obligations
of Forseon stockholders under the merger agreement. We incurred approximately
$2.3 million in expenses related to the acquisition of Forseon.

         On July 20, 1999, we acquired all of the issued and outstanding stock
of Imaging Institute, Inc. ("III"), a Bloomington, Minnesota-based company, for
approximately $1.0 million cash and the issuance of up to 81,016 shares of our
common stock. III's main products include AUGUSTA and EzVIEW VAULT(TM), which
offer unique and functional document imaging and archiving solutions tailored
for small to medium size businesses. In connection with the purchase of III, we
recorded goodwill in the amount of $1.9 million, which will be amortized over a
five-year period.

         We had net losses attributable to common shareholders of approximately
$2.1 million and $4.4 million for the three months ended September 30, 1998 and
1999, respectively. For the nine months ended September 30, 1998 and 1999, we
had net losses of approximately $17.6 million and $9.4 million, respectively.
As of December 31, 1998, we had an accumulated deficit of approximately $24.2
million. Approximately $12.9 million 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. As of September 30, 1999, this
accumulated deficit was approximately $33.7 million. During the nine months
ended September 30, 1999, approximately $2.3 million of this accumulated
deficit resulted from a one-time charge relating to acquisition costs, $240,000
from a one-time charge relating to a sub-lease agreement, and $1.3 million from
a one-time charge relating to employee severance agreements.

         Our total revenues were approximately $12.0 million and $22.7 million
for the nine months ended September 30, 1998 and 1999, respectively. We have
experienced net losses of $17.6 million and $9.4 million in each of these
periods, respectively, and expect to continue to incur losses for the
foreseeable future. The number of our employees at September 30, 1998 was 133,
compared to 344 employees at September 30, 1999. 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


                                      12
<PAGE>   13

significant revenue growth, our operating results for the third quarter ended
September 30, 1999 fell below market expectations, and there can be no
assurance that previous growth rates can be repeated. Therefore, our past
performance should not necessarily be relied upon as an indicator 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.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

         Revenues. Towne's revenues increased from $4.6 million for the three
months ended September 30, 1998 to $7.3 million for the three months ended
September 30, 1999. During these two periods, recurring revenues accounted for
approximately 69% and 78% of total revenues, respectively. Set-up fees
accounted for approximately 23% and 11% of total revenues, respectively. Other
nonrecurring revenues accounted for approximately 8% and 11% of total revenues,
respectively. The increase in revenues during these periods is attributed
primarily to an increase in transaction processing revenues and set up fees as
a result of the increase in the number of customers. The increase in other
nonrecurring revenues is primarily a result of an increase in software license
fee revenues of our inventory management, collection works and document imaging
products.

         Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $1.1 million for the three months ended
September 30, 1998 to $2.1 million for the three months ended September 30,
1999. These costs were approximately 24% and 29% of revenues, respectively, for
these two periods. Costs of processing, servicing and support increased in the
three months ended September 30, 1999 as compared to the same period in 1998 as
a result of additional services and support functions necessary to support our
growth both through the acquisition of new customers and the acquisition of
complementary businesses. Towne anticipates that these costs will continue to
increase as its customer base expands.

         Research and Development. Research and development expenses decreased
from $300,000 for the three months ended September 30, 1998 to $80,000 for the
three months ended September 30, 1999. Research and development expenses
represented approximately 7% and 1% of revenues, respectively, during these two
periods. Research and development costs have decreased compared to the same
period in 1998 due to our reduced efforts towards the development of new
products. In addition, we do not expect to incur significant research and
development costs related to making our current 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 $3.7
million for the three months ended September 30, 1998 to $5.2 million for the
three months ended September


                                      13
<PAGE>   14

30, 1999. Sales and marketing expenses were approximately 80% and 71% of
revenues, respectively, during these two periods. The increase in the dollar
amount of sales and marketing expenses for these periods 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 customers in the three months ended September 30, 1999 as
compared to the same period in 1998. Towne anticipates that sales and marketing
expenses will continue to increase as it continues to expand its direct sales
and marketing force and hires additional personnel to promote its indirect
sales channels. Costs of sales and marketing decreased as a percentage of
revenue as a result of substantially increased revenues and improved operating
efficiencies.

         Stock Compensation Expense. Stock compensation expense was $36,000 for
the three months ended September 30, 1998 and $36,000 for the three months
ended September 30, 1999. In the first quarter of 1998, Towne 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. Towne
retained an independent appraiser who subsequently valued the common stock at a
higher price. We will record $725,000 ($145,000 per year) of compensation
expense over the five-year vesting period of the options.

         Employee Severance Expense. We recorded $1.3 million relating to
severance benefits for two former employees during the three months ended
September 30, 1999. This expense represented approximately 18% of revenues for
that period. The severance benefits consisted of $1.0 million in cash payments
and $270,000 related to the early vesting of previously unvested stock options.
There were no similar employee severance expenses during the three months ended
September 30, 1998.

         General and Administrative. General and administrative expenses
increased from $1.0 million for the three months ended September 30, 1998 to
$3.3 million for the three months ended September 30, 1999. These costs
represented approximately 23% and 45% of revenues, respectively, for these two
periods. The increase in these expenses was primarily the result of increases
in the number of executive and administrative employees and the costs
associated with executive and administrative expenses related to our growth,
costs related to acquisitions, write-offs of uncollectible accounts receivable,
costs incurred for relocation to our new office facility and a one-time charge
relating to a sublease agreement that was terminated early. Also, Towne
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 Towne continues the upgrade of internal and financial reporting
systems to enhance management's ability to obtain and analyze information about
its operations.

         Interest (Income) Expense, Net. Towne reported net interest income of
$149,000 for the three months ended September 30, 1998 and net interest income
of $322,000 for the three months ended September 30, 1999. Net interest income
increased as a result of higher cash balances resulting from our secondary
offering completed in June 1999.


                                      14
<PAGE>   15

         Extraordinary Loss. The extraordinary loss reported for the
three-month period ended September 30, 1998 related to the early extinguishment
of debt in the amount of $476,000. This extraordinary loss was comprised of
$218,000 unamortized discount on a promissory note and $258,000 deferred debt
issuance costs. There were no similar extraordinary losses for the
corresponding three-month period ended September 30, 1999.

         Income Taxes. As of December 31, 1998, Towne Services had net
operating losses ("NOLs") of approximately $17.6 million for federal tax
purposes, which will expire beginning in 2011 if not utilized.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999

         Revenues. Towne's revenues increased from $12.0 million for the nine
months ended September 30, 1998 to $22.7 million for the nine months ended
September 30, 1999. During these two periods, recurring revenues accounted for
approximately 73% and 72% of total revenues, respectively. Set-up fees
accounted for approximately 19% and 15% of total revenues, respectively. Other
nonrecurring revenues accounted for approximately 8% and 13% of total revenues,
respectively. The increase in revenues during these periods is attributed
primarily to an increase in transaction processing revenues and set up fees as
a result of the increase in the number of customers. The increase in other
nonrecurring revenues is primarily a result of an increase in software license
fee revenues of our inventory management, collection works and document imaging
products.

         Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $3.0 million for the nine months ended
September 30, 1998 to $5.2 million for the nine months ended September 30,
1999. These costs were approximately 25% and 23% of revenues, respectively, for
these two periods. The dollar amount of costs of processing, servicing and
support increased as a result of additional services and support functions
necessary to support Towne's growth both through the acquisition of new
customers and the acquisition of complementary businesses. Towne anticipates
that the dollar amount of these costs will continue to increase as new
customers are added. Costs of processing, servicing and support decreased as a
percentage of revenues as a result of substantially increased revenues and
improved operating efficiencies.

         Research and Development. Research and development expenses decreased
from $843,000 for the nine months ended September 30, 1998 to $536,000 for the
nine months ended September 30, 1999. Research and development expenses
represented approximately 7% and 2% of revenues, respectively, during these two
periods. Research and development costs have decreased compared to the same
period in 1998 due to reduced efforts towards the development of new products.
In addition, we do not expect to incur significant research and development
costs related to making our current 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."


                                      15
<PAGE>   16

         Sales and Marketing. Sales and marketing expenses increased from $9.0
million for the nine months ended September 30, 1998 to $15.4 million for the
nine months ended September 30, 1999. Sales and marketing expenses were
approximately 75% and 68% of revenues, respectively, during these two periods.
The increase in the dollar amount of 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 customers. Towne anticipates that the dollar amount of sales and
marketing expenses will continue to increase as it continues to expand its
direct sales and marketing force and hires additional personnel to promote its
indirect sales channels. Costs of sales and marketing decreased as a percentage
of revenue as a result of substantially increased revenues and improved
operating efficiencies.

         Stock Compensation Expense. Stock compensation expense was $6.0
million for the nine months ended June 30, 1998 and $109,000 for the nine
months ended June 30, 1999. In the first quarter of 1998, Towne 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. Towne
retained an independent appraiser who subsequently valued the common stock at a
higher price. We will record $725,000 ($145,000 per year) of compensation
expense over the five-year vesting period of the options.

         Employee Severance Expense. We recorded $1.3 million relating to
severance benefits for two former employees during the nine months ended
September 30, 1999. The severance benefits consisted of $1.0 million in cash
payments and $270,000 related to the early vesting of previously unvested stock
options. There were no similar employee severance expenses during the
corresponding nine-month period ended September 30, 1998.

         Acquisition Expense. We incurred $2.3 million of expenses related to
the acquisition of Forseon in June 1999. The acquisition expenses represented
approximately 10% of revenues for the nine months ended September 30, 1999.
There were no similar acquisition expenses for the corresponding nine-month
period in 1998.

         General and Administrative. General and administrative expenses
increased from $4.0 million for the nine months ended September 30, 1998 to
$8.0 million for the nine months ended September 30, 1999. These costs
represented approximately 34% and 35% of revenues, respectively, for these two
periods. The increase in these expenses was primarily the result of increases
in the number of executive and administrative employees and the costs
associated with executive and administrative expenses related to our growth,
costs related to acquisitions, write-offs of uncollectible accounts receivable,
costs incurred for relocation to our new office facility and a one-time charge
relating to a sublease that was terminated early. Also, Towne 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
Towne continues to upgrade internal and financial reporting systems to enhance
management's ability to obtain and analyze information about its operations.



                                      16
<PAGE>   17

         Interest (Income) Expense, Net. Towne reported net interest expense of
$4,000 for the nine months ended September 30, 1998 and net interest income of
$435,000 for the nine months ended September 30, 1999. Net interest income is
the result of higher cash balances resulting from our secondary offering
completed in June 1999.

         Extraordinary Loss. The extraordinary loss reported for the nine
months ended September 30, 1998 related to the early extinguishment of debt in
the amount of $476,000. This extraordinary loss was comprised of $218,000
unamortized discount on a promissory note and $258,000 deferred debt issuance
costs. There were no similar extraordinary losses for the corresponding
nine-month period ended September 30, 1999.

         Income Taxes. As of December 31, 1998, Towne Services had net
operating losses (NOLs) of approximately $17.6 million for federal tax
purposes, which will expire beginning in 2011 if not utilized. We recognized
income tax benefits in the amounts of $28,000 and $354,000 for the nine months
ended September, 30, 1998 and 1999, respectively.

         During Towne's 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 our current and future
                  products and services;
         -        whether we can successfully transition our management and
                  retain key members of management;
         -        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 our 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 its inception, Towne has financed its operations primarily
through sales of its equity securities in private placements, its initial
public offering, its secondary offering and


                                      17
<PAGE>   18

through credit facilities. Through December 1997, Towne received aggregate net
proceeds of approximately $4.3 million from the sale of its common stock in
private transactions. In March 1998, Towne received net proceeds of
approximately $1.5 million from the sale of its Series A Preferred Stock in a
private placement. In July 1998, Towne received net proceeds of approximately
$27.0 million from the initial public offering of its common stock. In June
1999, Towne received net proceeds of approximately $33.0 million from its
secondary offering of its common stock and approximately $2.0 million from the
sale of its Series B preferred stock in a private placement.

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

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

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

         Net cash used in operating activities was $5.6 million for the nine
months ended September 30, 1998 and $9.0 million for the nine months ended
September 30,1999. Net cash used in operating activities for the nine months
ended September 30, 1998 represents $11.8 million net loss partially offset by
$179,000 increase in accounts payable and accrued expenses, $1.6 million growth
in accounts receivable, $177,000 increase in prepaid expenses and other assets
and $428,000 decrease in stock subscriptions receivable. Net cash used in
operating activities for the nine months ended September 30, 1999 represents
$9.4 million net loss partially offset by $1.5 million increase in accounts
payable and accrued expenses, $2.6 million increase in accounts receivable,
$798,000 increase in prepaid expenses and other assets and $850,000 increase in
short-term investments.

         Net cash used in investing activities was $1.8 million for the nine
months ended September 30, 1998 and $9.1 million for the nine months ended
September 30, 1999. Net cash used in investing activities for the nine months
ended September 30, 1998 represents an increase of $85,000 in notes due from
shareholders, $510,000 to acquire certain assets and liabilities of Credit
Collection Solutions, Inc. and $1.2 million for the purchases of computer
equipment and other capital equipment used in conducting Towne's business. Net
cash used in investing activities for the nine months ended September 30, 1999
represents an increase of $767,000 in notes receivable due from employees, $2.3
million of acquisition expenses related to the Forseon


                                      18
<PAGE>   19

and III transactions and $6.0 million for the purchase of computer equipment
and other capital equipment used in conducting Towne's business.

         Net cash provided by financing activities was $28.2 million and $30.1
million for the nine months ended September 30, 1998 and 1999, respectively.
Net cash provided by financing activities for the nine months ended September
30, 1998 consisted primarily of $2.4 million repayment of outstanding debt
obligations, $30.0 million of proceeds from the issuance of securities, and
$633,000 of proceeds from notes payable obligations. Net cash provided by
financing activities for the nine months ended September 30, 1999 consisted
primarily of $5.4 million for the repayment of outstanding short term debt
obligations, $66,000 of proceeds from stock option exercises and $35.0 million
of proceeds from the issuance of securities.

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 our affected
customers. We have conducted tests on our proprietary point of sale terminals
and connections and transaction processing software and believe that our TOWNE
CREDIT, TOWNE FINANCE , CASHFLOW MANAGER, and COLLECTION WORKS products and the
related network connections we maintain are able to process dates after December
31, 1999. We rely on several information technology systems including the
Charter System software, which is licensed to customers, and our mainframe-based
forecasting system. We have completed the remediation and testing of the Charter
System, and 98% of our Charter System clients are now using the remediated
version. The remaining 2% of our Charter System clients are unable to use the
remediated version at this time because they have not completed necessary
hardware upgrades. Year 2000 compliance testing on our mainframe-based
forecasting system was completed on July 1, 1999 and we believe that this
forecasting system has been remediated. We have implemented the remediated
version of this mainframe-based forecasting system and have experienced no
significant problems with the remediated system.

         We transmit data to and from our clients electronically. We have tested
these electronic data transmissions and reasonably expect that they will
function normally after December 31, 1999; however, a failure of these data
transmissions could negatively impact our ability to operate. We also use
certain third party software such as Microfocus software development tools and
Windows(R) in our operations. We have completed the assessment of our third
party software and have determined that this software meets Year 2000 compliance
standards. We have also completed an assessment of our internal workstations and
have remediated or replaced any workstations affected by Year 2000 problems. The
cost to the Company for the remediation or replacement of these workstations was
not material.

         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


                                      19
<PAGE>   20

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 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 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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 will not have a
material impact on our financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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


                                      20
<PAGE>   21

Changes in interest rates could decrease our interest income and could make it
more costly to borrow money in the future and may impede our future acquisition
and growth strategies if management determines that the costs associated with
borrowing funds are too high to implement these strategies.


                                      21
<PAGE>   22

                           PART II. OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

                           On October 12, 1999, a purported securities class
                  action lawsuit was filed by an individual shareholder against
                  Towne and three of its officers in the United States District
                  Court for the Northern District of Georgia, Atlanta Division.
                  No class has yet been certified. The complaint alleges that
                  Towne should have disclosed in the prospectus used for its
                  secondary public offering in June 1999 that it allegedly
                  experienced serious problems with its network infrastructure
                  and processing facilities during the move of its corporate
                  headquarters in June 1999, and that these problems allegedly
                  led to a higher than usual number of customers terminating
                  their contracts during the second quarter. The complaint seeks
                  an unspecified award of damages. Towne believes that the
                  allegations in the complaint are without merit and intends to
                  defend the lawsuit vigorously.

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS

                           In June 1999, we completed a secondary public
                  offering of 4,500,000 shares of common stock at an offering
                  price to the public of $7.125 per share and on July 20, 1999,
                  675,000 shares of common stock were issued and sold pursuant
                  to an underwriters' over-allotment provision in connection
                  with this public offering. The total proceeds to Towne from
                  the public offering, net of underwriting discounts and
                  offering expenses, were approximately $33.0 million.

                           In July 1999, Towne issued 81,016 shares of its
                  common stock, together with cash payments of approximately
                  $1.0 million, to former shareholders of Imaging Institute,
                  Inc. in exchange for all of the outstanding stock of Imaging
                  Institute, Inc. The recipients of stock in the transaction
                  also received the right to resell the shares to Towne at a
                  price of $9.50 per share upon the first anniversary of the
                  acquisition of Imaging Institute, Inc. if the average trading
                  price of Towne's common stock for the seven days preceding the
                  anniversary is less than $9.50 per share.

ITEM 3.                    DEFAULTS UPON SENIOR SECURITIES

                  None

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

                  None

ITEM 5.                    OTHER INFORMATION

                  None



                                      22
<PAGE>   23

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

A)       EXHIBITS

3.1       Amended and Restated Articles of Incorporation, as filed with the
          Secretary of the State of Georgia on July 29, 1998.*
3.2       Amended and Restated Bylaws, effective May 19,1998.*
3.3       Articles of amendment to the Amended and Restated Articles of
          Incorporation of Towne Services Inc., as filed with the Secretary of
          State of Georgia on May 21, 1999.*
3.4       Amendment to the Amended and Restated Bylaws of Towne Services Inc.,
          effective May 21, 1999*
3.5       Articles of Amendment to the Amended and Restated Articles of
          Incorporation of Towne Services Inc., as filed with the Secretary
          of State of Georgia on June 11, 1999.*
4.1       See Exhibits 3.1 through 3.5 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.
10.1      Form of Promissory notes for executive officers.
27.1      Financial Data Schedule (for SEC use only).

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

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

B)           REPORTS ON FORM 8-K

             Form 8-K (No. 000-24695) filed with SEC on July 13, 1999 to report
             the completion of the merger of Towne Services, Inc. with Forseon
             Corporation, effective on June 30, 1999.

             Form 8-K (No.000-24695) filed with SEC on August 19, 1999 to report
             the resignation of Drew W. Edwards as Chairman, Chief Executive
             Officer and a director of Towne Services, Inc., effective on
             August 19, 1999.


                                      23
<PAGE>   24

                                   SIGNATURES

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


                                   TOWNE SERVICES, INC.

<TABLE>
<S>                                <C>
November 12, 1999                  /s/  Henry M. Baroco
-----------------                  ----------------------------------------------------
Date                               Henry M. Baroco
                                   Chief Executive Officer/President and Director
                                   (principal executive officer)


November  12, 1999                 /s/ Bruce F. Lowthers, Jr.
------------------                 ----------------------------------------------------
Date                               Bruce F. Lowthers, Jr.
                                   Executive Vice President and Chief Financial Officer
                                   (principal financial and accounting officer)
</TABLE>


                                      24