"They are back together and are doing well and happy," a source tells PEOPLE. "[They're] not remarried but back together."
The couple, who divorced in 2002, were looking friendly on Saturday at Los Angeles lounge Boudoir. Onlookers at the lounge spotted Lynne and Jamie cheering and dancing as DJ Mr. Best spun Britney's hits, like "Toxic" and "Gimme More."
"They were in a great mood together," says an onlooker. "They were laughing together – dancing and laughing [and] totally having fun."
"Lynne is a dear, sweet person," a family friend tells PEOPLE. "She deserves happiness. As her friend, my wish for her would be a happy ending."
In 2002, shortly after the breakup of her parents' 30-year marriage, Britney told PEOPLE it wasn't a bad thing.
"It's the best thing that's ever happened to my family," says Spears. "My mom and dad, bottom line, do not get along. When I was a baby, they argued."
Britney, 28, also has been doing well romantically, and is currently dating Jason Trawick, 38.
Lynne and Jamie have been back together as a couple since last summer, according to Gossip Cop, which first reported the news of their reconciliation.
Reporting by ALICIA DENNIS, JENNIFER GARCIA and JULIE JORDAN