**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                          | ** **                                                                                                         |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
| ** **                                                                                                                                              |
| **For the quarterly period ended  March 31, 2008**                                                                                                 |
| ** **                                                                                                                                              |
| **OR**                                                                                                                                                  |
| ** **                                                                                                                                              |
| **o**                                                                                                                                                   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                              |
| **For the transition period from           to         ** |

 

**Commission File Number: 001-32033**

 

**TNS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**(State or jurisdiction of incorporation or  organization) | ** ** | **36-4430020**(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, includingarea 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. x Yeso No

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                     |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).o Yes  x No

 

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

 

**Shares Outstanding as of April 1, 2008**

 

24,462,488 Shares of Common Stock, $0.001 parvalue

 

 

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**TNS, INC.**

 

**INDEX**

 
| ** **                              | ** **                                                                                                | ** ** | **Page** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I:  FINANCIAL INFORMATION** |                                                                                                      |       |
| Item 1.                                 | Condensed Consolidated Financial Statements  (Unaudited)                                                  |       | 3        |
|                                    | Condensed  Consolidated Balance Sheets as of December 31, 2007 and March 31,  2008              |       | 3        |
|                                    | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2007 and 2008 |       | 4        |
|                                    | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2007 and 2008 |       | 5        |
|                                    | Notes to  Condensed Consolidated Financial Statements                                                     |       | 6        |
| Item 2.                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations               |       | 15       |
| Item 3.                                 | Quantitative and Qualitative Disclosures  About Market Risk                                               |       | 21       |
| Item 4.                                 | Controls and Procedures                                                                                   |       | 21       |
| **Part II: OTHER INFORMATION**     |                                                                                                      |       |
| Item 1.                                 | Legal Proceedings                                                                                         |       | 22       |
| Item 1A.                                | Risk Factors                                                                                              |       | 22       |
| Item 2.                                 | Unregistered Sales of Equity Securities and  Use of Proceeds                                              |       | 22       |
| Item 3.                                 | Default Upon Senior Securities                                                                            |       | 22       |
| Item 4.                                 | Submission of Matters to a Vote of Security  Holders                                                      |       | 22       |
| Item 5.                                 | Other Information                                                                                         |       | 22       |
| Item 6.                                 | Exhibits                                                                                                  |       | 22       |

 

2

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**PART I—FINANCIALINFORMATION**

 

**Item 1. Condensed Consolidated FinancialStatements**

 

**TNS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollars in thousands, except share and pershare data)**

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,  2007** | ** ** | **March 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | ** **                  | ** ** | **(UNAUDITED)**          | ** ** |
| **ASSETS**                                                                                                                                                                                               |       |                        |       |                     |       |
| Current assets:                                                                                                                                                                                          |       |                        |       |                     |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                           | 17,805     |                     | $          | 22,856 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $3,093 and $3,416, respectively                                                                                                          |       | 75,112                      |       | 72,707                   |       |
| Prepaid expenses                                                                                                                                                                                         |       | 6,765                       |       | 6,465                    |       |
| Deferred tax assets                                                                                                                                                                                      |       | 2,800                       |       | 2,048                    |       |
| Other current assets                                                                                                                                                                                     |       | 5,952                       |       | 5,519                    |       |
| Total current assets                                                                                                                                                                                     |       | 108,434                     |       | 109,595                  |       |
| Property and equipment, net                                                                                                                                                                              |       | 55,376                      |       | 56,545                   |       |
| Identifiable intangible assets, net                                                                                                                                                                      |       | 180,330                     |       | 175,439                  |       |
| Goodwill                                                                                                                                                                                                 |       | 13,513                      |       | 13,696                   |       |
| Deferred tax assets, net                                                                                                                                                                                 |       | 21,110                      |       | 22,665                   |       |
| Other assets                                                                                                                                                                                             |       | 4,335                       |       | 4,804                    |       |
| Total assets                                                                                                                                                                                             |       | $                           | 383,098    |                     | $          | 382,744 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            |       |                        |       |                     |       |
| Current liabilities:                                                                                                                                                                                     |       |                        |       |                     |       |
| Accounts payable, accrued expenses and  other current liabilities                                                                                                                                        |       | $                           | 57,069     |                     | $          | 57,312 |   |
| Deferred revenue                                                                                                                                                                                         |       | 18,521                      |       | 18,276                   |       |
| Total current liabilities                                                                                                                                                                                |       | 75,590                      |       | 75,588                   |       |
| Long-term debt, net of current portion                                                                                                                                                                   |       | 205,500                     |       | 201,500                  |       |
| Deferred tax liability                                                                                                                                                                                   |       | 5,537                       |       | 4,236                    |       |
| Other liabilities                                                                                                                                                                                        |       | 4,199                       |       | 2,665                    |       |
| Total liabilities                                                                                                                                                                                        |       | 290,826                     |       | 283,989                  |       |
| Commitments and contingencies                                                                                                                                                                            |       |                        |       |                     |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                        |       |                     |       |
| Common stock, $0.001 par value; 130,000,000  shares authorized; 24,274,195 shares issued and 24,258,942 shares outstanding  and 24,547,723 shares issued and 24,462,488 shares outstanding, respectively |       | 24                          |       | 25                       |       |
| Treasury stock, 15,253 shares and 85,235  shares, respectively                                                                                                                                           |       | (239                        | )          | (1,472                   | )          |
| Additional paid-in capital                                                                                                                                                                               |       | 131,485                     |       | 135,159                  |       |
| Accumulated deficit                                                                                                                                                                                      |       | (44,278                     | )          | (42,677                  | )          |
| Accumulated other comprehensive income                                                                                                                                                                   |       | 5,280                       |       | 7,720                    |       |
| Total stockholders’ equity                                                                                                                                                                          |       | 92,272                      |       | 98,755                   |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                           | 383,098    |                     | $          | 382,744 |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

3

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**TNS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

**(dollars in thousands, except share and pershare data)**

 
| ** **                                                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Revenues                                                                                     |       | $                                                | 72,661     |   | $ | 84,125 |   |
| Operating expenses:                                                                          |       |                                             |       |   |   |
| Cost of network services, exclusive of the  items shown separately below                     |       | 38,871                                           |       | 40,707 |   |
| Engineering and development                                                                  |       | 6,362                                            |       | 7,199 |   |
| Selling, general, and administrative                                                         |       | 17,175                                           |       | 19,445 |   |
| Depreciation and amortization of property  and equipment                                     |       | 5,804                                            |       | 5,967 |   |
| Amortization of intangible assets                                                            |       | 6,112                                            |       | 6,098 |   |
| Total operating expenses                                                                     |       | 74,324                                           |       | 79,416 |   |
| (Loss) income from operations                                                                |       | (1,663                                           | )          | 4,709 |   |
| Interest expense                                                                             |       | (3,967                                           | )          | (3,709 | ) |
| Interest income                                                                              |       | 245                                              |       | 180 |   |
| Other income, net                                                                            |       | 645                                              |       | 69 |   |
| (Loss) income before income tax benefit and  equity in net loss of unconsolidated affiliates |       | (4,740                                           | )          | 1,249 |   |
| Income tax benefit                                                                           |       | 1,577                                            |       | 352 |   |
| Equity in net loss of unconsolidated  affiliates                                             |       | (64                                              | )          | — |   |
| Net (loss) income                                                                            |       | $                                                | (3,227     | ) | $ | 1,601 |   |
|                                                                                         |       |                                             |       |   |   |
| Basic net (loss) income per common share                                                     |       | $                                                | (0.13      | ) | $ | 0.07 |   |
| Diluted net (loss) income per common share                                                   |       | $                                                | (0.13      | ) | $ | 0.06 |   |
| Basic weighted average common shares  outstanding                                            |       | 24,135,264                                       |       | 24,309,655 |   |
| Diluted weighted average common shares  outstanding                                          |       | 24,135,264                                       |       | 24,738,286 |   |
| Dividends declared per common share                                                          |       | $                                                | 4.00       |   | $ | — |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

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**TNS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                            |       |                                             |       |   |   |
| Net (loss) income                                                                |       | $                                                | (3,227     | ) | $ | 1,601 |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                             |       |   |   |
| Non-cash and working capital items                                               |       | 11,650                                           |       | 14,069 |   |
| Net cash provided by operating activities:                                       |       | 8,423                                            |       | 15,670 |   |
| Cash flows from investing activities                                             |       |                                             |       |   |   |
| Proceeds from the sale of property and  equipment                                |       | 2,164                                            |       | — |   |
| Purchases of property and equipment                                              |       | (4,896                                           | )          | (6,664 | ) |
| Net cash used in investing activities:                                           |       | (2,732                                           | )          | (6,664 | ) |
| Cash flows from financing activities                                             |       |                                             |       |   |   |
| Proceeds from issuance of long-term debt,  net of issuance costs of $3,501       |       | 221,949                                          |       | — |   |
| Increase in restricted cash for payment of dividend                              |       | (102,267                                         | )          | — |   |
| Repayments of long-term debt                                                     |       | (123,313                                         | )          | (4,000 | ) |
| Proceeds from tax benefits for share-based  payments                             |       | —                                           |       | 200 |   |
| Proceeds from stock option exercises,  inclusive of tax benefit                  |       | 30                                               |       | 587 |   |
| Payment of long-term debt financing costs                                        |       | —                                           |       | (75 | ) |
| Purchase of treasury stock                                                       |       | (690                                             | )          | (1,233 | ) |
| Net cash provided by (used in) financing  activities                             |       | 4,291                                            |       | (4,521 | ) |
| Effect of exchange rates on cash and cash  equivalents                           |       | 10                                               |       | 566 |   |
| Net increase in cash and cash equivalents                                        |       | 1,410                                            |       | 5,051 |   |
| Cash and cash equivalents, beginning of  period                                  |       | 17,322                                           |       | 17,805 |   |
| Cash and cash equivalents, end of period                                         |       | $                                                | 18,732     |   | $ | 22,856 |   |
|                                                                             |       |                                             |       |   |   |   |   |
| Supplemental disclosures of cash flow  information:                              |       |                                             |       |   |   |
| Cash paid for interest                                                           |       | $                                                | 2,918      |   | $ | 3,823 |   |
| Cash paid for income taxes                                                       |       | $                                                | 2,274      |   | $ | 2,012 |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

5

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**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

TNS, Inc. (TNS or the Company) is a Delaware corporation. TNS is aleading provider of business-critical data communications services toprocessors of credit card, debit card and automated teller machine (ATM)transactions. TNS is also a leading provider of call signaling and databaseaccess services to the domestic telecommunications industry and of secure dataand voice network services to the global financial services industry. TNS’ datacommunication services enable secure and reliable transmission oftime-sensitive, transaction-related information critical to its customers’operations. The Company’s customers outsource their data communicationrequirements to TNS because of the Company’s expertise, comprehensive customersupport, and cost-effective services. TNS provides services to customers in theUnited States and increasingly to customers in 29 countries, including Canada,Mexico and countries in Europe, Latin America and the Asia-Pacific region.

 

The Company provides its services through its multiple data networks,each designed specifically for transaction applications. These networks supporta variety of widely accepted communications protocols, are designed to bescalable and are accessible by multiple methods, including dial-up, dedicated,wireless and Internet connections.

 

The Company has four business divisions: (1) thepoint-of-sale/point-of-service (POS) division, which provides datacommunications services to payment processors in the U.S., Canada and Mexico,(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, Canada andMexico.

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with United States generally acceptedaccounting principles (GAAP) for interim financial information and inconjunction with the rules and regulations of the Securities and ExchangeCommission (SEC). Certain information and note disclosures normally included inthe annual financial statements, required by GAAP, have been condensed oromitted pursuant to those rules and regulations, although the Companybelieves that the disclosures made are adequate to make the information presentednot misleading.

 

In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect adjustments (all of which are of anormal and recurring nature) that are necessary for fair presentation of theperiods presented. The results of operations for the three months endedMarch 31, 2008 are not necessarily indicative of the results to beexpected for any subsequent interim period or for the fiscal year. It issuggested that these unaudited condensed consolidated financial statements beread in conjunction with the Company’s annual report on Form 10-K filedwith the SEC on March 17, 2008, which includes consolidated financialstatements and the notes thereto for the year ended December 31, 2007.

 

*Dividends and Recapitalization*

 

On March 28, 2007, the Company’s board of directors declared aspecial dividend of $4.00 per common share, which was paid on April 12,2007. Also, on March 28, 2007, the Company entered into a secured creditfacility, which consists of two facilities: a senior secured term loan facilityin an aggregate principal amount of $225 million (the Term Facility) and asenior secured revolving credit facility in an aggregate principal amount of$15 million (the Revolving Facility). The Company used approximately$98.3 million of the proceeds from the Term Facility to pay the specialdividend. The remainder of the proceeds from the Term Facility were used torefinance existing debt, to pay fees related to the senior secured creditfacility, to pay the special dividend, and for general corporate purposes.

 

*Capital Structure*

 

During the three months ended March 31, 2008 the Company issued38,477 shares of common stock following the exercise of stock options and 165,069shares of common stock following the vesting of restricted stock units.

 

**Use of Estimates**

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of certain assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements. Significant estimatesaffecting the consolidated financial statements include management’s judgmentsregarding the allowance for doubtful accounts, future cash flows fromlong-lived assets, accrued expenses for probable losses, estimates of the fairvalue of assets and liabilities assumed and estimates related to the fair valueof employee stock options, including volatility, expected term and estimates offorfeitures in future periods. Actual results could differ from thoseestimates.

 

6

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**Revenue Recognition**

 

The Company recognizes revenue when persuasive evidence of an agreementexists, the terms are fixed and determinable, services are performed, andcollection is probable. Cash received in advance of revenue recognition isrecorded as deferred revenue. Software development revenue under fixed pricecontracts for significant customization of software is recognized on apercentage-of-completion basis.

 

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 and monthly recurring fees for broadband and wireless offerings. TSDrevenue is derived primarily from fixed monthly fees for call signalingservices and per query fees charged for database access and call validationservices. Financial services revenue is derived primarily from monthlyrecurring fees based on the number of customer connections to and through theCompany’s networks.

 

Incentives granted to new customers or upon contract renewals aredeferred and recognized ratably as a reduction of revenue over the contract periodto the extent that the incentives are recoverable against the customer’sminimum purchase commitments under the contract. In addition, the Companyreceives installation fees related to the configuration of the customers’systems. Revenue from installation fees is deferred and recognized ratably overthe customer’s contractual service period, generally three years. The Companyperforms periodic evaluations of its customer base and establishes allowancesfor estimated credit losses.

 

**Cost of Network Services**

 

Cost of network services is comprised primarily of telecommunicationscharges, which include data transmission and database access charges, leaseddigital capacity charges, circuit installation charges and activation charges.The cost of data transmission is based on a contract or tariff rate per minuteof usage in addition to a prescribed rate per transaction for certain vendors.The costs of database access, circuits, installation, and activation chargesare based on fixed fee contracts with local exchange carriers and interexchangecarriers. The cost of network services also includes salaries, equipmentmaintenance and other costs related to the ongoing operation of the Company’sdata networks. These costs are expensed by the Company as incurred. The Companyrecognizes a liability for telecommunications charges based upon networkservices utilized at historical invoiced rates. Depreciation expense on networkequipment and amortization expense on developed technology are excluded fromcost of network services and included in depreciation and amortization ofproperty and equipment and amortization of intangible assets in theaccompanying consolidated statements of operations.

 

**Stock-Based Compensation**

 

The Company accounts for stock-based compensation under Statement ofFinancial Accounting Standards (SFAS) No. 123R “Share Based Payment”,using the modified prospective transition method. SFAS No. 123R requiresall stock-based compensation to employees be measured at fair value andexpensed over the requisite service period and also requires an estimate offorfeitures when calculating compensation expense. Stock-based compensation forall non-vested awards outstanding as of January 1, 2006, are beingrecognized based on the grant date fair value estimated in accordance with theprovisions of SFAS No. 123 “Accounting for Stock-Based Compensation” andin accordance with SFAS No. 123R for all awards granted or modified afterJanuary 1, 2006.

 

Stock-based compensation expense has been included in the followingcategories (in thousands)

 
| ** **                           | ** ** | **Three months ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31,**          | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2008** | ** ** |
| Cost of  network services            |       | $                      | 252        |   | $ | 327 |   |
| Engineering  and development         |       | 756                    |       | 455 |   |
| Selling,  general and administrative |       | 2,091                  |       | 2,183 |   |
|                                 |       | $                      | 3,099      |   | $ | 2,965 |   |

 

On March 28, 2007 the Company’s Board of Directors decided toallow the outstanding restricted stock units to receive dividend equivalentpayments. As a result of this decision, the Company recorded $1.5 millionof stock-based compensation during the three months ended March 31, 2007,which is included in the $3.1 million of stock-based compensationmentioned above. The $1.5 million charge related to this decision isreported as follows in the accompanying condensed consolidated statement ofoperations for the three months ended March 31, 2007: $0.1 million isincluded in cost of network services, $0.4 million is included inengineering and development and $1.0 million is included in selling,general and administrative expenses. This modification increased net loss pershare by $0.04 per share. As of March 31, 2008, there was a total of $19.5 millionof deferred compensation cost related to stock-based awards, which is expectedto be recognized over a weighted average period of approximately two years.

 

*Time-Vested Awards*

* *

Time-vested awards are subject to a vesting period determined at thedate of the grant, generally in equal installments over three or four years.The Company uses the Black Scholes option pricing model to determine the grantdate fair value of any time-vested stock options. The Company uses the marketprice of the Company’s stock on the date of grant to determine the fair valueof any time-vested restricted stock units. The Company recognizes compensationcost on these time-vested awards in equal installments over the vesting period.

 

During the three months ended March 31, 2007 the Company granted9,000 stock options and 139,025 restricted stock units at weighted averageestimated fair values of $8.61 and $19.07, respectively. During the threemonths ended March 31, 2008, the Company granted 15,500 stock options and17,550 restricted stock units at weighted average estimated fair values of $6.84and $16.31, respectively.

 

*Performance-Based Awards*

 

Performance-based awards are tied to the Company’s annual performanceagainst pre-established internal targets for revenues and adjusted earnings pershare and may vary from zero to 200% of an employee’s target payout, based uponthe 

 

7

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Company’s actual performanceover the fiscal year. The Company uses the Black Scholes option pricing modelto determine the grant date fair value of any performance-based stock options.The Company uses the market price of the Company’s stock on the date of grantto determine the fair value of any performance-based restricted stock units.Performance-based awards are also subject to vesting requirements, andgenerally vest in equal installments over three years. Compensation cost isbased on the expected payout level that will be achieved and is adjusted insubsequent periods as changes in the estimates occur until the performancecriteria have been satisfied. The Company recognizes compensation cost on theseperformance based awards using an accelerated attribution method.

 

In May 2007 the Company put in place a long-term performance-basedstock compensation plan (the 2007 Equity Performance Plan). The actual payoutunder the Company’s 2007 Equity Performance Plan was 147% of the targetedpayout, the results of which were approved by the Company’s board of directorsin February 2008. The total performance-based awards issued under theCompany’s 2007 Equity Performance Plan were 576,076 stock options and 236,341restricted stock units. The weighted average grant date fair value of performance-basedstock options and restricted stock units granted was $6.23 and $12.39,respectively. The Company recognized expense of $0.3 million and$0.2 million related to such stock options and restricted stock units,respectively, during the three months ended March 31, 2008, which isincluded in the $3.0 million of stock-based compensation mentioned above.As of March 31, 2008, there was a total of $2.4 million of deferredcompensation expense related to these performance-based awards which is includedin the $19.5 million total deferred compensation cost mentioned previously.

 

In February 2008 the Company put in place a long-term performance-basedstock compensation plan (the 2008 Equity Performance Plan). The total number ofawards that would be issued under the Company’s 2008 Equity Performance Plan,assuming that the target payout level was achieved, would be 253,266 stockoptions and 248,142 restricted stock units. The weighted average grant datefair value of performance-based stock options and restricted stock unitsgranted was $6.78 and $16.15, respectively. The Company recognized expense of$0.1 million and $0.3 million related to such stock options andrestricted stock units, respectively, during the three months endedMarch 31, 2008, which is included in the $3.0 million of stock-basedcompensation mentioned above. As of March 31, 2008, there was a total of$5.3 million of deferred compensation expense related to these performancebased awards which is included in the $19.5 million total deferred compensationcost mentioned previously.

 

**Income Taxes**

 

The Company accounts for income taxes in accordance with SFASNo. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferredtax assets or liabilities are computed based upon the difference between financialstatement and income tax bases of assets and liabilities using the enactedmarginal tax rate. The Company provides a valuation allowance on its netdeferred tax assets when it is more likely than not that such assets will notbe realized. Deferred income tax expense or benefits are based upon the changesin the asset or liability from period to period. The Company also recognizesinterest and penalties related to uncertain tax positions in income taxexpense.

 

Effective January 1, 2007, the Company adopted FinancialAccounting Standards Board (FASB) Interpretation No. 48, “Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109”(FIN 48), which prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken, or expected to be taken, in a tax return, and provides guidanceon derecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The adoption of FIN 48 did not resultin a cumulative adjustment to the Company’s accumulated deficit.

 

The Company records interest and penalties related to income taxes ascomponents of the income tax provision, which totaled $306,000 and $20,000 forthe three months ended March 31, 2007 and 2008, respectively. Of the $4.1million liability for unrecognized income tax benefits as of March 31,2008, the Company’s accrual for potential interest and penalties associatedwith uncertain tax positions was $165,000. To the extent interest and penaltiesare not assessed with respect to uncertain tax positions, amounts accrued willbe reversed and reflected as a reduction of the overall income tax provision.

 

A reconciliation of the beginning and ending balance for liabilitiesassociated with unrecognized tax benefits, excluding interest and penalties, isas follows (in thousands)

 

| Balance as  of January 1, 2008                            |   | $   | 3,863  |   |
|-----------------------------------------------------------|--------|-----|--------|--------|
| Additons for  tax positions related to the current period |   | 200 |   |
| Balance as  of March 31, 2008                             |   | $   | 4,063  |   |

 

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The Company’s effective tax rate for the three months endedMarch 31, 2007 and March 31, 2008 of 33.3% and (28.2)%, respectively,differ from the U.S. Federal statutory rate primarily due to stock-based compensationexpense not deductible for income tax purposes and profits of our internationalsubsidiaries being taxed at rates different than the U.S. statutory rate.

 

**Recent Accounting Pronouncements**

 

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. In February 2007, the FASB issued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities.” SFAS No. 159permits entities to choose to measure many financial assets and financialliabilities at fair value. For financial assets and financialliabilities, SFAS 157 was effective for the Company on January 1,2008. The adoption of SFAS 157 to the Company’s financial assets andfinancial liabilities did not have a material effect on the Company’sconsolidated financial statements. As we did not elect to fair value any of ourfinancial instruments under the provisions of SFAS 159, the adoption of thisstatement did not have any impact on our financial position or results ofoperations.

 

In December 2007, the FASB issued SFAS No. 141 (R), “BusinessCombinations, a revision of SFAS No. 141”. SFAS No. 141 (R) establishes principles and requirements for how theacquirer of a business recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree. The statement also provides guidance for recognizingand measuring the goodwill acquired in the business combination and determineswhat information to disclose to enable users of the financial statement toevaluate the nature and financial effects of the business combination. SFASNo. 141 (R) is effective for financial statements issued for fiscalyears beginning after December 15, 2008. Accordingly, any businesscombinations we engage in will be recorded and disclosed following existingGAAP until January 1, 2009. The Company expects SFAS No. 141(R) will have an impact on its consolidated financial statements wheneffective, but the nature and magnitude of the specific effects will dependupon the nature, terms and size of the acquisitions the Company consummatesafter the effective date. However, for business combinations completed prior tothe effective date, the Company will apply the requirements of SFASNo. 109, as amended by this statement which may result in an adjustment totax expense in lieu of recording an adjustment for valuation allowance tointangible assets recognized in connection with earlier business combinations.The Company is still assessing the full impact of this standard on its futureconsolidated financial statements.

 

**2.****                                      Acquisitionand Long-term Investments**

 

**Dialect Payment Technologies, Pty LimitedAcquisition**

 

On June 8, 2007, the Company acquired all of the outstandingshares of Dialect Payment Technologies Pty Limited (Dialect), an Australianprovider of internet payment gateway services to the card-not-presenttransaction market, for a purchase price of $4.2 million, plus directacquisition costs of approximately $0.4 million. The purchase priceincludes approximately $0.9 million, currently in escrow, that may be refundableto the Company based on the costs incurred related to one customer contractassumed in the purchase. If such amount is refunded to the Company, it mayresult in a corresponding decrease in goodwill, intangible assets and otherlong-lived assets. The Company accounted for the transaction as a purchaseunder the provisions of SFAS No. 141. The Company purchased Dialectprimarily to expand its current suite of POS product offerings. The purchaseprice for Dialect was allocated, on a preliminary basis, as follows (inthousands):

 

| Current assets                                            |   | $      | 580    |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accounts receivable                                       |   | 964    |   |
| Property and equipment                                    |   | 866    |   |
| Developed technology                                      |   | 4,863  |   |
| Customer relationships                                    |   | 5,319  |   |
| Tradename                                                 |   | 186    |   |
| Non-compete agreements                                    |   | 1,063  |   |
| Goodwill                                                  |   | 559    |   |
| Accounts payable, accrued expenses and  other liabilities |   | (1,985 | )      |
| Deferred revenue                                          |   | (6,465 | )      |
| Deferred tax liability                                    |   | (1,364 | )      |
| Net assets acquired                                       |   | $      | 4,586  |   |

 

The amounts allocated to the customer relationships and developedtechnology are being amortized over their estimated useful life of seven years.The amounts allocated to the non-compete agreements and tradename are beingamortized over their estimated useful life of three years and two years,respectively. The goodwill of $0.6 million is not deductible for incometax purposes. Unaudited pro forma results of operations are not providedbecause the historical operating results were not significant and pro formaresults would not be significantly different from reported results for theperiods presented. The Company’s results of operations include the operatingresults of this acquisition beginning June 8, 2007.

 

9

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**3.****                                      Long-termDebt**

 

On March 28, 2007, the Company entered into a $240.0 millionsenior secured credit facility (2007 Credit Facility) to finance the specialcash dividend and to refinance its 2005 amended and restated senior securedcredit facility (2005 Credit Facility). The 2007 Credit Facility consists of asenior secured term loan facility in an aggregate principal amount of$225.0 million (Term Facility) and a senior secured revolving creditfacility in an aggregate principal amount of $15.0 million (RevolvingFacility), under which there were no borrowings as of March 31, 2008. TheRevolving Facility matures March 27, 2013. Payments on the Term Facilityare due in quarterly installments over the seven year term beginningJune 30, 2007, with the remainder payable on March 28, 2014.Voluntary prepayments on the Term Facility are applied as directed by theCompany. The Company made voluntary pre-payments on the Term Facility totaling$4.0 million during the three months ended March 31, 2008.

 

As of March 31, 2008, the total scheduled remaining payments onthe Term Facility are as follows (in thousands):

 

| Nine months ending December 31, 2008 |   | $       | —  |   |
|-------------------------------------------|--------|---------|---------|--------|
| 2009                                      |   | —  |    |
| 2010                                      |   | —  |    |
| 2011                                      |   | —  |    |
| 2012                                      |   | —  |    |
| Thereafter                                |   | 201,500 |    |
|                                      |   | $       | 201,500 |   |

 

Interest on the outstanding balances under the Revolving Facility ispayable, at the Company’s option, at a rate equal to the higher of the WallStreet Journal published “base rate on corporate loans posted by at least 75%of the nation’s largest banks” or the federal funds rate plus 50 basis points(the “Base Rate”), in each case, plus a margin of 0.75% or at the LondonInterbank Offered Rate (“LIBOR”), plus a margin of 1.75%. Interest on theoutstanding balances under the Term Facility is payable, at the Company’soption, at the Base Rate plus a margin of 1.0%, or at LIBOR plus a margin of2.0%. For the three months ended March 31, 2008, borrowings on the TermFacility bore interest at the rate of 2.0% over the LIBOR rate (5.1% as ofMarch 31, 2008). The weighted average interest rate for the three monthsended March 31, 2008 was 6.9%. The Revolving Credit Facility is subject toan annual commitment fee in an amount equal to 0.5% per annum multiplied by theamount of funds available for borrowing under the Revolving Facility. Interestpayments on the 2007 Credit Facility are due biweekly, monthly, bimonthly orquarterly at the Company’s option.

 

The terms of the 2007 Credit Facility require the Company to make anannual prepayment in an amount that may range from 0% to 50% of the Company’s “excesscash flow” (as such term is defined in the Credit Agreement) depending on theCompany’s Leverage Ratio for any fiscal year. Prepayments are also required tobe made in other circumstances, including upon asset sales.

 

The terms of the 2007 Credit Facility require the Company to complywith financial and nonfinancial covenants, including maintaining a specifiedleverage ratio at the end of each fiscal quarter and complying with specifiedannual limits on capital expenditures. As of March 31, 2008, the Companywas required to maintain a leverage ratio of less than 3.2 to 1.0. The maximumleverage ratio continues to decline over the term of the 2007 Credit Facility.The Company’s leverage ratio as of March 31, 2008 was 2.6 to 1.0. The 2007Credit Facility also contains nonfinancial covenants that restrict some of theCompany’s corporate activities, including its ability to dispose of assets,incur additional debt, pay dividends, create liens, make investments, makecapital expenditures and engage in specified transactions with affiliates.Noncompliance with any of the financial or nonfinancial covenants without cureor waiver would constitute an event of default under the 2007 Credit Facility.An event of default resulting from a breach of a financial or nonfinancialcovenant may result, at the option of the lenders, in an acceleration of theprincipal and interest outstanding, and a termination of the RevolvingFacility. The 2007 Credit Facility also contains other customary events ofdefault (subject to specified grace periods), including defaults based onevents of bankruptcy and insolvency, nonpayment of principal, interest or feeswhen due, breach of specified covenants, change in control and materialinaccuracy of representations and warranties. The Company was in compliancewith the financial and non-financial covenants of the 2007 Credit Facility asof March 31, 2008.

 

In connection with the closing of the 2007 Credit Facility, the Companyincurred approximately $3.1 million in financing costs. These financingcosts were deferred and are being amortized using the effective interest methodover the life of the 2007 Credit Facility. In connection with the repayment ofthe 2005 Credit Facility in March 2007, the Company wrote-offapproximately $1.4 million in unamortized deferred financing costs related tothe 2005 Credit Facility. Such write-off has been included in interest expensein the accompanying condensed consolidated statement of operations for thethree months ended March 31, 2007.

 

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**4.****                                      Comprehensive(Loss) Income**

 

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

 

| ** **                               | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Net (loss) income                        |       | $                                                | (3,227     | ) | $ | 1,601 |   |
| Foreign currency translation adjustments |       | 393                                              |       | 2,440 |   |
| Total comprehensive (loss) income        |       | $                                                | (2,834     | ) | $ | 4,041 |   |

 

**5.****                                      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.During the three months ended March 31, 2007, the treasury stock effect ofoptions to purchase 1,824,142 shares of common stock and 368,380 restrictedstock units were not included in the computation of diluted income (loss) percommon share as their effect would have been anti-dilutive.

 

| ** **                                                | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Net (loss) income                                         |       | $                                                | (3,227     | ) | $ | 1,601 |   |
| Weighted average common share calculation:                |       |                                             |       |   |   |
| Basic weighted average common shares  outstanding         |       | 24,135,264                                       |       | 24,309,655 |   |
| Treasury stock effect of outstanding  options to purchase |       | —                                           |       | 109,421 |   |
| Treasury stock effect of unvested  restricted stock units |       | —                                           |       | 319,210 |   |
| Diluted weighted average common shares  outstanding       |       | 24,135,264                                       |       | 24,738,286 |   |
|                                                      |       |                                             |       |   |   |
| Net (loss) income per common share:                       |       |                                             |       |   |   |
| Basic net (loss) income per common share                  |       | $                                                | (0.13      | ) | $ | 0.07 |   |
| Diluted net (loss) income per common share                |       | $                                                | (0.13      | ) | $ | 0.06 |   |

 

**6.****                                      SegmentInformation**

 

The Company’s reportable segments are strategic business units thatoffer different products and services. The Company classifies its business intofour segments: POS, TSD, FSD and ISD. However, the Company’s management onlyevaluates revenues for these four segments. A significant portion of theCompany’s North American operating expenses are shared between the POS, TSD andFSD segments, and therefore, management analyzes operating results for thesethree segments on a combined basis.

 

Management evaluates the North American and ISD performance on EBITDAbefore stock compensation expense because operating expenses aredistinguishable between North American and ISD operations. The Company definesEBITDA before stock compensation expense as income from operations beforedepreciation, amortization and stock compensation expense. EBITDA before stockcompensation expense is not a generally accepted accounting principle measure, butrather a measure employed by management to view operating results adjusted formajor noncash items. The Company’s definition of EBITDA before stockcompensation expense may not be comparable to similarly titled measures used byother entities. Assets are not segregated between reportable segments, andmanagement does not use asset information by segments to evaluate segmentperformance. As such, no information is presented related to fixed assets byreportable segment and capital expenditures for each segment.

 

11

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Revenue for the Company’s four business units is presented below (inthousands):

 

| ** **     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| ISD            |       | $                                                | 28,207     |   | $ | 37,170 |   |
| POS            |       | 19,799                                           |       | 18,355 |   |
| TSD            |       | 14,913                                           |       | 17,854 |   |
| FSD            |       | 9,742                                            |       | 10,746 |   |
| Total revenues |       | $                                                | 72,661     |   | $ | 84,125 |   |

 

EBITDA before stock compensation expense for the North American and ISDoperations is reflected below (in thousands):

 

| ** **                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| ISD                                             |       | $                                                | 8,986      |   | $ | 12,879 |   |
| North America                                   |       | 4,367                                            |       | 6,860 |   |
| Total EBITDA before stock compensation  expense |       | $                                                | 13,353     |   | $ | 19,739 |   |

 

EBITDA before stock compensation expense differs from (loss) incomebefore income taxes and equity in net loss of unconsolidated affiliate reportedin the condensed consolidated statements of operations as follows (inthousands):

 

| ** **                                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| EBITDA before stock compensation expense                                               |       | $                                                | 13,353     |   | $ | 19,739 |   |
| Reconciling items:                                                                     |       |                                             |       |   |   |
| Depreciation and amortization of property  and equipment                               |       | (5,804                                           | )          | (5,967 | ) |
| Amortization of intangible assets                                                      |       | (6,112                                           | )          | (6,098 | ) |
| Stock compensation expense                                                             |       | (3,100                                           | )          | (2,965 | ) |
| Interest expense                                                                       |       | (3,967                                           | )          | (3,709 | ) |
| Interest income and other income, net                                                  |       | 890                                              |       | 249 |   |
| (Loss) income before income taxes and  equity in net loss of unconsolidated affiliates |       | $                                                | (4,740     | ) | $ | 1,249 |   |

 

Goodwill and intangible assets are located in the following reportingsegments (in thousands):

 

| ** **                                              | ** ** | **December 31,  2007** | ** ** | **March 31,  2008** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| POS                                                     |       | $                           | 114,573    |                     | $          | 111,635 |   |
| ISD                                                     |       | 54,430                      |       | 53,439                   |       |
| TSD                                                     |       | 3,760                       |       | 3,478                    |       |
| FSD                                                     |       | 21,080                      |       | 20,583                   |       |
| Total goodwill and identifiable intangible  assets, net |       | $                           | 193,843    |                     | $          | 189,135 |   |

 

**Geographic Information**

 

The Company sells its services through foreign subsidiaries inAustralia, Austria, Bermuda, Canada, Colombia, France, Germany, India, Ireland,Italy, Japan, Mexico, the Netherlands, New Zealand, Poland, Romania, SouthKorea, Spain, Sweden, Thailand and the United Kingdom. Information regardingrevenues and long-lived tangible assets attributable to each geographic regionis stated below.

 

The Company’s revenues were generated in the following geographicregions (in thousands):

 

| ** **     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| North America  |       | $                                                | 44,454     |   | $ | 46,956 |   |
| Europe         |       | 24,652                                           |       | 29,599 |   |
| Asia-Pacific   |       | 3,555                                            |       | 7,570 |   |
| Total revenues |       | $                                                | 72,661     |   | $ | 84,125 |   |

 

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Revenues from the Company’s subsidiaries in the United Kingdom were$15.3 million and $18.1 million for the three months ended March 31,2007 and 2008, respectively.

 

The Company’s long-lived assets, including goodwill and intangibleassets, were located as follows (in thousands):

 

| ** **              | ** ** | **December 31,  2007** | ** ** | **March 31,  2008** | ** ** |
|-------------------------|------------|-----------------------------|------------|--------------------------|------------|
| North America           |       | $                           | 204,177    |                     | $          | 204,862 |   |
| Europe                  |       | 53,310                      |       | 50,932                   |       |
| Asia-Pacific            |       | 17,177                      |       | 17,355                   |       |
| Total long-lived assets |       | $                           | 274,644    |                     | $          | 273,149 |   |

 

**7.****                                      RestructuringCosts**

 

In 2006, the Company implemented a plan to reduce its cost structureand improve operating efficiencies by reducing its workforce and implementingproductivity improvement initiatives and expense reduction measures. Inconnection with these efforts, the Company incurred approximately$5.6 million of severance and benefits charges.

 

During the year endedDecember 31, 2007, the Company incurred an additional $3.0 million inseverance and benefits charges as it continued to streamline its operations. Ofthe $3.0 million in severance and benefits charges in 2007, $0.9 million,or $0.02 per share, was incurred during the three months ended March 31, 2007and related primarily to the departure of two senior executives.

 

A summary of the liability for the Company’s severance and benefitsobligation is as follows (in thousands):

 

| ** **                                         | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Balance as  of January 1                           |       | $        | 4,778      |     | $          | 4,216 |   |
| Severence  and benefits from executive departures  |       | 946      |       | —   |       |
| Accretion of  liability due to the passage of time |       | 34       |       | 25       |       |
| Total  restructuring costs                         |       | 5,758    |       | 4,241    |       |
| Effects of  foreign currency translation           |       | —   |       | 47       |       |
| Cash paid                                          |       | (767     | )          | (1,368   | )          |
| Balance as  of March 31                       |       | $        | 4,991      |     | $          | 2,920 |   |

 

The remaining cash expenditures relating to the severance and benefitswill be paid through 2009. As of March 31, 2008, $2.7 million of thetotal $2.9 million liability for severance and benefits was classified asaccounts payable, accrued expenses and other liabilities and the remaining$0.2 million was classified as other liabilities in the accompanyingcondensed consolidated balance sheet.

 

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

 

Certain states in which the Company operates assess sales taxes oncertain services provided by the Company. The Company believes it has noliability because its customer contracts contain terms that stipulate thecustomer, not the Company, is responsible for any sales tax liability. Injurisdictions where the customer may be liable for sales taxes, the Companyeither includes sales tax on its invoice or has obtained an exemptioncertificate from the customer. Certain states have audited the Company from1996 to early 2001. On April 25, 2008, the Company entered into asettlement agreement with the remaining state’s Commissioner of Revenue tosettle the only state sales tax assessment remaining for the period from 1996to early 2001. In the settlement, the Company agreed to settle the outstandingsales tax assessment in the amount of $942,000 for a settlement payment in theamount of $250,000. The Company’s customer has agreed to pay $212,500 of thesettlement payment with the remaining $37,500 to be paid by the Company. Basedon the final executed settlement, the Company reduced its net liability forthis matter by $0.9 million. This $0.9 million reduction in the liability,or $0.02 per share, is included in selling, general and administrative expensesin the accompanying consolidated statements of operations for the three months endedMarch 31, 2008.

 

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The Company, John J. McDonnell, Jr., the Company’s former ChiefExecutive Officer, and Henry H. Graham, Jr., the Company’s Chief ExecutiveOfficer, are defendants in a putative class action lawsuit filed in connectionwith the Company’s public offering of common stock in September 2005(“Secondary Offering”). The Cement Masons and Plasterers Joint Pension Trust,purportedly on behalf of itself and others similarly situated, filed the putativeclass action lawsuit captioned *CementMasons & Plasterers Joint Pension Trust v. TNS, Inc., et al.,*Case No. 1:06 CV 363, CMH/BRP, on April 4, 2006 in the United StatesDistrict Court for the Eastern District of Virginia. After denying theCompany’s motion to dismiss on September 12, 2006, the Court ordered theparties to conduct discovery in the case. In March 2007, the partiesagreed to stay further discovery in the case with the Court’s approval pendinga mediation designed to reach a settlement resolving the lawsuit. The partiesconducted a mediation in April 2007, and subsequently entered into asettlement agreement in February 2008. The settlement agreement providesfor a cash settlement payment of $3.6 million to be paid by the Company’s insurerand payment of expenses of plaintiff’s lead counsel not to exceed $50,000. Inexchange for the cash settlement payment and expense payment, the Company andall defendants would be released from all claims of class members relating tothe action. The Court preliminarily approved the settlement agreement of theparties by an order entered on April 1, 2008. The settlement agreement ofthe parties is subject to final approval by the Court and a fairness hearing hasbeen scheduled to be held in June 2008. We do not expect the final outcomeof the lawsuit to have a material adverse affect on our financial condition oroperating results. During the year ended December 31, 2006, the Companyaccrued legal costs of approximately $0.5 million, representing the legalcosts to defend itself in this matter not otherwise covered by its insurancecarrier.

 

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**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

You should read the following discussion of the financial condition andresults of operations of TNS, Inc. in conjunction with the consolidatedfinancial statements and the related notes included in our annual report onForm 10-K filed with the SEC on March 17, 2008 and available directlyfrom the SEC at www.sec.gov and the condensed consolidated financial statementsand the related notes of TNS, Inc., included elsewhere in this quarterlyreport.

 

There are statements made herein which may not address historical factsand, therefore, could be interpreted to be forward-looking statements withinthe meaning of The Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are based on current expectations, forecasts andassumptions that are subject to risks and uncertainties that could cause actualresults to differ materially from those set forth in, or implied by, theforward-looking statements. The Company has attempted, whenever possible, toidentify these forward-looking statements using words such as “may,” “will,”“should,” “projects,” “estimates,” “expects,” “plans,” “intends,”“anticipates,” “believes,” and variations of these words and similarexpressions. Similarly, statements herein that describe the Company’s businessstrategy, prospects, opportunities, outlook, objectives, plans, intentions orgoals are also forward-looking statements. Actual results may differ materiallyfrom those indicated by such forward-looking statements as a result of variousimportant factors, including: the Company’s reliance upon a small number ofcustomers for a significant portion of its revenue; competitive factors such aspricing pressures; uncertainties related to the updated international taxplanning strategy implemented by the Company; our customer’s ability to directtheir data communications from the Company’s networks to other networks; theCompany’s ability to grow its business domestically and internationally bygenerating greater transaction volumes, acquiring new customers or developingnew service offerings; fluctuations in the Company’s quarterly results becauseof the seasonal nature of the business and other factors outside of the Company’scontrol; the Company’s substantial debt could adversely affect its financialhealth because the Company may be unable to obtain additional financing forworking capital, capital expenditures, acquisitions and general corporatepurposes, the Company may not generate sufficient cash flow to repay the debton a timely basis or to pre-pay the debt, and a significant portion of theCompany’s cash flow from operations will be dedicated to the repayment orservicing of indebtedness, thereby reducing the amount of cash available forother purposes; the Company’s ability to identify, execute or effectivelyintegrate acquisitions; the Company’s ability to identify, execute oreffectively integrate future acquisitions; increases in the prices charged bytelecommunication providers for services used by the Company; unfavorableforeign exchange movements; the Company’s ability to adapt to changingtechnology; additional costs related to compliance with the Sarbanes-Oxley Actof 2002, any revised New York Stock Exchange listing standards, SECrule changes or other corporate governance issues; and other risk factorsdescribed in the Company’s annual report on Form 10-K filed with the SECon March 17, 2008. In addition, the statements in this quarterly reportare made as of the date of this filing. The Company expects that subsequentevents or developments will cause its views to change. The Company undertakesno obligation to update any of the forward-looking statements made herein,whether as a result of new information, future events, changes in expectationsor otherwise. These forward-looking statements should not be relied upon asrepresenting the Company’s views as of any date subsequent to the date of thisfiling. The forward-looking statements in this document are intended to besubject to the safe harbor protection provided by Sections 27A of theSecurities Act and 21E of the Exchange Act.

 

**Overview**

 

We are an international data communications company which providesnetworking, data communications and value added services to many of the world’sleading retailers, banks and payment processors. We are also a leading providerof secure data and voice network services to the global financial servicesindustry. We operate one of the largest unaffiliated Signaling System No. 7networks in the United States capable of providing services nationwide, and weutilize this network to provide call signaling and database access services tothe domestic telecommunications industry. Our data communications servicesenable secure and reliable transmission of time-sensitive, transaction-relatedinformation critical to our customers’ operations. Our customers outsourcetheir data communications requirements to us because of our substantialexpertise, comprehensive customer support and cost-effective services. Weprovide services to customers in the United States and increasingly tointernational customers in 29 countries, including Canada and Mexico andcountries in Europe, Latin America and the Asia-Pacific region.

 

We provide services through our multiple data networks, each designedspecifically for transaction applications. Our networks support a variety ofwidely accepted communications protocols and are designed to be scalable andaccessible by multiple methods, including dial-up, dedicated, wireless,broadband and internet connections.

 

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We generate revenues through four business divisions:

 

•                  ***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.

 

•                  ***Telecommunication services.***Weprovide 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, toll-free callrouting and local number portability, and validation services, such as creditcard, calling card, third- party billing and collect calling. Ourtelecommunication services division generates revenues primarily from fixedmonthly fees charged for our call signaling services and per-query fees chargedfor our database access and validation services.

 

•                  ***Financial services.***Weprovide fast, secure and reliable private data networking services that enableseamless communications and facilitate electronic trading among commercialbanks, mutual funds, pension funds, broker-dealers, alternative tradingsystems, 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.

 

•                  ***International services.***Wesell our POS and financial services through our international servicesdivision. We are one of the leading providers of data communications servicesto the POS industry in the United Kingdom. Our international services divisionalso provides POS and financial services in Australia, Austria, Belgium,Bermuda, Colombia, Finland, France, Gibraltar, Germany, Hong Kong, India,Ireland, Italy, Japan, Malaysia, the Netherlands, New Zealand, Norway, Poland,Romania, Singapore, South Korea, Spain, Sweden, Taiwan and Thailand.

 

Our most significant expense is cost of network services, which iscomprised primarily of telecommunications charges, including data transmissionand database access, 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 some vendors. The costs of database access, circuits,installation charges and activation charges are based on fixed fee contractswith local exchange carriers and interexchange carriers. The cost of networkservices also includes salaries, equipment maintenance and other costs relatedto the ongoing operation of our data networks. Depreciation expense on ournetwork equipment and amortization of developed technology are excluded fromour cost of network services and included in depreciation and amortization ofproperty and equipment and amortization of intangible assets in ourconsolidated statements of operations.

 

Our engineering and development expenses include salaries and othercosts related to product development, engineering, hardware maintenance andmaterials. 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 relatedto sales, marketing, administrative and management personnel, as well asexternal legal, accounting and consulting services.

 

*Dividends and Recapitalization*

 

On March 28, 2007, our board of directors declared a specialdividend of $4.00 per common share which was paid on April 12, 2007. Also,on March 28, 2007, we entered into a secured credit facility, whichconsists of two facilities: a senior secured term loan facility in an aggregateprincipal amount of $225 million (the “Term Facility”) and a seniorsecured revolving credit facility in an aggregate principal amount of$15 million (the “Revolving Facility”). We used approximately$98.3 million of the proceeds from the Term Facility to pay the specialdividend. The remainder of the proceeds from the Term Facility were used torefinance existing debt, to pay fees related to the senior secured credit facilityand the special dividend and for general corporate purposes. No amount wasdrawn on the Revolving Facility at closing and the full principal amount of theRevolving Facility remained available to us as of March 31, 2008.

 

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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  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Revenues                                                                                     |       | $                                                | 72,661     |   | $ | 84,125 |   |
| Operating expenses:                                                                          |       |                                             |       |   |   |
| Cost of network services, exclusive of the  items shown separately below                     |       | 38,871                                           |       | 40,707 |   |
| Engineering and development                                                                  |       | 6,362                                            |       | 7,199 |   |
| Selling, general, and administrative                                                         |       | 17,175                                           |       | 19,445 |   |
| Depreciation and amortization of property and  equipment                                     |       | 5,804                                            |       | 5,967 |   |
| Amortization of intangible assets                                                            |       | 6,112                                            |       | 6,098 |   |
| Total operating expenses                                                                     |       | 74,324                                           |       | 79,416 |   |
| (Loss) income from operations                                                                |       | (1,663                                           | )          | 4,709 |   |
| Interest expense                                                                             |       | (3,967                                           | )          | (3,709 | ) |
| Interest income                                                                              |       | 245                                              |       | 180 |   |
| Other income, net                                                                            |       | 645                                              |       | 69 |   |
| (Loss) income before income tax benefit and  equity in net loss of unconsolidated affiliates |       | (4,740                                           | )          | 1,249 |   |
| Income tax benefit                                                                           |       | 1,577                                            |       | 352 |   |
| Equity in net loss of unconsolidated  affiliates                                             |       | (64                                              | )          | — |   |
| Net (loss) income                                                                            |       | $                                                | (3,227     | ) | $ | 1,601 |   |

 

**Three months ended March 31, 2008compared to the three months ended March 31, 2007**

 

***Revenues.***Totalrevenues increased $11.4 million, or 15.8%, to $84.1 million for thethree months ended March 31, 2008, from $72.7 million for the threemonths ended March 31, 2007. We generate revenues through four operatingdivisions.

 

***Internationalservices division.***Revenues from the internationalservices division increased $9.0 million, or 31.8%, to $37.2 millionfor the three months ended March 31, 2008, from $28.2 million for thethree months ended March 31, 2007. On a constant dollar basis, revenue forthe three months ended March 31, 2008 would have increased $6.7 million,or 23.8% to $34.9 million. Excluding the benefit of foreign exchange,international services division revenues increased primarily though theinclusion of a full quarter of revenue from the Dialect acquisition, highertransaction volumes and increased broadband connections from POS customers inEurope and Asia Pacific and additional connections from financial servicecustomers. Revenues from our U.K. subsidiaries increased $2.1 million, or13.7%, to $17.3 million for the three months ended March 31, 2008,from $15.2 million for the three months ended March 31, 2007. On aconstant dollar basis revenue for the U.K. subsidiary for the three monthsended March 31, 2008 would have increased $1.9 million, or 12.3%, to $17.1million. Future revenue growth in the international services division dependson a number of factors including the success of our POS and financial serviceproducts in countries we have recently entered, the success of our new productofferings and the successful integration of our card-not-present serviceofferings through our acquisition of Dialect.

 

***POS division.***Revenuesfrom the POS division decreased $1.4 million, or 7.3%, to$18.4 million for the three months ended March 31, 2008, from$19.8 million for the three months ended March 31, 2007. Included inPOS revenue for the three months ended March 31, 2008 is $0.4 millionin pass-through revenues compared with $0.6 million for the three monthsended March 31, 2007. POS dial-up transaction volumes decreased 8.5% to1.3 billion transactions for the three months ended March 31, 2008,from 1.4 billion transactions for the three months ended March 31,2007. Revenues from the POS division decreased primarily from the decrease indial-up transaction counts resulting from a customer moving a portion of itstraffic with the stated purpose of increasing its vendor diversification. Thiswas partially offset by revenue generated from our managed broadband products.Growth in the POS division depends on a number of factors including the successof our new broadband, wireless and vending service offerings as well as thetotal number of POS dial-up transactions we transport.

 

***Telecommunicationservices division.***Revenues from thetelecommunication services division increased $2.9 million, or 19.7%, to$17.8 million for the three months ended March 31, 2008, from$14.9 million for the three months ended March 31, 2007. Included inTSD revenue for the three months ended March 31, 2008 is $1.8 millionin pass-through revenues compared with $1.2 million for the three months endedMarch 31, 2007. Excluding the increase in pass-through revenues, revenuesincreased $2.3 million, or 17.7% due to an increase in network and databaseaccess services provided to 

 

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cable companies that enablethem to provide telephony services to their customers which more than offsetthe effects of pricing compression upon renewal of certain customer contracts.Future revenue growth in the telecommunication services division depends on anumber of factors including the number of database access queries we transport,the number of call signaling routes our customers purchase and the success ofour new product offerings, which potentially may be offset by customers seekingpricing discounts due to industry consolidation or other reasons.

 

***Financial servicesdivision.***Revenues from the financial servicesdivision increased $1.0 million, or 10.3%, to $10.7 million for thethree months ended March 31, 2008, from $9.7 million for the threemonths ended March 31, 2007. The increase in revenues was due to increasesin new customer endpoint installations as well as increases in connectivitybetween existing customers and increased demand for greater bandwidthconnectivity which results in higher average revenue per customer endpoint.Future revenue growth in the financial services division depends on a number offactors including the number of connections to and through our networks as wellas the success of our new product offerings. We have begun to see an increaseddemand from our customers for larger bandwidth connections to our network andwhile these connections create greater revenue per physical endpoint, theyrequire longer sales and installation lead-times.

 

***Cost of networkservices.***Cost of network services increased$1.8 million, or 4.7%, to $40.7 million for the three months endedMarch 31, 2008, from $38.9 million for the three months endedMarch 31, 2007. On a constant dollar basis, cost of network services wouldhave increased $0.9 million, or 2.3%, to $39.8 million. Cost ofnetwork services were 48.4% of revenues for the three months endedMarch 31, 2008, compared to 53.5% of revenues for the three months endedMarch 31, 2007. Excluding the effect of foreign exchange, the increase incost of network services resulted from higher volumes in our internationalservices, telecommunications services, and financial services divisions whichwas partially offset by declines in transaction volumes in our POS division, asmentioned above, as well as reductions in the cost of services provided to usthrough focus on cost control of key suppler contracts in our POS andtelecommunication services divisions.

 

Gross profit represented 51.6% of total revenues for the three monthsended March 31, 2008, compared to 46.5% for the three months endedMarch 31, 2007. Excluding $2.2 million and $1.9 million in totalpass-through revenues for the three months ended March 31, 2008 and 2007,respectively, gross margin would have been approximately 53.0% compared to51.6%. The improvement in gross margin from last year is a result of increasedcontribution from our international services division, our highest gross margindivision, and improvement in the gross margins of our POS division as we workedto lower the cost of services provided to us.

 

Future cost of network services depends on a number of factorsincluding total transaction and query volumes, the relative growth andcontribution to total transaction volume of each of our customers, the successof our new service offerings, the timing and extent of our network expansionand the timing and extent of any network cost increases or reductions.

 

***Engineering anddevelopment expense.***Engineering and developmentexpense increased $0.8 million, or 13.2%, to $7.2 million for thethree months ended March 31, 2008, from $6.4 million for the threemonths ended March 31, 2007. On a constant dollar basis, engineering anddevelopment expense would have increased $0.2 million, or 9.1% to $6.6million. Engineering and development expense represented 8.6% of revenues forthe three months ended March 31, 2008 and 8.8% of revenues for the threemonths ended March 31, 2007. Included in engineering and developmentexpense for the three months ended March 31, 2008 and 2007 is stockcompensation expense of $0.5 million and $0.8 million, respectively.The $0.3 million decrease in stock compensation expense related to the decisionby the Board of Directors to allow for dividend equivalent payments on theoutstanding restricted stock units as of March 31, 2007. Excluding thedecrease in stock compensation, engineering and development expense increasedprimarily as a result of the employees added from our acquisition of Dialect inAustralia and the expense related to our investment in our product developmentinitiatives.

 

***Selling, general andadministrative expense.***Selling, general andadministrative expenses increased $2.2 million, or 13.2%, to$19.4 million for the three months ended March 31, 2008, from$17.2 million for the three months ended March 31, 2007. On aconstant dollar basis, selling, general and administrative expenses would haveincreased $0.6 million, or 8.9%, to $17.8 million. Selling, general andadministrative expenses represented 23.1% of revenues for the three monthsended March 31, 2008, compared to 23.6% of revenues for the three monthsended March 31, 2007. Included in selling, general and administrativeexpenses for the three months ended March 31, 2008 and 2007 is$2.2 million and $2.1 million of stock compensation expense,respectively. The increase in stock compensation expense relates primarily toadditional grants during the year which was partially offset by the $1.0million charge related to the modification of restricted stock units, asmentioned above. Included in selling, general and administrative expenses forthe three months ended March 31, 2008 is $0.9 million pre-tax benefitassociated with the settlement of a state sales tax liability. Included inselling, general and administrative expenses for the three months endedMarch 31, 2007 is $0.8 million in severance expenses associated withthe departure of certain executives. Excluding these items and the effects offoreign exchange, selling, general and 

 

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administrative expenses wouldhave increased $2.2 million to $16.5 million, or 20.2% of revenues, for thethree months ended March 31, 2008 from $14.3 million, or 19.6% of revenues, forthe three months ended March 31, 2007. This increase in selling, general andadministrative expenses relates primarily to the exmployees added from our acquisitionof Dialect in Australia as well as expenses required to support our revenuegrowth  primarily in the internationalservices division.

 

***Depreciation andamortization of property and equipment.***Depreciationand amortization of property and equipment increased $0.2 million, or2.8%, to $6.0 million for the three months ended March 31, 2008, from$5.8 million for the three months ended March 31, 2007. On a constantdollar basis, depreciation and amortization of property and equipment wouldhave increased $0.1 million, or 1.7% to $5.9 million. Depreciation andamortization of property and equipment represented 7.1% of revenues for thethree months ended March 31, 2008, compared to 8.0% of revenues for thethree months ended March 31, 2007. Depreciation expense increasedprimarily due to capital expenditures made to support our revenue growth in theinternational services division.

 

***Amortization ofintangible assets.***Amortization of intangibleassets was $6.1 million for the three months ended March 31, 2008,and 2007. On a constant dollar basis, amortization of intangible assets wouldhave decreased $0.2 million, or 3.2% to $5.9 million. The amortization ofintangible assets for the three months ended March 31, 2008 and 2007relates solely to the intangible assets resulting from acquisitions. Forpurposes of measuring and recognizing impairment of long-lived assets includingintangibles, we assess whether separate cash flows can be attributed to anindividual asset. For our customer relationship intangible assets, we recognizeand measure impairment upon the significant loss of revenue from a customer.Based upon our contract with one of our major customers, we believe thatrevenues and related transaction volumes from this customer will continue todecline in 2008 and may decline further thereafter. The intangible asset valueattributable to this customer relationship was approximately $20.5 millionas of March 31, 2008. We assessed the recoverability of this customerrelationship asset based upon undiscounted anticipated future cash flows andconcluded no impairment existed as of March 31, 2008.

 

***Interest expense.***Interestexpense decreased $0.2 million to $3.7 million for the three monthsended March 31, 2008, from $3.9 million for the three months endedMarch 31, 2007. Included in interest expense for the three months endedMarch 31, 2007 is a charge of $1.4 million related to the acceleration ofdeferred financing costs as a result of the recapitalization supporting ourspecial dividend. Excluding this charge, interest expense increased primarilyas a result of increased borrowings under our 2007 credit facility as a resultof the recapitalization to support our special dividend.

 

***Interest income.***Interestincome was $0.2 million for the three months ended March 31, 2008 and2007.

 

***Other income, net.***Otherincome, net was $0.1 million for the three months ended March 31, 2008compared to $0.6 million for the three months ended March 31, 2007.Included in other income, net for the three months ended March 31, 2007 isa gain on the sale of an asset of $0.2 million and a gain on foreign currencytranslation of approximately $0.3 million due to fluctuations in the value ofthe U.S. dollar as compared with foreign currencies, principally, the euro andthe British pound, versus a gain on foreign currency translation of $0.1million for the three months ended March 31, 2008.

 

***Income tax benefit.***Forthe three months ended March 31, 2008, our income tax benefit wasapproximately $0.4 million compared to $1.6 million for the threemonths ended March 31, 2007. The decrease in our income tax benefit isprimarily related to higher income in foreign jurisdictions that cannot beoffset by losses in other jurisdictions.

 

During 2007, we implemented an updated transfer pricing policy which webelieve will significantly reduce the overall effective tax rate on ourinternational earnings. The updated policy more closely aligns ourinternational tax structure with our business operations. Our effective taxrate on international earnings for 2007 was 27.7% due to realizing a partialbenefit from the updated policy in 2007. However, we expect our tax rate onfuture international earnings to be in the range of 15% to 20%. The actual taxrate on international earnings for the three months ended March 31, 2008was 18.3%. Our effective tax rate for the three months ended March 31,2008 and March 31, 2007 was (28.2)% and 33.3%, respectively.

 

***Equity in net lossof unconsolidated affiliates.***Equity net loss ofunconsolidated affiliates for the three months ended March 31, 2008 waszero, compared to a loss of $0.1 million for the three months endedMarch 31, 2007. As of March 31, 2008, the carrying value of ourinvestment in AK Jensen, Inc. was $0.7 million.

 

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**Liquidity and Capital Resources**

 

Our primary liquidity and capital resource needs are to finance thecosts of our operations, to make capital expenditures and to service our debt.Based upon our current level of operations, we expect that our cash flow fromoperations, together with the amounts we are able to borrow under our 2007senior secured revolving credit facility, will be adequate to meet ouranticipated needs for the foreseeable future. Although we have no specificplans to do so, to the extent we decide to pursue one or more significantstrategic acquisitions, we will likely need to incur additional debt or selladditional equity to finance those acquisitions.

 

Our operations provided us cash of $15.7 million for the three monthsended March 31, 2008, which was attributable to net income of$1.6 million, depreciation, amortization and other non-cash charges of$13.3 million and an decrease in working capital of $0.8 million. Ouroperations provided us cash of $8.4 million for the three months endedMarch 31, 2007, which was attributable to a net loss of $3.2 million,depreciation, amortization and other non-cash charges of $16.3 million andan increase in working capital of $4.7 million.

 

We used cash of $6.7 million in investing activities for the threemonths ended March 31, 2008, which comprised solely of capitalexpenditures to support our revenue growth. We used cash of $2.7 millionin investing activities for the three months ended March 31, 2007, whichcomprised $4.9 million of capital expenditures to support our revenue growthoffset by proceeds of $2.2 million from the sale of a non-strategic asset.

 

We used cash of $4.5 million from financing activities for thethree months ended March 31, 2008, which includes $4.0 million ofvoluntary pre-payments on our 2007 senior secured credit facility. We used cashof $4.3 million from financing activities for the three months endedMarch 31, 2007, which includes net proceeds of $222 million from our 2007 seniorsecured credit facility, of which $102 million was held as restricted cash forpayment of our net special dividend in April 2007 and the repayment of our 2005amended and restated senior secured credit facility of $123 million.

 

**Seasonality**

 

Credit card and debit card transactions account for a major percentageof the transaction volume processed by our customers. The volume of thesetransactions on our networks generally is greater in the third and fourthquarter vacation and holiday seasons than during the rest of the year. Consequently,revenues and earnings from credit card and debit card transactions in the firstand second quarter generally are lower than revenues and earnings from creditcard and debit card transactions in the third and fourth quarters of theimmediately preceding year. We expect that our operating results in theforeseeable future will be significantly affected by seasonal trends in thecredit card and debit card transaction market.

 

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**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

***Interest rates***

 

Our principal exposure to market risk relates to changes in interestrates. As of March 31, 2008, we had $201.5 million outstanding underour 2007 senior secured credit facility with interest rates tied to changes inthe lender’s base rate or the LIBOR rate. Based upon the outstanding borrowingson March 31, 2008 and assuming repayment of the Term Loan in accordancewith scheduled maturities, each 1.0% increase in these rates could add an additional$2.0 million to our annual interest expense.

 

As of March 31, 2008, we did not hold derivative financial orcommodity instruments and all of our cash and cash equivalents were held inmoney market or commercial accounts.

 

***Foreign currencyrisk***

 

Our earnings are affected by fluctuations in the value of the U.S.dollar as compared with foreign currencies, predominately the euro, the Britishpound and the Australian dollar due to our operations in Europe and Australia.

 

We have operations in 20 countries outside of the U.S., including theUnited Kingdom, Austria, Australia, Bermuda, Canada, France, German, India,Ireland, Italy, Japan, Mexico, New Zealand, Poland, Romania, South Korea,Spain, Sweden, Thailand and the Netherlands. We provide services in thesecountries using networks deployed in each country. We manage foreign exchangerisk through the structure of our business. In the substantial majority of ourtransactions, we receive payments denominated in the U.S. dollar, Britishpound, euro or Australian dollar. Therefore, we do not rely on internationalcurrency markets to obtain and pay illiquid currencies. The foreign currencyexposure that does exist is limited by the fact that the majority oftransactions are paid according to our standard payment terms, which aregenerally short-term in nature. Our policy is not to speculate in foreigncurrencies, and we promptly buy and sell foreign currencies as necessary tocover our net payables and receivables, which are denominated in foreigncurrencies. For the three months ended March 31, 2008, we recorded a gainon foreign currency transactions of approximately $0.1 million.

 

**Item 4. Controls and Procedures**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sreports under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols 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 Company carried out an evaluation, under the supervision, and withthe participation, of the Company’s management, including the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures as ofMarch 31, 2008. Based on the foregoing, the Company’s Chief ExecutiveOfficer and principal financial officers concluded that the Company’sdisclosure controls and procedures were effective as of March 31, 2008.

 

There have been no significant changes during the three months endedMarch 31, 2008 covered by this report in the Company’s internal controlover financial reporting or in other factors that could significantly affectthe internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

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

 

Information regarding legal proceedings is contained in Note 8 tothe Condensed Consolidated Financial Statements contained in this Report and isincorporated herein by reference.

 

**Item 1A.****  Risk Factors**

 

There were no material changes from the risk factors previouslydisclosed in “Item 1A. Risk Factors” included in our Annual Report onForm 10-K for the year ended December 31, 2007.

 

**Item 2.****     Unregistered Sales of Equity Securities and Use ofProceeds**

 

None.

 

**Item 3.****     Default Upon Senior Securities**

 

None.

 

**Item 4.****     Submission of Matters to a Vote of SecurityHolders**

 

None.

 

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

 

None.

 

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

 

(31.1)  Certification—ChiefExecutive Officer

 

(31.2)  Certification — ChiefFinancial Officer

 

(32.1)  Written Statement ofChief Executive Officer and Chief Financial Officer

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                    | TNS, Inc.

(Registrant) |
|-------------------------|------------------------------|
|                    |                         |
| Date: May 12, 2008 | By:                          | /s/ HENRY H. GRAHAM, JR. |
|                    |                         |  

Henry H. Graham, Jr.

Chief Executive Officer |
|                    |                         |   |
| Date: May 12, 2008 | By:                          | /s/ DENNIS L. RANDOLPH, JR. |
|                    |                         |  

Dennis L. Randolph, Jr.

Executive Vice President, Chief Financial Officer &  Treasurer |

 

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