<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 JUNE 30, 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: 27,524,535 shares outstanding
at August 10, 2000.


                                       1
<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 June 30, 2000                                     3

                  Condensed Consolidated Statements of Operations for the Three
                  Months and Six Months ended June 30, 1999 and 2000                      4

                  Condensed Consolidated Statements of Cash Flows for the Six
                  Months ended June 30, 1999 and 2000                                     5

                  Notes to Condensed Consolidated Financial Statements                    6

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

     Item 3.      Quantitative and Qualitative Disclosures About Market Risk             16


     PART II      OTHER INFORMATION

     Item 1.      Legal Proceedings                                                      17

     Item 2.      Change in Securities and Use of Proceeds                               17

     Item 3.      Defaults Upon Senior Securities                                        17

     Item 4.      Submission of Matters to a Vote of Security Holders                    17

     Item 5.      Other Information                                                      18

     Item 6.      Exhibits and Reports on Form 8-K                                       18
</TABLE>


                                       2
<PAGE>   3

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              TOWNE SERVICES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                       DECEMBER 31, 1999 AND JUNE 30, 2000

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,            JUNE 30,
                                                                                              1999                  2000
                                                                                          ------------          ------------
                                                                                            AUDITED              UNAUDITED

<S>                                                                                       <C>                   <C>
                                                           ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                               $ 20,981,000          $ 16,048,000
  Investments                                                                                1,350,000             1,340,000
  Accounts receivable, net of allowance
     for uncollectible accounts of $531,000 and $585,000
     at December 31, 1999 and June 30, 2000, respectively                                    5,289,000             3,292,000
  Notes receivable from employees                                                              509,000               133,000
  Other                                                                                        600,000               629,000
                                                                                          ------------          ------------
       Total current assets                                                                 28,729,000            21,442,000
                                                                                          ------------          ------------

PROPERTY AND EQUIPMENT, net                                                                 10,540,000            10,584,000
NOTES RECEIVABLE FROM EMPLOYEES                                                                804,000               849,000
GOODWILL, net                                                                               15,905,000            15,347,000
OTHER INTANGIBLES, net                                                                       1,034,000               980,000
OTHER ASSETS, net                                                                              725,000               853,000
                                                                                          ------------          ------------
                                                                                          $ 57,737,000          $ 50,055,000
                                                                                          ============          ============

                                            LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                                        $  1,516,000          $    292,000
  Accrued liabilities                                                                        1,808,000             2,198,000
  Accrued compensation                                                                         950,000             1,279,000
  Accrued termination costs                                                                    230,000               171,000
  Dividends Payable                                                                             95,000               175,000
  Deferred Revenue                                                                           2,207,000             1,260,000
  Current portion of long-term debt                                                            231,000               251,000
                                                                                          ------------          ------------
     Total current liabilities                                                               7,037,000             5,626,000
                                                                                          ------------          ------------

LONG TERM DEBT                                                                               1,028,000               905,000

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 June 30, 2000, respectively              1,880,000             1,880,000
  Common stock, no par value; 50,000,000 shares authorized, 27,197,722 and
     27,524,535  issued and outstanding December 31, 1999 and June 30, 2000, respectively
                                                                                            86,690,000            86,866,000
Warrants outstanding                                                                           161,000               161,000
Accumulated deficit                                                                        (39,829,000)          (46,153,000)
                                                                                          ------------          ------------
   Total shareholders' equity                                                               48,902,000            42,754,000
                                                                                          ------------          ------------
                                                                                          $ 57,737,000          $ 50,055,000
                                                                                          ============          ============
</TABLE>

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


                                       3
<PAGE>   4

                              TOWNE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000

<TABLE>
<CAPTION>
                                                                   FOR THE THREE                           FOR THE SIX
                                                                   MONTHS ENDED                            MONTHS ENDED
                                                                     JUNE 30,                                JUNE 30,
                                                         --------------------------------        --------------------------------
                                                             1999                2000                1999                2000
                                                         ------------        ------------        ------------        ------------
                                                                     UNAUDITED                              UNAUDITED

<S>                                                      <C>                 <C>                 <C>                 <C>
REVENUES                                                 $  7,934,000        $  6,780,000        $ 15,427,000        $ 13,480,000

COSTS AND EXPENSES:
  Costs of processing, servicing and support                1,597,000           1,878,000           3,118,000           3,941,000
  Research and development                                    207,000                  --             456,000                  --
  Sales and marketing                                       4,906,000           4,433,000          10,191,000           9,423,000
  Acquisition expense                                       2,287,000              75,000           2,343,000              75,000
  General and administrative                                2,712,000           3,521,000           4,825,000           6,916,000
                                                         ------------        ------------        ------------        ------------
     Total costs and expenses                              11,709,000           9,907,000          20,933,000          20,355,000
                                                         ------------        ------------        ------------        ------------
OPERATING LOSS                                             (3,775,000)         (3,127,000)         (5,506,000)         (6,875,000)
                                                         ------------        ------------        ------------        ------------
OTHER EXPENSES:
  Interest income, net                                        (41,000)           (242,000)           (113,000)           (631,000)
                                                         ------------        ------------        ------------        ------------
     Total other expenses                                     (41,000)           (242,000)           (113,000)           (631,000)
                                                         ------------        ------------        ------------        ------------

Loss before provision (benefit) from income tax            (3,734,000)         (2,885,000)         (5,393,000)         (6,244,000)

Income tax expense (benefit)                                 (240,000)                 --            (354,000)                 --
                                                         ------------        ------------        ------------        ------------

Loss before extraordinary item and cumulative
  effect of accounting change                              (3,494,000)         (2,885,000)         (5,039,000)         (6,244,000)

Cumulative effect of an accounting change                          --                  --           3,183,000                  --

                                                         ------------        ------------        ------------        ------------
NET LOSS                                                 $ (3,494,000)       $ (2,885,000)       $ (8,222,000)       $ (6,244,000)
                                                         ============        ============        ============        ============

PREFERRED STOCK DIVIDENDS                                     (14,000)            (40,000)            (14,000)            (80,000)

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
  BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
  OF AN ACCOUNTING CHANGE:                               $ (3,508,000)       $ (2,925,000)#      $ (5,053,000)       $ (6,324,000)
                                                         ============        ============        ============        ============

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
  BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
  OF AN ACCOUNTING CHANGE PER COMMON SHARE:
Basic                                                    $      (0.16)       $      (0.11)       $      (0.23)       $      (0.23)
                                                         ============        ============        ============        ============
Diluted                                                  $      (0.16)       $      (0.11)       $      (0.23)       $      (0.23)
                                                         ============        ============        ============        ============

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS             $ (3,508,000)       $ (2,925,000)       $ (8,236,000)       $ (6,324,000)
                                                         ============        ============        ============        ============

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
     PER COMMON SHARE:
Basic                                                    $      (0.16)       $      (0.11)       $      (0.38)       $      (0.23)
                                                         ============        ============        ============        ============
Diluted                                                  $      (0.16)       $      (0.11)       $      (0.38)       $      (0.23)
                                                         ============        ============        ============        ============

Weighted Average Common Shares Outstanding                 21,994,027          27,434,983          21,913,816          27,330,412
                                                         ============        ============        ============        ============
</TABLE>

              The accompanying notes are an integral part of these
                condensed consolidated statement of operations.


                                       4
<PAGE>   5

                              TOWNE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000

<TABLE>
<CAPTION>
                                                                                                  FOR THE SIX MONTHS
                                                                                                    ENDED JUNE 30,
                                                                                          ----------------------------------
                                                                                              1999                  2000
                                                                                          ------------          ------------
                                                                                            UNAUDITED             UNAUDITED
<S>                                                                                       <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss                                                                                $ (8,222,000)         $ (6,244,000)
  Adjustments to reconcile net loss to net cash
  used in operating activities:
      Cumulative effect of an accounting change                                              3,183,000                    --
      Compensation expense recognized for stock for stock option grants                         72,000               (40,000)
      Depreciation and amortization                                                            446,000             1,209,000
      Amortization of intangibles and goodwill                                                 818,000             1,048,000
      Provision for doubtful accounts                                                           83,000               549,000
      Changes in operating assets and liabilities, net of assets acquired:
           Accounts receivable                                                              (2,676,000)            1,447,000
           Prepaid and other assets                                                           (947,000)             (156,000)
           Accounts payable                                                                  2,790,000            (1,224,000)
           Accrued liabilities                                                                 152,000               390,000
           Accrued compensation                                                                596,000               329,000
           Deferred revenue                                                                    163,000              (947,000)
           Accrued termination costs                                                           (81,000)              (59,000)
                                                                                          ------------          ------------
                   Total adjustments                                                         4,599,000             2,546,000
                                                                                          ------------          ------------
                    Net cash used in operating activities                                   (3,623,000)           (3,698,000)
                                                                                          ------------          ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net change in notes receivable from shareholders                                             (10,000)              331,000
  Purchase of short-term investments                                                                --            (1,619,000)
  Proceeds from sale of short-term investments                                                      --             1,629,000
  Purchase of property and equipment, net                                                   (3,153,000)           (1,292,000)
  Other Assets                                                                                      --               (33,000)
  Acquisitions, net of cash acquired                                                          (178,000)             (349,000)
                                                                                          ------------          ------------
                     Net cash used in investing activities                                  (3,341,000)           (1,333,000)
                                                                                          ------------          ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from exercise of stock options                                                       56,000               207,000
  Repayment of debt                                                                         (5,137,000)             (118,000)
  Proceeds from issuance of preferred stock and warrants                                     2,000,000                    --
  Proceeds from issuance of common stock                                                    28,318,000                 9,000
                                                                                          ------------          ------------
                      Net cash provided by financing activities                             25,237,000                98,000
                                                                                          ------------          ------------
NET INCREASE (DECREASE) IN CASH                                                             18,273,000            (4,933,000)
CASH AND CASH EQUIVALENTS, beginning of period                                              14,060,000            20,981,000
                                                                                          ============          ============
CASH AND CASH EQUIVALENTS, end of period                                                  $ 32,333,000          $ 16,048,000
                                                                                          ============          ============

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes                                                                $         --          $      8,000
                                                                                          ============          ============
Cash paid for interest                                                                    $     22,000          $     60,000
                                                                                          ============          ============
Acquisitions of property and equipment through capital leases                             $    948,000          $         --
                                                                                          ============          ============
</TABLE>
  The accompanying notes are an integral part of these condensed consolidated
                           statements of cash flows.

                                       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 and six months ended June 30, 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 and six months ended June 30, 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.

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


                                       6
<PAGE>   7

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 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 delays the Standard effective date
to the beginning of the first quarter of the fiscal year beginning after June
15, 2000. In June 2000, SFAS 133 was amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133," to be adopted concurrently with SFAS 133.

         As noted above in Note (3), the Company adopted SAB No. 101 at the
beginning of the fourth quarter ended December 31, 1999. In accordance with SFAS
No. 3, the Company's financial statements were restated, effective January 1,
1999, to reflect the cumulative effective of the change in accounting principle.

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 that provides products and services for retail
businesses. These products and services process inventory, accounts receivable
and point of sale transaction information and generate merchandise forecasts and
management reports. Towne Services 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 Services common stock has been held back in escrow to satisfy the
indemnification obligations of Forseon stockholders under the merger agreement.
The Company incurred approximately $2.3 million in expenses related to the
acquisition of Forseon.

         On July 20, 1999, the Company acquired all of the issued and
outstanding stock of Imaging Institute, Inc., a Bloomington, Minnesota-based
company, for approximately $1.2 million cash and the issuance of 81,016 shares
of the


                                       7
<PAGE>   8

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 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

COMMON STOCK

         On June 27, 2000, the Company announced that its Board of Directors has
approved a plan under which the Company may spend up to $3.0 million to
repurchase shares of its common stock at the current market price. As of June
30, 2000, the Company has not re-purchased any shares under this plan.

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 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 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 $174,142 at June 30, 2000.


                                       8
<PAGE>   9

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 April 2000, the promissory note in which the Company loaned its
President $30,000 was amended and restated. The full recourse loan bears
interest at 9.00% per annum, and the aggregate principal sum of $33,900.58 is
due in full in April 2002.

         In April 2000, the promissory note in which the Company loaned its
President $78,990 was amended and restated. The full recourse loan bears
interest at 9.00% per annum, and the aggregate principal sum of $96,418.80 is
due in full in April 2002.

         In April 2000, the promissory note in which the Company loaned its
Executive Vice President $50,000 was amended and restated. The full recourse
loan bears interest at 8.00% per annum, and the aggregate principal sum of
$50,000 is due in full in July 2002.

         In April 2000, the promissory note in which the Company loaned its
former Chief Financial Officer $86,484.47 was amended and restated. The full
recourse loan bears interest at 8.00% per annum, and the aggregate principal sum
of $86,484.47 is due in full in December 2000.


                                       9
<PAGE>   10

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 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' 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 consisted 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 were expensed as incurred; however, we capitalized
certain development costs under Statement of Financial Accounting Standards
("SFAS") No. 86 when the products reached technological feasibility. For the six
months ended June 30, 2000, we did not incur any research and development
expenses.


                                       10
<PAGE>   11

         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 us 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 that provides products and services for retail businesses.
These products and services 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 Services
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.

         For the three months ended June 30, 1999 and 2000, we had net losses
attributable to common shareholders of approximately $3.5 million and $2.9
million, respectively. For the six months ended June 30, 1999 and 2000, we had
net losses attributable to common shareholders of approximately $8.2 million and
$6.3 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 June 30, 2000, our accumulated deficit
was $46.2 million, which included $1.2 million of one-time charges relating to a
$80,000 accrual for preferred dividends, approximately $661,000 resulting from
employee severance payments, a charge of $365,000 related to early termination
of a sales agreement and a $75,000 charge related to a liability associated with
the acquisition of Forseon.

         Our total revenues were approximately $15.4 million and $13.5 million
for the six months ended June 30, 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 319 compared to 279 employees at June 30, 2000. The majority of this
reduction in our workforce occurred in our sales department, which is reported
under sales and marketing, and in our customer service department, which is
reported under cost of processing, servicing and support. We anticipate that our
overall operating expenses will decrease as a result of our reduction in labor
force and that 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 JUNE 30, 1999 AND 2000

         Revenues. Our revenues decreased from $7.9 million for the three months
ended June 30, 1999 to $6.8 million for the three months ended June 30, 2000.
Recurring revenues increased from $5.3 million for the three months ended June
30, 1999 to $5.5 million for the three months ended June 30, 2000. During these
two periods, recurring revenue accounted for


                                       11
<PAGE>   12

approximately 67% and 81% of total revenues, respectively. Set-up fees accounted
for approximately 14% and 8.4% of total revenues, respectively. Other revenues
accounted for approximately 19% and 10.3% 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 $1.6 million in 1999 to $1.9 million in
2000. These costs were approximately 20% and 28% 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. We anticipate that these costs will
continue to increase as its customer base expands.

         Research and Development. Research and development expenses decreased
from $207,000 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 $4.9
million in 1999 to $4.4 million in 2000. Sales and marketing expenses were
approximately 62% and 65% 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.

         Acquisition Expense. We incurred approximately $2.3 million in 1999 and
$75,000 in 2000 of expenses related to the acquisition of Forseon Corporation.

         General and Administrative. General and administrative expenses
increased from $2.7 million in 1999 to $3.5 million in 2000. These costs
represented approximately 34% 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 one-time charges related
to employee severance costs.

         Interest Expense (Income), Net. We reported net interest income of
$41,000 in 1999 and $242,000 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 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 $6.1 million will be limited to approximately $1.6 million in any
given year to offset future taxes. If we do not generate 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, our
projected effective tax rate will increase, which will adversely affect our
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.


                                       12
<PAGE>   13

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000

         Revenues. Our revenues decreased from $15.4 million for the six months
ended June 30, 1999 to $13.5 million for the six months ended June 30, 2000.
Recurring revenues increased from $10.7 million for the six months ended June
30, 1999 to $11.0 million for the six months ended June 30, 2000. During these
two periods, recurring revenue accounted for approximately 69% and 81.8% of
total revenues, respectively. Set-up fees accounted for approximately 16.5% and
9.4% of total revenues, respectively. Other revenues accounted for approximately
14.2% and 8.8% 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 $3.1 million in 1999 to $3.9 million in
2000. These costs were approximately 20% and 29% 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. We anticipate that these costs will
continue to increase as its customer base expands.

         Research and Development. Research and development expenses decreased
from $456,000 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 $10.2
million in 1999 to $9.4 million in 2000. Sales and marketing expenses were
approximately 66% and 70% 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.

         Acquisition Expense. We incurred approximately $2.3 million in 1999 and
$75,000 in 2000 of expenses related to the acquisition of Forseon Corporation.

         General and Administrative. General and administrative expenses
increased from $4.8 million in 1999 to $7.0 million in 2000. These costs
represented approximately 31% and 51% 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 one-time charges related
to employee severance costs.

         Interest Expense (Income), Net. We reported net interest income of
$113,000 in 1999 and $631,000 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 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 $6.1 million will be limited to approximately $1.6 million in any
given year to offset future taxes. If we do not generate 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, our
projected effective tax rate will increase, which will adversely affect our
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


                                       13
<PAGE>   14

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.

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

         whether our key initiatives with respect to training and compensation
         within our sales organization prove to be effective and lead to revenue
         growth;

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

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

         market acceptance of new products and services, including the business
         suite of products we offer;

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

         our limited operating history and whether we will be able to achieve or
         maintain profitability or other desired results of operations; and

         other factors discussed in this report and in our filings with
         Securities and Exchange Commission, 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 in those registration
         statements, and in our annual quarterly and periodic reports on Forms
         10-K, 10-Q and 8-K.

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.


                                       14
<PAGE>   15

         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, 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 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 $3.6 million
and $3.7 million for the six months ended June 30, 1999 and 2000, respectively.
Net cash used in operating activities for the six months ended June 30, 1999
primarily represents a $8.2 million net loss, partially offset (a) by a $3.6
million increase in accounts payable and accrued expenses, (b) $1.3 million of
depreciation and amortization expenses, (c) $3.2 million related to a change in
accounting principle and (d) a $163,000 increase in deferred revenues. Net cash
used in operating activities for that period also represents a $2.7 million
increase in accounts receivable and a $947,000 increase in prepaid and other
assets. Net cash used in operating activities for the six months ended June 30,
2000 primarily represents a $6.2 million net loss, partially offset by (a) a
$1.4 million decrease in accounts receivable, (b) $2.3 million of depreciation
and amortization expenses and (c) a $549,000 provision for doubtful accounts.
Net cash used in operating activities for that period also represents a $156,000
increase in prepaid and other assets, a $564,000 decrease in accounts payable
and accrued expenses and a $947,000 decrease in deferred revenue.

         Net cash used in investing activities was approximately $3.3 million
and $1.3 million for the six months ended June 30, 1999 and 2000, respectively.
Net cash used in investing activities for the six months ended June 30, 1999
primarily represents (a) an increase of $178,000 of expenses related to
acquisitions and (b) $3.2 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 six months ended June 30, 2000 primarily
represents (a) $1.3 million of expenses for the purchase of computer equipment
and other capital equipment used in conducting our business, (b) an increase of
$349,000 of expenses related to acquisitions and (c) a $331,000 decrease in
notes receivable from employees.

         Net cash provided by financing activities was approximately $25.2
million and $98,000 for the six months ended June 30, 1999 and 2000,
respectively. Net cash provided by financing activities for the six months ended
June 30, 1999 consisted primarily of $30.3 million of proceeds from the issuance
of securities offset by $5.1 million for the repayment of outstanding short term
obligations. Net cash provided by financing activities for the six months ended
June 30, 2000 consisted primarily of $207,000 of proceeds received from stock
option exercises offset by $118,000 for the repayment of short-term debt
obligations.


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 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 delays

                                       15
<PAGE>   16


the Standard effective date to the beginning of the first quarter of the fiscal
year beginning after June 15, 2000. In June 2000, SFAS 133 was amended by SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," to be adopted concurrently
with SFAS 133.

         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 first 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.


                                       16
<PAGE>   17

                           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 officers 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.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         None.

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 $174,000 at June 30, 2000.

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

         We held our annual meeting of shareholders on May 23, 2000 for the
         following purposes:


                                       17
<PAGE>   18


         1.       To elect five Class II directors to serve for three year
                  terms;

         2.       To consider and act upon the proposal to adopt the Amended and
                  Restated Director Stock Option Plan, which revises the
                  provisions relating to annual option grants to non-employee
                  directors; and

         3.       To ratify the appointment of Arthur Andersen LLP as the
                  Company's independent auditors for 2000.

         Only shareholders of record at the close of business on April 12, 2000
         were entitled to vote at the annual meeting. Proxies for the meeting
         were solicited pursuant to the Georgia Business Corporation Code, and
         there was no solicitation in opposition to management's solicitation.

         Proxies and ballots were received from the holders of 17,015,423 shares
         of our common stock, representing 62.48% of the outstanding shares of
         common stock.

         The results were as follows:

         1.       The five individuals nominated to serve as Class II directors
                  were elected, with the number of votes for and withheld as
                  indicated below:

<TABLE>
<CAPTION>
         Class II                          Voted For          Withheld
         --------                         ----------          --------

         <S>                              <C>                 <C>
         Henry M. Baroco                  16,877,354          138,069
         Richardson M. Roberts            16,546,579          468,844
         Joe M. Rogers                    16,875,834          139,589
         Glenn W. Sturm                   16,291,959          723,464
         J. Stephen Turner                16,875,834          139,589
</TABLE>

         Also, the shareholders approved the following matters with the number
         of votes specified below:

         1.       The proposal to adopt the Company's Amended and Restated
                  Director Stock Option Plan

<TABLE>
<CAPTION>

         Voted For                        Voted Against             Abstained
         ----------                       -------------             ---------
         <S>                              <C>                       <C>
         16,196,364                          795,000                 23,503
</TABLE>

         2.       The proposal to ratify the Company's appointment of Arthur
                  Andersen LLP

<TABLE>
<CAPTION>
         Voted For                        Voted Against             Abstained
         ----------                       -------------             ---------
         <S>                              <C>                       <C>
         17,000,737                           13,606                  1,080
</TABLE>


ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO.                                       DESCRIPTION
-------                                   -----------
<S>               <C>
10.1              Amended and Restated Director Stock Option Plan, adopted March
                  22, 2000 by the Board of Directors and approved by the
                  shareholders on May 23, 2000 (incorporated by reference to the
                  Company's definitive Proxy Statement for its 2000 Annual
                  Meeting filed with the SEC on April 26, 2000).
10.2              Employment Agreement by and between Towne Services, Inc. and
                  Lynn Boggs dated as of
</TABLE>


                                       18
<PAGE>   19


<TABLE>
<S>               <C>
                  June 8, 2000.

10.3              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Henry M. Baroco in the
                  principal sum of $33,990.58.
10.4              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Henry M. Baroco in the
                  principal sum of $96,418.80.
10.5              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Cleve B. Shultz in the
                  principal sum of $50,000.
10.6              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Bruce F. Lowthers, Jr. in
                  the principal sum of $86,484.47.
27.1              Financial Data Schedule for the period ending June 30, 2000
                  (for SEC use only).
</TABLE>

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

(b)      Reports on Form 8-K

         None.


                                       19
<PAGE>   20

                                   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.


August 11, 2000             /s/  G. Lynn Boggs
------------------          ---------------------------------------------------
Date                        G. Lynn Boggs
                            Chairman  of the Board  and Chief Executive Officer
                            (principal and executive officer)


August 11, 2000             /s/ Randall S. Vosler
------------------          ---------------------------------------------------
Date                        Randall S. Vosler
                            Senior Vice President and Chief Financial Officer
                            (principal financial and accounting officer)


                                       20
<PAGE>   21

                                  EXHIBIT INDEX

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

<S>               <C>
10.1              Amended and Restated Director Stock Option Plan, adopted March
                  22, 2000 by the Board of Directors and approved by the
                  shareholders on May 23, 2000 (incorporated by reference to the
                  Company's definitive Proxy Statement for its 2000 Annual
                  Meeting filed with the SEC on April 26, 2000).
10.2              Employment Agreement by and between Towne Services, Inc. and
                  Lynn Boggs dated as of June 8, 2000.
10.3              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Henry M. Baroco in the
                  principal sum of $33,990.58.
10.4              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Henry M. Baroco in the
                  principal sum of $96,418.80.
10.5              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Cleve B. Shultz in the
                  principal sum of $50,000.
10.6              Amended and Restated Promissory Note dated April 24, 2000
                  issued to Towne Services, Inc. by Bruce F. Lowthers, Jr. in
                  the principal sum of $86,484.47.
27.1              Financial Data Schedule for the period ending June 30, 2000
                  (for SEC use only).
</TABLE>


                                       21