SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

         [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2001

                                       OR

         [  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from  to

                        Commission file number: 000-24695

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

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

     3950 Johns Creek Court, Suite 100,                      30024
              Suwanee, Georgia                            (Zip Code)
  (Address of principal executive offices)

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


         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 5,037,421 shares
outstanding at May 12, 2001.


<PAGE>


                               INDEX TO FORM 10-Q
<TABLE>
<CAPTION>

                                                                                                             PAGE
                                                                                                             ----
  PART I                   FINANCIAL INFORMATION

<S>                                                                                                       <C>
           Item 1.     Financial Statements

                       Condensed Consolidated Balance Sheets as of
                       December 31, 2000 and March 31, 2001                                                       1

                       Condensed Consolidated Statements of Operations for the Three Months ended
                       March 31, 2000 and 2001                                                                    2

                       Condensed Consolidated Statements of Cash Flows for the Three Months ended
                       March 31, 2000 and 2001                                                                    3

                       Notes to Condensed Consolidated Financial Statements                                       4

           Item 2.     Management's Discussion and Analysis of Financial Condition and Results of
                       Operations
                                                                                                                  6

           Item 3.     Quantitative and Qualitative Disclosures About Market Risk                                10


PART II                                   OTHER INFORMATION

           Item 1.     Legal Proceedings                                                                         10

           Item 3.     Defaults Upon Senior Securities                                                           12

           Item 6.     Exhibits and Reports on Form 8-K                                                          12


</TABLE>


<PAGE>

                          PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements


                              TOWNE SERVICES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      December 31, 2000 and March 31, 2001
<TABLE>
<CAPTION>

                                                                                     DECEMBER 31,         MARCH 31,
                                                                                         2000               2001
                                                                                  --------------------------------------
                                                                                        audited           unaudited


<S>                                                                                  <C>                <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                       $11,997,000        $10,530,000
     Investments                                                                         498,000                  -
     Accounts receivable, net of allowance
         for uncollectible accounts of  $542,000 and $530,000
         at December 31, 2000 and March 31, 2001, respectively                         2,137,000          1,888,000
     Notes receivable from employees                                                      93,000             95,000
     Other                                                                               486,000            536,000
                                                                                  --------------------------------------
         Total current assets                                                         15,211,000         13,049,000
                                                                                  --------------------------------------

PROPERTY AND EQUIPMENT, net                                                            7,932,000          7,545,000
NOTES RECEIVABLE FROM FORMER EMPLOYEES                                                   167,000            170,000
GOODWILL, net                                                                         13,004,000         12,544,000
OTHER INTANGIBLES, net                                                                   689,000            828,000
OTHER ASSETS, net                                                                        171,000            171,000
                                                                                  --------------------------------------
                                                                                     $37,174,000        $34,307,000
                                                                                  ======================================


CURRENT LIABILITIES:
     Accounts payable                                                                $   272,000        $    40,000
     Accrued liabilities                                                               3,719,000          2,999,000
     Dividends payable                                                                   254,000            294,000
     Deferred revenue                                                                    499,000            290,000
     Current portion of long-term debt                                                   270,000            292,000
                                                                                  --------------------------------------
         Total current liabilities                                                     5,014,000          3,915,000
                                                                                  --------------------------------------

LONG TERM DEBT                                                                           771,000            679,000

SHAREHOLDERS' EQUITY:
     Preferred stock, no par value; 20,000,000 shares authorized, 20,000 shares
         issued and outstanding at December 31, 2000 and March 31, 2001                1,880,000          1,880,000
     Common stock, no par value; 50,000,000 shares authorized, 5,497,864
         shares issued and 5,140,321 and 5,037,421 shares outstanding
         December 31, 2000 and March 31, 2001, respectively                           86,953,000         86,989,000
     Warrants outstanding                                                                161,000            161,000
     Accumulated deficit                                                             (56,976,000)       (58,445,000)
     Less treasury stock, at cost, 357,543 and 460,443 shares at December 31,
         2000 and March 31, 2001, respectively                                          (629,000)          (872,000)
                                                                                  --------------------------------------
         Total shareholders' equity                                                   31,389,000         29,713,000
                                                                                  --------------------------------------
                                                                                     $37,174,000        $34,307,000
                                                                                  ======================================

</TABLE>

                                       1

<PAGE>

                              TOWNE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               For The Three Months Ended March 31, 2000 and 2001


<TABLE>
<CAPTION>
                                                                                    FOR THE THREE
                                                                                    MONTHS ENDED
                                                                                      MARCH 31,
                                                                         ------------------------------------
                                                                               2000              2001
                                                                         ------------------------------------
                                                                                      unaudited

<S>                                                                      <C>               <C>
REVENUES                                                                    $6,700,000        $5,671,000

COSTS AND EXPENSES:
     Costs of processing, servicing and support                              2,063,000         1,923,000
     Sales and marketing                                                     4,990,000         3,134,000
     General and administrative                                              3,395,000         2,141,000
                                                                         ------------------------------------
         Total costs and expenses                                           10,448,000         7,198,000
                                                                         ------------------------------------
OPERATING LOSS                                                              (3,748,000)       (1,527,000)
                                                                         ------------------------------------

OTHER EXPENSES:
     Interest (income), net                                                   (389,000)         (122,000)
                                                                         ------------------------------------
         Total other expenses                                                 (389,000)         (122,000)
                                                                         ------------------------------------

Loss before provision (benefit) from income taxes                           (3,359,000)       (1,405,000)

Income tax expense (benefit)                                                         -            24,000


                                                                         ------------------------------------
NET LOSS                                                                   $(3,359,000)      $(1,429,000)
                                                                         ====================================

PREFERRED STOCK DIVIDENDS                                                      (40,000)          (40,000)

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                               $(3,399,000)      $(1,469,000)
                                                                         ====================================

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
     PER COMMON SHARE:

Basic                                                                    $       (0.62)     $      (0.29)
                                                                         ====================================

Diluted                                                                  $       (0.62)     $      (0.29)
                                                                         ====================================

Weighted Average Common Shares Outstanding                                   5,444,475         5,053,228
                                                                         ====================================

</TABLE>

                                       2

<PAGE>

                              TOWNE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               For the Three Months Ended March 31, 2000 and 2001


<TABLE>
<CAPTION>

                                                                                           FOR THE THREE
                                                                                            MONTHS ENDED
                                                                                             MARCH 31,
                                                                                  ---------------------------------
                                                                                       2000             2001
                                                                                  ---------------------------------
                                                                                             unaudited

<S>                                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                       $(3,359,000)    $(1,429,000)
     Adjustments to reconcile net loss to net cash used in operating activities:
         Depreciation                                                                   533,000         668,000
         Amortization of intangibles and goodwill                                       524,000         524,000
         Other                                                                          (76,000)         36,000
         Changes in operating assets and liabilities, net of assets acquired:
              Accounts receivable                                                     1,518,000         249,000
              Prepaid and other assets                                                 (227,000)        (50,000)
              Accounts payable                                                       (1,042,000)       (232,000)
              Accrued liabilities                                                       174,000        (720,000)
              Deferred revenue                                                         (330,000)       (209,000)
                                                                                  ---------------------------------
                  Total adjustments                                                   1,074,000         266,000
                                                                                  ---------------------------------
                  Net cash used in operating activities                              (2,285,000)     (1,163,000)
                                                                                  ---------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Net change in notes receivable from former employees                               350,000          (5,000)
     Purchase of short-term investments                                              (1,118,000)              -
     Proceeds from sale of short-term investments                                       850,000         498,000
     Purchase of property and equipment, net                                           (784,000)       (484,000)
     Other assets                                                                       (29,000)              -
     Acquisitions, net of cash acquired                                                (132,000)              -
                                                                                  ---------------------------------
                  Net cash provided by (used in) investing activities                  (863,000)          9,000
                                                                                  ---------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from exercise of stock options                                             24,000               -
     Repayment of debt                                                                  (62,000)        (70,000)
     Repurchase of common stock                                                               -        (243,000)
                                                                                  ---------------------------------
                  Net cash used in financing activities                                 (38,000)       (313,000)
                                                                                  ---------------------------------
NET DECREASE IN CASH                                                                 (3,186,000)     (1,467,000)
CASH AND CASH EQUIVALENTS, beginning of period                                       20,981,000      11,997,000
                                                                                  ---------------------------------
CASH AND CASH EQUIVALENTS, end of period                                            $17,795,000     $10,530,000
                                                                                  =================================

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes                                                        $           -   $      23,000
                                                                                  =================================
Cash paid for interest                                                            $      32,000   $      24,000
                                                                                  =================================
</TABLE>


                                       3

<PAGE>


                              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 businesses and banks in the United States. Towne
Services 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. Towne
Services uses this electronic gateway to deliver a variety of business and
management solutions using internet and telecommunication connections. Towne
Services also provides these solutions through its proprietary software housed
at its clients' locations.

         The Company's virtual credit card system processes the in-house credit
transactions of businesses and includes an automated receivables management
system that allows banks to quickly finance the working capital needs of their
business customers. Towne Services' merchandise planning system processes sales
and inventory transactions of businesses, giving business owners greater control
over inventory levels and the ability to make better inventory purchase
decisions and to improve cash flow 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 commercial businesses, and RMSA
Merchandise Planning System, which processes sales and inventory transactions
and provides merchandising information for specialty retail stores. Through the
use of the Company's products and services, 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 condensed consolidated financial statements for the
three months ended March 31, 2001 are unaudited. 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. Please
read these condensed consolidated financial statements in conjunction with the
financial statements and the notes to them included in the Company's most recent
annual report on Form 10-K filed with the SEC on April 2, 2001. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001 or for any other future periods.

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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


                                       4
<PAGE>


Revenue Recognition

         The Company's revenues are generated primarily through initial set-up
fees, discount fees, recurring monthly transaction processing fees and software
license fees. In response to the issuance of the Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," the Company recognizes revenues related to the initial set-up fees
on a deferred basis over the estimated life of the contract terms and in the
case of 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 Statement of
Position 97-2, "Software Revenue Recognition," as amended. The Company also
leases point of sale terminal equipment to banks under month-to-month operating
leases. Such operating lease revenues are recognized on a monthly basis as
earned.

Net Loss Per Share

         On November 20, 2000, the Board of Directors announced a one-for-five
reverse stock split of the Company's common stock. The reverse stock split was
effected for all shareholders of record as of the close of business on December
20, 2000. All references to the number of shares and per share amounts have been
adjusted retroactively to reflect the split.

4.       RECENT 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, 1999. The adoption of this statement on January 1, 2001
did not have a material impact on the Company's financial statements.

5.       SHAREHOLDERS' EQUITY

Preferred Stock

         In June 1999, the Company sold 20,000 shares of Series B Preferred
Stock and issued a warrant to purchase 6,000 shares of the Company's common
stock to Synovus Financial Corporation for $2.0 million. The shares are
convertible into common stock at a conversion price equal to $45.40. 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 $1.8 million
and $120,000 to the preferred stock and warrants, respectively, 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 accrued
balance of Series B Preferred Stock dividends is $254,000 and $294,000 at
December 31, 2000 and March 31, 2001, respectively.

Warrants

         In connection with the issuance of the Series B Preferred Stock, the
Company issued a warrant to purchase 6,000 shares of the Company's common stock
for $45.40 per share, which is exercisable beginning 12 months after the issue
date.


                                       5
<PAGE>

The term of the warrant is five years. The Company allocated $120,000 to the
warrant based on the relative fair value of the warrant using the Black-Scholes
pricing method.

6.       POTENTIAL MERGER

         On March 13, 2001, the Company signed a letter of intent to merge with
Private Business, Inc. Upon completion of due diligence, the Company signed a
merger agreement on April 12, 2001. The merger is subject to customary closing
conditions, including the approval of the shareholders of both companies, and is
expected to close in the first half of 2001.



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

         This interim 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. Those statements involve risks,
uncertainties and assumptions, including industry and economic conditions,
competition and other factors discussed in this and our other filings with the
SEC. If one or more of this risks or uncertainties materialize or underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. See "Disclosure Regarding Forward-Looking Statements" at the end of
this Item for a description of some of the important factors that may affect
actual outcomes.

Overview

         Towne Services, Inc. provides services and products that process sales
and payment information and related financing transactions for businesses and
banks in the United States. We deliver these services and products online via an
electronic hub, or gateway, that links business and bank customers with us and
other providers of products and services that can benefit these customers. We
use this electronic gateway to deliver a variety of business and management
solutions using Internet and telecommunication connections. We also provide
these solutions through our proprietary software housed at our clients'
locations. We generate revenues through the deployment and use of three primary
products: TOWNE CREDIT(R), which processes consumer credit transactions for
small and medium size businesses; TOWNE FINANCE(R) and CASHFLOW MANAGER(SM),
which process business-to-business credit transactions for commercial
businesses; and RMSA Merchandise Planning service, which processes sales and
inventory transactions and provides merchandising information for specialty
retail stores; and ancillary services related to 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.

         Bank set-up fees include charges for installation, implementation, and
training of our bank and business customers. In response to the issuance of the
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB No. 101") we began recognizing all revenues from set-up fees
on a deferred basis over the estimated life of the contract terms and for
certain cancellation clauses and/or return guarantees until the guarantee period
is expired. The effects of this change in accounting principle were applied
cumulatively as of the beginning of 1999. 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.

         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. The business' customer pays fees to the bank for amounts
owed by the customer for purchases made on in-house credit, and in some
instances pays interest to the bank. 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


                                       6
<PAGE>

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

         On December 20, 2000, we effected a one-for-five reverse split of the
issued and outstanding shares of our common stock. We have restated the offering
prices and numbers of shares issued in each transaction below to take the
reverse split into account.

         For the three months ended March 31, 2000 and 2001, we had net losses
attributable to common shareholders of approximately $3.4 million, and $1.5
million, respectively. As of December 31, 2000, we had an accumulated deficit of
$57.0 million, of which $17.1 million related to 2000. Of this $17.1 million,
$5.3 million resulted from one-time charges, including:

         o    $2.7 million in fixed asset write-offs,
         o    $1.3 million related to Imaging Institute goodwill impairment, and
         o    $763,000 for a writedown of CollectionWorks assets to their net
              realizable value.

         The deficit for 2000 also included a one time note receivable write-off
of $473,000. As of March 31, 2001, our accumulated deficit was $58.4 million,
which included $40,000 for preferred dividends for the first quarter.

         Our total revenues were approximately $6.7 million and $5.7 million for
the three months ended March 31, 2000 and 2001, respectively. We have
experienced net losses in each of these periods and expect to continue to incur
losses for the foreseeable future. The number of our employees at March 31, 2000
was 294, compared to 216 employees at March 31, 2001. The majority of this
reduction in our workforce occurred in our sales and customer service
departments, which are reported under sales and marketing and costs of
processing, servicing and support, respectively. We anticipate that our overall
operating expenses will decrease as a result of our reduction in labor force,
and some components of our operating expenses may be more significantly affected
than other components. 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 these risks and difficulties
or that we will achieve profitability in the future.

Results of Operations

Comparison of three months ended March 31, 2000 and 2001

         Revenues. Our revenues decreased from $6.7 million for the three months
ended March 31, 2000 to $5.7 million for the three months ended March 31, 2001.
Recurring revenues decreased from $5.5 million for the three months ended March
31, 2000 to $5.0 million for the three months ended March 31, 2001. During these
two periods, recurring revenue accounted for approximately 82% and 88% of total
revenues, respectively. Set-up fees accounted for approximately 11% and 7% of
total revenues, respectively. Other revenues accounted for approximately 7% and
5% of total revenues, respectively. The decrease in revenues during these
periods is attributed primarily to a decrease in bank set-up fee revenues and
software license fee revenues and the related recurring revenue associated with
new business sales.

         Costs of Processing, Servicing, and Support. Costs of processing,
servicing and support decreased from $2.1 million in 2000 to $1.9 million in
2001. These costs were approximately 31% and 34% of total revenues,
respectively, for these two periods. Costs of processing, servicing and support
decreased due to new implementation of budget processes in 2001 and increased
operational efficiencies achieved over the past year.


                                       7
<PAGE>


         Sales and Marketing. Sales and marketing expenses decreased from $5.0
million in 2000 to $3.1 million in 2001. Sales and marketing expenses were
approximately 74% and 54% of total revenues, respectively, during these two
periods. The decrease in the dollar amount of these expenses is primarily the
result of the decrease in the number of sales personnel, related business travel
expenses, and recruiting expenses to attract new sales employees as well as the
implementation of budget processes in 2001.

         General and Administrative. General and administrative expenses
decreased from $3.4 million in 2000 to $2.1 million in 2001. These costs
represented approximately 51% and 38% of total revenues, respectively, for these
two periods. The decrease in these expenses was primarily the result of a
decrease in the number of overall employees and the implementation of a formal
budgetary process with improved controls.

         Interest Expense (Income), Net. We reported net interest income of
$389,000 in 2000 and $122,000 in 2001. Net interest income decreased as a result
of a decrease in the overall balance in our interest bearing instruments and a
decrease in the interest rates offered on those instruments.

         Income Taxes. As of December 31, 2000, we had net operating loss carry
forwards ("NOLs") of approximately $40.5 million for federal tax purposes, which
will expire if not utilized beginning 2011. Due to changes in our ownership
structure, our use of NOLs as of October 1, 1997 of approximately $2.5 million
will be limited to approximately $550,000 in any given year to offset future
taxes. In addition, due to our acquisitions during 1998 and 1999, NOLs of
approximately $5.3 million will be limited to approximately $1.6 million in any
given year to offset future taxes. If we do not realize taxable income in excess
of the limitation in future years, certain NOLs will be unrealizable. Due to the
uncertainty of realization, we have provided a valuation allowance against the
net deferred tax assets at March 31, 2001.

Liquidity and Capital Resources

         We have financed our operations primarily through sales of equity
securities in private placements, our initial public offering, our second public
offering, and through credit facilities. In June 1999, we received net proceeds
of approximately $33.0 million from a second public offering of our common stock
and approximately $2.0 million from the sale of our Series B preferred stock in
a private placement.

         In June 1999, we 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, we 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, we 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.

         In November 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
$21,000 includes interest expense of approximately $6,700, or 10.5%, of the
principal. The amount of the minimum monthly lease obligation, consisting of
principal and interest, is approximately $388.

         Net cash used in operating activities was approximately $2.3 million
and $1.2 million for the three months ended March 31, 2000 and 2001,
respectively. Net cash used in operating activities for the three months ended
March 31, 2000 primarily represents a $3.4 million net loss, partially offset by
(a) a $1.1 million decrease in accounts receivable, (b) $1.1 million of
depreciation and amortization expenses, and (c) a $459,000 provision for
doubtful accounts. Net cash used in

                                       8


<PAGE>

operating activities for that period also represents a $867,000 decrease in
accounts payable and accrued expenses and a $330,000 decrease in deferred
revenue. Net cash used in operating activities for the three months ended March
31, 2001 represents (a) a $1.4 million net loss, (b) a $720,000 decrease in
accrued liabilities, (c) a $232,000 decrease in accounts payable, and (d) a
$209,000 decrease in deferred revenue, offset by (e) $1.2 million of
depreciation and amortization, and (f) a $249,000 decrease in accounts
receivable.

         Net cash provided by (used in) investing activities was approximately
($863,000) and $9,000 for the three months ended March 31, 2000 and 2001,
respectively. Net cash used in investing activities for the three months ended
March 31, 2000 primarily represents (a) a net increase of $268,000 in short-term
investments, (b) $813,000 of expenses for the purchase of computer equipment and
other capital equipment used in conducting our business, (c) an increase of
$132,000 of expenses related to acquisitions, and (d) a $350,000 decrease in
notes receivable from shareholders. For the three months ended March 31, 2001,
net cash provided by investing activities represents $498,000 from the sale of
investments, offset by $484,000 in additional equipment purchases and $5,000
increase in notes receivable.

         Net cash used for financing activities was approximately $38,000 and
$313,000 for the three months ended March 31, 2000 and 2001, respectively. Net
cash used for financing activities for the three months ended March 31, 2000
consisted primarily of $62,000 related to the repayment of short-term debt
obligations offset by proceeds of $24,000 received from stock option exercises.
Net cash used for financing activities for the three months ended March 31, 2001
represents $243,000 in stock repurchases and $70,000 in repayment of short-term
debt obligations.

         On June 27, 2000 our board of directors authorized the repurchase of up
to $3.0 million of our common stock in the open market at prevailing prices,
subject to normal trading restrictions. There is no expiration date for the
program. Under this program, we purchased 383,143 shares through December 31,
2000. As of December 31, 2000, 357,543 shares were in the treasury at a cost of
$629,000. In January 2001, we purchased an additional 102,900 shares at a cost
of $243,000.

         We believe that we will have sufficient cash flows from operations and
available borrowings to meet our cash needs for 2001 and beyond.

Recent 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, 1999. The adoption of this statement on January 1, 2001
did not have a material impact on our financial statements.

Disclosure Regarding Forward-Looking Statements

         This interim report contains several "forward-looking statements"
concerning our operations, performance, 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
that are subject to significant uncertainties, many of which are beyond our
control. 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 these results to
differ materially include, but are not limited to:

         o        whether our management team can attain our goals and improve
                  our financial condition;


                                       9
<PAGE>


         o        the possible negative impact of lawsuits on our stock price
                  and ability to meet our sales and other business objectives;

         o        the distraction of management's time and attention,
                  increased legal and other costs, and other possible adverse
                  effects on our business and operations if we again face a
                  potential delisting from the Nasdaq National Market for
                  failure to maintain the continued listing requirements;

         o        market acceptance of new products and services;

         o        whether we will be able to achieve or maintain profitability
                  or other desired results of operations;

         o        other factors discussed in this Annual Report and in our
                  filings with SEC, including our registration statements on
                  Form S-4 (No. 333-76493) as declared effective on June 10,
                  1999, and Form S-1 (No. 333-76659) declared effective on June
                  23, 1999, and the "Risk Factors" sections contained therein;
                  and

         o        risks related to our pending merger with Private Business,
                  Inc.

         In addition, the amount of revenue 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 revenue 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 expense varies with
revenues.

Item  3.          Quantitative and Qualitative Disclosures About Market Risk

         We do not use derivative financial instruments in our operations or
investments and do not have significant operations that are 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, our outstanding debt obligations have a fixed rate of interest and,
therefore, we do not have a significant risk due to potential fluctuations in
interest rates for loans at this time.


PART II.  OTHER INFORMATION

Item 1.           Legal Proceedings

         Except for the two lawsuits described below, we are not a party to, and
none of our material properties is subject to, any material litigation other
than routine litigation incidental to our business.

         1. In re Towne Services, Inc./Securities Litigation; Case No.
1:99-CV-2641-BBM; filed in U.S. District Court, Northern District of Georgia on
January 31, 2001. Before being combined into one lawsuit as explained below,
this lawsuit was previously known prior to consolidation as (a) Thomas J. Golab
v. Towne Services, Inc., Drew W. Edwards, Henry M. Baroco, and Bruce F.
Lowthers; Case No. 1:99-CV-2641-JTC; filed in U.S. District Court, Northern
District Court of Georgia, on October 12, 1999; and (b) James E. Bolen v. Towne
Services, Inc., Drew W. Edwards, Henry M. Baroco, and Bruce F. Lowthers; Case
No. 1:99-CV-3067; filed in U.S. District Court, Northern District of Georgia, on
November 24, 1999.

         The two original suits are purported securities class actions brought
by the named individual shareholders against Towne, two of its former officers
and a current officer. No class has yet been certified. The complaints allege,
among other things, that Towne should have disclosed in the prospectus used for
its secondary public offering in June 1999 that it allegedly

                                       10

<PAGE>

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 complaints seek an
unspecified awards of damages. The court recently granted a motion to
consolidate the Golab and Bolen cases and the plaintiffs have filed an amended
complaint. This amended complaint combines the claims in the Golab and Bolen
cases. We have filed a motion to dismiss for failure to state a claim, and the
plaintiffs have filed an answer to our motion. Discovery has not yet commenced
and will be stayed pending the court's ruling on the motion to dismiss. We
believe that the allegations in the complaints are without merit and intend to
defend the lawsuits vigorously. Our directors and executive officers liability
insurance carrier is presently providing a defense under a reservation of
rights.

         2. Edward H. Sullivan, Jr. and Lisa Sullivan v. Towne Services, Inc.,
Towne Services, Inc., as the successor to Banking Solutions, Inc., Banc
Leasing.Com, Inc., the successor to BSI Capital Funding, Inc., Moseley &
Standerfer, P.C., David R. Frank, Don G. Shafer, and Shannon W. Webb; filed in
the District Court of Collin County, Texas; Judicial District 199; Civil Action
No. 199-1848-99, on or about November 15, 1999.

         This lawsuit arises out of Towne's acquisition of Banking Solutions,
Inc. ("BSI") through a stock purchase made by its subsidiary, BSI Acquisition
Corp., in December 1998. Plaintiff Edward Sullivan, Jr. was employed by BSI.
Sullivan alleges, among other things, that he had a buy-out agreement with BSI
and certain BSI shareholders under which, in certain circumstances, Sullivan was
to receive a commission based on the gross sales price paid by any purchaser of
BSI. Sullivan contends that BSI and the other shareholders allegedly
fraudulently induced him to release them from the agreement by fraudulently
misrepresenting the gross sales price paid by Towne's subsidiary in the stock
purchase. Sullivan contends that Towne is liable to him as the successor to BSI,
and also for allegedly tortuously interfering with the agreement. Sullivan also
contends Towne conspired with the other defendants to misrepresent the "gross
purchase price." We deny all allegations of the petition. Mr. Sullivan and his
wife seek an unspecified amount of damages including a percentage of the gross
sales price paid by Towne's subsidiary for the acquisition of BSI, as well as
punitive damages, attorneys' fees, and pre-judgment and post-judgment interest.
We have filed a motion for summary judgment seeking dismissal of all claims
against us. The court has not yet ruled on the motion, and discovery is ongoing.
We believe that the allegations in the complaint are without merit and intend to
defend the lawsuit vigorously. We also contend that we are entitled to
indemnification from the BSI shareholders for our expenses in defending this
action. Specifically, the BSI stock purchase agreement provides that the BSI
shareholders will indemnify us against any claims, damages, liabilities, costs
and expenses (including reasonable attorneys' and accountants' fees and
expenses) we suffer that arise out of any breach of the representations made by
BSI in the agreement, provided that the aggregate of all claims, etc. exceeds
$100,000.

         3. Banking Solutions, Inc. and Towne Services, Inc. v. The Clipper
Group, Mike Mansfield, Jim Mumford, Myron E. Sappington, Stan Goudeau, Jim Peil
and Vern Hargrave; Case No. 01-211-CT77, filed in the District Court of
Williamson County, Texas, 277th Judicial District on April 24, 2001, and
referred to arbitration by court order dated May 4, 2001, and currently in
arbitration before the American Arbitration Association, Dallas, Texas.

         Towne and its wholly owned subsidiary, BSI, filed this action against
six former BSI sales representatives and The Clipper Group, a company founded by
one or more of those former sales representatives. Towne contends that the
defendants have formed a competing company, and are marketing a competing
product, to Towne's bank customers, in violation of the named individuals'
employment contracts, and in particular, in violation of trade secret and
confidentiality provisions and non-solicitation of customer and employee
provisions contained in those contracts. Towne has asserted claims against these
defendants for misappropriation of trade secrets (including both customer
information and confidential information regarding Towne's software product),
misappropriation of confidential information, breach of employment contacts,
tortious interference with employment contracts, tortious interference with
licensing agreements, tortious interference with customer contracts, breach of
the covenant of good faith and fair dealing, and conspiracy. Towne seeks actual
and punitive damages, injunctive relief, and attorney's fees and costs. On or
about April 30, 2001, the defendants answered, denied liability, moved to compel
arbitration, and asserted a counterclaim against Towne for alleged fraudulent
inducement of the employment contracts at issue. The defendants seek an
unspecified amount of actual damages, punitive damages, attorney's fees,
interests, and a declaration that the employment agreements at issue are not
enforceable. Towne believes that the allegations in the counterclaim are without
merit and it intends to defend the counterclaim vigorously. Towne also intends
to vigorously pursue its claims against these defendants.


                                       11
<PAGE>


Item 3.  Defaults Upon Senior Securities

         The holders of Series B Preferred Stock are entitled to receive
cumulative cash dividends at the rate of $2.00 per share of Series B Preferred
Stock payable quarterly on March 31, June 30, September 30 and December 31 in
each year. The accrued balance of Series B Preferred Stock dividends is $294,000
at March 31, 2001.


Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit
No.               Description
-------           -----------

10.7       --    Employment Agreement by and between Towne Services, Inc. and
                 Henry M. Baroco dated February 9, 2001.*

10.8       --    Employment Agreement by and between Towne Service, Inc. and
                 Randall S. Vosler dated February 9, 2001.*


*  Incorporated by reference to the exhibits to the Company's Annual Report on
   Form 10-K (No. 333-53341) filed with the SEC on April 2, 2001.


(b)  Reports on Form 8-K

         None




                                       12
<PAGE>



                                   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.


May 14, 2001                   /s/  G.  Lynn Boggs
------------                   ------------------------------------------------
Date                           G.  Lynn Boggs
                               Chairman of the Board and Chief Executive Officer
                               (principal and executive officer)


May 14, 2001                   /s/ Randall S. Vosler
------------                   ------------------------------------------------
Date                           Randall S. Vosler
                               Chief Financial Officer and Senior Vice President
                               (principal financial and accounting officer)


                                       13

<PAGE>

                                  Exhibit Index



Exhibit No.             Description
----------              -----------

10.7                    Employment Agreement by and between Towne Services, Inc.
                        and Henry M. Baroco dated February 9, 2001.*


10.8                    Employment Agreement by and between Towne Service, Inc.
                        and Randall S. Vosler dated February 9, 2001.*



*                Incorporated by reference to the exhibits to the Company's
                 Annual Report on Form 10-K (No. 333-53341) filed with the SEC
                 on April 2, 2001.