<PAGE>
                               UNITED STATES
                     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 September 30, 1997

   [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934


                         Commission file Number 1-10993


                          SPS TRANSACTION SERVICES, INC.
             (Exact name of Registrant as specified in its charter)

              Delaware                                         36-3798295
       (State of incorporation)                            (I.R.S. Employer
                                                          Identification No.)

    2500 Lake Cook Road, Riverwoods, IL                           60015
  (Address of principal executive offices)                     (Zip Code)

     Registrant's telephone number, including area code:   (847) 405-3400


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 [  ]

As of October 31, 1997, the Registrant had 27,222,827 shares of common stock, 
$0.01 par value, outstanding.


                                                            Page 1 of 18 pages

















<PAGE>

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements


SPS TRANSACTION SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
(In Thousands, Except Share Data)
[CAPTION]
<TABLE>
                                                   September 30,   December 31,
                                                       1997            1996
                                                   ------------    ------------
                                                    (Unaudited) 
<S>                                                <C>             <C> 
ASSETS:
  Cash and due from banks                            $   15,169     $   15,205
  Investments held to maturity - at amortized cost       41,576         41,675
  Credit card loans                                   1,245,080      1,637,507
  Allowance for loan losses                             (75,236)       (88,397)
                                                     ----------     ----------
    Credit card loans, net                            1,169,844      1,549,110
  Accrued interest receivable                            18,512         21,141
  Accounts receivable                                    29,551         42,202
  Due from affiliated companies                           8,115          9,900
  Amounts due from asset securitizations                 56,915             --
  Premises and equipment, net                            29,431         25,294
  Deferred income taxes                                  33,409         38,266
  Prepaid expenses and other assets                      14,672         17,992
                                                     ----------     ----------
TOTAL ASSETS                                         $1,417,194     $1,760,785
                                                     ==========     ==========
LIABILITIES:
  Deposits:
    Noninterest-bearing                              $    4,500     $    9,012
    Interest-bearing                                    531,332        454,423
                                                     ----------     ----------
  Total deposits                                        535,832        463,435
  Accounts payable, accrued expenses and other           47,016         50,019
  Income taxes payable                                    3,383         17,756
  Due to affiliated companies                           557,262        982,547
  Accrued recourse obligation                            22,636         22,636
                                                     ----------     ----------
    Total liabilities                                 1,166,129      1,536,393
                                                     ----------     ----------
STOCKHOLDERS' EQUITY:
  Preferred stock, $1.00 par value, 100,000
    shares authorized; none issued or outstanding
  Common stock, $.01 par value, 40,000,000 and 
    40,000,000 shares authorized; 27,270,663 and    
    27,242,207 shares issued; 27,220,277 and 
    27,187,462 shares outstanding at September 30,     
    1997 and December 31, 1996, respectively                273            272
  Capital in excess of par value                         81,493         81,096
  Retained earnings                                     170,559        144,345
  Common stock held in treasury, at cost, $.01
    par value, 50,386 and 54,745 shares at September 
    30, 1997 and December 31, 1996, respectively         (1,242)        (1,312)
  Stock compensation plan                                   483            453
  Employee stock benefit trust                             (483)          (413)
  Unearned stock compensation                               (18)           (49)
                                                     ----------     ----------
    Total stockholders' equity                          251,065        224,392
                                                     ----------     ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $1,417,194     $1,760,785
                                                     ==========     ==========
<FN>
See notes to unaudited consolidated financial statements.

</TABLE>
                                          

                                         2

<PAGE>
SPS TRANSACTION SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
[CAPTION]
<TABLE>

                                    Three Months Ended      Nine Months Ended
                                       September 30,           September 30,    
                                    ------------------     -------------------
                                     1997        1996        1997       1996 
                                    -------    -------     --------   --------
                                        (Unaudited)            (Unaudited)
<S>                                 <C>        <C>         <C>        <C>
Processing and service revenues     $66,507    $65,712     $209,080   $204,808
Merchant discount revenue             3,981     10,163       10,797     25,382
                                    -------    -------     --------   --------
                                     70,488     75,875      219,877    230,190

Interest revenue                     58,038     53,972      184,515    166,118
Interest expense                     17,695     18,238       57,521     59,824
                                    -------    -------     --------   --------
  Net interest income                40,343     35,734      126,994    106,294
Provision for loan losses            28,480     32,037       86,273     84,605
                                    -------    -------     --------   --------
  Net credit income                  11,863      3,697       40,721     21,689
                                    -------    -------     --------   --------

Net operating revenues               82,351     79,572      260,598    251,879

Salaries and employee benefits       27,064     23,736       84,861     72,407
Processing and service expenses      22,153     26,589       74,849     80,096
Other expenses                       17,110     20,221       58,194     61,915
                                    -------    -------     --------   --------
  Total operating expenses           66,327     70,546      217,904    214,418
                                    -------    -------     --------   --------

Income before income taxes           16,024      9,026       42,694     37,461
Income tax expense                    6,185      3,428       16,480     14,235
                                    -------    -------     --------   --------
Net income                          $ 9,839    $ 5,598     $ 26,214   $ 23,226
                                    =======    =======     ========   ========

Net income per common share         $  0.36    $  0.21     $   0.96   $   0.85
                                    =======    =======     ========   ========

Weighted average common shares 
  outstanding                        27,217     27,194       27,208     27,165

<FN>
See notes to unaudited consolidated financial statements.

</TABLE>



                                          3
<PAGE>

SPS TRANSACTION SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
(In Thousands)
[CAPTION]
<TABLE>
                                                           Nine Months Ended
                                                             September 30,
                                                         ----------------------
                                                           1997          1996
                                                         --------     ---------
                                                              (Unaudited)
<S>                                                      <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                             $ 26,214     $ 23,226
  Adjustments to reconcile net income to
  net cash flows from operating activities:                                 
    Depreciation and amortization                           9,304       10,687
    Imputed interest on notes payable                          --           15
    Provision for loan losses                              86,273       84,605
    Deferred income taxes                                   4,857       (1,598)
  (Increase) decrease in operating assets:
    Cash and due from banks - restricted                       --       29,000 
    Due from affiliated companies                           1,785          (35)
    Accrued interest receivable and accounts receivable    15,280        3,797 
    Amounts due from asset securitizations                (56,915)          --
    Prepaid expenses and other assets                       2,383        1,623 
  Increase (decrease) in operating liabilities:
    Accounts payable, accrued expenses and other           (1,706)       8,520 
    Income taxes payable                                  (14,373)      (3,239)
    Due to affiliated companies                             6,272        2,903
    Accrued recourse obligation                                --         (537)
                                                         --------     --------
    Net cash from operating activities                     79,374      158,967 
                                                         --------     --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Investments held to maturity - purchases               (167,284)    (226,841)
  Investments held to maturity - maturities               167,383      229,350
  Net principal collected (disbursed) on credit card 
    portfolios                                            288,593      (38,462)
  Proceeds from sale of credit card loan                       --      138,861
  Purchases of premises and equipment, net                 (9,056)      (7,059)
                                                         --------     --------
    Net cash from investing activities                    279,636       95,849 
                                                         --------     --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net decrease in noninterest-bearing deposits             (4,512)      (2,228)
  Net increase in interest-bearing deposits                76,909       84,969
  Due to affiliated companies                            (431,557)    (328,477)
  Repayment of notes payable                                   --       (2,110)
  Proceeds from exercise of stock options                      44          622
  Change in treasury stock, net                                70          925
                                                         --------     --------
    Net cash from financing activities                   (359,046)    (246,299)
                                                         --------     --------

(Decrease) increase in cash and due from banks                (36)       8,517
Cash and due from banks, beginning of period               15,205        8,879
                                                         --------     --------
Cash and due from banks, end of period                   $ 15,169     $ 17,396
                                                         ========     ========


<FN>
See notes to unaudited consolidated financial statements.

</TABLE>



                                         4
<PAGE>

SPS TRANSACTION SERVICES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
-------------------------------------------------------------------------------

A.  ORGANIZATION AND BASIS OF PRESENTATION

  The consolidated financial statements include the accounts of SPS Transaction 
Services, Inc. (the "Company") and its subsidiaries. The Company is a 73.5% 
majority owned subsidiary of NOVUS Credit Services Inc., which in turn is a 
wholly owned, direct subsidiary of Morgan Stanley, Dean Witter, Discover & Co. 
("MSDWD").  

  On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean 
Witter, Discover & Co.  At that time Dean Witter, Discover & Co. changed its 
corporate name to Morgan Stanley, Dean Witter, Discover & Co.
  
  The Company provides a range of technology outsourcing services including the 
processing of credit and debit card transactions, consumer private label credit 
card programs, commercial account processing services, and call center customer 
service activities in the United States.  SPS Payment Systems, Inc. ("SPS"), a 
wholly owned subsidiary of the Company, is incorporated in the State of 
Delaware.  Hurley State Bank ("HSB"), a wholly owned subsidiary of the Company, 
is chartered as a bank by the State of South Dakota and is a member of the 
Federal Deposit Insurance Corporation.

  The Consolidated Balance Sheet as of September 30, 1997, and the Consolidated 
Statements of Income for the three and nine months ended September 30, 1997 and 
1996, and the Consolidated Statements of Cash Flows for the nine months ended 
September 30, 1997 and 1996 are unaudited; however, in the opinion of 
management, all adjustments, consisting only of normal recurring accruals 
necessary for fair presentation, have been reflected.  All material 
intercompany balances and transactions have been eliminated.  Certain 
reclassifications have been made to prior year amounts to conform to current 
presentation.  The preparation of the consolidated financial statements in 
accordance with generally accepted accounting principles requires management to 
make estimates and assumptions that affect the financial statements and related 
disclosures. Management believes that the estimates utilized in the preparation 
of the consolidated financial statements are prudent and reasonable.  Actual 
results could differ from these estimates.

  The consolidated financial statements should be read in conjunction with the 
consolidated financial statements and notes thereto included in the Company's 
1996 Annual Report to Stockholders and Annual Report on Form 10-K.  The results 
of operations for the interim periods should not be considered indicative of 
results to be expected for the full year.


B.  RECENT ACCOUNTING PRONOUNCEMENTS 

  As of January 1, 1997, the Company adopted Statement of Financial Accounting 
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of 
Financial Assets and Extinguishments of Liabilities," which is effective for 
transfers of financial assets made after December 31, 1996, except for certain 
financial assets for which the effective date has been delayed for one year.  
SFAS No. 125 provides financial reporting standards for the derecognition and 
recognition of financial assets, including the distinction between transfers of 
financial assets which should be recorded as sales and those which should be 

                                          5
<PAGE>

recorded as secured borrowings.  The adoption of the enacted provisions of SFAS 
No. 125 had no material effect on the Company's financial position or results 
of operations.

  The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings 
per Share" ("EPS"), effective for periods ending after December 15, 1997, with 
restatement required for all prior periods.  SFAS No. 128 maintains the current 
EPS category of net income per common share with "basic" EPS, which similarly 
reflects no dilution from common stock equivalents, and requires "diluted" EPS 
which reflects dilution from common stock equivalents based on the average 
price per share of the Company's common stock during the period.  The adoption 
of SFAS No. 128 would not have had, and is not expected to have, a material 
effect on the Company's EPS calculation.

  In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, 
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments 
of an Enterprise and Related Information."  These statements, which are 
effective for fiscal years beginning after December 15, 1997, establish 
standards for the reporting and display of comprehensive income and disclosure 
requirements related to segments.

C.  ALLOWANCE FOR LOAN LOSSES AND ACCRUED RECOURSE OBLIGATION

  The changes in the allowance for loan losses were as follows:
[CAPTION]
<TABLE>
                                      Three Months Ended     Nine Months Ended
                                         September 30,         September 30, 
                                      ------------------    ------------------
                                        (In Thousands)        (In Thousands)
                                        1997       1996       1997       1996
                                      -------    -------    -------    -------
<S>                                   <C>        <C>        <C>        <C>
Balance, beginning of period          $79,120    $65,304    $88,397    $63,704
Additions:
  Provision for loan losses            28,480     32,037     86,273     84,605

Deductions:
  Charge-offs                         (37,819)   (36,434)  (116,586)   (99,415)
  Less: recoveries                      5,455      4,741     17,152     16,754
                                      -------    -------    -------    -------
  Net charge-offs                     (32,364)   (31,693)   (99,434)   (82,661)
                                      -------    -------    -------    -------
Balance, end of period                $75,236    $65,648    $75,236    $65,648
                                      =======    =======    =======    =======
</TABLE>
  
  At September 30, 1997, there were $77.2 million in loans past due 30 days 
through 89 days, and $57.0 million in loans past due 90 days through 179 days.

  Credit card loans were reduced by $580.0 million at both September 30, 1997 
and 1996, due to the sale with limited recourse of such loans through 
securitization transactions.  The accrued recourse obligation related to 
securitized loans was $22.6 million and $26.6 million at September 30, 1997 and 
1996, respectively.









                                         6
<PAGE>

 Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  
RESULTS OF OPERATIONS


RESULTS OF OPERATIONS  

  The Company's net operating revenues consist of processing and service 
revenues, merchant discount revenue and net credit income, which are derived as 
a result of its four principal business services: Network Transaction Services, 
TeleServices, Commercial Accounts Processing and Consumer Credit Card Services.

  Processing and service revenues consist of four components (as described 
below): Transaction processing services, Managed programs, HSB programs and 
Servicing fees on securitized loans.

  Transaction processing services include revenues received as a result of 
TeleServices and Network Transaction Services such as call center processing, 
electronic transaction processing, the sale and servicing of point-of-sale 
terminals, and a System Access Agreement with NOVUS Services, Inc., an 
affiliated company.  Revenues from Network Transaction Services typically are 
based on the number of electronic point-of-sale transactions processed rather 
than the dollar transaction amount. Revenues from TeleServices typically are 
based upon the number, type and length of customer contacts processed through 
service activities such as technical help-desk inquiries, catalog order 
processing, customer billing inquiries and dispatch services.

  Managed programs includes revenues received as a result of Commercial Account 
Processing and those Consumer Credit Card Services which the Company 
administers, but for which it does not act as the card issuer or own the credit 
card loans. Managed Program revenues are derived from fees based on the volume 
of the services provided and on services provided in the administration of 
credit life insurance programs.

  HSB programs refers to those Consumer Credit Card Services for which the 
Company issues the credit card on behalf of the client and owns the credit card 
loans that are generated through the use of the card. The revenues derived from 
the administration of HSB programs that are included as part of processing and 
service revenues primarily consist of late fees.

  Servicing fees on securitized loans are revenues derived from credit card 
loans that have been sold to investors through asset securitizations. Such 
revenues are the result of the fees earned for servicing the underlying credit 
card accounts. Loan securitizations have the effect of converting portions of 
net credit income, merchant discount revenue and credit card fees to a 
component of processing and service revenues for the credit card accounts that 
are securitized.

  Merchant discount revenue is derived from the Company's owned Consumer Credit 
Card Services, portions of which are currently deferred and accreted to 
interest revenue.  Generally, credit card sales are subject to a discount 
charged to the merchant based upon contractual percentages.  This percentage 
varies by portfolio and by the type of credit plan offered.  

  Interest revenue represents finance charges derived from owned Consumer 
Credit Card Services, investment interest and the accretion of deferred 
merchant discount revenue. Net credit income is calculated by subtracting 
interest expense and the provision for loan losses from interest revenue.



                                         7

<PAGE>
Recent Events

  On July 15, 1997, the Company announced receipt of notice of termination of 
its System Access Agreement with NOVUS Services, Inc., an affiliated company.  
The agreement will continue under current terms until July 31, 2000. For the 
years ended December 31, 1995 and 1996, and for the nine months ended September 
30, 1997, fees received under this licensing agreement have totaled $8.0 
million, $8.0 million and $5.6 million, respectively. Although the Company 
believes that termination of this agreement on July 31, 2000 will not have a 
material adverse effect on the Company's financial position or results of 
operations prior to that date, the Company is unable to predict the effects of 
the termination thereafter.  
















































                                         8
<PAGE>

The following table presents, for the periods indicated, the percentage 
relationship that certain statement of income items bear to net operating 
revenues and the period-to-period percentage dollar increase or decrease in 
each item.
[CAPTION]
<TABLE>
                                    Three Months Ended      Nine Months Ended
                                       September 30,          September 30,
                                     Period-to-Period       Period-to-Period
                                   --------------------   --------------------
                                    1997   1996  Change    1997   1996  Change
                                   ------ ------ ------   ------ ------ ------
  <S>                              <C>    <C>    <C>      <C>    <C>    <C> 
  NET OPERATING REVENUES:
  Processing and service revenues   80.8%  82.6%   1.2%    80.2%  81.3%   2.1%
  Merchant discount revenue          4.8   12.8  (60.8)     4.2   10.1  (57.5)
  Net credit income                 14.4    4.6  220.9     15.6    8.6   87.7
                                   -----  -----           -----  -----  
                                   100.0  100.0    3.5    100.0  100.0    3.5
  OPERATING EXPENSES:
  Salaries and employee benefits    32.9   29.9   14.0     32.6   28.7   17.2
  Processing and service expenses   26.9   33.4  (16.7)    28.7   31.8   (6.6)
  Other expenses                    20.7   25.4  (15.4)    22.3   24.6   (6.0)
                                   -----  -----           -----  -----  
                                    80.5   88.7   (6.0)    83.6   85.1    1.6

  Income before income taxes        19.5   11.3   77.5     16.4   14.9   14.0
  Income tax expense                 7.6    4.3   80.4      6.3    5.7   15.8
                                   -----  -----           -----  -----  

  Net income                        11.9%   7.0%  75.8%    10.1%   9.2%  12.9%
                                   =====  =====           =====  =====  
</TABLE>

  Net income for the three months ended September 30, 1997 was $9.8 million, an 
increase of $4.2 million, or 75.8%, over the same period a year ago.  Net 
income per common share for the three month period was $0.36, compared to $0.21 
in the prior year's third quarter.  Net income for the nine months ended 
September 30, 1997 was $26.2 million, an increase of $3.0 million, or 12.9%, 
over the same period a year ago.  Net income per common share for the nine 
month period was $0.96, compared to $0.85 for the same period a year ago.

  Net operating revenues for the third quarter of 1997 grew to $82.4 million, 
an increase of 3.5% over the same period last year.  Net operating revenues for 
the nine months ended September 30, 1997 were $260.6 million, an increase of 
3.5% over the same period last year.  The increase in net operating revenues 
for both periods resulted from an increase in net credit income and processing 
and service revenues partially offset by a decrease in merchant discount 
revenue. 

  Processing and service revenues increased 1.2% to $66.5 million for the three 
months ended September 30, 1997, as compared to $65.7 million for the same 
period last year.  For the nine months ended September 30, 1997, processing and 
service revenues increased 2.1% to $209.1 million as compared to $204.8 million 
for the same period last year.  Processing and service revenues represented 
80.8% and 82.6% of net operating revenues for the three months ended September 
30, 1997 and 1996, respectively.  For the nine months ended September 30, 1997 
and 1996, processing and service revenues represented 80.2% and 81.3% of net 
operating revenues, respectively.



                                          9

<PAGE>
Processing and service revenues consisted of the following:
[CAPTION]
<TABLE>

                                      Three Months Ended     Nine Months Ended
                                         September 30,          September 30,
                                      ------------------    -------------------
                                         (In Thousands)        (In Thousands)
                                        1997       1996        1997       1996 
                                      -------    -------    --------   --------
                                          (Unaudited)            (Unaudited)
  <S>                                 <C>        <C>         <C>        <C>
  Transaction processing services     $22,771    $20,698     $71,402    $62,787
  Managed Programs                     21,296     21,074      67,019     66,312
  HSB Programs                         12,310     13,107      37,905     36,308
  Servicing fees on securitized loans  10,130     10,833      32,754     39,401
                                      -------    -------    --------   --------
                                      $66,507    $65,712    $209,080   $204,808
                                      =======    =======    ========   ========
</TABLE>

SUPPLEMENTAL INFORMATION
Components of servicing fees on securitized loans:
[CAPTION]
<TABLE>

                                      Three Months Ended     Nine Months Ended
                                         September 30,          September 30,
                                      ------------------    -------------------
                                         (In Thousands)        (In Thousands)
                                        1997       1996        1997       1996 
                                      -------    -------    --------   --------
                                          (Unaudited)            (Unaudited)
  <S>                                 <C>        <C>        <C>        <C>
  Processing and service revenues     $3,307     $3,463     $11,480    $10,497
  Merchant discount revenue            1,086      1,283       3,031      3,255
  Interest revenue                    26,123     25,042      79,954     80,063
  Interest expense                    (8,421)    (8,231)    (24,934)   (24,835)
  Provision for loan losses          (11,965)   (10,724)    (36,777)   (29,579)
                                     -------    -------     -------    -------
  Servicing fees on securitized 
    loans                            $10,130    $10,833     $32,754    $39,401
                                     =======    =======     =======    =======
</TABLE>

  The increase in revenues from transaction processing services for both the 
three and nine months ended September 30, 1997, resulted primarily from 
increased TeleServices revenue per customer contact processed and from a higher 
volume of Network Transaction Services point-of-sale transactions processed.  
Increased revenues from the sale and servicing of point-of-sale terminals 
further contributed to the increase in transaction processing services revenues 
for the nine months ended September 30, 1997.  The number of TeleServices 
customer contacts processed for the three months ended September 30, 1997, 
totaled 1.9 million, down 3.8% from 2.0 million in the same period in 1996.  
For the nine months ended September 30, 1997, the number of TeleServices 
customer contacts processed totaled 6.6 million, down 2.2% from 6.8 million in 
the same period in 1996. The decrease in the number of customer contacts was 
offset by an increase in revenues per customer contact processed due to a 
greater mix of technical help desk calls to total calls processed. TeleServices 
minutes increased to 11.9 million and 42.2 million for the three and nine 
months ended September 30, 1997 from 10.8 million and 35.5 million for the same 
periods in 1996.  (The number of contacts processed for the nine months ended 
September 30, 1997 reflects a correction to previously reported numbers by 
increasing the first and second quarters of 1997 by .1 million and .2 million, 
                                         10

<PAGE>
respectively.  Also, the number of minutes for the nine months ended September 
30, 1997 reflects a correction to previously reported numbers by increasing the 
first and second quarters of 1997 by 5.9 million and 4.1 million, 
respectively.)  For the three months ended September 30, 1997, the number of 
point-of-sale transactions processed totaled 118.5 million, up 7.6% from 110.1 
million in the same period in 1996. For the nine months ended September 30, 
1997, the number of point-of-sale transactions processed totaled 329.5 million, 
up 5.6% from 312.1 million in the same period in 1996.  The increase in 
revenues from Managed programs for both the three and nine months ended 
September 30, 1997, resulted primarily from an increase in the volume of 
Commercial Account Processing Services provided, offset by a decrease in credit 
life insurance program revenues.  The decrease in revenues from HSB programs 
for the three months ended September 30, 1997, was due to a decrease in late 
fee revenue resulting primarily from a lower number of delinquent accounts.  
The increase in revenues from HSB programs for the nine months ended September 
30, 1997, was due to an increase in late fee revenue resulting primarily from 
changes in late fee terms initiated in late 1996.  The decrease in servicing 
fees on securitized loans for the three months ended September 30, 1997 was due 
primarily to a higher rate of credit losses on securitized loans, partially 
offset by an increase in interest revenue on securitized loans.  The decrease 
in servicing fees on securitized loans for the nine months ended September 30, 
1997 was due primarily to a higher rate of credit losses on securitized loans. 

  Merchant discount revenue decreased 60.8% to $4.0 million for the three 
months ended September 30, 1997, as compared to $10.2 million for the same 
period last year. For the nine months ended September 30, 1997 merchant 
discount revenue decreased 57.5% to $10.8 million in 1997 compared to the same 
period last year.  The decrease in merchant discount revenue for the three and 
nine months ended September 30, 1997, resulted from decreased sales activity 
and from the deferral of $2.8 million of merchant discount revenues in the 
third quarter of 1997 and the deferral of $6.3 million of merchant discount 
revenues in the first nine months of 1997 related to interest-deferred 
promotional payment plans.  The deferral and accretion of merchant discount 
revenue did not begin until the fourth quarter of 1996.  As of September 30, 
1997, $2.3 million of merchant discount revenue is deferred which will be 
accreted as interest income over the life of the promotional payment plans.  
Merchant discount revenue was 4.8% and 12.8% of net operating revenues for the 
three months ended September 30, 1997 and 1996, respectively, and was 4.2% and 
10.1% of net operating revenues for the nine months ended September 30, 1997 
and 1996, respectively.

  For the three months ended September 30, 1997, net credit income increased 
220.9% to $11.9 million from the same period a year ago as a result of higher 
net interest income and a lower provision for loan losses.  For the nine months 
ended September 30, 1997, net credit income increased 87.7% to $40.7 million 
from the same period a year ago as a result of higher net interest income, 
partially offset by an increase in the provision for loan losses. 

  The increase in interest revenue for the three and nine months ended 
September 30, 1997, resulted primarily from the accretion of $3.3 million and 
$13.2 million of deferred merchant discount revenue into interest income, 
respectively, related to interest-deferred promotional payment plans and an 
increase in the yield on credit card loans due in part to performance-based 
pricing initiatives implemented in 1996, partially offset by higher charge-offs 
of interest revenue.  




                                          11
<PAGE>

  The decrease in interest expense for the three and nine months ended 
September 30, 1997, resulted from a decrease in average borrowings due mainly 
to a decrease in credit card loans, partially offset by higher interest rates 
on borrowings. Furthermore, the decrease in interest expense for the nine 
months ended September 30, 1997 also resulted from lower interest expense 
associated with interest rate contracts. 

  The decrease in the provision for loan losses for the three months ended 
September 30, 1997, is attributable to a decline in the amount of credit card 
loans outstanding, partially offset by an increase in the net charge-off rate.  
The increase in provision for loan losses for the nine months ended September 
30, 1997, is attributable to an increase in the net charge-off rate, partially 
offset by a decline in the amount of credit card loans outstanding.  The 
decline in credit card loans, which creates a provision benefit, is related to 
certain portfolios that are in paydown such as the Incredible Universe and 
McDuff portfolios, and to the Company's portfolio improvement program designed 
to limit the Company's exposure to higher risk accounts.  Net charge-offs as a 
percentage of average credit card loans on an owned basis increased to 9.91% in 
the third quarter of 1997 from 8.86% in the third quarter of 1996.  For the 
nine months ended September 30, 1997 and 1996, net charge-offs as a percentage 
of average credit card loans on an owned basis increased to 9.25% from 7.44%. 

  The industry-wide trend of increasing net charge-off rates, which the Company 
believes is related to increased consumer debt levels and bankruptcy rates, 
contributed to the increase in the Company's net charge-off rate.  The Company 
believes that this industry-wide trend may continue and the Company expects to 
experience a higher net charge-off rate for the full year 1997 as compared to 
1996. 

  The Company continues to take corrective measures to reduce future charge-
offs through its portfolio improvement program which analyzes credit risk and 
credit behavior scores for existing accounts, taking into consideration their 
current financial condition; re-scoring existing accounts and reducing credit 
lines or closing accounts as appropriate; accelerating the development schedule 
for new credit scoring models; and increasing collection efforts by adding 
collectors, expanding call hours, and identifying high-risk accounts to 
accelerate contacts.  In 1997, the Company intensified these efforts and 
continues to implement measures designed to improve the credit quality of both 
new and existing credit card accounts.  To help mitigate the impact of higher 
charge-offs, the Company has also instituted changes in cardholder terms and 
has instituted the implementation of certain client pricing revisions, 
including those for promotional programs.  The Company believes these actions, 
along with other operational changes, will have an increasingly positive impact 
over time and will serve to moderate the effects of a difficult credit 
environment.

  The Company's expectations about future charge-off rates and portfolio 
improvements are subject to uncertainties that could cause actual results to 
differ materially from the Company's expectations, as described above.  Factors 
that influence the level and direction of credit card loan delinquencies and 
charge-offs include changes in consumer spending and loan payment patterns, 
bankruptcy trends, the seasoning of the Company's loan portfolio, interest rate 
movements and their impact on consumer behavior, and the rate and magnitude of 
changes in the Company's credit card loan portfolio, including the overall mix 
of accounts, products and loan balances within the portfolio.





                                         12
<PAGE>
  For the three months ended September 30, 1997, total operating expenses of 
$66.3 million represented a decrease of 6.0% over the same period last year.  
Total operating expenses as a percentage of net operating revenues declined to 
80.5% for the three months ended September 30, 1997, as compared to 88.7% for 
the same period a year ago.  For the nine months ended September 30, 1997, 
total operating expenses of $217.9 million represented an increase of 1.6% over 
the same period last year.  Total operating expenses as a percentage of net 
operating revenues declined to 83.6% for the nine months ended September 30, 
1997, as compared to 85.1% for the same period a year ago.

  For the three months ended September 30, 1997, salaries and employee benefits 
totaled $27.1 million, an increase of 14.0% from $23.7 million from the same 
period a year ago. For the nine months ended September 30, 1997, salaries and 
employee benefits totaled $84.9 million, an increase of 17.2% from $72.4 
million from the same period a year ago.  The Company added approximately 185 
additional full-time equivalent employees since September 30, 1996. Nearly all 
of these new employees were assigned to field processing facilities to address 
increased collection efforts and to provide for increased TeleServices volume.

  Processing and service expenses include data processing, communications and 
account processing expenses, which are influenced, in part, by changes in 
transaction volume. For the three months ended September 30, 1997, such 
expenses decreased by 16.7% to $22.2 million, on a period-to-period basis. For 
the nine months ended September 30, 1997, processing and service expenses 
decreased by 6.6% to $74.8 million, from the same period a year ago.  The 
decrease in processing and service expenses for both periods resulted from a 
decrease in credit life insurance expenses, an adjustment resulting from the 
sale of the Company's indirect interest in one of the Company's transaction 
processing vendors and from a lower volume of private label transactions 
processed.  Processing and service expenses as a percentage of net operating 
revenues declined to 26.9% for the three months ended September 30, 1997, as 
compared to 33.4% for the comparable prior year period.  Processing and service 
expenses as a percentage of net operating revenues declined to 28.7% for the 
nine months ended September 30, 1997, as compared to 31.8% for the comparable 
prior year period.

  Other expenses include expenses relating to business development, merchant 
marketing, occupancy, advertising and promotion, cost of terminals sold, credit 
card fraud and other miscellaneous employee and administrative expenses.  For 
the three months ended September 30, 1997 and 1996, other expenses totaled 
$17.1 million and $20.2 million, respectively.  For the nine months ended 
September 30, 1997 and 1996, other expenses totaled $58.2 million and $61.9 
million, respectively.  The decrease in other expenses for both periods 
resulted from decreased merchant marketing expenses, an adjustment resulting 
from the sale of the Company's indirect interest in one of the Company's 
transaction processing vendors and decreased fraud losses.  The expense 
decreases for both periods were partially offset by increased occupancy, 
outside collection agency and administrative expenses.  Other expenses were 
20.7% and 25.4% of net operating revenues for the three months ended September 
30, 1997 and 1996, respectively.  Other expenses were 22.3% and 24.6% of net 
operating revenues for the nine months ended September 30, 1997 and 1996, 
respectively.








                                         13
<PAGE>
The table below sets forth owned credit card loan net charge-off and loan 
delinquency information with supplemental total loan information regarding the 
Company's credit card loan portfolio as of and for the year-to-date periods 
indicated.
[CAPTION]
<TABLE>
                                September 30, 1997     September 30, 1996       December 31, 1996
                            ----------------------------------------------------------------------
                                             Total                  Total                    Total
                                 Owned       Loans*     Owned       Loans*      Owned        Loans*
                                 -----       -----      -----       -----       -----        -----
(Dollars in Thousands)               (Unaudited)           (Unaudited)
<S>                         <C>         <C>         <C>         <C>         <C>         <C>
Average credit card loans   $1,437,842  $2,017,842  $1,516,941  $2,099,666  $1,512,986  $2,095,026
Period-end credit card 
loans                       $1,245,080  $1,825,080  $1,433,373  $2,013,373  $1,637,507  $2,217,507

Net charge-offs as a % of 
average credit card loans         9.25%       9.02%       7.44%       7.29%       7.82%      7.66%

Accruing loans contractually 
past due as to principal and 
interest payments
  30-89 days                      6.20%       5.66%       5.74%       5.29%       4.97%      4.88%
  90-179 days                     4.58%       4.14%       4.15%       3.79%       4.15%      3.89%

* Total loans represents both owned and securitized credit card loans.

</TABLE>
LIQUIDITY AND CAPITAL RESOURCES

  Through its liquidity policies, the Company seeks to ensure access to cost 
effective funding in all business environments.  This objective is accomplished 
through diversification of funding sources, extension of funding terms and 
staggering of liability maturities.

  The Company's capital policies seek to maintain a strong balance sheet 
consistent with the Company's business risks as well as regulatory 
requirements.  The Company's subsidiary bank, HSB, targets the maintenance of 
capital levels considered for regulatory purposes to be "well-capitalized" as 
defined by the FDIC Improvement Act of 1991.

  The Company finances its operations from three principal sources:  deposit 
taking activities utilizing certificates of deposit ("CDs")in denominations of 
$100,000 or more; securitizations of credit card loans; and borrowings from 
MSDWD.

  HSB administers a certificate of deposit program through which CDs are issued 
to investors in denominations of $100,000 or more.  Such CDs are issued to 
investors under two programs - an institutional CD program and a retail CD 
program.  CDs under the institutional CD program are issued directly by HSB to 
the investor and generally have a maturity of one to twelve months.  CDs under 
the retail CD program are issued to investors through Dean Witter Reynolds 
Inc., a subsidiary of MSDWD, and generally have a maturity of two to 10 years.  
As of September 30, 1997, CDs outstanding were $531.3 million, of which 
institutional CDs represented $259.4 million and retail CDs represented $271.9 
million.

  HSB maintains a loan securitization program with Receivables Capital 
Corporation ("RCC"), and at September 30, 1997, outstanding loans sold under 
such program were $280.0 million.  HSB also maintains a loan securitization 
program with Barton Capital Corporation ("BCC"), and at September 30, 1997, 
outstanding loans sold under such program were $300.0 million.  At September 
30, 1997, $580.0 million or 31.8% of the HSB Program loans had been sold 
through loan securitizations.
                                       14
<PAGE>
  The RCC loan securitization program has been amended so that it now expires 
October 31, 1998. The BCC facility is scheduled to expire in April 1998.  The 
amended and restated agreements with RCC and BCC include the elimination of the 
MSDWD guarantee (which provided credit support in the transaction) and its 
replacement with a funded cash collateral account recorded on the balance sheet 
as "amounts due from asset securitizations."  Funding for this cash collateral 
account is to be provided by a special purpose corporation established as a 
subsidiary of the Company.  The Company expects to renew or replace these 
facilities on or prior to their expiration dates.  If these programs are not 
extended on or prior to their expiration dates, collections allocable to RCC 
and BCC under the programs will be paid to RCC or to BCC, as applicable, and 
the interests of RCC and of BCC in the applicable securitization pool will 
gradually decline to zero.  Any receivables originated after a program's 
expiration date would remain on the Company's consolidated balance sheet.

  The Company has an Amended and Restated Borrowing Agreement (as amended, the 
"Borrowing Agreement") and a facility fee letter agreement (as amended, the 
"Facility Fee Agreement")(collectively, the "Financing Agreements"), with 
MSDWD, pursuant to which MSDWD has agreed to provide financing to the Company.  
The maximum amount available under the Borrowing Agreement, which expires April 
11, 1998, is $1.2 billion.  At October 31, 1997, the Company had $550.2 million 
outstanding under the Borrowing Agreement.  Under the Facility Fee Agreement, 
the Company has agreed to pay certain monthly facility fees in connection with 
its financing arrangements with MSDWD.

  The Company expects to renew or replace the Financing Agreements prior to the 
expiration dates of such Financing Agreements.  The Company is continuing to 
evaluate alternative sources of financing to replace all or a portion of its 
financing arrangements with MSDWD.  If the Company were unable to reach a 
satisfactory agreement with MSDWD for the renewal or the replacement of the 
Financing Agreements, the Company believes it would be able to meet its 
financial requirements over the next twelve months from other sources.

  Cash flows from operating activities resulted in net proceeds of cash of 
$79.4 million and $159.0 million for the nine months ended September 30, 1997 
and 1996, respectively. 

  Cash flows from investing activities for the nine months ended September 30, 
1997 resulted in net proceeds of cash of $279.6 million, primarily consisting 
of net principal collected on credit card loans, representing the difference 
between sales made using the cards and payments received from cardholders 
($288.6 million), partially offset by purchases of premises and equipment 
resulting in net uses of cash ($9.1 million).  Cash flows from investing 
activities for the nine months ended September 30, 1996 resulted in net 
proceeds of cash of $95.8 million, primarily consisting of net proceeds of cash 
from the sale of a private label credit card portfolio ($138.9 million) 
partially offset by net uses of cash consisting of net principal disbursed on 
credit card loans ($38.5 million) and the purchases of premises and equipment 
($7.1 million).

  Cash flows from financing activities for the nine months ended September 30, 
1997 resulted in net uses of cash of $359.0 million, primarily consisting of a 
net decrease in borrowings due to affiliated companies ($431.6 million), 
partially offset by a net increase in interest-bearing deposits resulting from 
the issuance of jumbo certificates of deposit ($76.9 million). Cash flows from 
financing activities for the nine months ended September 30, 1996 resulted in 
net uses of cash of $246.3 million, primarily consisting of a net decrease in 
borrowings due to affiliated companies ($328.5 million), partially offset by a 
net increase in interest-bearing deposits resulting from the issuance of jumbo 
                                        15
<PAGE>
certificates of deposit ($85.0 million).  At September 30, 1997 and 1996, the 
Company had cash and cash equivalents of $15.2 million and $17.4 million, 
respectively.

  The Company currently has no material commitments requiring capital 
expenditures.  The Company has not paid any dividends on its Common Stock and 
anticipates retaining future operating cash flows for the foreseeable future to 
finance growth and business expansion rather than to pay dividends to its 
stockholders. Any future determination as to the payment of dividends will 
depend upon results of operations, capital requirements, financial condition of 
the Company and such other factors as the Board of Directors of the Company in 
its discretion shall determine. Periodically, SPS and HSB have paid dividends 
to the Company. The amount of dividends that can be paid to the Company by HSB 
is restricted by applicable banking regulations.

INTEREST RATE RISK

  The Company's interest rate risk policies are designed to reduce the 
volatility of earnings resulting from changes in interest rates.  This is 
accomplished primarily through matched financing, where possible, which entails 
matching the repricing schedules of credit card loans and the related 
financing.  Matched financing includes the funding of variable rate credit card 
loans that are primarily indexed to the prime rate with floating rate financing 
that is primarily indexed to commercial paper rates and the federal funds rate. 
The Company generally retains basis risk between the prime rate and commercial 
paper/federal funds rates on variable rate credit card loans. Fixed rate credit 
card loans are generally funded with fixed rate financing (financing with an 
initial term of one year or greater).

  The Company also funds fixed rate credit card loans with floating rate 
financing by utilizing interest rate swaps, cost of funds agreements and 
interest rate caps to adjust the repricing characteristics of its financing to 
fixed rate financing.  Under interest rate swaps and cost of funds agreements, 
the Company effectively exchanges the interest payments on its financing with 
those of a counterparty. Interest rate cap agreements effectively establish a 
maximum interest rate on certain of the Company's floating rate borrowings. 
Interest rate swap agreements are entered into with an affiliate. Interest rate 
cap agreements are entered into with institutions that are established dealers 
in these instruments and that maintain certain minimum credit criteria 
established by the Company. Costs of funds agreements are entered into as part 
of agreements pursuant to which the Company owns the credit card loan portfolio 
and provides private label credit card processing services to certain of its 
credit card merchant clients.

  To reduce the volatility of interest expense from changes in interest rates, 
the Company had outstanding interest rate swaps and cost of funds agreements 
with notional amounts of $457.3 million and $499.1 million at September 30, 
1997 and 1996, respectively.

  At September 30, 1997, the Company had no interest rate cap agreements.  At 
September 30, 1996, the Company had outstanding interest rate cap agreements 
with notional amounts of $40.0 million.

  At September 30, 1997 and 1996, the Company's interest rate swap agreements 
had maturities ranging from October 1997 to December 2000, and from December 
1996 to December 2000, respectively.



                                          16
<PAGE>
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

  In the normal course of business, the Company is involved in litigation 
incidental to the business.  The consequences of these matters are not 
presently determinable but, in the opinion of management after consultation 
with counsel, the ultimate liability, if any, will not have a material adverse 
effect on the consolidated results of operations or financial position of the 
Company.

Item 2.  Changes in Securities.- 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.

    27.0 Financial Data Schedule

(b) Reports on Form 8-K.

      A Current Report on form 8-K, dated October 22, 1997, was filed with the 
Securities and Exchange Commission reporting Item 7 relating to the 
Company's third quarter earnings release.

      A Current Report on form 8-K, dated July 31, 1997, was filed with the 
Securities and Exchange Commission reporting Item 7 relating to the 
Company's 1997 Second Quarter Report to Stockholders.

      A Current Report on form 8-K, dated July 15, 1997, was filed with the 
Securities and Exchange Commission reporting Item 7 relating to the 
Company's second quarter earnings release.





                                        17
<PAGE>
                                 SIGNATURE

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.



                                    SPS TRANSACTION SERVICES, INC.
                                    ------------------------------
                                            (Registrant)




Date:  November 12, 1997            By:/s/ Russell J. Bonaguidi
       -----------------            -----------------------------------
                                    Russell J. Bonaguidi
                                    Vice President and Controller (Duly
                                    Authorized Officer and Principal
                                    Accounting Officer)



















                                        18
<PAGE>
EDGAR
Exhibit    Description of Exhibits
-------    -----------------------

  27.0     Financial Data Schedule

18