**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10–Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Forthe quarter ended June 30, 2005**

 

**CommissionFile Number: 001–32033**

 

**TNS, INC.**

(Exact name of registrant asspecified in its charter)

 
| **DELAWARE**                                                    | ** ** | **36-4430020**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or  jurisdiction of incorporation or organization)       |       | (I.R.S.  Employer Identification Number) |
|                                                            |       |                                     |
| **11480 Commerce Park Drive, Suite 600  Reston, VA 20191** |
| (Address of  principal executive offices)                       |
|                                                            |       |                                     |
| **(703) 453-8300**                                         |
| (Registrant’s  telephone number, including area code)      |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirement for the past 90 days.   ý Yes    o No

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inRule 12b–2 of the Exchange Act).    o Yes    ý No

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of Common Stock,as of the latest practicable date.

 
|                                                    | Shares Outstanding as of  July 1, 2005 |   |
|---------------------------------------------------------|---------------------------------------------|--------|
| **21,834,326 Shares of Common Stock, $0.001 par value** |

 

 

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**TNS, INC.INDEX**

 
| **Part I:**  |   | **FINANCIAL INFORMATION** |
|-------------------|--------|---------------------------|
|              |   |                      |   |   |
|              |   | Item 1.              |   | Condensed Consolidated Financial Statements (Unaudited) |
|              |   |                      |   | Condensed Consolidated Balance Sheets as of December 31, 2004  and June 30, 2005 |
|              |   |                      |   | Condensed Consolidated Statements of Operations for the three and six  months ended June, 2004 and 2005 |
|              |   |                      |   | Condensed Consolidated Statements of Cash Flows for the six months  ended June 30, 2004 and 2005 |
|              |   |                      |   | Notes to Condensed Consolidated Financial Statements |
|              |   | Item 2.              |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|              |   | Item 3.              |   | Quantitative  and Qualitative Disclosures About Market Risk |
|              |   | Item 4.              |   | Controls and Procedures |
|              |   |                      |   |   |
| **Part II:** |   | **OTHER INFORMATION**     |
|              |   |                      |   |   |
|              |   | Item 1.              |   | Legal Proceedings |
|              |   | Item 2.              |   | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities |
|              |   | Item 3.              |   | Default Upon Senior Securities |
|              |   | Item 4.              |   | Submission of Matters to a Vote of Security  Holders |
|              |   | Item 5.              |   | Other Information |
|              |   | Item 6.              |   | Exhibits |

 

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**PART I—FINANCIAL INFORMATION**

 

**Item 1. Condensed Consolidated Financial Statements (Unaudited)**

 

**TNS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(dollars in thousands, except share and per share data)**

 
| ** **                                                                                                                             | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|
| ** **                                                                                                                             | ** ** | ** **                  | ** ** | **(unaudited)**    | ** ** |
| **ASSETS**                                                                                                                             | ** ** | ** **                  | ** ** | ** **         | ** ** |
| Current assets:                                                                                                                        |       |                        |       |               |       |
| Cash and cash equivalents                                                                                                              |       | $                           | 19,788     |               | $          | 19,689 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $4,756 and $4,925, respectively                                        |       | 47,896                      |       | 46,213             |       |
| Other current assets                                                                                                                   |       | 9,349                       |       | 12,009             |       |
| Total current assets                                                                                                                   |       | 77,033                      |       | 77,911             |       |
| Property and equipment, net                                                                                                            |       | 50,587                      |       | 49,844             |       |
| Identifiable intangible assets, net                                                                                                    |       | 205,208                     |       | 194,849            |       |
| Goodwill                                                                                                                               |       | 5,386                       |       | 5,261              |       |
| Other assets                                                                                                                           |       | 18,198                      |       | 19,226             |       |
| Total assets                                                                                                                           |       | $                           | 356,412    |               | $          | 347,091 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                          |       |                        |       |               |       |
| Current liabilities:                                                                                                                   |       |                        |       |               |       |
| Current portion of long-term debt                                                                                                      |       | $                           | 9,000      |               | $          | 1,650 |   |
| Accounts payable, accrued expenses and  other current liabilities                                                                      |       | 43,528                      |       | 42,616             |       |
| Deferred revenue                                                                                                                       |       | 14,419                      |       | 10,714             |       |
| Total current liabilities                                                                                                              |       | 66,947                      |       | 54,980             |       |
| Long-term debt, net of current portion                                                                                                 |       | 42,000                      |       | 162,938            |       |
| Other liabilities                                                                                                                      |       | 4,967                       |       | 3,008              |       |
| Total liabilities                                                                                                                      |       | 113,914                     |       | 220,926            |       |
| Commitments and contingencies                                                                                                          |       |                        |       |               |       |
| Stockholders’ equity:                                                                                                             |       |                        |       |               |       |
| Common stock, $0.001 par value; 130,000,000  shares authorized; 27,996,053 and 21,834,326 shares issued and outstanding,  respectively |       | 28                          |       | 22                 |       |
| Treasury stock                                                                                                                         |       | —                      |       | (468               | )          |
| Additional paid-in capital                                                                                                             |       | 281,766                     |       | 170,052            |       |
| Accumulated deficit                                                                                                                    |       | (37,333                     | )          | (35,628            | )          |
| Deferred stock compensation                                                                                                            |       | (4,766                      | )          | (8,445             | )          |
| Accumulated other comprehensive income                                                                                                 |       | 2,803                       |       | 632                |       |
| Total stockholders’ equity                                                                                                        |       | 242,498                     |       | 126,165            |       |
| Total liabilities and stockholders’ equity                                                                                        |       | $                           | 356,412    |               | $          | 347,091 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

2

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**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(dollars in thousands, except share and per share data)**

 
| ** **                                                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues                                                                        |       | $                                     | 60,940     |                                | $          | 65,354 |   | $ | 121,096 |   | $ | 128,486 |   |
| Operating expenses:                                                             |       |                                  |       |                                |       |   |   |   |   |
| Cost of network services, exclusive of the  items shown separately below        |       | 29,133                                |       | 30,966                              |       | 59,825 |   | 61,196 |   |
| Engineering and development                                                     |       | 3,494                                 |       | 4,034                               |       | 6,932 |   | 7,940 |   |
| Selling, general, and administrative                                            |       | 12,806                                |       | 12,957                              |       | 23,825 |   | 26,051 |   |
| Depreciation and amortization of property  and equipment                        |       | 4,950                                 |       | 4,964                               |       | 9,756 |   | 9,827 |   |
| Amortization of intangible assets                                               |       | 6,196                                 |       | 7,249                               |       | 14,705 |   | 13,514 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Total operating expenses                                                        |       | 56,579                                |       | 60,170                              |       | 115,043 |   | 118,528 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Income from operations                                                          |       | 4,361                                 |       | 5,184                               |       | 6,053 |   | 9,958 |   |
| Interest expense                                                                |       | (1,004                                | )          | (3,228                              | )          | (5,437 | ) | (4,039 | ) |
| Interest income                                                                 |       | 50                                    |       | 134                                 |       | 86 |   | 250 |   |
| Other income (expense), net                                                     |       | (268                                  | )          | (194                                | )          | (168 | ) | (498 | ) |
| Income before income taxes and equity in  net loss of unconsolidated affiliates |       | 3,139                                 |       | 1,896                               |       | 534 |   | 5,671 |   |
| Income tax provision                                                            |       | (1,612                                | )          | (929                                | )          | (630 | ) | (2,834 | ) |
| Equity in net loss of unconsolidated  affiliates                                |       | (61                                   | )          | (716                                | )          | (98 | ) | (1,132 | ) |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                                                               |       | 1,466                                 |       | 251                                 |       | (194 | ) | 1,705 |   |
| Dividends on preferred stock                                                    |       | —                                |       | —                              |       | (3,428 | ) | — |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) attributable to common  stockholders                          |       | $                                     | 1,466      |                                | $          | 251 |   | $ | (3,622 | ) | $ | 1,705 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Basic net income (loss) per common share                                        |       | $                                     | 0.05       |                                | $          | 0.01 |   | $ | (0.17 | ) | $ | 0.07 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Diluted net income (loss) per common share                                      |       | $                                     | 0.05       |                                | $          | 0.01 |   | $ | (0.17 | ) | $ | 0.06 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Basic weighted average common shares  outstanding                               |       | 26,778,520                            |       | 24,157,435                          |       | 20,842,355 |   | 26,072,053 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Diluted weighted average common shares  outstanding                             |       | 27,206,244                            |       | 24,529,448                          |       | 20,842,355 |   | 26,445,417 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

3

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**TNS, INC.CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(dollars in thousands)**

 
| ** **                                                                                           | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                           | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                                |       |                               |       |   |   |
| Net income (loss)                                                                                    |       | $                                  | (194       | ) | $ | 1,705 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:            |       |                               |       |   |   |
| Depreciation and amortization of property  and equipment                                             |       | 9,756                              |       | 9,827 |   |
| Amortization of intangible assets                                                                    |       | 14,705                             |       | 13,514 |   |
| Deferred income tax (benefit) provision                                                              |       | (1,728                             | )          | 101 |   |
| Loss on disposal of property and equipment                                                           |       | —                             |       | 33 |   |
| Amortization and write-off of deferred  financing costs                                              |       | 2,723                              |       | 1,390 |   |
| Equity in net loss of unconsolidated  affiliates                                                     |       | 98                                 |       | 1,132 |   |
| Stock compensation                                                                                   |       | 438                                |       | 1,034 |   |
| Changes in operating assets and  liabilities, net of effect of acquisitions:                         |       |                               |       |   |   |
| Accounts receivable, net                                                                             |       | (5,062                             | )          | 1,683 |   |
| Other current and noncurrent assets                                                                  |       | (438                               | )          | (1,221 | ) |
| Accounts payable, accrued expenses and  other current and noncurrent liabilities                     |       | (2,947                             | )          | (2,509 | ) |
| Deferred revenue                                                                                     |       | 2,231                              |       | (3,705 | ) |
|                                                                                                 |       |                               |       |   |   |
| Net cash provided by operating activities:                                                           |       | 19,582                             |       | 22,984 |   |
|                                                                                                 |       |                               |       |   |   |
| Cash flows from investing activities:                                                                |       |                               |       |   |   |
| Purchases of property and equipment                                                                  |       | (8,204                             | )          | (10,211 | ) |
| Purchase of Synapse assets from USWD                                                                 |       | (6,077                             | )          | — |   |
| Purchase of vending assets from USWD                                                                 |       | (3,748                             | )          | — |   |
| Investment in affiliated entities                                                                    |       | (100                               | )          | (2,802 | ) |
| Purchase of FusionPoint assets                                                                       |       | —                             |       | (3,501 | ) |
|                                                                                                 |       |                               |       |   |   |
| Net cash used in investing activities:                                                               |       | (18,129                            | )          | (16,514 | ) |
|                                                                                                 |       |                               |       |   |   |
| Cash flows from financing activities:                                                                |       |                               |       |   |   |
| Proceeds from issuance of long-term debt,  net of financing costs of $1,979 and $2,727, respectively |       | 84,531                             |       | 165,188 |   |
| Repayment of long-term debt                                                                          |       | (155,896                           | )          | (54,328 | ) |
| Payment of long-term debt financing costs                                                            |       | —                             |       | (75 | ) |
| Payment of dividends on preferred stock                                                              |       | (173                               | )          | — |   |
| Proceeds from stock option exercises                                                                 |       | 16                                 |       | 436 |   |
| Purchase of treasury stock                                                                           |       | —                             |       | (468 | ) |
| Purchase of common stock, inclusive of fees  of $996                                                 |       | —                             |       | (116,869 | ) |
| Proceeds from issuance of common stock, net                                                          |       | 71,516                             |       | — |   |
|                                                                                                 |       |                               |       |   |   |
| Net cash used in financing activities:                                                               |       | (6                                 | )          | (6,116 | ) |
|                                                                                                 |       |                               |       |   |   |
| Effect of exchange rates on cash and cash  equivalents                                               |       | (108                               | )          | (453 | ) |
|                                                                                                 |       |                               |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                |       | 1,339                              |       | (99 | ) |
| Cash and cash equivalents, beginning of  period                                                      |       | 11,074                             |       | 19,788 |   |
|                                                                                                 |       |                               |       |   |   |
| Cash and cash equivalents, end of period                                                             |       | $                                  | 12,413     |   | $ | 19,689 |   |
|                                                                                                 |       |                               |       |   |   |
| Supplemental disclosures of cash flow  information:                                                  |       |                               |       |   |   |
| Cash paid for interest                                                                               |       | $                                  | 3,397      |   | $ | 969 |   |
|                                                                                                 |       |                               |       |   |   |
| Cash paid for income taxes                                                                           |       | $                                  | 2,832      |   | $ | 3,009 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

4

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**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

 

**1.****                                      Descriptionof Business and Basis of Presentation**

 

TNS, Inc.(TNS or the Company) is a Delaware corporation. TNS is a leading provider ofbusiness–critical data communications services to processors of credit card,debit card and automated teller machine (ATM) transactions. TNS is also a leadingprovider of call signaling and database access services to the domestictelecommunications industry and of secure data and voice network services tothe global financial services industry. TNS’ data communication services enablesecure and reliable transmission of time–sensitive, transaction–relatedinformation critical to its customers’ operations. The Company’s customersoutsource their data communication requirements to TNS because of the Company’sexpertise, comprehensive customer support, and cost–effective services. TNSprovides services to customers in the United States and increasingly tointernational customers.  Internationally,TNS operates networks in 18 countries, including Canada and countries in Europeand the Asia–Pacific region, and uses these networks to provide services tocustomers in these countries.

 

The Company provides its services through itsmultiple data networks, each designed specifically for transactionapplications. These networks support a variety of widely accepted communicationsprotocols, are designed to be scalable and are accessible by multiple methods,including dial–up, dedicated, wireless and Internet connections.

 

The Company has four business divisions:(1) the point–of–sale/point–of–service (POS) division, which provides datacommunications services to payment processors in the U.S. and Canada,(2) the telecommunication services division (TSD), which provides callsignaling services and database access services targeting primarily thetelecommunications industry, (3) the financial services division (FSD),which provides data and voice communications services to the financial servicescommunity in support of the Financial Information eXchange (FIX) messagingprotocol and other transaction–oriented trading applications, and (4) theinternational services division (ISD), which markets the Company’s POS andfinancial services in countries outside of the United States and Canada.

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles (GAAP) for interim financialinformation and in conjunction with the rules and regulations of theSecurities and Exchange Commission (SEC). Certain information and note disclosuresnormally included in the annual financial statements, required by GAAP, havebeen condensed or omitted pursuant to those rules and regulations,although the Company believes that the disclosures made are adequate to makethe information presented not misleading.

 

In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect allnecessary adjustments (all of which are of a normal and recurring nature) thatare necessary for fair presentation for the periods presented. The results ofoperations for the three and six months ended June 30, 2005 are not necessarilyindicative of the results to be expected for any subsequent interim period orfor the fiscal year. It is suggested that these unaudited condensed consolidatedfinancial statements be read in conjunction with the Company’s annual report onForm 10-K filed with the SEC on March 31, 2005, which includesconsolidated financial statements and the notes thereto for the year endedDecember 31, 2004.

 

**Use of Estimates**

 

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of certain assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements.Significant estimates affecting the consolidated financial statements includemanagement’s judgments regarding the allowance for doubtful accounts, reservesfor excess and obsolete inventories, future cash flows from long–lived assets,and accrued expenses for probable losses. Actual results could differ fromthose estimates.

 

5

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**Revenue Recognition**

 

The Companyrecognizes revenue when persuasive evidence of an agreement exists, the termsare fixed and determinable, services are performed, and collection is probable.Cash received in advance of revenue recognition is recorded as deferredrevenue. POS services revenue is derived primarily from per transaction feespaid by the Company’s customers for the transmission of transaction data,through the Company’s networks, between payment processors and POS or ATMterminals. Telecommunication services revenue is derived primarily from fixedmonthly fees for call signaling services and per query fees charged fordatabase access and validation services. Financial services revenue is derivedprimarily from monthly recurring fees based on the number of customerconnections to and through the Company’s networks. Incentives granted to newcustomers or upon contract renewals are deferred and recognized ratably as areduction of revenue over the contract period to the extent that the incentivesare recoverable against the customer’s minimum purchase commitments under thecontract. In addition, the Company receives installation fees related to theconfiguration of the customers’ systems. Revenue from installation fees isdeferred and recognized ratably over the customer’s contractual service period,generally three years.

 

**Cost of Network Services**

 

Cost of network services is comprisedprimarily of telecommunications charges, which include data transmission anddatabase access charges, leased digital capacity charges, circuit installationcharges and activation charges. The cost of data transmission is based on acontract or tariff rate per minute of usage in addition to a prescribed rateper transaction for certain vendors. The costs of database access, circuits,installation and activation charges are based on fixed fee contracts with localexchange carriers and interexchange carriers. The cost of network services alsoincludes salaries, equipment maintenance and other costs related to the ongoingoperation of the Company’s data networks. These costs are expensed by theCompany as incurred. Direct costs of installations are deferred and amortizedover three years. The Company records its accrual for telecommunication chargesbased upon network services utilized at historical invoiced rates. Depreciationexpense on our network equipment and amortization of developed technology areexcluded from our cost of network services and included in depreciation andamortization of property and equipment and amortization of intangible assets inour condensed consolidated statement of operations.

 

**Goodwill and Identifiable Intangible Assets**

 

Amortizationof intangible assets is recorded on a straight-line basis over their expecteduseful lives. The Company evaluates the useful lives assigned to intangibleassets on a regular basis

 

Developedtechnology represents the Company’s proprietary knowledge, including processesand procedures, used to configure its networks. Network equipment and software,both purchased and internally developed, are components used to build thenetworks and are separately identified assets classified within property andequipment.

 

For purposes of measuring and recognizingimpairment of long-lived assets, including intangibles, the Company assesseswhether separate cash flows can be attributed to the individual asset.  For the Company’s customer relationshipassets, the Company recognizes and measures impairment upon the termination orloss of a customer that results in a loss in revenue. For the customerrelationship intangible assets, the Company recognizes and measures impairmentupon the termination or loss of a customer that results in a loss ofrevenue.  Included in amortization ofintangibles expense for the six months ended June 30, 2004 and for the threeand six months ended June 30, 2005 is approximately $2.0 million and $3.1million, respectively, in accelerated amortization on a portion of the Company’scustomer relationship assets in connection with the loss of certain customersduring those respective periods.  TheCompany has experienced revenue and transaction volume declines with a majorcustomer during 2004 and 2005.  Thecustomer relationship intangible asset assigned to this customer isapproximately $24.4 million as of June 30, 2005.  The Company assessed the recoverability of thiscustomer relationship intangible asset based upon undiscounted anticipatedfuture cash flows and concluded that no impairment existed as of June 30, 2005.

 

The Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets,” on January 1, 2002. Under this standard, goodwilland intangible assets deemed to have indefinite lives are not amortized and aresubject to annual impairment tests. Other intangible assets are amortized overtheir useful lives. As a result of the adoption of SFAS No. 142 on January 1,2002, the Company reclassified approximately $2.6 million of net book valueallocated to assembled workforce to goodwill, and these assets are no longeramortized. The cost and net book value of the Company’s goodwill was $4.5million and $4.0 million, respectively, as of January 1, 2002.

 

The Companyperforms its annual SFAS No. 142 impairment testing of its goodwill as ofOctober 1 of each year, which could have an adverse effect on the Company’sfuture results of operations if impairment occurs. To date, the Company’stesting has indicated that there is no impairment of its goodwill.

 

**Income Taxes**

 

TheCompany accounts for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes.” Under SFAS

 

6

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No. 109, deferredtax assets or liabilities are computed based upon the difference betweenfinancial statement and income tax bases of assets and liabilities using theenacted marginal tax rate. The Company provides a valuation allowance on itsnet deferred tax assets when it is more likely than not that such assets willnot be realized. Deferred income tax expense or benefits are based upon thechanges in the asset or liability from period to period.

 

The American Jobs Creation Act of2004 (the Jobs Act), enacted on October 22, 2004, provides for a temporary85 percent dividends received deduction on certain foreign earnings repatriatedduring a one-year period. The deduction would result in an approximate 5.25percent federal tax rate on the repatriated earnings. To qualify for thededuction, the earnings must be reinvested in the United States pursuant to adomestic reinvestment plan established by a company’s chief executive officerand approved by the company’s board of directors. Certain other criteria in theJobs Act must be satisfied as well. For the Company, the one-year period duringwhich the qualifying distributions can be made is calendar year 2005.

 

In April 2005, theCompany decided to repatriate $10.0 million of foreign earnings under therepatriation provisions of the Jobs Act. Accordingly, the Company has recorded an additional income tax provisionof approximately $0.5 million related to this decision, which is included inincome tax provision in the accompanying condensed consolidated statements ofoperations for the three and six months ended June 30, 2005. The Companyrepatriated $9.3 million during the three months ended June 30, 2005.  The Company intends to reinvest the remainingundistributed foreign earnings indefinitely and, therefore, no provision forU.S. income taxes has been provided against these undistributed earnings.

 

**Stock Based Compensation**

 

InFebruary 2004, the Board of Directors of the Company adopted theTNS, Inc. 2004 Long–Term Incentive Plan (the Plan) and the Company’sstockholders approved the Plan in March 2004. In May 2005, the Company’sstockholders approved an amendment to the Plan to increase the number of sharesof common stock available for issuance under the Plan by 2,261,000.  The Plan reserves 3,847,384 shares of commonstock for grants of incentive stock options, nonqualified stock options,restricted stock awards and performance shares to employees, non–employeedirectors and consultants performing services for the Company. Options grantedunder the Plan have an exercise price equal to or greater than the fair marketvalue of the underlying common stock at the date of grant and becomeexercisable based on a vesting schedule determined at the date of grant,generally in equal monthly installments over four years. The options expire 10 yearsfrom the date of grant. During the three and six months ended June 30, 2005,20,660 and 20,833 shares of common stock were issued from optionexercises.  Restricted stock awards andperformance shares granted under the Plan are subject to a vesting period determinedat the date of grant, generally in equal annual installments over four years.As of June 30, 2005, the Company has 446,749 unvested restricted stock unitsoutstanding and approximately $8.4 million of deferred compensationrelated to these restricted stock units. The deferred compensation is beingamortized over the vesting period of the restricted stock units. For the threeand six months ended June 30, 2005, the Company recorded compensationexpense of approximately $0.5 million and $1.0 million, respectively, relatedto these restricted stock units.  For thethree and six months ended June 30, 2004 the Company recorded compensationexpense of $55,000 and $0.3 million, respectively.  During the three and six months ended June30, 2005, 2,663 shares and 80,875 shares of common stock were issued upon thevesting of restricted stock units.

 

The Companycontinues to account for employee stock options or similar equity instrumentsto employees under the intrinsic value method prescribed by Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”Under the intrinsic value method, compensation cost is the excess, if any, ofthe fair value of the stock at the grant date or other measurement date overthe amount an employee must pay to acquire the stock. Statement of FinancialAccounting Standards (SFAS) No. 123, “Accounting for Stock–BasedCompensation” defines a fair value method of accounting for employee stockoptions or similar equity instruments. Under the fair value method,compensation cost is measured at the grant date based on the value of the awardand is recognized over the service period. SFAS No. 123 allows an entityto continue to use the intrinsic value method. However, entities electing toaccount for employee stock options or similar instruments pursuant to APBOpinion No. 25 must make pro forma disclosures of net income, as if thefair value method of accounting had been applied.

 

7

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If stock compensation expense hadbeen determined based upon the fair value method at the grant dates, theCompany’s net income (loss) attributable to common stockholders would haveincreased to the pro forma amounts indicated below (in thousands, except pershare data):

 
| ** **                                                                                                                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2004**                              | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income (loss) attributable to common  stockholders, as reported                                                                                |       | $                                     | 1,466      |                           | $          | 251 |   | $ | (3,622 | ) | $ | 1,705 |   |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                          |       | 217                                   |       | 326                            |       | 263 |   | 620 |   |
| Deduct: Total stock–based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (683                                  | )          | (806                           | )          | (942 | ) | (1,537 | ) |
| Pro forma net income (loss) attributable to  common stockholders                                                                                   |       | $                                     | 1,000      |                           | $          | (229 | ) | $ | (4,301 | ) | $ | 788 |   |
| Basic net income (loss) per common share,  as reported                                                                                             |       | $                                     | 0.05       |                           | $          | 0.01 |   | $ | (0.17 | ) | $ | 0.07 |   |
| Diluted net income (loss) per common share,  as reported                                                                                           |       | $                                     | 0.05       |                           | $          | 0.01 |   | $ | (0.17 | ) | $ | 0.06 |   |
|                                                                                                                                               |       |                                  |       |                           |       |   |   |   |   |
| Pro forma basic and diluted net income  (loss) per common share                                                                                    |       | $                                     | 0.04       |                           | $          | (0.01 | ) | $ | (0.21 | ) | $ | 0.03 |   |

 

##### **Recent Accounting Pronouncements**

 

In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (revised2004), “Share-Based Payment” (SFAS No. 123R), which is a revision of SFASNo. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”,and amends SFAS No. 95, “Statement of Cash Flows”. The Company will adoptSFAS No. 123R on January 1, 2006. SFAS No. 123R requires allshare-based payments to employees, including grants of employee stock options,to be recorded as an expense based on their fair values. The Company is currentlyevaluating the impact of adopting SFAS No. 123R. Information about thefair value of stock options under the Black-Scholes model and its pro formaimpact on its net income (loss) and basic and diluted net income (loss) percommon share for the three and six months ended June 30, 2004 and 2005 (whichmay differ from the ultimate impact of adopting the new standard) can be foundin this Note 1.

 

**2.**                                      **Stock Repurchase and Retirement**

 

On May 4, 2005 the Companypurchased and retired 6,263,435 shares of its common stock, pursuant to amodified Dutch auction tender offer, for $18.50 per share plus expenses ofapproximately $1.0 million.  Of theshares tendered, 6 million shares were tendered by TNS’ controllingstockholder, GTCR Golder Ranuner L.L.C. and its affiliated investment funds.

 

**3.****                                      Long-termInvestments and Acquisitions**

 

In August 2004, TNS made an investment in WAYSystems, Inc. (WAY), which provides mobile POS transaction infrastructureand solutions for mobile merchants. TNS purchased 5,952,381 shares or 38.5percent of WAY’s Series B convertible preferred stock for $2.5 million andbecame entitled to representation on WAY’s board of directors. As ofDecember 31, 2004, TNS owned 18.1 percent of WAY’s total outstandingshares. In March 2005, TNS made an additional investment of $0.8 millionto purchase 1,910,401 shares of WAY’s Series B convertible preferred stockfor an additional 1.9 percent of WAY’s outstanding shares.  TNS owned 20.0 percent of Way’s outstandingshares as of June 30, 2005.  In July 2005,TNS made an additional investment of $0.7 million in exchange for a convertiblenote bearing interest at a rate of 8 percent per annum and due January 1,2009.  TNS is accounting for itsinvestment under the equity method of accounting. Due to timing of the receiptof WAY’s financial statements, TNS is accounting for the income or loss in thisequity method investment on a one-month lag. For the three and six months ended June 30, 2005, the Company recognizeda net loss in the equity of an unconsolidated affiliate of approximately $0.3million and $0.6 million, respectively.

 

In January 2005, TNS made an investmentin IP Commerce, Inc., a company that provides operating software to facilitatethe authorization of IP-based retail payment transactions. TNS purchased2,368,545 Series A preferred shares or 39.9 percent of IP Commerce’s totaloutstanding shares for $2.0 million and became entitled to representation on IPCommerce’s board of directors. TNS is accounting for its investment under theequity method of accounting. Due to timing of the receipt of IP Commerce’sfinancial statements, TNS is accounting for the income or loss in this equitymethod investment on a one-month lag. For the three and six months ended June 30, 2005, the Company recognizeda net loss in the equity of an unconsolidated affiliate of approximately $0.3million and $0.4 million, respectively.

 

8

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On May 12, 2005, the Company paid approximately $3.5million, including direct acquisition costs of $0.1 million, for certaintangible and intangible assets of FusionPoint Technology Solutions(FusionPoint)  from Techlan, Inc. as wellas a two-year, non-compete agreement. FusionPoint designs and installs turn-key solutions that integrate legacydevices found in convenience stores and service stations onto an IP network.

 

The purchase price for the FusionPoint assets was allocatedas follows (in thousands):

 
| Customer relationships | ** ** | $   | 2,960  | ** ** |
|------------------------|------------|-----|--------|------------|
| Non-compete agreement  |       | 522 |   |
| Other tangible assets  |       | 19  |   |
| Net assets acquired    |       | $   | 3,501  |       |

 

The amount allocated to customer relationships is beingamortized over their estimated useful life of three years and the amountallocated to the non-compete agreement is being amortized over its’ estimateduseful life of two years.  Unaudited proforma results of operations are not provided because the historical operatingresults were not significant and pro forma results would not be significantlydifferent from reported results for the periods presented.  The Company’s results of operations for thethree and six months ended June 30, 2005 include the operating results of theacquisition from May 12, 2005 through June 30, 2005.

 

**4.****                                      Long–termDebt**

 

Debt consistsof the following (in thousands):

 
| ** **            | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|-----------------------|------------|-----------------------------|------------|--------------------|------------|
| Prior Term A Loan     |       | $                           | 51,000     |               | $          | — |   |
| Term B Loan           |       | —                      |       | 164,588            |       |
|                  |       | 51,000                      |       | 164,588            |       |
| Less: Current portion |       | (9,000                      | )          | (1,650             | )          |
| Long-term portion     |       | $                           | 42,000     |               | $          | 162,938 |   |

 

On May 4,2005, the Company entered into an amended and restated senior secured creditfacility (the May 4, 2005 Credit Facility) to finance the stock repurchasedescribed in Note 2 and to replace its March 19, 2004 senior secured creditfacility (March 19, 2004 Credit Facility). The May 4, 2005 Credit Facilityconsists of a $165.0 million Term B Loan (Term B Loan) and a revolvingcredit facility of $30.0 million (New Revolving Credit Facility), underwhich there were no borrowings as of June 30, 2005. The May 4, 2005 CreditFacility matures May 4, 2012. Payments on the Term B Loan are due in quarterlyinstallments over the seven–year term, beginning on June 1, 2005, with theremainder payable on May 4, 2012. As of June 30, 2005 total remaining paymentson the Term Loan are as follows (in thousands):

 
| Six months ending December 31, 2005 | ** ** | $       | 825     | ** ** |
|------------------------------------------|------------|---------|---------|------------|
| 2006                                     |       | 1,650   |    |
| 2007                                     |       | 1,650   |    |
| 2008                                     |       | 1,650   |    |
| 2009                                     |       | 1,650   |    |
| Thereafter                               |       | 157,163 |    |
|                                     |       | $       | 164,588 |       |

 

For the periodthrough June 30, 2005, borrowings on the New Revolving Credit Facility andthe Term B Loan bore interest at a rate of 2.00 percent over the LIBORrate (5.41 percent as of June 30, 2005). Thereafter, if the Company achieves aleverage ratio of less than 1.75, the borrowings on the New Revolving CreditFacility and the Term B Loan generally will bear interest at a rate, at the Company’soption, of either 0.75 percent over the lender’s base rate or1.75 percent over the LIBOR rate. The Company’s leverage ratio as of June30, 2005 was 2.41 to 1.0. The New Revolving Credit Facility is subject to anannual non-use commitment fee in an amount equal to 0.375 percent or 0.5percent per annum, depending on the Company’s leverage ratio, multiplied by theamount of funds available for borrowing under the New Revolving CreditFacility. Interest payments on the May 4, 2005 Credit Facility are due monthly,bimonthly, or quarterly at the Company’s option.

 

9

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The terms ofthe May 4, 2005 Credit Facility require the Company to comply with financialand nonfinancial covenants, including maintaining certain leverage, interestand fixed charge coverage ratios at the end of each fiscal quarter. As of June30, 2005, the Company was required to maintain a leverage ratio of less than2.85 to 1.0, an interest coverage ratio of greater than 4.0 to 1.0 and a fixedcharge ratio of greater than 2.5 to 1.0. Certain of the financial covenantswill become more restrictive over the term of the May 4, 2005 Credit Facility.The May 4, 2005 Credit Facility also contains nonfinancial covenants thatrestrict some of the Company’s corporate activities, including the Company’sability to dispose of assets, incur additional debt, pay dividends, createliens, make investments, make capital expenditures and engage in specifiedtransactions with affiliates. The Company’s future results of operations andits ability to comply with the covenants could be adversely impacted byincreases in the general level of interest rates since the interest on amajority of the Company’s debt is variable. Noncompliance with any of thefinancial or nonfinancial covenants without cure or waiver would constitute anevent of default under the May 4, 2005 Credit Facility. An event of defaultresulting from a breach of a financial or nonfinancial covenant may result, atthe option of the lenders, in an acceleration of the principal and interestoutstanding, and a termination of the May 4, 2005 Revolving Credit Facility.The May 4, 2005 Credit Facility also contains other customary events of default(subject to specified grace periods), including defaults based on events ofbankruptcy and insolvency, nonpayment of principal, interest or fees when due,breach of specified covenants, change in control and material inaccuracy ofrepresentations and warranties. The Company was in compliance with the financialand nonfinancial covenants of the May 4, 2005 Credit Facility as of June 30,2005.

 

In connectionwith the closing of the May 4, 2005 Credit Facility, the Company incurredapproximately $2.7 million in financing costs. These financing costs weredeferred and are being amortized using the effective interest method over thelife of the May 4, 2005 Credit Facility. In connection with the termination ofthe March 19, 2004 Credit Facility in May 2005, the Company wrote–offapproximately $1.1 million in unamortized deferred financing costs relatedto the March 19, 2004 Credit Facility. Such write–off has been included ininterest expense in the accompanying condensed consolidated statement ofoperations for the three and six months ended June 30, 2005.

 

On March 19, 2004, the Company enteredinto a senior secured credit facility (the March 19, 2004 Credit Facility) toreplace its prior credit facility consisting of a $65.0 million term loan(Term A Loan) and a revolving credit facility of $30.0 million (Revolving CreditFacility).  In connection with theclosing of the March 19, 2004 Credit Facility, the Company incurredapproximately $2.0 million in financing costs. These financing costs weredeferred and were being amortized using the effective interest method over thelife of the March 19, 2004 Credit Facility. In connection with the terminationof the prior credit facility in March 2004, the Company wrote–offapproximately $2.0 million in unamortized deferred financing costs relatedto the prior credit facility. Such write–off has been included in interestexpense in the accompanying condensed consolidated statement of operations forthe six months ended June 30, 2004.

 

**5.****                                      ComprehensiveIncome (Loss)**

 

The components of comprehensive income(loss), net of tax effect are as follows (in thousands):

 
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income (loss)                        |       | $                                               | 1,466      |                                          | $          | 251 |   | $ | (194 | ) | $ | 1,705 |   |
| Foreign currency translation adjustments |       | (886                                            | )          | (1,360                                        | )          | 31 |   | (2,171 | ) |
| Total comprehensive income (loss)        |       | $                                               | 580        |                                          | $          | (1,109 | ) | $ | (163 | ) | $ | (466 | ) |

 

10

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**6.****                                      NetIncome (Loss) Per Common Share**

 

SFAS No. 128, “Earnings Per Share”, requires the presentation ofbasic and diluted earnings per share. Basic earnings (loss) per common share iscomputed by dividing income (loss) attributable to common stockholders by theweighted average number of common shares outstanding for the period. Thediluted earnings (loss) per common share data is computed using the weightedaverage number of common shares outstanding plus the dilutive effect of commonstock equivalents, unless the common stock equivalents are anti–dilutive. Forthe period prior to the Company’s initial public offering on March 16,2004, the effect of the Class A Preferred Stock converting into shares ofcommon stock was not included in the computation of diluted net loss per commonshare as the effect would be anti–dilutive.  Inaddition, options to purchase 1,145,597 shares of common stock that wereoutstanding as of June 30, 2004 were excluded from the computation ofdiluted net loss per common share for the six months ended June 30, 2004as their effect would be anti-dilutive. The treasury stock effect of 304,000shares of unvested restricted stock units held by executives and employees asof June 30, 2004 was not included in the computation of diluted net lossper common share for the six months ended June 30, 2004 as the effectwould be anti-dilutive.

 

The following details the computation of thenet income (loss) per common share (dollars in thousands, except share and pershare data):

 
| ** **                                                | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income (loss)                                         |       | $                                     | 1,466      |                                | $          | 251 |   | $ | (194 | ) | $ | 1,705 |   |
| Dividends on preferred stock                              |       | —                                |       | —                              |       | (3,428 | ) | — |   |
|                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) attributable to common  stockholders    |       | $                                     | 1,466      |                                | $          | 251 |   | $ | (3,622 | ) | $ | 1,705 |   |
|                                                      |       |                                  |       |                                |       |   |   |   |   |
| Weighted average common share calculation:                |       |                                  |       |                                |       |   |   |   |   |
| Basic weighted average common shares  outstanding         |       | 26,778,520                            |       | 24,157,435                          |       | 20,842,355 |   | 26,072,053 |   |
| Treasury stock effect of unvested  restricted stock units |       | 302,132                               |       | 280,985                             |       | — |   | 296,020 |   |
| Treasury stock effect of options                          |       | 125,592                               |       | 91,028                              |       | — |   | 77,344 |   |
|                                                      |       |                                  |       |                                |       |   |   |   |   |
| Diluted weighted average common shares  outstanding       |       | 27,206,244                            |       | 24,529,448                          |       | 20,842,355 |   | 26,445,417 |   |
|                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) per common share:                       |       |                                  |       |                                |       |   |   |   |   |
| Basic net income (loss) per common share                  |       | $                                     | 0.05       |                                | $          | 0.01 |   | $ | (0.17 | ) | $ | 0.07 |   |
| Diluted net income (loss) per common share                |       | $                                     | 0.05       |                                | $          | 0.01 |   | $ | (0.17 | ) | $ | 0.06 |   |

 

**7.****                                      SegmentInformation**

 

The Company’s reportable segments arestrategic business units that offer different products and services. TheCompany classifies its business into four segments: POS, TSD, FSD and ISD.However, the Company’s management only evaluates revenues for these foursegments. A significant portion of the Company’s North American operatingexpenses are shared between the POS, TSD and FSD segments, and therefore,management analyzes operating results for these three segments on a combinedbasis.

 

Management evaluates the North American andISD performance on EBITDA before stock compensation expense because operatingexpenses are distinguishable between North American and ISD operations. TheCompany defines EBITDA before stock compensation expense as income fromoperations before depreciation, amortization and stock compensation expense.EBITDA before stock compensation expense is not a generally accepted accountingprinciple measure, but rather a measure employed by management to viewoperating results adjusted for major noncash items. The Company’s definition ofEBITDA before stock compensation expense may not be comparable to similarlytitled measures used by other entities. Assets are not segregated betweenreportable segments, and management does not use asset information by segmentsto evaluate segment performance. As such, no information is presented relatedto fixed assets by reportable segment and capital expenditures for eachsegment.

 

11

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Revenue for the Company’s four business unitsis presented below (in thousands):

 
| ** **     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
|           |       |                                  |       |                                |       |   |   |   |   |
| Revenues:      |       |                                  |       |                                |       |   |   |   |   |
| POS            |       | $                                     | 28,586     |                                | $          | 22,113 |   | $ | 57,471 |   | $ | 45,272 |   |
| TSD            |       | 8,241                                 |       | 11,213                              |       | 16,851 |   | 21,250 |   |
| FSD            |       | 6,163                                 |       | 7,735                               |       | 12,158 |   | 15,042 |   |
| ISD            |       | 17,950                                |       | 24,293                              |       | 34,616 |   | 46,922 |   |
|           |       |                                  |       |                                |       |   |   |   |   |
| Total revenues |       | $                                     | 60,940     |                                | $          | 65,354 |   | $ | 121,096 |   | $ | 128,486 |   |
|                |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |

 

EBITDA beforestock compensation expense for North American and ISD operations is reflectedbelow (in thousands):

 
| ** **                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| EBITDA before stock compensation expense:       |       |                                  |       |                                |       |   |   |   |   |
| North America                                   |       | $                                     | 10,384     |                                | $          | 9,261 |   | $ | 21,118 |   | $ | 18,456 |   |
| ISD                                             |       | 5,485                                 |       | 8,680                               |       | 9,834 |   | 15,877 |   |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Total EBITDA before stock compensation  expense |       | $                                     | 15,869     |                                | $          | 17,941 |   | $ | 30,952 |   | $ | 34,333 |   |
|                                                 |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |

 

EBITDA beforestock compensation expense differs from income before income taxes and equityin net loss of unconsolidated affiliate reported in the condensed consolidatedstatements of operations as follows (in thousands):

 
| ** **                                                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| EBITDA before stock compensation expense                                        |       | $                                     | 15,869     |                                | $          | 17,941 |   | $ | 30,952 |   | $ | 34,333 |   |
| Reconciling items:                                                              |       |                                  |       |                                |       |   |   |   |   |
| Depreciation and amortization of property  and equipment and intangible assets  |       | (11,146                               | )          | (12,213                             | )          | (24,461 | ) | (23,341 | ) |
| Stock compensation expense                                                      |       | (362                                  | )          | (544                                | )          | (438 | ) | (1,034 | ) |
| Interest expense                                                                |       | (1,004                                | )          | (3,228                              | )          | (5,437 | ) | (4,039 | ) |
| Interest and other income (expense), net                                        |       | (218                                  | )          | (60                                 | )          | (82 | ) | (248 | ) |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Income before income taxes and equity in  net loss of unconsolidated affiliates |       | $                                     | 3,139      |                                | $          | 1,896 |   | $ | 534 |   | $ | 5,671 |   |
|                                                                                 |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |

 

Goodwill andidentifiable intangible assets, net are located in the following reportingsegments (in thousands):

 
| ** **                                              | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|
| POS                                                     |       | $                           | 147,936    |               | $          | 141,638 |   |
| TSD                                                     |       | 5,117                       |       | 4,801              |       |
| FSD                                                     |       | 28,233                      |       | 26,368             |       |
| ISD                                                     |       | 29,308                      |       | 27,303             |       |
| Total goodwill and identifiable intangible  assets, net |       | $                           | 210,594    |               | $          | 200,110 |   |

 

12

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**Geographic Information**

 

The Companysells its services through foreign subsidiaries in the United Kingdom,Australia, Canada, France, Germany, Ireland, Italy, Japan, New Zealand, Poland,Spain, Sweden and The Netherlands. Information regarding revenues andlong–lived tangible assets attributable to each geographic region is statedbelow.

 

The Company’srevenues were generated in the following geographic regions (in thousands):

 
| ** **     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues:      |       |                                  |       |                                |       |   |   |   |   |
| North America  |       | $                                     | 42,990     |                                | $          | 41,061 |   | $ | 86,480 |   | $ | 81,564 |   |
| Europe         |       | 15,870                                |       | 21,640                              |       | 30,700 |   | 41,493 |   |
| Asia-Pacific   |       | 2,080                                 |       | 2,653                               |       | 3,916 |   | 5,429 |   |
|           |       |                                  |       |                                |       |   |   |   |   |
| Total revenues |       | $                                     | 60,940     |                                | $          | 65,354 |   | $ | 121,096 |   | $ | 128,486 |   |

 

The Company’slong–lived assets including goodwill and identifiable intangible assets, netwere located as follows (in thousands):

 
| ** **              | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|--------------------|------------|
| North America           |       | $                           | 231,570    |               | $          | 225,306 |   |
| Europe                  |       | 42,441                      |       | 39,025             |       |
| Asia-Pacific            |       | 5,368                       |       | 4,849              |       |
| Total long-lived assets |       | $                           | 279,379    |               | $          | 269,180 |   |

 

**8.****                                      Litigationand Claims**

 

The Company isperiodically involved in disputes arising from normal business activities. Inthe opinion of management, resolution of these matters will not have a materialadverse effect upon the financial position or future operating results of theCompany, and adequate provision for any potential losses has been made in theaccompanying consolidated financial statements.

 

On August 26, 2002, an action was filedin the Superior Court of the State of Delaware by persons alleging that theCompany breached an agreement to purchase an unrelated entity. OnFebruary 28, 2005, the court denied the Company’s motion for summary judgmentfiled in June 2004.  Afterconsidering the defense costs, potential damages should the plaintiffs prevail,and continued diversion of management resources, the Company determined inMarch 2005 that a settlement was warranted, but had not yet executed anagreement as of March 31, 2005. In April 2005, the Company made thepayment of $3.3 million in cash to the plaintiffs and received the dismissal ofall claims, with prejudice, by the plaintiffs, thereby settling thisdispute.  This $3.3 million settlement isincluded in selling, general and administrative expenses in the accompanyingcondensed consolidated statement of operations for the six months ended June30, 2005.

 

Certain statesin which the Company operates assess sales taxes on certain services providedby the Company. The Company believes it has no liability because its customercontracts contain terms that stipulate the customer, not the Company, isresponsible for any sales tax liability. In jurisdictions where the customermay be liable for sales taxes, the Company either includes sales tax on itsinvoice or has obtained an exemption certificate from the customer. Certainstates have audited the Company from 1996 to early 2001 and originally proposed$6.7 million in assessments on the basis that sales taxes are owed. InMarch 2005, the Company received verbal notification from a state salestax auditor that one of the states was likely to reduce its proposed assessmentby an amount in excess of  $4million.  In April 2005, the Companyreceived written confirmation from that state’s Department of Revenue that thestate’s assessment would be reduced by $4.3 million.  Based on this written confirmation, theCompany reduced its liability for this matter by $4.3 million during the firstquarter of 2005.  In July 2005, theCompany entered into an agreement with that state’s Department of Revenue tosettle the outstanding liability for $0.8 million and concurrently entered intoan agreement with a customer to reimburse the Company for $0.5 million of thesettlement amount.  Based on these finalexecuted settlements, the Company reduced its net liability for this matter by$1.5 million during the three months ended June 30, 2005. This $1.5 million and$5.8 million reduction in the liability, respectively, is included in selling,general and administrative expenses in the accompanying condensed consolidatedstatements of operations for three and six months ended June 30, 2005. Both theCompany and the customers involved are vigorously defending the remainingproposed assessments by the sales tax authorities. In the opinion of management,resolution of these matters will not have a material adverse effect upon thefinancial position or future operating results of the Company.

 

Included innet income in the accompanying condensed consolidated statement of operationsfor the three months ended June

 

13

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30, 2005 is a $0.9 millionbenefit, or $0.04 per share, related to the state sales tax settlement, net ofrelated tax provision.  Included in netincome in the accompanying condensed consolidated statements of operations forthe six months ended June 30, 2005 is a $1.5 million net benefit, or $0.06 pershare, related to the reduced state sales tax liability and legal settlement.

 

14

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

You shouldread the following discussion of the financial condition and results ofoperations of TNS, Inc. in conjunction with the consolidated financialstatements and the related notes included in our annual report on Form 10-Kfiled with the SEC on March 31, 2005 and available directly from the SECat www.sec.gov and the condensed consolidated financial statements and therelated notes of TNS, Inc., included elsewhere in this quarterly report.

 

There are statements made herein which maynot address historical facts and, therefore, could be interpreted to be forward–lookingstatements within the meaning of The Private Securities Litigation Reform Actof 1995. These forward–looking statements are based on current expectations,forecasts and assumptions that are subject to risks and uncertainties thatcould cause actual results to differ materially from those set forth in, orimplied by, the forward–looking statements. The Company has attempted, wheneverpossible, to identify these forward–looking statements using words such as “may,”“will,” “should,” “projects,” “estimates,” “expects,” “plans,” “intends,” “anticipates,”“believes,” and variations of these words and similar expressions. Similarly,statements herein that describe the Company’s business strategy, prospects,opportunities, outlook, objectives, plans, intentions or goals are also forward–lookingstatements. Actual results may differ materially from those indicated by suchforward–looking statements as a result of various important factors, including:the Company’s reliance upon a small number of customers for a significantportion of its revenue; competitive factors such as pricing pressures; ourcustomer’s ability to direct their data communications from the Company’snetworks to other networks; the Company’s ability to grow its businessdomestically and internationally by generating greater transaction volumes,acquiring new customers or developing new service offerings; fluctuations inthe Company’s quarterly results because of the seasonal nature of the businessand other factors outside of the Company’s control; the Company’s ability toidentify, execute or effectively integrate future acquisitions; the Company’sability to adapt to changing technology; additional costs related to compliancewith the Sarbanes–Oxley Act of 2002, any revised New York Stock Exchangelisting standards, SEC rule changes or other corporate governance issues;and other risk factors described in the Company’s annual report on Form 10-Kfiled with the SEC on March 31, 2005. In addition, the statements in thisquarterly report are made as of the date of this filing. The Company expectsthat subsequent events or developments will cause its views to change. TheCompany undertakes no obligation to update any of the forward–lookingstatements made herein, whether as a result of new information, future events,changes in expectations or otherwise. These forward–looking statements shouldnot be relied upon as representing the Company’s views as of any datesubsequent to the date of this filing.  Theforward–looking statements in this document are intended to be subject to thesafe harbor protection provided by Sections 27A of the Securities Act and 21Eof the Exchange Act.

 

**Overview**

 

We are a leading provider ofbusiness-critical data communications services to processors of credit card,debit card and ATM transactions. We are also a leading provider of secure dataand voice network services to the global financial services industry. Weoperate one of four unaffiliated Signaling System No. 7 networks in theUnited States capable of providing services nationwide, and we utilize thisnetwork to provide call signaling and database access services to the domestictelecommunications industry. Our data communications services enable secure andreliable transmission of time-sensitive, transaction-related informationcritical to our customers’ operations. Our customers outsource their datacommunications requirements to us because of our substantial expertise,comprehensive customer support and cost-effective services. Internationally, weoperate networks in 18 countries, including Canada and countries in Europe andthe Asia-Pacific region, and we use these networks to provide services tocustomers in these countries.

 

We provide ourservices through multiple data networks, each designed specifically fortransaction applications. Our networks support a variety of widely acceptedcommunications protocols and are designed to be scalable and accessible bymultiple methods, including dial-up, dedicated, wireless and Internetconnections.

 

We generaterevenues through four business divisions:

 

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•                  ***POS services***. Weprovide fast, secure and reliable data communications services primarily topayment processors in the United States and Canada. POS services revenue isderived primarily from per transaction fees paid by our customers for thetransmission of transaction data through our networks between paymentprocessors and POS or ATM terminals.

 

•                  ***International services***.We are one of the leading providers of data communications services to the POSindustry in the United Kingdom. Our international services division also hasoperations in Australia, Finland, France, Germany, Hong Kong, Ireland,Italy, Japan, Korea, The Netherlands, New Zealand, Norway, Poland, Spain,Sweden and Thailand. We provide services in these countries using networksdeployed in each country.  Ourinternational services division generates revenues primarily from our POS andfinancial services offerings abroad.

 

•                  ***Telecommunication services***.We provide call signaling services that enable telecommunications carriers toestablish and terminate telephone calls placed by their subscribers. We alsoprovide database access services that enable our customers to provideintelligent network services, such as caller identification and local numberportability, and credit card, calling card, third-party billing and collectcalling. Our telecommunication services division generates revenues primarilyfrom fixed monthly fees charged for our call signaling services and per-queryfees charged for our database access and validation services.

 

•                  ***Financial services.***We provide fast, secure and reliable private data networking services thatenable seamless communications and facilitate electronic trading amongcommercial banks, mutual funds, pension funds, broker-dealers, alternativetrading systems, electronic communications networks, securities and commoditiesexchanges and other market participants. Our networks support multiplecommunications protocols including the Financial Information eXchange, or FIX,protocol. Our financial services division generates revenues from monthlyrecurring fees based on the number of customer connections to and through ournetworks.

 

Our mostsignificant expense is cost of network services, which is comprised primarilyof telecommunications charges, including data transmission and database access,leased digital capacity charges, circuit installation charges and activationcharges. The cost of data transmission is based on a contract or tariff rateper minute of usage in addition to a prescribed rate per transaction for some vendors.The costs of database access, circuits, installation charges and activationcharges are based on fixed fee contracts with local exchange carriers andinterexchange carriers. The cost of network services also includes salaries,equipment maintenance and other costs related to the ongoing operation of ourdata networks. Depreciation expense on our network equipment and amortizationof developed technology are excluded from our cost of network services andincluded in depreciation and amortization of property and equipment andamortization of intangible assets in our consolidated statements of operations.

 

Our engineering and development expensesinclude salaries and other costs related to product development, engineeringand materials. The majority of these costs are expensed as incurred, includingcosts related to the development of internal use software in the preliminaryproject, the post-implementation and operation stages. Development costs weincur during the software application development stage are capitalized andamortized over the estimated useful life of the developed software.

 

Our selling,general and administrative expenses include costs related to sales, marketing,administrative and management personnel, as well as outside legal, accountingand consulting services. We believe that selling, general and administrativeexpenses as a percentage of revenues will remain constant or increase tosupport expansion of the international services division, as well as from theadditional costs of being a publicly traded company, including the legal,audit, insurance and board of directors compensation costs needed to establishand maintain compliance with the Sarbanes-Oxley Act of 2002.

 

InMarch 2004, we completed our initial public offering (IPO) of common stockissuing 4,420,000 common shares at $18.00 per share, which generated proceeds,net of offering costs, of approximately $71.5 million. The net proceeds of theIPO were used to repay a portion of the outstanding debt under ourthen-existing

 

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senior secured credit facility.On March 19, 2004, we entered into a new senior secured credit facility andused the net proceeds from borrowings to repay the remaining debt outstandingunder our then-existing senior secured credit facility. In connection with thetermination of our then-existing senior secured credit facility, we recognizeda charge of approximately $2.0 million related to the write-off of unamortizeddeferred financing costs. Such write-off was included in interest expense inthe accompanying condensed consolidated statement of operations for the sixmonths ended June 30, 2004.

 

Upon thecompletion of the IPO, all of the outstanding shares of our Class Aredeemable convertible preferred stock, including accrued and unpaid dividends,converted at $18.00 per share into 9,984,712 shares of common stock.

 

OnOctober 1, 2004, we completed a follow-on offering of common stock issuing1,084,744 common shares at $20.00 per share, which generated proceeds, net ofoffering costs, of approximately $19.9 million. On November 1, 2004, inconnection with the follow-on offering, the underwriters exercised a portion oftheir over-allotment option and we issued an additional 118,232 common sharesat $20.00 per share, which generated proceeds, net of offering costs ofapproximately $2.3 million. The net proceeds from the follow-on offering wereused to repay a portion of our long-term debt outstanding under our existingcredit facility.

 

On May 4, 2005, we repurchased andretired 6,263,435 shares of our common stock, pursuant to a modified Dutchauction tender offer, at a price of $18.50 per share, including expenses, forapproximately $116.9 million.  Of theshares tendered, 6 million shares were tendered by our controlling stockholder,GTCR Golder Ranuner L.L.C. and its affiliated investment funds. Concurrent withthe closing of the stock repurchase, we entered into an amended and restatedsenior secured credit facility and used the net proceeds from borrowings torepay the remaining debt outstanding under our previous senior secured creditfacility and to finance the share repurchase. In connection with the termination of our previous senior secured creditfacility, we recognized a charge of approximately $1.1 million related to thewrite-off of unamortized deferred financing costs. Such write-off was includedin interest expense in the accompanying condensed consolidated statement ofoperations for the three and six months ended June 30, 2005.

 

**Long–term Investments and Acquisitions**

 

In August 2004, we made an investment in WAYSystems, Inc. (WAY), which provides mobile POS transaction infrastructureand solutions for mobile merchants.  Wepurchased 5,952,381 shares or 38.5 percent of WAY’s Series B convertible preferredstock for $2.5 million and became entitled to representation on WAY’s board ofdirectors. As of December 31, 2004, we owned 18.1 percent of WAY’s totaloutstanding shares. In March 2005, we made an additional investment of$0.8 million to purchase 1,910,401 shares of WAY’s Series B convertiblepreferred stock for an additional 1.9 percent of WAY’s outstanding shares.  In July 2005, we made an additionalinvestment of $0.7 million in exchange for a convertible note bearing interestat a rate of 8 percent per annum and due January 1, 2009.  As of June 30, 2005, we owned 20.0 percent ofWAY’s outstanding shares. We are accounting for this investment under theequity method of accounting. Due to timing of the receipt of WAY’s financialstatements, we are accounting for the income or loss in this equity methodinvestment on a one-month lag.  For thethree and six months ended June 30, 2005, we recognized a net loss in theequity of an unconsolidated affiliate of approximately $0.3 million and $0.6million, respectively.

 

In January 2005, we made aninvestment in IP Commerce, Inc., a company that provides operating software tofacilitate the authorization of IP-based retail payment transactions. Wepurchased 2,368,545 Series A preferred shares or 39.9 percent of IPCommerce’s total outstanding shares for $2.0 million and became entitled torepresentation on IP Commerce’s board of directors. We are accounting for thisinvestment under the equity method of accounting.  Due to timing of the receipt of IP Commerce’sfinancial statements, TNS is accounting for the income or loss in this equitymethod investment on a one-month lag. For the three and six months ended June 30, 2005, we recognized a netloss in the equity of an unconsolidated affiliate of approximately $0.3 millionand $0.4 million, respectively.

 

On May 12, 2005 we paid approximately $3.5 million,including direct acquisition costs of $0.1 million, for certain tangible andintangible assets of FusionPoint Technology Solutions (FusionPoint) from Techlan,Inc. as well as a two-year, non-compete agreement.  FusionPoint designs and installsturn-key solutions that integrate legacy devices found in convenience storesand service stations onto an IP network. We accounted for the acquisition of the FusionPoint assets under thepurchase method with the total consideration allocated to the fair value of theassets acquired and liabilities assumed, including identifiable intangibles of$3.5 million.  Our consolidatedresults of operations for the three and six months ended June 30, 2005 includethe operating results of this acquisition from May 12, 2005 through June 30,2005.

 

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**Results of Operations**

 

The following table sets forth, for the periods indicated, selectedstatement of operations data (dollars in thousands):

 
| ** **                                                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                         | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                            |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Revenues                                                                        |       | $                                | 60,940     |                           | $          | 65,354 |   | $ | 121,096 |   | $ | 128,486 |   |
| Operating expenses:                                                             |       |                             |       |                           |       |   |   |   |   |
| Cost of network services, exclusive of the  items shown separately below        |       | 29,133                           |       | 30,966                         |       | 59,825 |   | 61,196 |   |
| Engineering and development                                                     |       | 3,494                            |       | 4,034                          |       | 6,932 |   | 7,940 |   |
| Selling, general, and administrative                                            |       | 12,806                           |       | 12,957                         |       | 23,825 |   | 26,051 |   |
| Depreciation and amortization of property  and equipment                        |       | 4,950                            |       | 4,964                          |       | 9,756 |   | 9,827 |   |
| Amortization of intangible assets                                               |       | 6,196                            |       | 7,249                          |       | 14,705 |   | 13,514 |   |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Total operating expenses                                                        |       | 56,579                           |       | 60,170                         |       | 115,043 |   | 118,528 |   |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Income from operations                                                          |       | 4,361                            |       | 5,184                          |       | 6,053 |   | 9,958 |   |
| Interest expense                                                                |       | (1,004                           | )          | (3,228                         | )          | (5,437 | ) | (4,039 | ) |
| Interest and other income (expense), net                                        |       | (218                             | )          | (60                            | )          | (82 | ) | (248 | ) |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Income before income taxes and equity in  net loss of unconsolidated affiliates |       | 3,139                            |       | 1,896                          |       | 534 |   | 5,671 |   |
| Income tax provision                                                            |       | (1,612                           | )          | (929                           | )          | (630 | ) | (2,834 | ) |
| Equity in net loss of unconsolidated  affiliates                                |       | (61                              | )          | (716                           | )          | (98 | ) | (1,132 | ) |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                               |       | $                                | 1,466      |                           | $          | 251 |   | $ | (194 | ) | $ | 1,705 |   |

 

**Three months ended June 30, 2005 compared tothe three months ended June 30, 2004**

 

***Revenues.***  Total revenues increased $4.4 million, or7.2%, to $65.4 million for the three months ended June 30, 2005, from $60.1million for the three months ended June 30, 2004. We generate revenues throughfour business divisions.

 

***POSdivision.*** Revenues from the POS division decreased $6.5 million, or 22.6%, to$22.1 million for the three months ended June 30, 2005, from $28.6 million forthe three months ended June 30, 2004. The $6.5 million decrease in POS revenuesresulted from a decline in transaction volumes primarily from a major customerand to a lesser extent a decrease in revenue per transaction as a result ofnegotiated price reductions upon renewal of certain contracts. POS transactionvolumes decreased 20.4% to 1.5 billion transactions for the three months endedJune 30, 2005, from 1.9 billion transactions for the three months ended June30, 2004. We negotiated contract renewals with some of our POS customers, andin several instances we agreed to pricing discounts in exchange for maintainingor increasing their minimum transaction or revenue commitments. As a result, itis likely our revenue per transaction will decrease and, depending upon thenumber of transactions we transport, our POS revenues may continue to decrease.In addition, we recently amended our contract with a major customer to extendthe term of the agreement for two years. The amended contract does not containany minimum transaction or revenue commitments. Based on the amended contract,we believe that revenues and related transaction volumes from this customer maycontinue to decline in 2005 and thereafter.

 

***Internationalservices division.*** Revenues from the international services division increased $6.3 million,or 35.3%, to $24.3 million for the three months ended June 30, 2005, from$18.0 million for the three months ended June 30, 2004. The increase wasprimarily due to additional revenues generated from our POS customers in theU.K., Central Europe and Australia, and to a lesser extent we benefited fromfavorable foreign exchange. Revenues from our U.K. subsidiary increased $3.6million, or 31.7%, to $14.8 million for the three months ended June 30,2005, from $11.3 million for the three months ended June 30, 2004.

 

***Telecommunicationservices division.*** Revenues from the telecommunication services division increased $3.0million, or 36.1%, to $11.2 million for the three months ended June 30, 2005,from $8.2 million for the three months ended June 30, 2004. The growth inrevenues was primarily due to increased usage of our call signaling servicesfrom new and existing customers.

 

***Financialservices division.*** Revenues from the financial services division increased $1.6 million, or25.5%, to $7.7 million for the three months ended June 30, 2005, from $6.2million for the three months ended June 30, 2004. The increase in revenues wasdue to the growth in the number of customer connections, both physical andlogical, to and through our networks.

 

***Costof network services.***  Cost of network services increased $1.8million, or 6.3%, to $31.0 million for the three months ended June 30, 2005,from $29.1 million for the three months ended June 30, 2004. Cost of networkservices were 47.4% of revenues

 

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for the three months ended June30, 2005, compared to 47.8% of revenues for the three months ended June 30,2004. The increase in cost of network services resulted primarily from higherusage charges from our TSD, FSD and ISD services partially offset by lowerusage charges from decreased POS transactions and to a lesser extent a decreasein usage-based vendor telecommunications charges in our POS division. Grossprofit represented 52.6% of total revenues for the three months ended June 30,2005, compared to 52.2% for the three months ended June 30, 2004. The increasein gross profit as a percentage of total revenues resulted primarily fromincreased contribution of our financial services division and internationalservices division, and to a lesser extent the decrease in usage-based vendortelecommunications charges associated with our POS services.

 

Future cost of network services depends on anumber of factors including total transaction and query volume, the relative growthand contribution to total transaction volume of each of our customers, thesuccess of our new service offerings, the timing and extent of our networkexpansion and the timing and extent of any network cost reductions. Inaddition, any significant loss or significant reduction in transaction volumescould lead to a decline in gross margin since significant portions of ournetwork costs are fixed costs.

 

***Engineeringand development expense.***  Engineering and development expense increased$0.5 million, or 15.5%, to $4.0 million for the three months ended June 30,2005, from $3.5 million for the three months ended June 30, 2004. Engineeringand development expense represented 6.2% of revenues for the three months endedJune 30, 2005 and 5.7% of revenues for the three months ended June 30, 2004.Engineering and development expense increased primarily from an increase inengineering expenses required to support our international expansion.

 

***Selling, general andadministrative expense.***  Selling, general and administrative expenseincreased $0.2 million, or 1.2%, to $13.0 million for the three months endedJune 30, 2005, from $12.8 million for the three months ended June 30, 2004.Selling, general and administrative expense represented 19.8% of revenues forthe three months ended June 30, 2005, compared to 21.0% of revenues for thethree months ended June 30, 2004. Included in selling, general andadministrative expenses for the three months ended June 30, 2005 is a $1.5million benefit from a state sales tax liability settlement.  Excluding this item, selling, general andadministrative expense increased primarily from the expenses required tosupport our revenue growth, mainly within the international services division,and to a lesser extent, the incremental costs necessary to operate as a publiccompany and stock compensation expense.

 

***Depreciation andamortization of property and equipment.***  Depreciation and amortization of property andequipment increased $14,000 to $5.0 million for the three months ended June 30,2005, from $5.0 million for the three months ended June 30, 2004. Depreciationand amortization of property and equipment represented 7.6% of revenues for thethree months ended June 30, 2005, compared to 8.1% of revenues for the threemonths ended June 30, 2004.

 

***Amortizationof intangible assets.***  Amortization of intangible assets increased$1.0 million, or 17.0%, to $7.2 million for the three months ended June 30,2005, from $6.2 million for the three months ended June 30, 2004. Theamortization of intangible assets for the three months ended June 30, 2005 and2004 relates solely to the intangible assets resulting from acquisitions. Theincrease was primarily attributable to approximately $3.1 million inaccelerated amortization on a portion of our customer relationship intangibleassets in connection with the loss of certain customers during the three monthsended June 30, 2005, partially offset by a reduction in amortization expensedue to certain intangible assets becoming fully amortized. For purposes ofmeasuring and recognizing impairment of long-lived assets includingintangibles, we assess whether separate cash flows can be attributed to theindividual asset. For our customer relationship intangible assets, we recognizeand measure impairment upon the termination or loss of a customer that resultsin a loss of revenue.  Based on theoutcome of our contract negotiations with one of our major customers, webelieve that revenues and related transaction volumes from this customer maycontinue to decline in 2005 and thereafter. The intangible asset value attributable to this customer relationship isapproximately $24.4 million as of June 30, 2005.  We assessed the recoverability of thiscustomer relationship asset based upon anticipated future cash flows andconcluded that no impairment existed.

 

***Interestexpense.*** Interest expense increased $2.2 million to $3.2 million for the threemonths ended June 30, 2005, from $1.0 million for the three months ended June30, 2004. This increase was primarily due to the additional borrowings underour amended and restated senior secured credit facility, as well as thewrite-off on May 4, 2005 of approximately $1.1 million of deferred financingcosts in connection with the termination of our previous senior secured creditfacility.

 

***Interestand other income (expense), net.***  Interest and other income (expense), net wasan expense of $60,000 for the three months ended June 30, 2005 compared $0.2million for the three months ended June 30, 2004.

 

***Incometax provision.***  For the three months ended June 30, 2005, ourincome tax provision was $0.9 million compared to $1.6 million for the threemonths ended June 30, 2004. Our effective tax rate for the three months endedJune 30, 2005 is 49.0% versus the U.S. federal statutory tax rate of 35.0%, dueprimarily to the fact that we have losses from certain of our internationalsubsidiaries that cannot be used to offset income in other jurisdictions.  In addition we made the decision, in April2005, to repatriate $10.0 million of foreign earnings under the repatriationprovisions of the American Jobs Creation Act of 2004 for which we have providedan income tax provision of approximately $0.5 million.

 

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***Equityin net loss of unconsolidated affiliates.***  For the three months ended June 30, 2005, ourequity in net loss of unconsolidated affiliates was $0.7 million compared to$61,000 for the three months ended June 30, 2004. As of June 30, 2005, we have$4.9 million of long-term investments in unconsolidated affiliates, and weexpect to incur additional losses on these investments in 2005 and we maycontinue to incur losses thereafter.

 

**Six months ended June 30, 2005 compared tothe six months ended June 30, 2004**

 

***Revenues.***  Total revenues increased $7.4 million, or6.1%, to $128.5 million for the six months ended June 30, 2005, from $121.1million for the six months ended June 30, 2004. We generate revenues throughfour operating divisions.

 

***POSdivision.*** Revenues from the POS division decreased $12.2 million, or 21.2%, to$45.3 million for the six months ended June 30, 2005, from $57.5 million forthe six months ended June 30, 2004. The $12.2 million decrease in POS revenuesresulted from a decline in transaction volumes primarily from our largestcustomer and to a lesser extent a decrease in revenue per transaction as aresult of negotiated price reductions upon renewal of certain contracts. POStransaction volumes decreased 19.6% to 3.0 billion transactions for the sixmonths ended June 30, 2005, from 3.7 billion transactions for the six monthsended June 30, 2004. In 2004, we negotiated contract renewals with some of ourPOS customers, and in several instances we agreed to pricing discounts inexchange for maintaining or increasing their minimum transaction or revenuecommitments. As a result, it is likely our revenue per transaction willdecrease and, depending upon the number of transactions we transport, our POSrevenues may continue to decrease. In addition, we recently amended ourcontract with a major customer to extend the term of the agreement for twoyears. The amended contract does not contain any minimum transaction or revenuecommitments. Based on the amended contract, we believe that revenues andrelated transaction volumes from this customer may continue to decline in 2005and thereafter.

 

***Internationalservices division.*** Revenues from the international services division increased $12.3million, or 35.5%, to $46.9 million for the six months ended June 30, 2005,from $34.6 million for the six months ended June 30, 2004. The increase wasprimarily due to additional revenues generated from our POS customers in theU.K., Central Europe and Australia, and to a lesser extent we benefited fromfavorable foreign exchange. Revenues from our U.K. subsidiary increased $6.6million, or 22.9%, to $28.6 million for the six months ended June 30,2005, from $22.1 million for the six months ended June 30, 2004.

 

***Telecommunicationservices division.*** Revenues from the telecommunication services division increased $4.4million, or 26.1%, to $21.3 million for the six months ended June 30, 2005,from $16.9 million for the six months ended June 30, 2004. The growth inrevenues was primarily due to increased usage of our call signaling services fromnew and existing customers.

 

***Financialservices division.*** Revenues from the financial services division increased $2.9 million, or23.7%, to $15.0 million for the six months ended June 30, 2005, from $12.2million for the six months ended June 30, 2004. The increase in revenues wasdue to the growth in the number of customer connections, both physical andlogical, to and through our networks.

 

***Costof network services.***  Cost of network services increased $1.4million, or 2.3%, to $61.2 million for the six months ended June 30, 2005, from$59.8 million for the six months ended June 30, 2004. Cost of network serviceswere 47.6% of revenues for the six months ended June 30, 2005, compared to49.4% of revenues for the six months ended June 30, 2004. The increase in costof network services resulted primarily from higher usage charges from our TSD,FSD and ISD services partially offset by lower usage charges from decreased POStransactions and to a lesser extent a decrease in usage-based vendortelecommunications charges in our POS division. Gross profit represented 52.4%of total revenues for the six months ended June 30, 2005, compared to 50.6% forthe six months ended June 30, 2004. The increase in gross profit as apercentage of total revenues resulted primarily from increased contribution ofour financial services division and international services division, and to alesser extent the decrease in usage-based vendor telecommunications chargesassociated with our POS services.

 

Future cost of network services depends on anumber of factors including total transaction and query volume, the relativegrowth and contribution to total transaction volume of each of our customers,the success of our new service offerings, the timing and extent of our networkexpansion and the timing and extent of any network cost reductions. Inaddition, any significant loss or significant reduction in transaction volumescould lead to a decline in gross margin since significant portions of ournetwork costs are fixed costs.

 

***Engineeringand development expense.***  Engineering and development expense increased$1.0 million, or 14.5%, to $7.9 million for the six months ended June 30,2005, from $6.9 million for the six months ended June 30, 2004. Engineering anddevelopment expense represented 6.2% of revenues for the six months ended June30, 2005 and 5.7% of revenues for the six months ended June 30, 2004.Engineering and development expense increased primarily from an increase inengineering expenses required to support our international expansion.

 

***Selling,general and administrative expense.***  Selling, general and administrative expenseincreased $2.2 million, or 9.3%, to $26.0 million for the six months endedJune 30, 2005, from $23.8 million for the six months ended June 30, 2004. Selling,general and administrative expense represented 20.3% of revenues for the sixmonths ended June 30, 2005, compared to 19.7% of revenues for the

 

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six months ended June 30, 2004.Included in selling, general and administrative expenses for the six monthsended June 30, 2005 is a charge related to a legal settlement of approximately$3.3 million and a benefit from a reduced state sales tax liability assessmentof approximately $5.8 million. Excluding these items, selling, general andadministrative expense increased primarily from the expenses required tosupport our revenue growth, mainly within the international services division,and to a lesser extent, the incremental costs necessary to operate as a publiccompany and stock compensation expense.

 

***Depreciationand amortization of property and equipment.***  Depreciation and amortization of property andequipment increased $70,000 to $9.8 million for the six months ended June 30,2005, from $9.8 million for the six months ended June 30, 2004. Depreciationand amortization of property and equipment represented 7.7% of revenues for thesix months ended June 30, 2005, compared to 8.1% of revenues for the six monthsended June 30, 2004.

 

***Amortizationof intangible assets.***  Amortization of intangible assets decreased$1.2 million, or 8.1%, to $13.5 million for the six months ended June 30, 2005,from $14.7 million for the six months ended June 30, 2004. The amortization ofintangible assets for the six months ended June 30, 2005 and 2004 relatessolely to the intangible assets resulting from acquisitions. The decrease wasprimarily attributable to certain intangible assets becoming fully amortizedduring the second half of 2004 and first quarter of 2005.  In the six months ended June 30, 2005 and2004 we accelerated amortization on a portion of our customer relationshipintangible assets in connection with the loss of certain customers by$3.1million and $2.0 million, respectively. For purposes of measuring and recognizing impairment of long-livedassets including intangibles, we assess whether separate cash flows can beattributed to the individual asset. For our customer relationship intangibleassets, we recognize and measure impairment upon the termination or loss of acustomer that results in a loss of revenue. Based on the outcome of our contract negotiations with one of our majorcustomers, we believe that revenues and related transaction volumes from thiscustomer may continue to decline in 2005 and thereafter.  The intangible asset value attributable tothis customer relationship is approximately $24.4 million as of June 30,2005.  We assessed the recoverability ofthis customer relationship asset based upon anticipated future cash flows, andconcluded no impairment existed as of June 30, 2005.

 

***Interestexpense.*** Interest expense decreased $1.4 million to $4.0 million for the sixmonths ended June 30, 2005, from $5.4 million for the six months endedJune 30, 2004. This decrease was primarily due to the write-off in March, 2004of approximately $2.0 million of deferred financing costs in connection withthe termination of our then existing credit facility partially offset by thewrite-off in May 2005 of approximately $1.1 million of deferred financing costsin connection with the termination of our previous senior secured creditfacility.

 

***Interestand other income (expense), net.***  Interest and other income (expense), net wasan expense of $0.2 million for the six months ended June 30, 2005 compared to$0.1 million for the six months ended June 30, 2004.

 

***Incometax provision.*** For the six months ended June 30, 2005, our income tax provision was$2.8 million compared to $0.6 million for the six months ended June 30,2004. Our effective tax rate for the six months ended June 30, 2005 is 50.0%versus the U.S. federal statutory tax rate of 35.0%, due primarily to the factthat we have losses from certain of our international subsidiaries that cannotbe used to offset income in other jurisdictions.  In addition we made the decision, in April2005, to repatriate $10.0 million of foreign earnings under the repatriationprovisions of the American Jobs Creation Act of 2004 for which we have providedan income tax provision of approximately $0.5 million.

 

***Equityin net loss of unconsolidated affiliates.***  For the six months ended June 30, 2005, ourequity in net loss of unconsolidated affiliates was $1.1 million compared to$98,000 for the six months ended June 30, 2004. As of June 30, 2005, we have$4.9 million of long-term investments in unconsolidated affiliates, and weexpect to incur additional losses on these investments in 2005 and we maycontinue to incur losses thereafter.

 

**Seasonality**

 

Credit card and debit card transactionsaccount for a major percentage of the transaction volume processed by ourcustomers. The volume of these transactions on our networks generally isgreater in the third and fourth quarter vacation and holiday seasons thanduring the rest of the year. Consequently, revenues and earnings from creditcard and debit card transactions in the first and second quarter generally arelower than revenues and earnings from credit card and debit card transactionsin the third and fourth quarters of the immediately preceding year. We expectthat our operating results in the foreseeable future will be significantlyaffected by seasonal trends in the credit card and debit card transactionmarket.

 

**Liquidity and Capital Resources**

 

Our primary liquidity and capital resourceneeds are to finance the costs of our operations, to make capital expendituresand to service our debt. The borrowings under our May 4, 2005 amended andrestated senior secured credit facility were used to finance the stockrepurchase on May 4, 2005, as well as to repay the amounts outstanding underour previous senior secured credit facility. The proceeds from our initial public offering in March 2004, alongwith the proceeds from borrowings under our previous senior secured creditfacility, were used to repay the amounts outstanding under our then-existingsenior secured credit facility. Based upon

 

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our current level ofoperations, we expect that our cash flow from operations, together with theamounts we are able to borrow under our amended and restated senior securecredit facility, will be adequate to meet our anticipated needs for theforeseeable future. Although we have no specific plans to do so, to the extentwe decide to pursue one or more significant strategic acquisitions, we will likelyneed to incur additional debt or sell additional equity to finance thoseacquisitions.

 

Our operations provided us cash of$23.0 million for the six months ended June 30, 2005, which wasattributable to net income of $1.7 million, depreciation, amortization andother non-cash charges of $27.0 million and an increase in working capitalof $5.8 million. Our operations provided us cash of $19.6 million forthe six months ended June 30, 2004, which was attributable to a net loss of$0.2 million, depreciation, amortization and other non-cash charges of$26.0 million and a decrease in working capital of $6.2 million.

 

We used cash of $16.5 million ininvesting activities for the six months ended June 30, 2005, which includescapital expenditures of $10.1 million. In addition, we made investmentsfor $0.8 million in WAY and $2.0 million in IP Commerce and we purchasedcertain assets of FusionPoint for $3.5 million.  We used cash of $18.1 million ininvesting activities for the six months ended June 30, 2004, which includescapital expenditures of $8.2 million. In addition, we spent $6.1 million and $3.7 million, respectively topurchase the Synapse and vending assets from USWD.  Significant portions of our capitalexpenditures in each period were for network equipment, third-party softwareand capitalized software development costs we incurred to expand our networkplatforms and service our customer requirements.  Our remaining capital expenditures were foroffice equipment and leasehold improvements and for general corporatepurposes.  We currently have nosignificant capital spending or purchase commitments but expect to continue toengage in capital spending in the ordinary course of business.

 

We used cash of $6.1 million for financingactivities for the six months ended June 30, 2005, which includes borrowingsunder our amended and restated senior secure credit facility, net of financingcosts, of $165.2 million that were used to finance the purchase and retirementof 6,263,435 shares of our common stock at a price of $18.50 per share plusexpenses for approximately $116.9 million and to repay $48.0 million oflong-term debt under our previous senior secured credit facility.  In addition, we made long-term debtrepayments of $3.3 million on our amended and restated senior secure creditfacility and an additional $3.0 million on our March 19, 2004 credit facility.We used cash of $6,000 for financing activities for the six months ended June30, 2004, which includes $5.5 million of long-term debt repayments on our previoussenior secured credit facility and $150.4 million of long-term debt underour then-existing senior secured credit facility with the net proceedsgenerated from our IPO in March 2004 of $71.5 million and borrowingsunder our new credit facility, net of financing costs, of$79.0 million.  We also borrowed$5.5 million in May 2004 under our previous senior secured credit facility, theproceeds of which were used to fund the acquisition of the Synapse assets fromUSWD.

 

***Amended and RestatedSenior Secured Credit Facility***

 

On May 4, 2005, we entered into anamended and restated senior secured credit facility to finance the stockrepurchase and to replace our previous senior secured credit facility. Theamended and restated senior secure credit facility consists of a$165.0 million term loan and a revolving credit facility of$30.0 million, under which there were no borrowings as of June 30, 2005.The amended and restated senior secure credit facility matures May 4, 2012.Payments on the term loan are due in quarterly installments over the seven-yearterm, beginning on June 1, 2005, with the remainder payable on May 4,2012. As of June 30, 2005 total remaining payments on the term loan are asfollows (in thousands):

 

| Six months ending December 31, 2005 | ** ** | $       | 825     | ** ** |
|------------------------------------------|------------|---------|---------|------------|
| 2006                                     |       | 1,650   |    |
| 2007                                     |       | 1,650   |    |
| 2008                                     |       | 1,650   |    |
| 2009                                     |       | 1,650   |    |
| Thereafter                               |       | 157,163 |    |
|                                     |       | $       | 164,588 |       |

 

For the periodthrough June 30, 2005, borrowings on the revolving credit facility and theterm loan bore interest at a rate of 2.00 percent over the LIBOR rate(5.41 percent as of June 30, 2005). Thereafter, if we achieve a leverage ratioof less than 1.75, the borrowings on the revolving credit facility and the termloan generally will bear interest at a rate, at our option, of either0.75 percent over the lender’s base rate or 1.75 percent over theLIBOR rate. Our leverage ratio as of June 30, 2005 was 2.5 to 1.0. Therevolving credit facility is subject to an annual non-use commitment fee in anamount equal to 0.375 percent or 0.5 percent per annum, depending on ourleverage ratio, multiplied by the amount of funds available for borrowing underthe revolving credit facility. Interest payments on the amended and restatedsenior secure credit facility are due monthly, bimonthly, or quarterly at ouroption.

 

The terms ofthe amended and restated senior secure credit facility require us to complywith financial and nonfinancial covenants, including maintaining certainleverage, interest and fixed charge coverage ratios at the end of each fiscalquarter. As of June 30, 2005, we were required to maintain a leverage ratio ofless than 2.85 to 1.0, an interest coverage ratio of greater than 4.0 to 1.0and a fixed

 

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charge ratio of greater than2.5 to 1.0. Certain of the financial covenants will become more restrictiveover the term of the amended and restated senior secure credit facility. Theamended and restated senior secure credit facility also contains nonfinancialcovenants that restrict some of the Company’s corporate activities, includingour ability to dispose of assets, incur additional debt, pay dividends, createliens, make investments, make capital expenditures and engage in specifiedtransactions with affiliates. Our future results of operations and our abilityto comply with the covenants could be adversely impacted by increases in thegeneral level of interest rates since the interest on a majority of our debt isvariable. Noncompliance with any of the financial or nonfinancial covenantswithout cure or waiver would constitute an event of default under the amendedand restated senior secure credit facility. An event of default resulting froma breach of a financial or nonfinancial covenant may result, at the option ofthe lenders, in an acceleration of the principal and interest outstanding, anda termination of the amended and restated senior secure revolving creditfacility. The amended and restated senior secure credit facility also containsother customary events of default (subject to specified grace periods),including defaults based on events of bankruptcy and insolvency, nonpayment ofprincipal, interest or fees when due, breach of specified covenants, change incontrol and material inaccuracy of representations and warranties. We were incompliance with the financial and nonfinancial covenants of the amended andrestated senior secure credit facility as of June 30, 2005.

 

On March 19, 2004, we entered into asenior secured credit facility to replace our then-existing senior securedcredit facility. The senior secured credit facility consisted of a$65.0 million term loan and a revolving credit facility of$30.0 million.

 

##### **Recent Accounting Pronouncements**

##### ** **

In December 2004, the FASB issued SFASNo. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), whichis a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for StockIssued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows.”We will adopt SFAS No. 123R on January 1, 2006. SFAS No. 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recorded as an expense based on their fair values. We arecurrently evaluating the impact of adopting SFAS No. 123R. Informationabout the fair value of stock options under the Black-Scholes model and its proforma impact on net income and basic and diluted net income per common sharefor the three and six months ended June 30, 2004 and 2005 (which may differfrom the ultimate impact of the new standard) can be found in Note 1 tothe condensed consolidated financial statements in this Form 10–Q.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

***Interest rates***

 

Our principalexposure to market risk relates to changes in interest rates. As of June 30,2005, we had $164.6 million outstanding under our new senior securedcredit facility with interest rates tied to changes in the lender’s base rateor the LIBOR rate. Based upon the outstanding borrowings on June 30, 2005 andassuming repayment of the Term Loan in accordance with scheduled maturities,each 1.0% increase in these rates could add an additional $1.6 million to ourannual interest expense.

 

As of June 30, 2005, we did not holdderivative financial or commodity instruments and all of our cash and cashequivalents were held in money market or commercial accounts.

 

***Foreign currencyrisk***

 

Our earnings are affected by fluctuations inthe value of the U.S. dollar as compared with foreign currencies, predominatelythe euro, the British pound and the Australian dollar due to our operations inEurope and Australia.

 

We have operations in 18 countries outside ofthe U.S., including the United Kingdom, Australia, Canada, Finland, France,Germany, Hong Kong, Ireland, Italy, Japan, Korea, The Netherlands, NewZealand, Norway, Poland, Spain, Sweden and Thailand. We provide services inthese countries using networks deployed in each country.  We manage foreign exchange risk through thestructure of our business. In the substantial majority of our transactions, wereceive payments denominated in the U.S. dollar, British pound, euro orAustralian dollar. Therefore, we do not rely on international currency marketsto obtain and pay illiquid currencies. The foreign currency exposure that doesexist is limited by the fact that the majority of transactions are paidaccording to our standard payment terms, which are generally short–term innature. Our policy is not to speculate in foreign currencies, and we promptlybuy and sell foreign currencies as necessary to cover our net payables andreceivables, which are denominated in foreign currencies. For the six monthsended June 30, 2005, we recorded a loss on foreign currency translation ofapproximately $0.6 million.

 

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**Item 4. Controls and Procedures**

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s reports under the Securities Exchange Act of 1934,as amended, is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to the Company’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost–benefit relationship of possible controls and procedures.

 

**Evaluation**

 

The Companycarried out an evaluation, under the supervision, and with the participation,of the Company’s management, including the Company’s Chief Executive Officerand the Company’s Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures as of June 30, 2005. Based on the foregoing,the Company’s Chief Executive Officer and principal financial officersconcluded that the Company’s disclosure controls and procedures were effectiveas of June 30, 2005.

 

There have beenno significant changes during the quarter covered by this report in the Company’sinternal control over financial reporting or in other factors that couldsignificantly affect the internal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.****           Legal Proceedings**

 

OnAugust 26, 2002, an action was filed in the Superior Court of the State ofDelaware by persons alleging that the Company breached an agreement to purchasean unrelated entity. On February 28, 2005, the court denied the Company’smotion for summary judgment filed in June 2004.  After considering the defense costs,potential damages should the plaintiffs prevail, and continued diversion ofmanagement resources, the Company determined in March 2005 that asettlement was warranted. In April 2005, the Company made the payment of$3.25 million in cash to the plaintiffs and received the dismissal of allclaims, with prejudice, by the plaintiffs, thereby settling this dispute.

 

Certain statesin which the Company operates assess sales taxes on certain services providedby the Company. The Company believes it has no liability because its customercontracts contain terms that stipulate the customer, not the Company, isresponsible for any sales tax liability. In jurisdictions where the customermay be liable for sales taxes, the Company either includes sales tax on itsinvoice or has obtained an exemption certificate from the customer. Certainstates have audited the Company from 1996 to early 2001 and originally proposed$6.7 million in assessments on the basis that sales taxes are owed. InMarch 2005, the Company received verbal notification from a state salestax auditor that one of the states was likely to reduce its proposed assessmentby an amount in excess of  $4million.  In April 2005, the Companyreceived written confirmation from that state’s Department of Revenue that thestate’s assessment would be reduced by $4.3 million.  In July 2005, the Company entered into anagreement with that state’s Department of Revenue to settle the remaining outstandingliability of approximately $1.5 million for $0.8 million and concurrentlyentered into an agreement with a customer to reimburse the Company for $0.5million of the settlement amount.  Boththe Company and the customers involved are vigorously defending the remainingproposed assessments. In the opinion of management, resolution of these matterswill not have a material adverse effect upon the financial position or futureoperating results of the Company.

 

We also areparty to various legal proceedings in the normal course of business. Please seethe description under the caption “Legal Proceedings” in the annual report onForm 10-K filed with the Commission on March 31, 2005.

 

**Item 2.****           UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.****           DefaultUpon Senior Securities**

 

None.

 

**Item 4.****           Submissionof Matters to a Vote of Security Holders**

 

The AnnualMeeting of Stockholders was held on May 17, 2005. The stockholders voted on thefollowing matters as set forth in the proxy statement:

 

1.  ELECTION OF DIRECTORS. The stockholders votedto elect nine directors to a one-year term expiring at the annual meeting ofstockholders in 2006. The voting tabulation for each nominee was as follows:

 
| **Director**           | ** ** | **Votes in Favor** | ** ** | **Votes Withheld** | ** ** |
|------------------------|------------|--------------------|------------|--------------------|------------|
|                   |       |               |       |               |       |
| John J. McDonnell, Jr. |       | 25,135,172         |       | 208,962            |       |
|                   |       |               |       |               |       |
| Brian J. Bates         |       | 25,204,324         |       | 139,810            |       |
|                   |       |               |       |               |       |
| John J. McDonnell III  |       | 25,205,374         |       | 138,760            |       |
|                   |       |               |       |               |       |
| Bruce V. Rauner        |       | 25,200,049         |       | 144,085            |       |
|                   |       |               |       |               |       |
| Philip A. Canfield     |       | 24,920,477         |       | 423,657            |       |
|                   |       |               |       |               |       |
| John B. Benton         |       | 25,320,034         |       | 24,100             |       |
|                   |       |               |       |               |       |
| Stephen X. Graham      |       | 25,040,962         |       | 303,172            |       |
|                   |       |               |       |               |       |
| George G. Moore        |       | 24,614,874         |       | 729,260            |       |
|                   |       |               |       |               |       |
| John V. Sponyoe        |       | 25,320,034         |       | 24,100             |       |

 

2.  INCREASE IN THE COMMON STOCKSUBJECT TO THE 2004 LONG-TERM INCENTIVE PLAN. The stockholders approved anincrease in the aggregate number of shares of Common Stock authorized forissuance under the Company’s 2004 Long-Term Incentive Plan from 1,586,384 to3,847,384 shares.  The voting tabulationwas as follows: 19,755,847 votes in favor of the increase; 3,913,149 votesagainst the increase; and 850 abstentions.

 

3.  RATIFICATION OF INDEPENDENTACCOUNTANTS. The stockholders ratified the selection of Ernst & Young LLPas the Company’s independent accountants for the current fiscal year. Thevoting tabulation was as follows: 25,295,102 votes in favor of theratification; 49,032 against the ratification; and no abstentions.

 

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**Item 5.****           Other Information**

 

None.

 

##### **Item 6.**           Exhibits

 

(10.1)   Amended and Restated CreditAgreement, dated as of May 4, 2005, by and among Transaction Network Services,Inc., Registrant, the several financial institutions from time to time partythereto and General Electric Capital Corporation, as Agent, L/C Issuer and aLender, with GECC Capital Markets Group, Inc., as Lead Arranger*

 

(31.1)   Certification—Chief ExecutiveOfficer

 

(31.2)   Certification—Chief FinancialOfficer

 

(32.1)   Written Statement of ChiefExecutive Officer and Chief Financial Officer

 

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*             Incorporatedby reference to the exhibit of same designation in the Report on Form 8-K filedby the Registrant on May 5, 2005

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                  | TNS, Inc. |
|-----------------------|----------------|
|                  | (Registrant)   |
|                  |           |
| Date: August 15, 2005 | By:            | /s/ John J. McDonnell, Jr. |   |
|                  |           | John J. McDonnell, Jr. |   |
|                  |           | Chairman and Chief Executive Officer |   |
|                  |           |   |   |
| Date: August 15, 2005 | By:            | /s/ Henry H. Graham, Jr. |   |
|                  |           | Henry H. Graham, Jr. |
|                  |           | Executive Vice President, Chief Financial  Officer & Treasurer |

 

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