<PAGE>   1


                       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, 2000

                                       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: 27,464,015 shares
outstanding at May 10, 2000.



<PAGE>   2

                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                                                                               PAGE
                                                                                                                               ----
            <S>                <C>                                                                                             <C>
            PART I             FINANCIAL INFORMATION

              Item 1.          Financial Statements

                               Condensed Consolidated Balance Sheets as of
                               December 31, 1999 and March 31, 2000                                                              3

                               Condensed Consolidated Statements of Operations for the Three Months ended March 31,
                               1999 and 2000                                                                                     4

                               Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31,
                               1999 and 2000                                                                                     5

                               Notes to Condensed Consolidated Financial Statements                                              6

               Item 2.         Management's Discussion and Analysis of Financial Condition and Results of Operations            11

               Item 3.         Quantitative and Qualitative Disclosures About Market Risk                                       18


          PART II              OTHER INFORMATION

               Item 1.         Legal Proceedings                                                                                19

               Item 2.         Change in Securities and Use of Proceeds                                                         19

               Item 3.         Defaults Upon Senior Securities                                                                  19

               Item 4.         Submission of Matters to a Vote of Security Holders                                              19

               Item 5.         Other Information                                                                                19

               Item 6.         Exhibits and Reports on Form 8-K                                                                 20
</TABLE>


                                       2
<PAGE>   3

                          PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                              TOWNE SERVICES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      DECEMBER 31, 1999 AND MARCH 31, 2000

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,        MARCH 31,
                                                                                                    1999               2000
                                                                                               ---------------------------------
                                                                                                   AUDITED           UNAUDITED
                                     ASSETS
<S>                                                                                             <C>                <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                                     $ 20,981,000       $ 17,795,000
  Investments                                                                                      1,350,000          1,618,000
  Accounts receivable, net of allowance
     for uncollectible accounts of $532,000 and $599,000
     at December 31, 1999 and March 31, 2000, respectively                                         5,289,000          3,771,000
  Notes receivable from employees                                                                    509,000            153,000
  Other                                                                                              600,000            671,000
                                                                                               ---------------------------------
       Total current assets                                                                       28,729,000         24,008,000
                                                                                               ---------------------------------

PROPERTY AND EQUIPMENT, net                                                                       10,540,000         10,753,000
NOTES RECEIVABLE FROM EMPLOYEES                                                                      804,000            810,000
GOODWILL, net                                                                                     15,905,000         15,583,000
OTHER INTANGIBLES, net                                                                             1,034,000          1,046,000
OTHER ASSETS, net                                                                                    725,000            882,000
                                                                                               ---------------------------------
                                                                                                $ 57,737,000       $ 53,082,000
                                                                                               =================================


                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                                              $  1,516,000       $    475,000
  Accrued liabilities                                                                              1,808,000          2,078,000
  Accrued compensation                                                                               950,000            898,000
  Accrued termination costs                                                                          230,000            186,000
  Dividends payable                                                                                   95,000            134,000
  Deferred revenue                                                                                 2,207,000          1,878,000
  Current portion of long-term debt                                                                  231,000            237,000
                                                                                               ---------------------------------
     Total current liabilities                                                                     7,037,000          5,886,000
                                                                                               ---------------------------------

LONG TERM DEBT                                                                                     1,028,000            975,000
REDEEMABLE COMMON SHARES                                                                             770,000            770,000

SHAREHOLDERS' EQUITY:
  Preferred stock, $100 par value; 20,000,000 shares authorized, 20,000 shares
    issued and outstanding at December 31, 1999 and March 31, 2000                                 1,880,000          1,880,000
  Common stock, no par value; 50,000,000 shares authorized, 27,197,722 and
     27,230,592 issued and outstanding December 31, 1999 and March 31,
     2000, respectively                                                                           86,690,000         86,638,000
  Warrants outstanding                                                                               161,000            161,000
  Accumulated deficit                                                                            (39,829,000)       (43,228,000)
                                                                                               ---------------------------------
     Total shareholders' equity                                                                   48,902,000         45,451,000
                                                                                               ---------------------------------
                                                                                                $ 57,737,000       $ 53,082,000
                                                                                               =================================
</TABLE>

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


                                       3
<PAGE>   4

                              TOWNE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000


<TABLE>
<CAPTION>
                                                                                                        FOR THE THREE
                                                                                                         MONTHS ENDED
                                                                                                           MARCH 31,
                                                                                               ---------------------------------
                                                                                                   1999                 2000
                                                                                               ---------------------------------
                                                                                                           UNAUDITED

<S>                                                                                             <C>                <C>
REVENUES                                                                                        $  7,493,000       $  6,700,000

COSTS AND EXPENSES:
  Costs of processing, servicing and support                                                       1,520,000          2,063,000
  Research and development                                                                           249,000                 --
  Sales and marketing                                                                              5,285,000          4,990,000
  General and administrative                                                                       2,170,000          3,395,000
                                                                                               ---------------------------------
     Total costs and expenses                                                                      9,224,000         10,448,000
                                                                                               ---------------------------------
OPERATING LOSS                                                                                    (1,731,000)        (3,748,000)
                                                                                               ---------------------------------

OTHER EXPENSES:
  Interest income, net                                                                               (72,000)          (389,000)
                                                                                               ---------------------------------
     Total other expenses                                                                            (72,000)          (389,000)
                                                                                               ---------------------------------

Loss before provision (benefit) from income taxes                                                 (1,659,000)        (3,359,000)

Income tax expense (benefit)                                                                        (114,000)                --


                                                                                               ---------------------------------
NET LOSS                                                                                        $ (1,545,000)      $ (3,359,000)
                                                                                               =================================

PREFERRED STOCK DIVIDENDS                                                                                 --            (40,000)

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                                                    $ (1,545,000)      $ (3,399,000)
                                                                                               =================================

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
   PER COMMON SHARE:
Basic                                                                                           $      (0.07)      $      (0.12)
                                                                                               =================================
Diluted                                                                                         $      (0.07)      $      (0.12)
                                                                                               =================================


Weighted Average Common Shares Outstanding                                                        21,840,772         27,222,373
                                                                                               =================================
</TABLE>

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


                                       4
<PAGE>   5

                              TOWNE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000

<TABLE>
<CAPTION>
                                                                                                        FOR THE THREE
                                                                                                         MONTHS ENDED
                                                                                                           MARCH 31,
                                                                                               ---------------------------------
                                                                                                    1999               2000
                                                                                               ---------------------------------
                                                                                                           UNAUDITED
<S>                                                                                             <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                                      $ (1,545,000)      $ (3,360,000)
  Adjustments to reconcile net loss to net cash used in operating activities:
      Compensation expense recognized for stock for stock option grants                               36,000            (76,000)
      Depreciation                                                                                   195,000            533,000
      Amortization of intangibles and goodwill                                                       426,000            524,000
      Provision for doubtful accounts                                                                 16,000            459,000
      Changes in operating assets and liabilities, net of assets acquired:
           Accounts receivable                                                                    (1,740,000)         1,059,000
           Prepaid & other assets                                                                   (624,000)          (227,000)
           Accounts payable                                                                        1,195,000         (1,041,000)
           Accrued liabilities                                                                      (294,000)           270,000
           Accrued compensation                                                                      386,000            (52,000)
           Deferred revenue                                                                          290,000           (330,000)
           Accrued termination costs                                                                      --            (44,000)
                                                                                               ---------------------------------
                   Total adjustments                                                                (114,000)         1,075,000
                                                                                               ---------------------------------
                   Net cash used in operating activities                                          (1,659,000)        (2,285,000)
                                                                                               ---------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net change in notes receivable from shareholders                                                    (5,000)           350,000
  Purchase of short-term investments                                                                      --         (1,118,000)
  Proceeds from sale of short-term investments                                                            --            850,000
  Purchase of property and equipment, net                                                         (1,244,000)          (784,000)
  Other assets                                                                                            --            (29,000)
  Acquisitions, net of cash acquired                                                                (153,000)          (132,000)
                                                                                               ---------------------------------
                     Net cash used in investing activities                                        (1,402,000)          (863,000)
                                                                                               ---------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from exercise of stock options                                                             19,000             24,000
  Repayment of debt                                                                               (5,056,000)           (62,000)
                                                                                               ---------------------------------
                      Net cash used in financing activities                                       (5,037,000)           (38,000)
                                                                                               ---------------------------------
NET DECREASE IN CASH                                                                              (8,098,000)        (3,186,000)
CASH AND CASH EQUIVALENTS, beginning of period                                                    14,060,000         20,981,000
                                                                                               ---------------------------------
CASH AND CASH EQUIVALENTS, end of period                                                        $  5,962,000       $ 17,795,000
                                                                                               =================================

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes                                                                      $         --       $         --
                                                                                               =================================
Cash paid for interest                                                                          $     42,000       $     32,000
                                                                                               =================================
</TABLE>

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


                                       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 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.

         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 forecasting system
processes sales and inventory transactions of small businesses, giving small
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
Forecast, which processes sales and inventory transactions and provides
merchandising information for specialty retail stores.

         As discussed below in Note 6, the Company acquired Forseon Corporation
("Forseon") in 1999 under the pooling-of-interests basis in accounting, and,
accordingly the Company's historical consolidated financial statements have been
restated as if the acquisition occurred as of the earliest period presented.

2. BASIS OF PRESENTATION

UNAUDITED INTERIM FINANCIAL INFORMATION

         The accompanying condensed consolidated financial statements for the
three months ended March 31, 2000 are unaudited. The historical financial
information has been restated for the effects of the Forseon acquisition, 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. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's most recent
Form 10-K report filed with the Security and Exchange Commission on March 30,
2000. The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000 or for any other future periods.


                                       6
<PAGE>   7


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.

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, 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 ("SAB") 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. Prior to the adoption of SAB No. 101, the Company
recognized initial set-up fees upon the execution of the related contract.
Transaction fees are recognized on a monthly basis as earned. Revenues related
to software license fees and Agent Agreements for the re-sales of 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 banks under month-to-month operating leases. Such
operating lease revenues are recognized on a monthly basis as earned.

4.  RECENT  ACCOUNTING  PRONOUNCEMENTS

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


                                       7
<PAGE>   8

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

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

         As noted above in Note (3), the Company adopted SAB No. 101 effective
as of the beginning of the fourth quarter ended December 31, 1999.

5.  PUBLIC OFFERING

         In June 1999, the Company completed a second 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 this public
offering, net of underwriting discounts and offering expenses, were
approximately $33.0 million.

6.  ACQUISITIONS

         In June 1999, the Company acquired Forseon Corporation, 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


                                       8
<PAGE>   9

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., a Bloomington, Minnesota-based
company, for approximately $1.2 million cash and the issuance of 81,016 shares
of the Company's common stock. Imaging Institute'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. Pursuant to
the terms of the registration rights agreement that we entered into in
connection with the Imaging Institute acquisition, we are required to purchase
from the Imaging Institute shareholders, upon their request, up to 81,016 shares
of our common stock at a price of $9.50 per share on the one year anniversary of
this transaction. In connection with the purchase of Imaging Institute, 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

         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.

         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.

8.  SHAREHOLDERS' EQUITY

PREFERRED STOCK

         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 Corporation for $2.0


                                       9
<PAGE>   10

million. 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 $1.8 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 $135,000 at March 31, 2000.

WARRANTS

         In connection with the issuance of the Series B Preferred Stock, the
Company issued a warrant to purchase 30,000 shares of the Company's common stock
for $9.08 per share, which 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.

9.  RELATED-PARTY TRANSACTIONS

         In July 1999, the Company loaned its President $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 former 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.


                                       10
<PAGE>   11


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 these forward-looking statements. Actual results may differ materially
from those expressed or implied by these forward-looking statements. See
"Disclosures 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 the
Company 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. Towne
Services currently generates revenues through the deployment and use of four
primary products: 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; RMSA Forecast, 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
Securities and Exchange Commission 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 the fourth quarter of
1999. Prior to the adoption of SAB No. 101, we recognized set-up fees upon
execution of the related contract. 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. In addition, the business'


                                       11
<PAGE>   12

customer pays 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, the 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 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, hiring
costs and costs of marketing materials. These expenses also include the costs
incurred to develop our indirect marketing channels.

         In June 1999, we completed a second public offering of 4,500,000 shares
of common stock at an offering price to the public of $7.125 per share and in
July 1999, we issued and sold 675,000 shares of common stock 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 June 1999, we acquired Forseon Corporation, 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.

         In July 1999, we acquired all of the issued and outstanding stock of
Imaging Institute, Inc., a Bloomington, Minnesota-based company, for
approximately $1.2 million cash and the issuance of up to 81,016 shares of our
common stock. Imaging Institute'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 Imaging Institute, we recorded goodwill in the amount of $1.9
million, which will be amortized over a five-year period.


                                       12
<PAGE>   13

         For the three months ended March 31, 1999 and 2000, we had net losses
attributable to common shareholders of approximately $1.5 million, and $3.4
million, respectively. As of December 31, 1999, we had an accumulated deficit of
$39.8 million, of which $15.6 million related to 1999. Approximately $7.8
million of this $15.6 million increase in accumulated deficit resulted from
one-time charges, including a non-cash charge of $3.2 million related to the
cumulative effect of an accounting change resulting from adoption of Staff
Accounting Bulletin No. 101, a charge of $2.3 million related to the acquisition
of Forseon, a charge of $1.6 million related to employee severance packages and
the loss on a sublease agreement and a non-cash charge of $595,000 related to a
deferred tax asset from Forseon. As of March 31, 2000, our accumulated deficit
was $43.2 million, which included $232,000 of one-time charges relating to a
$40,000 accrual for preferred dividends and a charge of $192,000 resulting from
employee severance payments.

         Our total revenues were approximately $7.5 million and $6.7 million for
the three months ended March 31, 1999 and 2000, 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, 1999
was 320 compared to 294 employees at March 31, 2000. The majority of this
reduction in our workforce occurred in our sales and customer service
departments, which are reported under sales and marketing and cost 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, 1999 AND 2000

         Revenues. Our revenues decreased from $7.5 million for the three months
ended March 31, 1999 to $6.7 million for the three months ended March 31, 2000.
Recurring revenues increased from $5.4 million for the three months ended March
31, 1999 to $5.5 million for the three months ended March 31, 2000. During these
two periods, recurring revenue accounted for approximately 72% and 82% of total
revenues, respectively. Set-up fees accounted for approximately 19% and 11% of
total revenues, respectively. Other revenues accounted for approximately 9% and
7% 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.

         Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $1.5 million in 1999 to $2.1 million in
2000. These costs were approximately 20% and 31% of total revenues,
respectively, for these two periods. Costs of processing, servicing and support
increased 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.


                                       13
<PAGE>   14

         Research and Development. Research and development expenses decreased
from $249,000 in 1999 to $0 in 2000. Research and development expenses
represented approximately 3% and 0% of total revenues, respectively, during
these two periods. Research and development costs have decreased compared to
1999 as a result of our products reaching technological feasibility and being
capitalized in accordance with FASB 86. In addition, we did not incur
significant costs to make our products year 2000 compliant because our products
are currently designed to properly function through and beyond the year 2000.
Please see "--Effects of the Year 2000" for further discussion about our efforts
to make our systems and operations ready for the year 2000.

         Sales and Marketing. Sales and marketing expenses decreased from $5.3
million in 1999 to $5.0 million in 2000. Sales and marketing expenses were
approximately 71% and 74% 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. We anticipate
that sales and marketing expenses will increase as we expand our sales and
marketing efforts. Costs of sales and marketing increased as a percentage of
revenues in 2000 as a result of the decrease in revenues during the period.

         General and Administrative. General and administrative expenses
increased from $2.2 million in 1999 to $3.4 million in 2000. These costs
represented approximately 28% and 52% of total 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 expenses
related to our growth, amortization expenses relating to acquisitions,
write-offs of uncollectible accounts receivables, and a one-time charge for
employee severance costs.

         Interest Expense (Income), Net. We reported net interest income of
$72,000 in 1999 and $389,000 in 2000. Net interest income increased as a result
of earnings on investments of cash proceeds received from our public offering in
June 1999.

         Income Taxes. As of December 31, 1999, we had net operating loss carry
forwards ("NOLs") of approximately $27.3 million for federal tax purposes, which
will expire if not utilized beginning 2012. Due to changes in the Company's
ownership structure, the Company's use of its NOLs as of October 1, 1997 of
approximately $2.5 million will be limited to approximately $550,000 in any
given year to offset future taxes. In addition, due to the Company's
acquisitions during 1998 and 1999, NOLs of approximately $6.1 million will be
limited to approximately $1.6 million in any given year to offset future taxes.
If Towne does not realize taxable income in excess of the limitation in future
years, certain NOLs will be unrealizable. Once these net operating loss
carryforwards are utilized or expire, the Company's projected effective tax rate
will increase, which will adversely affect the Company's operating results and
financial condition.

         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 varies with
revenues.


                                       14
<PAGE>   15

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These statements appear in a number of places in this
report and include all statements that are not historical facts. Some of the
forward-looking statements relate to our intent, belief or expectations
regarding our strategies and plans for operations and growth. Other
forward-looking statements relate to trends affecting our financial condition
and results of operations, and our anticipated capital needs and expenditures.
These forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those that are anticipated in the forward-looking statements. During our short
history, our operating results have varied significantly and are likely to
fluctuate significantly in the future as a result of a combination of factors.
These factors include:

         whether Towne can successfully complete transitions in its management
         and operations and whether its management team can attain its goals and
         improve its financial condition;

         the possible negative impact of lawsuits which have been filed against
         Towne on the company's stock price and ability to meet its sales and
         other business objectives;

         the distraction of management's time and attention and other possible
         adverse effects on the company's business and operations as a result of
         foregoing factors;

         market acceptance of new products and services, including the recently
         announced business suite of products offered by Towne;

         whether Towne can successfully complete the integration of acquired
         businesses and products without incurring significant costs or charges;

         Towne's limited operating history and whether it will be able to
         achieve or maintain profitability or other desired results of
         operations; and

         other factors discussed in this report and in Towne's filings with
         Securities and Exchange Commission, including its 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.



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.


                                       15
<PAGE>   16

         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 $1.7 million
and $2.3 million for the three months ended March 31, 1999 and 2000,
respectively. Net cash used in operating activities for the three months ended
March 31, 1999 primarily represents a $1.5 million net loss, partially offset
(a) by a $1.3 million increase in accounts payable and accrued expenses, (b)
$621,000 of depreciation and amortization expenses and (c) a $290,000 increase
in deferred revenues. Net cash used in operating activities for that period also
represents a $1.7 million increase in accounts receivable and a $624,000
increase in prepaid and other assets. Net cash used in operating activities for
the three months ended March 31, 2000 primarily represents a $3.4 million net
loss, partially offset (a) by a $1.1 million decrease in accounts receivable,
(b) $1.1 million of depreciation and amortization expenses and (c) $459,000 of a
provision for doubtful accounts. Net cash used in 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 investing activities was approximately $1.4 million
and $863,000 for the three months ended March 31, 1999 and 2000, respectively.
Net cash used in investing activities for the three months ended March 31, 1999
primarily represents (a) an increase of $153,000 of expenses related to
acquisitions and (b) $1.2 million of expenses for the purchase of computer
equipment and other capital equipment used in conducting our business. 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.

         Net cash used for financing activities was approximately $5.0 million
and $38,000 for the three months ended March 31, 1999 and 2000, respectively.
Net cash used for financing activities for the three


                                       16
<PAGE>   17

months ended March 31, 1999 consisted primarily of $5.1 million related to the
repayment of short-term debt obligations offset by proceeds of $19,000 received
from stock option exercises. 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.

EFFECTS OF THE YEAR 2000

         We did not experience any difficulties related to the Year 2000 problem
on December 31, 1999, and we are not aware of any such difficulties since that
date. Our operations have not, to date, been adversely affected by any
difficulties experienced by our third party software suppliers, customers or
other entities with which we have business relationships, in connection with the
Year 2000 problem.


RECENT ACCOUNTING STANDARDS

         In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general purpose
financial statements. This statement is effective for periods beginning after
December 15, 1997. Towne adopted SFAS No. 130 on January 1, 1998. SFAS No. 130
does not have a material impact on our financial statements as comprehensive
income did not differ from the reported net loss for all periods presented.

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

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. A company may


                                       17
<PAGE>   18

also implement SFAS No. 133 as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1999 and thereafter). SFAS
No. 133 cannot be applied retroactively; it must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997.
The adoption of SFAS No. 133 is not expected to have a material impact on our
financial statements.

         In response to the issuance of the Securities and Exchange Commission
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," we began recognizing all revenues from set-up fees on a deferred
basis. The effects of this change in accounting principle were applied
cumulatively as of the beginning of the fourth quarter of 1999.


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 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, Note (7), 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.


                                       18
<PAGE>   19


                           PART II. OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

                  Except as 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.

                  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, Northern District of Georgia on October 12,
         1999.

                  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, Northern District of Georgia in November, 1999.

                  These two suits are purported securities class actions brought
         by the named individual shareholders against Towne Services and one of
         its current officer and two former officers. No class has yet been
         certified. The complaint alleges, among other claims, that Towne
         Services 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. A Motion to Consolidate the
         Golab and Bolen cases is pending. Discovery has not yet commenced.
         Towne Services believes that the allegations in the complaints are
         without merit and intends to defend the lawsuits vigorously.

                  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 Services' 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 a shareholder in, and had an employment contract
         with, BSI. Sullivan alleges, among other claims, that he entered into 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 other shareholders allegedly fraudulently induced him to
         release them from the agreement by fraudulently misrepresenting the
         gross sales price paid by Towne Services' subsidiary in the stock
         purchase. Sullivan contends that Towne Services is liable to him as the
         successor to BSI, and also for allegedly tortiously interfering with
         the agreement. Sullivan also contends Towne Services conspired with the
         other defendants to misrepresent the "gross purchase price". Towne
         Services denies 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 Services' subsidiary for the
         acquisition of BSI, as well as punitive damages, attorneys' fees, and
         prejudgment and post-judgment interest. Discovery has not yet begun.
         Towne Services believes that the allegations in the complaint are
         without merit and intends to defend the lawsuit vigorously.


                                       19
<PAGE>   20


ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS.

                  None.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

                  None

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

                  None

ITEM 5.           OTHER INFORMATION

                  None

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO.                               DESCRIPTION
---                               -----------


<S>   <C>  <C>
27.1  --   Financial Data Schedule for the period ending March 31, 2000 (for
           SEC use only).

27.2 --    Restated Financial Data Schedule for the period ending March 31, 1999
           (for SEC use only).
</TABLE>

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


(b)      Reports on Form 8-K

Form     8-K (No. 000-24695) filed with the SEC on January 13, 2000 to report
         the resignation of Bruce F. Lowthers as Chief Financial Officer of
         Towne Services.


                                       20
<PAGE>   21

                                   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 15, 2000            /s/  G. Lynn Boggs
---------------         -------------------------------------------------
Date                    G. Lynn Boggs
                        Chairman of the Board and Chief Executive Officer
                        (principal and executive officer)


May 15, 2000            /s/ Michele Ann Bowman
---------------         -------------------------------------------------
Date                    Michele Ann Bowman
                        Vice President and Controller
                        (principal financial and accounting officer)


                                       21
<PAGE>   22


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO.                                        DESCRIPTION
---                                       -----------


<S>        <C>   <C>
27.1       --    Financial Data Schedule for the period ending March 31, 2000 (for SEC use only).

27.2       --    Restated Financial Data Schedule for the period ending March 31, 1999 (for SEC use only).
</TABLE>


                                       22