**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarter endedJune 30, 2007**

** **

**Commission File Number:001-32033**

** **

** **

**TNS, INC.**

(Exact name of registrant as specified in its charter)

 

 

| **DELAWARE**                                              |   | **36-4430020**                           |
|-----------------------------------------------------------|--------|------------------------------------------|
| (State or  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**11480 Commerce ParkDrive, Suite 600**

**Reston, VA 20191**

(Address of principal executive offices)

 

**(703) 453-8300**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementfor the past 90 days.  x Yes    o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer  o      Acceleratedfiler  x      Non-acceleratedfiler  o

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

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

| **Shares Outstanding as of July 1, 2007**       |
|------------------------------------------------------|
| 24,211,373  Shares of Common Stock, $0.001 par value |

 

 

----

 

**TNS, INC.**

**INDEX**
|                                         |   | **Page**      |
|-----------------------------------------|--------|---------------|
| **Part I: FINANCIAL  INFORMATION** |   |          |
|                                    |   |          |   | ** ** |   |   |
|                                    |   | Item 1.  |   | Condensed Consolidated Financial Statements  (Unaudited) |   | 3 |
|                                    |   |          |   | Condensed Consolidated Balance Sheets as of  December 31, 2006 and June 30, 2007 |   | 3 |
|                                    |   |          |   | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2006 and 2007 |   | 4 |
|                                    |   |          |   | Condensed Consolidated Statements of Stockholders’  Equity for the six months ended June 30, 2007 |   | 5 |
|                                    |   |          |   | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2006  and 2007 |   | 6 |
|                                    |   |          |   | Notes to Condensed Consolidated Financial Statements |   | 7 |
|                                    |   | Item 2.  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 17 |
|                                    |   | Item 3.  |   | Quantitative and Qualitative Disclosures About Market  Risk |   | 27 |
|                                    |   | Item 4.  |   | Controls and Procedures |   | 28 |
|                                    |   |          |   |   |   |   |
| **Part II:  OTHER INFORMATION**    |   |          |
|                                    |   |          |   | ** ** |   |   |
|                                    |   | Item 1.  |   | Legal  Proceedings |   | 29 |
|                                    |   | Item 1A. |   | Risk Factors |   | 29 |
|                                    |   | Item 2.  |   | Unregistered Sales of Equity Securities and Use of  Proceeds |   | 29 |
|                                    |   | Item 3.  |   | Default Upon Senior Securities |   | 29 |
|                                    |   | Item 4.  |   | Submission of Matters to a Vote of Security Holders |   | 29 |
|                                    |   | Item 5.  |   | Other  Information |   | 29 |
|                                    |   | Item 6.  |   | Exhibits |   | 30 |

 

 

2

----

**PART I—FINANCIALINFORMATION**

**Item 1.**                          CondensedConsolidated Financial Statements (Unaudited)

**TNS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(dollars in thousands,except share and per share data)**
| ** **                                                                                                                                                                                                | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | ** **                  | ** ** | **(unaudited)**         | ** ** |
| **ASSETS**                                                                                                                                                                                                | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Current assets:                                                                                                                                                                                           |       |                        |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                                |       | $                           | 17,322     |                    | $          | 22,921 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $6,435 and $3,097,  respectively                                                                                                          |       | 64,985                      |       | 70,968                  |       |
| Prepaid expenses                                                                                                                                                                                          |       | 4,931                       |       | 5,603                   |       |
| Deferred tax  assets                                                                                                                                                                                      |       | 2,875                       |       | 3,446                   |       |
| Other current  assets                                                                                                                                                                                     |       | 10,232                      |       | 6,701                   |       |
| Total current  assets                                                                                                                                                                                     |       | 100,345                     |       | 109,639                 |       |
|                                                                                                                                                                                                      |       |                        |       |                    |       |
| Property and equipment,  net                                                                                                                                                                              |       | 58,376                      |       | 57,040                  |       |
| Identifiable intangible  assets, net                                                                                                                                                                      |       | 192,700                     |       | 193,972                 |       |
| Goodwill                                                                                                                                                                                                  |       | 12,043                      |       | 14,561                  |       |
| Deferred tax assets,  net                                                                                                                                                                                 |       | 13,096                      |       | 18,120                  |       |
| Other assets                                                                                                                                                                                              |       | 5,117                       |       | 5,701                   |       |
| Total assets                                                                                                                                                                                              |       | $                           | 381,677    |                    | $          | 399,033 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                            | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Current liabilities:                                                                                                                                                                                      |       |                        |       |                    |       |
| Current portion  of long-term debt                                                                                                                                                                        |       | $                           | 1,650      |                    | $          | — |   |
| Accounts  payable, accrued expenses and other current liabilities                                                                                                                                         |       | 51,751                      |       | 60,261                  |       |
| Deferred revenue                                                                                                                                                                                          |       | 15,115                      |       | 23,974                  |       |
| Total current  liabilities                                                                                                                                                                                |       | 68,516                      |       | 84,235                  |       |
|                                                                                                                                                                                                      |       |                        |       |                    |       |
| Long-term debt, net of  current portion                                                                                                                                                                   |       | 121,663                     |       | 216,000                 |       |
| Deferred tax liability                                                                                                                                                                                    |       | 6,440                       |       | 9,884                   |       |
| Other liabilities                                                                                                                                                                                         |       | 5,793                       |       | 4,959                   |       |
| Total  liabilities                                                                                                                                                                                        |       | 202,412                     |       | 315,078                 |       |
| Commitments and  contingencies                                                                                                                                                                            |       |                        |       |                    |       |
| Stockholders’ equity:                                                                                                                                                                                |       |                        |       |                    |       |
| Common stock,  $0.001 par value; 130,000,000 shares authorized; 24,145,804 shares issued and  24,113,434 shares outstanding and 24,212,010 shares issued and 24,211,373  shares outstanding, respectively |       | 24                          |       | 24                      |       |
| Treasury stock,  32,370 shares and 637 shares, respectively                                                                                                                                               |       | (605                        | )          | (8                      | )          |
| Additional  paid-in capital                                                                                                                                                                               |       | 218,099                     |       | 123,964                 |       |
| Accumulated  deficit                                                                                                                                                                                      |       | (41,463                     | )          | (44,153                 | )          |
| Accumulated  other comprehensive income                                                                                                                                                                   |       | 3,210                       |       | 4,128                   |       |
| Total  stockholders’ equity                                                                                                                                                                          |       | 179,265                     |       | 83,955                  |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                          |       | $                           | 381,677    |                    | $          | 399,033 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

3

----

**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(dollars in thousands, except share and per share data)**
| ** **                                                                                                                                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                                                                                                                                             |       | $                                               | 72,660     |                                          | $          | 79,361 |   | $ | 138,568 |   | $ | 152,022 |   |
| Operating  expenses:                                                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Cost of network services, exclusive of the items  shown separately below                                                                             |       | 37,127                                          |       | 40,174                                        |       | 70,184 |   | 79,046 |   |
| Engineering and development                                                                                                                          |       | 5,501                                           |       | 6,641                                         |       | 10,036 |   | 13,003 |   |
| Selling, general, and administrative                                                                                                                 |       | 17,992                                          |       | 17,581                                        |       | 34,118 |   | 34,755 |   |
| Depreciation and amortization of property and  equipment                                                                                             |       | 5,346                                           |       | 5,433                                         |       | 10,373 |   | 11,237 |   |
| Amortization of intangible assets                                                                                                                    |       | 5,346                                           |       | 5,972                                         |       | 10,276 |   | 12,083 |   |
| Total operating expenses                                                                                                                             |       | 71,312                                          |       | 75,801                                        |       | 134,987 |   | 150,124 |   |
| Income from  operations                                                                                                                              |       | 1,348                                           |       | 3,560                                         |       | 3,581 |   | 1,898 |   |
| Interest expense                                                                                                                                     |       | (2,288                                          | )          | (4,221                                        | )          | (4,319 | ) | (8,189 | ) |
| Interest income                                                                                                                                      |       | 147                                             |       | 429                                           |       | 265 |   | 674 |   |
| Other income,  net                                                                                                                                   |       | 331                                             |       | 491                                           |       | 521 |   | 1,136 |   |
| (Loss) income  before income tax benefit, equity in net loss of unconsolidated affiliates  and cumulative effect of a change in accounting principle |       | (462                                            | )          | 259                                           |       | 48 |   | (4,481 | ) |
| Income tax  benefit (provision)                                                                                                                      |       | 456                                             |       | (285                                          | )          | 469 |   | 1,292 |   |
| Equity in net  (loss) income of unconsolidated affiliates                                                                                            |       | (924                                            | )          | 563                                           |       | (1,998 | ) | 499 |   |
| (Loss) income  from continuing operations before cumulative effect of a change in accounting  principle                                              |       | (930                                            | )          | 537                                           |       | (1,481 | ) | (2,690 | ) |
| Cumulative  effect of a change in accounting principle, net of tax provision                                                                         |       | —                                          |       | —                                        |       | 84 |   | — |   |
| Net (loss)  income                                                                                                                                   |       | $                                               | (930       | )                                             | $          | 537 |   | $ | (1,397 | ) | $ | (2,690 | ) |
| Basic and  diluted net (loss) income per common share:                                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| (Loss) income  from continuing operations before cumulative effect of a change in accounting  principle                                              |       | $                                               | (0.04      | )                                             | $          | 0.02 |   | $ | (0.06 | ) | $ | (0.11 | ) |
| Cumulative  effect of a change in accounting principle, net of tax provision                                                                         |       | —                                          |       | —                                        |       | — |   | — |   |
| Net (loss) income                                                                                                                                    |       | $                                               | (0.04      | )                                             | $          | 0.02 |   | $ | (0.06 | ) | $ | (0.11 | ) |
|                                                                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Basic weighted  average common shares outstanding                                                                                                    |       | 24,093,752                                      |       | 24,208,755                                    |       | 24,042,340 |   | 24,172,212 |   |
| Diluted weighted  average common shares outstanding                                                                                                  |       | 24,093,752                                      |       | 24,219,660                                    |       | 24,042,340 |   | 24,172,212 |   |
| Dividends declared per  common share                                                                                                                 |       | $                                               | —     |                                          | $          | — |   | $ | — |   | $ | 4.00 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

4

----

**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)(dollars in thousands)**
| ** **                                                       | ** ** | ** **                                                                                | ** ** | ** **   | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                       | ** ** | ** **                                                                                | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **other**              | ** ** | **Total**  | ** ** |
| ** **                                                       | ** ** | **Common Stock**                                                                     | ** ** | **Treasury** | ** ** | **paid-in** | ** ** | **Accumulated** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                                                       | ** ** | **Shares**                                                                                | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **capital**     | ** ** | **deficit**       | ** ** | **income**             | ** ** | **equity** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except per share and share amounts)** | ** ** |
| Balance,  December 31, 2006                                 |       | 24,145,804                                                                                |       | $            | 24         |        | $          | (605            | )          | $                 | 218,099    |                   | $          | (41,463    | )          | $ | 3,210 |   | $ | 179,265 |   |
| Issuance of  common stock upon vesting of restricted stock units |       | 138,366                                                                                   |       | —       |       | —      |       | —          |       | —            |       | —                 |       | —     |       |
| Exercise of  employee stock options                              |       | 1,718                                                                                     |       | —       |       | —      |       | 30              |       | —            |       | —                 |       | 30         |       |
| Purchase of  treasury stock                                      |       | —                                                                                    |       | —       |       | (698        | )          | —          |       | —            |       | —                 |       | (698       | )          |
| Stock  compensation expense                                      |       | —                                                                                    |       | —       |       | —      |       | 5,424           |       | —            |       | —                 |       | 5,424      |       |
| Foreign currency  translation                                    |       | —                                                                                    |       | —       |       | —      |       | —          |       | —            |       | 918                    |       | 918        |       |
| Net loss                                                         |       | —                                                                                    |       | —       |       | —      |       | —          |       | (2,690            | )          | —                 |       | (2,690     | )          |
| Special cash  dividend declared, $4 per common share             |       | —                                                                                    |       | —       |       | —      |       | (98,294         | )          | —            |       | —                 |       | (98,294    | )          |
| Retirement of  treasury stock                                    |       | (73,878                                                                                   | )          | —       |       | 1,295       |       | (1,295          | )          | —            |       | —                 |       | —     |       |
| Balance, June 30, 2007                                           |       | 24,212,010                                                                                |       | $            | 24         |        | $          | (8              | )          | $                 | 123,964    |                   | $          | (44,153    | )          | $ | 4,128 |   | $ | 83,955 |   |

 

See accompanying notes to condensed consolidated financialstatements (unaudited).

5

----

**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(dollars in thousands)**
| ** **                                                                       | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                          | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                           |       |                                              |       |   |   |
| Net loss                                                                         |       | $                                                 | (1,397     | ) | $ | (2,690 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                              |       |   |   |
| Non-cash and working capital items                                               |       | 21,643                                            |       | 30,477 |   |
| Net cash provided by operating activities:                                       |       | 20,246                                            |       | 27,787 |   |
| Cash flows from  investing activities                                            |       |                                              |       |   |   |
| Purchases of property and equipment                                              |       | (11,857                                           | )          | (8,139 | ) |
| Cash paid for business acquisitions, net of cash  acquired                       |       | (19,804                                           | )          | (4,166 | ) |
| Net cash used in investing activities:                                           |       | (31,661                                           | )          | (12,305 | ) |
| Cash flows from  financing activities                                            |       |                                              |       |   |   |
| Proceeds from issuance of long-term debt, net of  issuance costs of $3,501       |       | —                                            |       | 221,949 |   |
| Borrowings under 2005 amended and restated senior  secured credit facility, net  |       | 5,775                                             |       | — |   |
| Repayments of long-term debt                                                     |       | —                                            |       | (132,313 | ) |
| Proceeds from stock option exercises, inclusive of  tax benefit                  |       | 342                                               |       | 30 |   |
| Payment of special dividend, $4 per common share                                 |       | —                                            |       | (98,294 | ) |
| Purchase of treasury stock                                                       |       | (19                                               | )          | (698 | ) |
| Net cash provided (used in) by financing activities                              |       | 6,098                                             |       | (9,324 | ) |
| Effect of  exchange rates on cash and cash equivalents                           |       | (123                                              | )          | (559 | ) |
| Net (decrease)  increase in cash and cash equivalents                            |       | (5,440                                            | )          | 5,559 |   |
| Cash and cash  equivalents, beginning of period                                  |       | 26,628                                            |       | 17,322 |   |
| Cash and cash  equivalents, end of period                                        |       | $                                                 | 21,188     |   | $ | 22,921 |   |
| Supplemental  disclosures of cash flow information:                              |       |                                              |       |   |   |
| Cash paid for interest                                                           |       | $                                                 | 2,110      |   | $ | 3,151 |   |
| Cash paid for  income taxes                                                      |       | $                                                 | 4,460      |   | $ | 3,409 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

6

----

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

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

TNS, Inc. (TNS or the Company) is a Delawarecorporation. TNS is an international provider of networking, communications,and value added services to many of the world’s leading retailer,banks/processors, telecommunication companies, and financial markets. 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 28 countries, including Canadaand countries in Europe, Latin America and the Asia-Pacific region.

The Company provides its services through its multipledata networks, each designed specifically for transaction applications. Thesenetworks support a variety of widely accepted communications protocols, aredesigned to be scalable and are accessible by multiple methods, includingdial-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. and Canada,(2) the telecommunication services division (TSD), which provides callsignaling services and database access services targeting primarily thetelecommunications industry, (3) the financial services division (FSD),which provides data and voice communications services to the financial servicescommunity in support of the Financial Information eXchange (FIX) messagingprotocol and other transaction-oriented trading applications, and (4) theinternational services division (ISD), which markets the Company’s POS andfinancial services in countries outside of the United States and Canada.

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with United Statesgenerally accepted accounting principles (GAAP) for interim financialinformation and in conjunction with the rules and regulations of theSecurities and Exchange Commission (SEC). Certain information and notedisclosures normally included in the annual financial statements, required byGAAP, have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading.

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect adjustments (allof which are of a normal and recurring nature) that are necessary for fairpresentation of the periods presented. The results of operations for the threeand six months ended June 30, 2007 are not necessarily indicative of theresults to be expected for any subsequent interim period or for the fiscalyear. It is suggested that these unaudited condensed consolidated financialstatements be read in conjunction with the Company’s annual report onForm 10-K filed with the SEC on March 16, 2007, which includesconsolidated financial statements and the notes thereto for the year endedDecember 31, 2006.

*Dividends andRecapitalization*

On March 28, 2007, the Company’s board of directorsdeclared a special dividend of $4.00 per common share which was paid on April12, 2007. Also, on March 28, 2007, the Company entered into a secured creditfacility, which consists of two facilities: a senior secured term loan facility in an aggregate principal amount of$225 million (the Term Facility) and a senior secured revolving credit facilityin an aggregate principal amount of $15 million (the Revolving Facility). TheCompany used approximately $98.3 million of the proceeds from the Term Facilityto pay the special dividend.  Theremainder of the proceeds from the Term Facility was used to refinance existingdebt, to pay fees related to the senior secured credit facility and the specialdividend and for general corporate purposes.  The payment of the special dividend and theclosing on the secured credit facility reflect the completion of the Company’srecapitalization plan.

**Use of Estimates**

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of certain assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements. Significantestimates affecting the consolidated financial statements include management’sjudgments regarding 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.

7

----

**Revenue Recognition**

The Company recognizes revenue when persuasiveevidence of an agreement exists, the terms are fixed and determinable, servicesare performed, and collection is probable. Cash received in advance of revenuerecognition is recorded as deferred revenue. POS services revenue is derivedprimarily from per transaction fees paid by the Company’s customers for thetransmission of transaction data, through the Company’s networks, betweenpayment processors and POS or ATM terminals. TSD revenue is derived primarilyfrom fixed monthly fees for call signaling services and per query fees chargedfor database access and validation services. FSD revenue is derived primarilyfrom monthly recurring fees based on the number of customer connections to andthrough the Company’s networks. Incentives granted to new customers or uponcontract renewals are deferred and recognized ratably as a reduction of revenueover the contract period to the extent that the incentives are recoverableagainst the customer’s minimum purchase commitments under the contract. Inaddition, the Company receives installation fees related to the configurationof the customers’ systems. Revenue from installation fees is deferred andrecognized ratably over the customer’s contractual service period, generallythree years. The Company performs periodic evaluations of its customer base andestablishes allowances for estimated credit losses.

**Cost of Network Services**

Cost of network services is comprised primarily oftelecommunications charges, which include data transmission and database accesscharges, leased digital capacity charges, circuit installation charges andactivation charges. The cost of data transmission is based on a contract ortariff rate per minute of usage in addition to a prescribed rate pertransaction for certain vendors. The costs of database access, circuits,installation, and activation charges are based on fixed fee contracts withlocal exchange carriers and interexchange carriers. The cost of networkservices also includes salaries, equipment maintenance and other costs relatedto the ongoing operation of the Company’s data networks. These costs areexpensed by the Company as incurred. The Company recognizes a liability fortelecommunications charges based upon network services utilized at historicalinvoiced rates. Depreciation expense on network equipment and amortizationexpense on developed technology are excluded from cost of network services andincluded in depreciation and amortization of property and equipment andamortization of intangible assets in the accompanying consolidated statementsof operations.

**Stock-Based Compensation**

Effective January 1,2006, the Company adopted Statements of Financial Accounting Standards (SFAS)No. 123R “Share Based Payment”, using the modified prospective transition method.SFAS No. 123R requires that all stock-based compensation to employees bemeasured at fair value and expensed over the requisite service period and alsorequires an estimate of forfeitures when calculating compensation expense. TheCompany recognizes compensation cost on awards with graded vesting on astraight-line basis over the requisite service period for the entire award. Share-basedexpenses for all non-vested awards outstanding as of January 1, 2006, arebeing recognized based on the grant date fair value estimated in accordancewith the provisions of SFAS No. 123 “Accounting for Stock-BasedCompensation” and in accordance with SFAS No. 123R for all awards grantedor modified after January 1, 2006.

The Company recognized$3.1 million and $5.4 million of stock based compensation for the six monthsended June 30, 2006 and 2007, respectively. During the six months ended June 30, 2006 the Company granted 467,495stock options and 175,999 restricted stock units at weighted average estimatedfair values of $10.44 and $20.47 respectively. During the six months ended June30, 2007 the Company granted 332,324 stock options and 464,927 restricted stockunits at weighted average estimated fair values of $6.26 and $14.36,respectively. As of June 30, 2007, there was a total of $21.9 million ofdeferred compensation cost related to share based awards, which is expected tobe recognized over a weighted average period of approximately three years.

On March 28, 2007 theCompany’s Board of Directors decided to allow the outstanding restricted stockunits to receive dividend equivalent payments. As a result of this decision, the Company recorded $1.5 million ofstock-based compensation, which is included in the $5.4 million of stock-basedcompensation mentioned above.  The $1.5million charge related to this decision is reported as follows in theaccompanying condensed consolidated statement of operations for the six monthsended June 30, 2007:  $0.1 million isincluded in cost of network services, $0.4 million is included in engineeringand development and $1.0 million is included in selling, general andadministrative expenses.

8

----

**IncomeTaxes**

Effective January 1,2007, the Company adopted Financial Accounting Standards Board (FASB)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109” (FIN 48), which prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken, or expected to be taken,in a tax return, and provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. The adoption of FIN 48 did not result in a cumulative adjustment tothe Company’s accumulated earnings. As of the date of adoption, the Company’sunrecognized tax benefits totaled $2.1 million, of which $1.5 millionwould impact the annual effective income tax rate. The Company paidapproximately $0.2 million to settle an uncertain tax position during the sixmonths ended June 30, 2007. As of June 30, 2007, the Company’s unrecognized taxbenefits totaled $1.9 million, of which $1.5 million would impact the annualeffective income tax rate.

The Company or one of its subsidiaries is subject totaxation in the U.S. and in various state, local and foreign jurisdictions. TheCompany remains subject to examination by U.S. Federal, state, local andforeign tax authorities for tax years 2003 through 2006.  With the exception of Spain and Australia,which have longer statutes of limitation than the U.S., the Company is nolonger subject to US Federal, state, local or foreign tax examinations for thetax years 2002 and prior.

It is reasonably possible that the amount ofunrecognized benefit with respect to the Company’s unrecognized tax positionswill increase or decrease in the next 12 months; however, quantification of anestimated range cannot be made at this time. These changes may be the result of settlement of ongoing state audits orthe expiration of certain statutes of limitation.

The Company records interest and penalties related toincome taxes as components of the income tax provision, which totaled $39,000for the six months ended June 30, 2007. The Company’s accrual for potential interest and penalties associatedwith uncertain tax positions was $326,000 as of June 30, 2007. To the extentinterest and penalties are not assessed with respect to uncertain taxpositions, amounts accrued will be reversed and reflected as a reduction of theoverall income tax provision.

The Company’s income tax benefit for the six monthsended June 30, 2006 differs from the U.S. federal statutory rate primarily dueto an increase in valuation allowance and profits of our internationalsubsidiaries being taxed at rates different than the U.S. statutory rate. TheCompany’s income tax benefit for the six months ended June 30, 2007 differsfrom 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 AccountingPronouncements**

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements”. SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value in accordance with generally accepted accountingprinciples, and expands disclosures about fair value measurements. In February2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.” SFAS No. 159 permits entities to choose tomeasure many financial assets and financial liabilities at fair value. BothSFAS No. 157 and SFAS No. 159 are effective for fiscal years beginning afterNovember 15, 2007. The Company does not believe that the adoption of SFASNo. 157 and SFAS No. 159 will have a material impact on its financialstatements.

9

----

**2.             Acquisitionand Long-term Investment**

**DialectPayment Technologies, Pty Limited Acquisition**

On June 8, 2007, the Company acquired all of theoutstanding shares of Dialect Payment Technologies Pty Limited (Dialect), anAustralian provider of internet payment gateway services to the ‘card-not-present’transaction 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 berefundable to the Company based on the costs incurred related to one customercontract assumed in the purchase. If such amount is refunded to the Company, itwill result in a corresponding decrease in goodwill. The Company purchasedDialect primarily to expand its current suite of POS product offerings. Thepurchase price for Dialect was allocated, on a preliminary basis, as follows(in thousands):

| Current assets                                           |   | 580    |   |
|----------------------------------------------------------|--------|--------|--------|
| Accounts receivable                                      |   | 964    |   |
| Property and equipment                                   |   | 866    |   |
| Developed technology                                     |   | 5,454  |   |
| Customer relationships                                   |   | 5,319  |   |
| Tradename                                                |   | 186    |   |
| Non-compete agreements                                   |   | 1,063  |   |
| Goodwill                                                 |   | 2,210  |   |
| Accounts payable, accrued expenses and other liabilities |   | (1,985 | )      |
| Deferred revenue                                         |   | (6,465 | )      |
| Deferred tax liability                                   |   | (3,606 | )      |
| Net assets acquired                                      |   | $4,586 |   |

 

The amounts allocated to the customer relationshipsand developed technology are being amortized over their estimated useful lifeof seven years. The amounts allocated to the non-compete agreements andtradename are being amortized over their estimated useful life of three yearsand two years, respectively. The goodwill of $2.2 million is not deductible forincome tax 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.

**WAY Systems Investment**

In August 2004, the Company made an investment inWAY Systems, Inc. (WAY), which provides mobile POS transactioninfrastructure and solutions for mobile merchants. The Company purchased5,952,381 shares or 38.5 percent of WAY’s Series B convertible preferredstock for $2.5 million and became entitled to representation on WAY’s board ofdirectors. The Company accounted for its investment under the equity method ofaccounting as the Company had significant influence over the financing andoperating activities of WAY through its representation on the board ofdirectors. In March 2005, the Company made an additional investment of$0.8 million to purchase 1,910,401 shares of WAY’s Series B convertiblepreferred stock representing an additional 1.9 percent of WAY’s outstandingshares. In July 2005, the Company made an additional investment of $0.7million in exchange for a convertible note bearing interest at a rate of 8percent per annum and due January 1, 2009. In September 2005, theCompany exercised its option on the convertible note to convert the outstandingprincipal and accrued interest of approximately $0.8 million to 1,185,085shares of WAY’s Series C convertible preferred stock and made anadditional investment of $1.1 million to purchase 1,676,429 shares of WAY’sSeries C convertible preferred stock. As of December 31, 2006, the Companyowned approximately 17.2 percent of WAY’s total outstanding shares. DuringDecember 2006, in conjuction with management’s decision to not advanceadditional capital to WAY and continuing and projected operating losses fromWAY, the Company determined its WAY investment was impaired and recorded a $1.3million charge to reduce the carrying value of its WAY investement to zero.  In June 2007, the Company sold all of its WAYshares for $625,000.  This amount isincluded in equity in net (loss) income of unconsolidated affiliates for thethree and six months ended June 30, 2007.

10

----

**3.             Long-term Debt**

On March 28, 2007, theCompany entered into a $240.0 million senior secured credit facility (2007Credit Facility) to finance the special cash dividend and to refinance its 2005amended and restated senior secured credit facility (2005 CreditFacility).  The 2007 Credit Facilityconsists of a senior secured term loan facility in an aggregate principalamount 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 June 30, 2007. TheRevolving Facility matures March 27, 2013. Payments on the Term Facility are due in quarterly installments over theseven year term beginning June 30, 2007, with the remainder payable on March28, 2014.  Voluntary prepayments on theTerm Facility are applied as directed by the Company.  The Company made voluntary pre-payments onthe Term Facility totaling $9.0 million during the three months ended June 30,2007. In July 2007 the Company made an additional voluntary pre-payment on theTerm Facility in the amount of $4.0 million.

As of June 30, 2007, total scheduled remainingpayments on the Term B Loan are as follows (in thousands):

| Six months ending December  31, 2007 |   | $       | —  |   |
|--------------------------------------|--------|---------|---------|--------|
| 2008                                 |   | —  |    |
| 2009                                 |   | —  |    |
| 2010                                 |   | —  |    |
| 2011                                 |   | 1,688   |    |
| Thereafter                           |   | 214,312 |    |
|                                 |   | $       | 216,000 |   |

 

Interest on the outstanding balances under theRevolving Facility is payable, at the Company’s option, at a rate equal to thehigher of the Wall Street Journal published “base rate on corporate loansposted by at least 75% of the nation’s largest banks” or the federal funds rateplus 50 basis points (the “Base Rate”), in each case, plus a margin of 1.0% orat the London Interbank Offered Rate (“LIBOR”), plus a margin of 2.0%. Interest on the outstanding balances under the Term Facility are payable, atthe Company’s option, at the Base Rate plus a margin of 1.0%, or at LIBOR plusa margin of 2.0%.  The Revolving CreditFacility is subject to an annual commitment fee in an amount equal to 0.5% perannum multiplied by the amount of funds available for borrowing under theRevolving Facility.  Interest payments onthe 2007 Credit Facility are due biweekly, monthly, bimonthly or quarterly atthe Company’s option.

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

The terms of the 2007 Credit Facility require theCompany to comply with financial and nonfinancial covenants, includingmaintaining a specified Leverage Ratio at the end of each fiscal quarter andcomplying with specified annual limits on capital expenditures.  As ofJune 30, 2007, the Company was required to maintain a leverage ratio of lessthan 4.4 to 1.0.  The leverage ratiocontinues to decline over the term of the 2007 Credit Facility.  The Company’s leverage ratio as of June 20,2007 was 3.3 to 1.0. The 2007 Credit Facility also contains nonfinancialcovenants that restrict some of the Company’s corporate activities, including itsability to dispose of assets, incur additional debt, pay dividends, createliens, make investments, make capital expenditures and engage in specifiedtransactions with affiliates.  Noncompliance with any of the financial ornonfinancial covenants without cure or waiver would constitute an event ofdefault under the 2007 Credit Facility.  An event of default resultingfrom a breach of a financial or nonfinancial covenant may result, at the optionof the lenders, in an acceleration of the principal and interest outstanding,and a termination of the Revolving Facility.  The 2007 Credit Facilityalso contains other customary events of default (subject to specified graceperiods), including defaults based on events of bankruptcy and insolvency,nonpayment of principal, interest or fees when due, breach of specifiedcovenants, change in control and material inaccuracy of representations andwarranties.  The Company was incompliance with the financial and non-financial covenants of the 2007 CreditFacility as of June 30, 2007.

In connection with the closing of the 2007 CreditFacility, the Company incurred approximately $3.1 million in financingcosts. These financing costs were deferred and are being amortized using theeffective interest method over the life of the 2007 Credit Facility.   In connection with the repayment of the 2005Credit Facility in March 2007, the Company wrote-off approximately $1.4 millionin unamortized deferred financing costs related to the 2005 CreditFacility.  Such write-off has been includedin interest expense in the accompanying condensed consolidated statement ofoperations for the six months ended June 30, 2007.

11

----

**4.             ComprehensiveLoss**

The components of comprehensive loss, net of taxeffect are as follows (in thousands):
| ** **                                | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net (loss) income                         |       | $                                                     | (930       | )                                                   | 537        |   | $ | (1,397 | ) | $ | (2,690 | ) |
| Foreign currency  translation adjustments |       | 1,276                                                 |       | 525                                                 |       | 1,380 |   | 918 |   |
| Total comprehensive income (loss)         |       | $                                                     | 346        |                                                | $          | 1,062 |   | $ | (17 | ) | $ | (1,772 | ) |
|                                           |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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

SFASNo. 128, “Earnings Per Share”, requires the presentation of basic anddiluted earnings per share. Basic earnings (loss) per common share is computedby dividing income (loss) attributable to common stockholders by the weightedaverage number of common shares outstanding for the period. The dilutedearnings (loss) per common share data is computed using the weighted averagenumber of common shares outstanding plus the dilutive effect of common stockequivalents, unless the common stock equivalents are anti-dilutive. During thethree and six months ended June 30, 2006, the treasury stock effect of optionsto purchase 1,890,484 shares of common stock and 489,423 restricted stock unitswere not included in the computation of diluted income (loss) per common shareas their effect would have been anti-dilutive. During the six months ended June 30, 2007, the treasury stock effect ofoptions to purchase 2,041,330 shares of common stock and 667,464 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   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| (Loss) income from  continuing operations before cumulative effect of a change in accounting  principle |       | $                                                     | (930       | )                                                   | $          | 537 |   | $ | (1,481 | ) | $ | (2,690 | ) |
| Cumulative effect of a  change in accounting principle, net of tax provision                            |       | —                                                |       | —                                              |       | 84 |   | — |   |
| Net (loss) income                                                                                       |       | $                                                     | (930       | )                                                   | $          | 537 |   | $ | (1,397 | ) | $ | (2,690 | ) |
| Weighted average common  share calculation:                                                             |       |                                                  |       |                                                |       |   |   |   |   |
| Basic weighted average  common shares outstanding                                                       |       | 24,093,752                                            |       | 24,208,755                                          |       | 24,042,340 |   | 24,172,212 |   |
| Treasury stock effect  of unvested restricted stock units                                               |       | —                                                |       | 10,905                                              |       | — |   | — |   |
| Diluted weighted  average common shares outstanding                                                     |       | 24,093,752                                            |       | 24,219,660                                          |       | 24,042,340 |   | 24,172,212 |   |
| Basic and diluted net  (loss) income per common share:                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| (Loss) income from  continuing operations before cumulative effect of a change in accounting  principle |       | $                                                     | (0.04      | )                                                   | $          | 0.02 |   | $ | (0.06 | ) | $ | (0.11 | ) |
| Cumulative effect of a change in accounting principle, net of tax  provision                            |       | —                                                |       | —                                              |       | — |   | — |   |
| Net (loss) income                                                                                       |       | $                                                     | (0.04      | )                                                   | $          | 0.02 |   | $ | (0.06 | ) | $ | (0.11 | ) |

 

12

----

**6.             SegmentInformation**

The Company’s reportablesegments are strategic business units that offer different products andservices. The Company classifies its business into four segments: POS, TSD, FSDand ISD. However, the Company’s management only evaluates revenues for thesefour segments. A significant portion of the Company’s North American operatingexpenses are shared between the POS, TSD and FSD segments, and therefore, managementanalyzes operating results for these three segments on a combined basis.

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

Revenue for the Company’s four business units ispresented below (in thousands):
| ** **     | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues:      |       |                                                  |       |                                                |       |   |   |   |   |
| POS            |       | $                                                     | 21,422     |                                                | $          | 20,754 |   | $ | 40,214 |   | $ | 40,553 |   |
| TSD            |       | 16,725                                                |       | 16,109                                              |       | 31,554 |   | 31,022 |   |
| FSD            |       | 8,629                                                 |       | 10,118                                              |       | 17,001 |   | 19,860 |   |
| ISD            |       | 25,884                                                |       | 32,380                                              |       | 49,799 |   | 60,587 |   |
| Total revenues |       | $                                                     | 72,660     |                                                | $          | 79,361 |   | $ | 138,568 |   | $ | 152,022 |   |

 

EBITDA before stock compensation expense for the NorthAmerican and ISD operations is reflected below (in thousands):
| ** **                                     | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |
| EBITDA before stock  compensation expense:     |       |                                                  |       |                                                |       |   |   |   |   |
| North America                                  |       | $                                                     | 5,687      |                                                | $          | 5,561 |   | $ | 12,290 |   | $ | 14,295 |   |
| ISD                                            |       | 8,207                                                 |       | 11,727                                              |       | 15,229 |   | 16,346 |   |
| Total EBITDA before stock compensation expense |       | $                                                     | 13,894     |                                                | $          | 17,288 |   | $ | 27,519 |   | $ | 30,642 |   |

 

13

----

EBITDA before stock compensation expense differs from(loss) income before income taxes and equity in net loss of unconsolidatedaffiliate reported in the condensed consolidated statements of operations asfollows (in thousands):
| ** **                                                                                                                                                           | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2006**                                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| EBITDA before stock  compensation expense                                                                                                                            |       | $                                                     | 13,894     |                                                | $          | 17,288 |   | $ | 27,519 |   | $ | 30,642 |   |
| Reconciling items:                                                                                                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| Depreciation and  amortization of property and equipment and intangible assets                                                                                       |       | (10,692                                               | )          | (11,405                                             | )          | (20,649 | ) | (23,320 | ) |
| Stock compensation  expense                                                                                                                                          |       | (1,854                                                | )          | (2,323                                              | )          | (3,289 | ) | (5,424 | ) |
| Interest expense                                                                                                                                                     |       | (2,288                                                | )          | (4,221                                              | )          | (4,319 | ) | (8,189 | ) |
| Interest income and  other income, net                                                                                                                               |       | 478                                                   |       | 920                                                 |       | 786 |   | 1,810 |   |
| (Loss) income before income taxes, equity in net loss of  unconsolidated affiliates and cumulative effect of a change in accounting  principle, net of tax provision |       | $                                                     | (462       | )                                                   | $          | 259 |   | $ | 48 |   | $ | (4,481 | ) |

 

Goodwill and intangible assets are located in thefollowing reporting segments (in thousands):
| ** **                                             | ** ** | **December 31,   2006** | ** ** | **June 30,   2007** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| POS                                                    |       | $                                 | 127,051    |                          | $          | 121,483 |   |
| TSD                                                    |       | 4,890                             |       | 4,325                         |       |
| FSD                                                    |       | 23,208                            |       | 22,116                        |       |
| ISD                                                    |       | 49,594                            |       | 60,609                        |       |
| Total goodwill and identifiable intangible assets, net |       | $                                 | 204,743    |                          | $          | 208,533 |   |

 

**GeographicInformation**

The Company sells itsservices through foreign subsidiaries in Australia, Austria, Canada, Colombia,France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, theNetherlands, New Zealand, Poland, Romania, South Korea, Spain, Sweden, Thailandand the United Kingdom. Information regarding revenues and long-lived tangibleassets attributable to each geographic region is stated below.

The Company’s revenues were generated in the followinggeographic regions (in thousands):
| ** **     | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| North America  |       | $                                                     | 46,776     |                                                | $          | 46,981 |   | $ | 88,770 |   | $ | 91,435 |   |
| Europe         |       | 22,807                                                |       | 27,928                                              |       | 43,986 |   | 52,580 |   |
| Asia-Pacific   |       | 3,077                                                 |       | 4,452                                               |       | 5,812 |   | 8,007 |   |
| Total revenues |       | $                                                     | 72,660     |                                                | $          | 79,361 |   | $ | 138,568 |   | $ | 152,022 |   |

 

Revenues from theCompany’s subsidiaries in the United Kingdom were $14.2 million and $27.9million for the three and six months ended June 30, 2006, respectively.Revenues from the Company’s subsidiaries in the United Kingdom were $17.2million and $32.4 million for the three and six months ended June 30, 2007,respectively.

The Company’s long-lived assets, including goodwilland intangible assets, were located as follows (in thousands):
| ** **              | ** ** | **December 31,   2006** | ** ** | **June 30,   2007** | ** ** |
|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| North America           |       | $                                 | 225,159    |                          | $          | 212,529 |   |
| Europe                  |       | 47,615                            |       | 57,177                        |       |
| Asia-Pacific            |       | 4,319                             |       | 19,688                        |       |
| Total long-lived assets |       | $                                 | 277,093    |                          | $          | 289,394 |   |

 

14

----

**7.             RestructuringCosts**

In August 2006,the Company implemented a plan to reduce its cost structure and improveoperating efficiencies by reducing its workforce and implementing productivityimprovement initiatives and expense reduction measures (2006 RestructuringPlan). In connection with the 2006 Restructuring Plan, the Company incurredapproximately $5.6 million of severance associated with its workforcereduction, of which $4.2 million was included in selling, general andadministrative expense, $0.8 million was included in engineering anddevelopment expense and $0.6 million was included in cost of network servicesin the third quarter of 2006.  Of thetotal $5.6 million in severance, $5.0 million related to the Company’s U.S.operations and $0.6 million related to its ISD operations.

During the firstquarter of 2007 the Company incurred an additional $0.9 million in severanceand benefits charges related primarily to the departure of two seniorexecutives.  Of the total $0.9 million inseverance and benefits, $0.8 million is included in selling, general andadministrative expense and $0.1 million is included in engineering anddevelopment expense in the accompanying condensed consolidated statement ofoperations for the six months ended June 30, 2007.

A summary of the liability for the Company’s severanceand benefits obligation is as follows (in thousands):
| Balance as of January  1, 2007                     |   | $      | 4,778  |   |
|----------------------------------------------------|--------|--------|--------|--------|
| Severance and benefits  from executive departures  |   | 946    |   |
| Accretion of liability  due to the passage of time |   | 33     |   |
| Cash paid                                          |   | (1,870 | )      |
| Balance as of June 30, 2007                        |   | $      | 3,887  |   |

 

The remaining cashexpenditures relating to the severance and benefits will be paid through 2009.As of June 30, 2007, $2.3 million of the total $3.9 million liabilityfor severance and benefits was classified as accounts payable, accrued expensesand other liabilities and the remaining $1.6 million was classified asother liabilities in the accompanying condensed consolidated balance sheet.

15

----

**8.             Litigationand Claims**

The Company is periodically involved in disputesarising from normal business activities. In the opinion of management,resolution of these matters will not have a material adverse effect upon thefinancial position or future operating results of the Company, and adequateprovision for any potential losses has been made in the accompanyingconsolidated financial statements.

The Company and John J.McDonnell, Jr., the Company’s former Chief Executive Officer, and Henry H.Graham, Jr., the Company’s Chief Executive Officer, are defendants in aputative class action lawsuit filed in connection with the Company’s publicoffering of common stock in September 2005 (“Secondary Offering”). The CementMasons and Plasterers Joint Pension Trust, purportedly on behalf of itself andothers similarly situated, filed the putative class action lawsuit captionedCement Masons & Plasterers Joint Pension Trust v. TNS, Inc.,et al., Case No. 1:06 CV 363, CMH/BRP, on April 4, 2006 inthe United States District Court for the Eastern District of Virginia.Plaintiff claims that the Registration Statement filed in connection with theSecondary Offering negligently failed to disclose that (1) TNS’ agreementwith the Pepsi Bottling Group, Inc. (“Pepsi”) to provide cashless vendingto Pepsi had been delayed beyond August 7, 2005; (2) TNS wasgenerating less revenues and income than it had anticipated from its contractwith the Royal Bank of Scotland (“RBS”), because RBS purportedly had overstatedthe number of transactions that TNS would be responsible for processing forRBS; and (3) TNS’ International Services Division was experiencingdeclining revenues during that time period because of unfavorable foreignexchange rates. TNS filed a motion to dismiss the lawsuit on July 14,2006. The Plaintiff filed its memorandum in opposition to TNS’ motion todismiss on August 4, 2006, and TNS filed its reply memorandum onAugust 18, 2006. The Court denied the motion to dismiss onSeptember 12, 2006, and ordered the parties to conduct discovery in thecase. In March 2007, the Court stayed further discovery in the case pending amediation of the matter. The parties conducted a mediation on April 26,2007.  The timing and course of thelitigation, including the mediation, are not predictable.  As a result, management cannot estimate arange of possible loss and has therefore not recognized a liability for thisexpense. However, TNS intends to continue to take appropriate steps to defendagainst the lawsuit, the outcome of which could have a material adverse affecton the financial condition or future operating results of TNS. During the sixmonths ended June 30, 2006, the Company accrued legal costs of approximately$0.5 million to defend itself in this matter. These legal costs areincluded in selling, general and administrative expense in the accompanyingcondensed consolidated statement of operations for the six months ended June30, 2006.

16

----

**Item2.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of thefinancial condition and results of operations of TNS, Inc. in conjunctionwith the consolidated financial statements and the related notes included inour annual report on Form 10-K filed with the SEC on March 16,2007 and available directly from the SEC at www.sec.gov and the condensedconsolidated financial statements and the related notes of TNS, Inc.,included elsewhere in this quarterly report.

There are statements made herein which may not addresshistorical facts and, therefore, could be interpreted to be forward-lookingstatements within the meaning of The Private Securities Litigation Reform Actof 1995. These forward-looking statements are based on current expectations,forecasts and assumptions that are subject to risks and uncertainties thatcould cause actual results to differ materially from those set forth in, orimplied by, the forward-looking statements. The Company has attempted, wheneverpossible, to identify these forward-looking statements using words such as “may,”“will,” “should,” “projects,” “estimates,” “expects,” “plans,” “intends,” “anticipates,”“believes,” and variations of these words and similar expressions. Similarly,statements herein that describe the Company’s business strategy, prospects,opportunities, outlook, objectives, plans, intentions or goals are alsoforward-looking statements. Actual results may differ materially from those indicatedby such forward-looking statements as a result of various important factors,including: the Company’s reliance upon a small number of customers for asignificant portion of its revenue; competitive factors such as pricingpressures; our customer’s ability to direct their data communications from theCompany’s networks to other networks; the Company’s ability to grow itsbusiness domestically and internationally by generating greater transactionvolumes, acquiring new customers or developing new service offerings;fluctuations in the Company’s quarterly results because of the seasonal natureof the business and other factors outside of the Company’s control; the Company’ssubstantial debt could adversely affect its financial health because the Companymay be unable to obtain additional financing for working capital, capitalexpenditures, acquisitions and general corporate purposes, the Company may notgenerate sufficient cash flow to repay the debt on a timely basis or to pre-paythe debt, and a significant portion of the Company’s cash flow from operationswill be dedicated to the repayment or servicing of indebtedness, therebyreducing the amount of cash available for other purposes; the Company’s abilityto identify, execute or effectively integrate acquisitions; the Company’sability to identify, execute or effectively integrate future acquisitions;increases in the prices charged by telecommunication providers for servicesused by the Company; the Company’s ability to adapt to changing technology; additionalcosts related to compliance with the Sarbanes-Oxley Act of 2002, any revisedNew York Stock Exchange listing standards, SEC rule changes or other corporategovernance issues; and other risk factors described in the Company’s annualreport on Form 10-K filed with the SEC on March 16, 2007. Inaddition, the statements in this quarterly report are made as of the date ofthis filing. The Company expects that subsequent events or developments willcause its views to change. The Company undertakes no obligation to update anyof the forward-looking statements made herein, whether as a result of newinformation, future events, changes in expectations or otherwise. Theseforward-looking statements should not be relied upon as representing theCompany’s views as of any date subsequent to the date of this filing. Theforward-looking statements in this document are intended to be subject to thesafe harbor protection provided by Sections 27A of the Securities Act and21E of the Exchange Act.

**Overview**

We are an international provider of networking,communications, and value added services to many of the world’s leadingretailer, banks/processors, telecommunication companies, and financial markets.We are also a leading provider of secure data and voice network services to theglobal financial services industry. We operate one of the largest SignalingSystem No. 7 networks in the United States capable of providing servicesnationwide, and we utilize this network to provide call signaling and databaseaccess services to the domestic telecommunications industry. Our datacommunications services enable secure and reliable transmission oftime-sensitive, transaction-related information critical to our customers’operations. Our customers outsource their data communications requirements tous because of our substantial expertise, comprehensive customer support andcost-effective services. We provide services to customers in the United Statesand increasingly to international customers in 28 countries, including Canada andcountries in Europe, Latin America and the Asia-Pacific region.

We provide services through our multiple datanetworks, each designed specifically for transaction applications. Our networkssupport a variety of widely accepted communications protocols and are designedto be scalable and accessible by multiple methods, including dial-up,dedicated, wireless and Internet connections.

We generaterevenues 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.

·                                          ***International services***.We are one of the leading providers of data communications services to the POSindustry in the United Kingdom. Our international services division alsoprovides services in Australia, Austria, Colombia,

17

----

France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, theNetherlands, New Zealand, Poland, Romania, South Korea, Spain, Sweden andThailand through subsidiaries located in these countries. Additionally, throughthese international subsidiaries we also provide services to customers locatedin Belgium, Bermuda, Finland, Gibraltar, Hong Kong, Norway andSingapore. Our international services division generates revenuesprimarily from our POS and financial services offerings abroad.

·                                          ***Telecommunication services***.We provide call signaling services that enable telecommunications carriers toestablish and terminate telephone calls placed by their subscribers. We alsoprovide database access services that enable our customers to provideintelligent network services, such as caller identification, toll-free callrouting and local number portability, and validation services, such as credit card,calling card, third-party billing and collect calling. Our telecommunicationservices division generates revenues primarily from fixed monthly fees chargedfor our call signaling services and per-query fees charged for our databaseaccess and validation services.

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

Our most significant expense is cost of networkservices, which is comprised primarily of telecommunications charges, includingdata transmission and database access, leased digital capacity charges, circuitinstallation charges and activation charges. The cost of data transmission isbased on a contract or tariff rate per minute of usage in addition to aprescribed rate per transaction for some vendors. The costs of database access,circuits, installation charges and activation charges are based on fixed feecontracts with local exchange carriers and interexchange carriers. The cost ofnetwork services also includes salaries, equipment maintenance and other costsrelated to 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 includesalaries and other costs related to product development, engineering, hardwaremaintenance and materials. The majority of these costs are expensed asincurred, including costs related to the development of internal use softwarein the preliminary project, the post-implementation and operation stages.Development costs we incur during the software application development stageare capitalized and amortized over the estimated useful life of the developedsoftware.

Our selling, general and administrative expensesinclude costs related to sales, marketing, administrative and managementpersonnel, as well as external legal, accounting and consulting services.

*Dividends andRecapitalization*

On March 28, 2007, our board of directors declared aspecial dividend 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 senior securedrevolving credit facility in an aggregate principal amount of $15 million (the “RevolvingFacility”). We used approximately $98.3 million of the proceeds from the TermFacility to pay the special dividend. The remainder of the proceeds from theTerm Facility was used to refinance existing debt, to pay fees related to thesenior secured credit facility and the special dividend and for generalcorporate purposes. No amount was drawn on the Revolving Facility at closingand the full principal amount of the Revolving Facility remained available tous as of June 30, 2007. The payment of the special dividend and the closing onthe secured credit facility reflect the completion of our recapitalizationplan. We believe these actions were in the best interest of our shareholdersand established a more appropriate capital structure.

18

----

**Results of Operations**

Thefollowing table sets forth, for the periods indicated selected statement ofoperations data (dollars in thousands):
| ** **                                                                                                                                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                                                                                                                                             |       | $                                               | 72,660     |                                          | $          | 79,361 |   | $ | 138,568 |   | $ | 152,022 |   |
| Operating  expenses:                                                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Cost of network services, exclusive of the items  shown separately below                                                                             |       | 37,127                                          |       | 40,174                                        |       | 70,184 |   | 79,046 |   |
| Engineering and development                                                                                                                          |       | 5,501                                           |       | 6,641                                         |       | 10,036 |   | 13,003 |   |
| Selling, general, and administrative                                                                                                                 |       | 17,992                                          |       | 17,581                                        |       | 34,118 |   | 34,755 |   |
| Depreciation and amortization of property and equipment                                                                                              |       | 5,346                                           |       | 5,433                                         |       | 10,373 |   | 11,237 |   |
| Amortization of intangible assets                                                                                                                    |       | 5,346                                           |       | 5,972                                         |       | 10,276 |   | 12,083 |   |
| Total operating expenses                                                                                                                             |       | 71,312                                          |       | 75,801                                        |       | 134,987 |   | 150,124 |   |
| Income from  operations                                                                                                                              |       | 1,348                                           |       | 3,560                                         |       | 3,581 |   | 1,898 |   |
| Interest expense                                                                                                                                     |       | (2,288                                          | )          | (4,221                                        | )          | (4,319 | ) | (8,189 | ) |
| Interest income                                                                                                                                      |       | 147                                             |       | 429                                           |       | 265 |   | 674 |   |
| Other income,  net                                                                                                                                   |       | 331                                             |       | 491                                           |       | 521 |   | 1,136 |   |
| (Loss) income  before income tax benefit, equity in net loss of unconsolidated affiliates  and cumulative effect of a change in accounting principle |       | (462                                            | )          | 259                                           |       | 48 |   | (4,481 | ) |
| Income tax  benefit (provision)                                                                                                                      |       | 456                                             |       | (285                                          | )          | 469 |   | 1,292 |   |
| Equity in net  (loss) income of unconsolidated affiliates                                                                                            |       | (924                                            | )          | 563                                           |       | (1,998 | ) | 499 |   |
| (Loss) income  from continuing operations before cumulative effect of a change in accounting  principle                                              |       | (930                                            | )          | 537                                           |       | (1,481 | ) | (2,690 | ) |
| Cumulative  effect of a change in accounting principle, net of tax provision                                                                         |       | —                                          |       | —                                        |       | 84 |   | — |   |
| Net (loss) income                                                                                                                                    |       | $                                               | (930       | )                                             | $          | 537 |   | $ | (1,397 | ) | $ | (2,690 | ) |

**Threemonths ended June 30, 2007 compared to the three months ended June 30, 2006**

***Revenues.***Totalrevenues increased $6.7 million, or 9.2%, to $79.4 million for the three monthsended June 30, 2007, from $72.9 million for the three months ended June 30,2006. We generate revenues through four operating divisions.

***POS division.***Revenuesfrom the POS division decreased $0.7 million, or 3.1%, to $20.8 million for thethree months ended June 30, 2007, from $21.4 million for the three months endedJune 30, 2006. POS dial-up transaction volumes decreased 3.8% to 1.51 billiontransactions for the three months ended June 30, 2007, from 1.57 billiontransactions for the three months ended June 30, 2006. Included in POS revenuefor the second quarter of 2007 is $0.7 million in pass-through revenuescompared with none for the three months ended June 30, 2006. POS revenuesincreased $1.0 million in the three months ended June 30, 2007 compared tothe three months ended March 31, 2007. The increase in revenue on a sequential basis,was due primarily to increased dial-up transaction volumes and to a lesserextent from additional endpoints from our broadband service offerings. Growthin the POS division depends upon a number of factors including the success ofour new broadband, wireless and vending service offerings as well as the totalnumber of POS dial-up transactions we transport.

***Internationalservices division.***Revenues from the internationalservices division increased $6.5 million, or 25.1%, to $32.4 million for thethree months ended June 30, 2007, from $25.9 million for the three months endedJune 30, 2006. On a constant dollar basis, revenue for the three months endedJune 30, 2007 would have increased $4.0 million, or 15.5% to $29.9 million.Excluding the benefit of foreign exchange, international services divisionrevenues increased primarily though higher transaction volumes from POScustomers and more connections from FSD customers in Europe and Asia Pacificand to a lesser extent from the inclusion of one month of revenue from ourrecent acquisition of Dialect. Revenues from our U.K. subsidiaries increased$3.0 million, or 20.8%, to $17.2 million for the three months ended June 30,2007, from $14.2 million for the three months ended June 30, 2006. Future revenuegrowth in the international services division depends on a number of factorsincluding the success of our POS and FSD products in countries we have recentlyentered, the success of our new product offerings and the successfulintegration of our recent acquisitions, including our recent acquisition of JPGTelecom, SAS, and Dialect.

19

----

***Telecommunicationservices division.***Revenues from the telecommunicationservices division decreased $0.6 million, or 3.7%, to $16.1 million for thethree months ended June 30, 2007, from $16.7 million for the three months endedJune 30, 2006. Included in telecommunications services revenues for the threemonths ended June 30, 2007 and 2006 were approximately $1.4 million and $2.4million, respectively, of pass-through revenues. Excluding the decrease in pass-throughrevenues, revenues increased $0.4 million through continued demand for ourdatabase access and validation services which offset pricing compression due tocustomer consolidation in our call signaling business.

In 2006, one of our largest telecommunicationsservices division customers completed multiple acquisitions in its industry,including acquisitions of several of our other telecommunications servicesdivision customers. In September 2006, we negotiated a contract renewal withthis significant customer in which we agreed to a pricing discount. Futurerevenue growth in the telecommunication services division depends on a numberof factors including the number of database access queries we transport, thenumber of call signaling routes our customers purchase and the success of ournew product offerings, which potentially may be offset by customers seekingpricing discounts due to industry consolidation or other reasons.

***Financial servicesdivision.***Revenues from the financial services divisionincreased $1.5 million, or 17.3%, to $10.1 million for the three months endedJune 30, 2007, from $8.6 million for the three months ended June 30, 2006. Theincrease in revenues was due to increases in new customer endpointinstallations as well as increases in connectivity between existing customersand increased demand for greater bandwidth connectivity. Future revenue growthin the financial services division depends on a number of factors including thenumber of connections to and through our networks as well as the success of ournew product offerings. We have begun to see an increased demand from ourcustomers for larger bandwidth connections to our network and while theseconnections create greater revenue per physical endpoint, they require longersales and installation lead times.

***Cost of network services.***Cost ofnetwork services increased $3.1 million, or 8.2%, to $40.2 million for thethree months ended June 30, 2007, from $37.1 million for the three months endedJune 30, 2006. Cost of network services were 50.6% of revenues for the threemonths ended June 30, 2007, compared to 51.1% of revenues for the three monthsended June 30, 2006. The increase in cost of network services resulted fromhigher volumes in our international services division, increases in customerconnections in our financial services division, and increases in access chargesfor our dial-up POS product within our POS division.

Future cost of network services depends on a numberof factors including total transaction and query volumes, the relative growthand contribution to total transaction volume of each of our customers, thesuccess of our new service offerings, the timing and extent of our networkexpansion and the timing and extent of any network cost increases or reductions.Due to an increase in the fourth quarter of 2006 in the rates charged by one ofthe providers of toll-free access services we use to transport domestic dial-upPOS transactions, we anticipate that the cost of network services associatedwith the POS division will increase between $5 million and $7 million in 2007as compared to 2006. The actual amount of this increase will depend upon anumber of factors, including the number and average length of domestictoll-free POS transactions we transport in 2007 and our ability to findalternate providers of toll-free access services at lower costs. During the secondquarter of 2007, we entered into an agreement with an alternate provider oftoll-free access. As a result, we anticipate reductions in our toll-free accesscharges in the second half of 2007.

Gross profitrepresented 49.4% of total revenues for the three months ended June 30, 2007,compared to 48.9% for the three months ended June 30, 2006. Excluding $2.2million and $2.4 million in total pass-through revenues for the three monthsended June 30, 2007 and 2006, respectively, gross margin would have beenapproximately 50.8% compared to 50.6%. The improvement in gross margin fromlast year is a result of increased contribution from our international servicesand financial services divisions, our highest gross margin divisions, whichoffset both margin declines in the POS division as a result of increased accesscharges, as discussed above, and price compression in the telecommunicationservices division as a result of customer consolidation.

***Engineering anddevelopment expense.***Engineering and development expenseincreased $1.1 million, or 20.7%, to $6.6 million for the three months endedJune 30, 2007, from $5.5 million for the three months ended June 30, 2006.Engineering and development expense represented 8.4% of revenues for the threemonths ended June 30, 2007 and 7.6% of revenues for the three months ended June30, 2006. Included in engineering and development expenses for the three monthsended June 30, 2006 was approximately $0.2 million of severance expense.Excluding the severance expense, engineering and development expense increasedprimarily to support our revenue growth in the international services division,the expense related to our investment in our product development initiativesand from decreases in the amount of internal software development expensescapitalized and to a lesser extent from increases in headcount related to ouracquisition of Dialect.

20

----

***Selling, generaland administrative expense.***Selling, general andadministrative expense decreased $0.4 million, or 2.3%, to $17.6 million forthe three months ended June 30, 2007, from $18.0 million for the three monthsended June 30, 2006. Selling, general and administrative expense represented22.2% of revenues for the three months ended June 30, 2007, compared to 24.8%of revenues for the three months ended June 30, 2006. Included in selling,general and administrative expenses for the three months ended June 30, 2007and 2006 is approximately $1.7 million and $1.2 million of stock compensationexpense, respectively. Included in selling, general and administrative expensesfor the three months ended June 30, 2006 is a $0.6 million pre-tax charge forexpenses incurred by the special committee of the board of directors. Excludingthese items, selling, general and administrative expenses decreased $0.3million primarily as a result of the cost cutting measures that were put inplace during the fourth quarter of 2006 that were partially offset by increasesin selling expenses to support our revenue growth.

***Depreciation andamortization of property and equipment.***Depreciation andamortization of property and equipment increased $0.1 million, or 1.6%, to $5.4million for the three months ended June 30, 2007, from $5.3 million for thethree months ended June 30, 2006. Depreciation and amortization of property andequipment represented 6.8% of revenues for the three months ended June 30,2007, compared to 7.4% of revenues for the three months ended June 30, 2006.Depreciation expense increased primarily due to capital expenditures made tosupport our revenue growth.

***Amortization ofintangible assets.***Amortization of intangible assetsincreased $0.6 million, or 11.7%, to $6.0 million for the three months endedJune 30, 2007, from $5.4 million for the three months ended June 30, 2006. Theamortization of intangible assets for the three months ended June 30, 2007 and2006 relates solely to the intangible assets resulting from acquisitions. Theincrease was primarily attributable to acquisitions we completed during 2006and 2007. For purposes of measuring and recognizing impairment of long-livedassets including intangibles, we assess whether separate cash flows can beattributed to the individual asset. For our customer relationship intangibleassets, we recognize and measure impairment upon the significant loss ofrevenue from a customer. Based upon our contract with one of our majorcustomers, we believe that revenues and related transaction volumes from thiscustomer will continue to decline in 2007 and may decline further thereafter.The intangible asset value attributable to this customer relationship wasapproximately $21.5 million as of June 30, 2007. We assessed the recoverabilityof this customer relationship asset based upon undiscounted anticipated futurecash flows and concluded no impairment existed as of June 30, 2007.

***Interest expense.***Interestexpense increased $1.9 million to $4.2 million for the three months ended June30, 2007, from $2.3 million for the three months ended June 30, 2006. Interestexpense increased due to higher debt levels incurred as a result of ourrecapitalization supporting our special dividend.

***Interest income.***Interest income was $0.4 million for the three months ended June 30, 2007compared to $0.1 million for the three months ended June 30, 2006. The increaseof $0.3 million in interest income is primarily due to the restricted cash wehad on hand for the payment of the special dividend and to a lesser extent thehigher outstanding average cash balances during the three months ended June 30,2007.

***Other income, net.***Otherincome, net was $0.5 million for the three months ended June 30, 2007 comparedto $0.3 million for the three months ended June 30, 2006. Included in otherincome, net for the three months ended June 30, 2007 is a gain on foreigncurrency translation of approximately $0.4 million due to fluctuations in thevalue of the U.S. dollar as compared with foreign currencies, principally, thepound sterling, Euro and Australian dollar, versus a gain on foreign currencytranslation of $0.3 million for the three months ended June 30, 2006.

***Income tax(provision) benefit.***For the three months ended June 30,2007, our income tax provision was approximately $0.3 million compared to anincome tax benefit of $0.5 million for the three months ended June 30, 2006. Theincrease is due to higher income in profitable foreign jurisdictions ascompared to higher losses in the U.S. during 2006.

***Equity in net lossof unconsolidated affiliates.***For the three months endedJune 30, 2007, our equity in net income of unconsolidated affiliates was $0.6million compared to a loss of $0.9 million for the three months ended June 30,2006. The increase was due primarily to the realized gain of $0.6 million onthe sale of all our outstanding shares of our investment in WAY Systems, Inc. Duringthe three months ended June 30, 2006 we recorded losses on our investments inWAY Systems Inc., IP Commerce Inc., and AK Jensen. As of June 30, 2007, we havea $0.9 million long-term investment in another unconsolidated affiliate, and weexpect to incur additional losses on this investment in 2007, and we maycontinue to incur losses thereafter.

21

----

**Six months ended June 30, 2007 compared to the sixmonths ended June 30, 2006**

***Revenues.***Totalrevenues increased $13.4 million, or 9.7%, to $152.0 million for the six monthsended June 30, 2007, from $138.6 million for the six months ended June 30,2006. We generate revenues through four operating divisions.

***POS division.***Revenuesfrom the POS division increased $0.3 million, or 0.8%, to $40.5 million for thesix months ended June 30, 2007, from $40.2 million for the six months endedJune 30, 2006. POS dial-up transaction volumes for the six months ended June30, 2007 were 2.9 billion transactions, an increase of 2.4% compared to the sixmonths ended June 30, 2006. Included in POS revenue for the six months endedJune 30, 2007 is an incremental $1.4 million in pass-through revenues comparedwith none for the six months ended June 30, 2006. Excluding the pass-throughrevenues, POS division revenue decreased $1.0 million, or 2.7%, resulting fromlower revenue per transaction partially offset by increases in revenues fromour broadband service offerings and higher dial-up transactions volumes. Growthin the POS division depends upon a number of factors including the success ofour new broadband, wireless and vending service offerings as well as the totalnumber of POS dial-up transactions we transport.

***Internationalservices division.***Revenues from the internationalservices division increased $10.8 million, or 21.7%, to $60.6 million for thesix months ended June 30, 2007, from $49.8 million for the six months endedJune 30, 2006. On a constant dollar basis, revenue for the six months endedJune 30, 2007 would have increased $5.8 million, or 11.7% to $55.6 million.Excluding the benefit of foreign exchange, international services divisionrevenues increased primarily though higher transaction volumes from POScustomers and increases in the number of FSD customer connections in Europe andAsia Pacific. Revenues from our U.K. subsidiaries increased $4.5 million, or16.3%, to $32.4 million for the six months ended June 30, 2007, from $27.9million for the six months ended June 30, 2006. Future revenue growth in the internationalservices division depends on a number of factors including the success of ourPOS and FSD products in countries we have recently entered, the success of ournew product offerings and the successful integration of our recentacquisitions, including our recent acquisition of JPG Telecom, SAS, andDialect.

***Telecommunicationservices division.***Revenues from the telecommunicationservices division decreased $0.5 million, or 1.7%, to $31.1 million for the sixmonths ended June 30, 2007, from $31.6 million for the six months ended June30, 2006. Included in telecommunications services revenues for the six monthsended June 30, 2007 and 2006 were approximately $2.7 million and $3.7 million,respectively, of pass-through revenues. Excluding the decrease in pass-throughrevenues, revenues increased $0.5 million through continued demand for ourdatabase access services, partially offset by pricing compression due tocustomer consolidation in our call signaling business, as discussed below.

In 2006, one of our largest telecommunicationsservices division customers completed multiple acquisitions in its industry,including acquisitions of several of our other telecommunications servicesdivision customers. In September 2006, we negotiated a contract renewal withthis significant customer in which we agreed to a pricing discount. Futurerevenue growth in the telecommunication services division depends on a numberof factors including the number of database access queries we transport, thenumber of call signaling routes our customers purchase and the success of ournew product offerings, which potentially may be offset by customers seekingpricing discounts due to industry consolidation or other reasons.

***Financial servicesdivision.***Revenues from the financial services divisionincreased $2.9 million, or 16.8%, to $19.9 million for the six months endedJune 30, 2007, from $17.0 million for the six months ended June 30, 2006. Theincrease in revenues was due to increases in new customer endpointinstallations as well as increases in connectivity between existing customersand increased demand for greater bandwidth connectivity. Future revenue growthin the financial services division depends on a number of factors including thenumber of connections to and through our networks as well as the success of ournew product offerings. We have begun to see an increased demand from ourcustomers for larger bandwidth connections to our network and while theseconnections create greater revenue per physical endpoint, they require longersales and installation lead times.

***Cost of network services.***Cost ofnetwork services increased $8.9 million, or 12.6%, to $79.0 million for the sixmonths ended June 30, 2007, from $70.2 million for the six months ended June30, 2006. Cost of network services were 52.0% of revenues for the six monthsended June 30, 2007, compared to 50.6% of revenues for the six months endedJune 30, 2006. The increase in cost of network services resulted from highervolumes in our international services division, increases in customerconnections in our financial services division, and increases in access chargesfor our dial-up POS product within our POS division.

Futurecost of network services depends on a number of factors including totaltransaction and query volumes, the relative growth and contribution to totaltransaction volume of each of our customers, the success of our new serviceofferings, the timing and extent of our network expansion and the timing andextent of any network cost increases or reductions. Due to an increase in thefourth quarter of 2006 in the rates charged by one of the providers oftoll-free access services we use to transport domestic dial-up POStransactions, we anticipate that the cost of network services associated withthe POS division will increase between $5 million and $7 million in 2007 ascompared to 2006. The actual amount of this increase will depend upon a numberof factors, including the number and average length of domestic toll-free POStransactions we transport in 2007 and our ability to find alternate providersof toll-free access services at lower costs. During the second quarter of 2007,we entered into an agreement with an alternate provider of toll-free access. Asa result, we anticipate reductions in our toll-free access charges in thesecond half of 2007.

 

22

----

 

Gross profit represented48.0% of total revenues for the six months ended June 30, 2007, compared to49.4% for the six months ended June 30, 2006. Exluding $4.1 million and $3.7million in total pass-through revenues for the six months ended June 30, 2007and 2006, respectively, gross margin would have been approximately 49.3%compared to 50.7%. This margin compression is a result of declines in the grossmargin of our dial-up POS product from increases in toll-free access charges,as discussed above, as well as price compression in the telecommunicationsservices division as a result of customer consolidation, which is partiallyoffset by increased contribution from the international services and financialservices divisions, our highest gross margin divisions.

***Engineering anddevelopment expense.***Engineering and development expenseincreased $3.0 million, or 29.6%, to $13.0 million for the six months endedJune 30, 2007, from $10.0 million for the six months ended June 30, 2006.Engineering and development expense represented 8.6% of revenues for the sixmonths ended June 30, 2007 and 7.2% of revenues for the six months ended June30, 2006. Included in engineering and development expenses for the six monthsended June 30, 2007 and 2006 is approximately $1.2 million and $0.4 million ofstock compensation expense, respectively. Excluding the increase in stockcompensation expense, engineering and development expense increased primarilyto support our revenue growth in the international services division and decreasesin the amount of internally developed software expenses capitalized and to alesser extent from the increased expense related to our investment in productdevelopment.

***Selling, general and administrativeexpense.***Selling, general and administrative expenseincreased $0.6 million, or 1.9%, to $34.7 million for the six months ended June30, 2007, from $34.1 million for the six months ended June 30, 2006. Selling,general and administrative expense represented 22.9% of revenues for the sixmonths ended June 30, 2007, compared to 24.6% of revenues for the six monthsended June 30, 2006. Included in selling, general and administrative expensefor the six months ended June 30, 2007 are pre-tax charges to earnings ofapproximately $0.8 million related to executive severance and $3.8 million instock compensation expense of which $1.1 million related to the modification ofoutstanding restricted stock units. Included in selling, general andadministrative expenses for the six months ended June 30, 2006 is a charge for expensesincurred by the special committee of the board of directors of approximately$0.6 million, a charge related to a reserve for litigation of approximately$0.5 million and $2.5 million of stock compensation expense. Excluding theseitems, selling, general and administrative expenses decreased $0.4 million primarilyas a result of the cost cutting measures that were put in place during thefourth quarter of 2006, which were partially offset by increases in sellingcosts to support our revenue growth.

***Depreciation andamortization of property and equipment.***Depreciation andamortization of property and equipment increased $0.9 million, or 8.3% to $11.2million for the six months ended June 30, 2007, from $10.4 million for the sixmonths ended June 30, 2006. Depreciation and amortization of property andequipment represented 7.4% of revenues for the six months ended June 30, 2007,compared to 7.5% of revenues for the six months ended June 30, 2006.Depreciation expense increased primarily due to capital expenditures made tosupport our revenue growth.

***Amortization ofintangible assets.***Amortization of intangible assetsincreased $1.8 million, or 17.6%, to $12.1 million for the six months endedJune 30, 2007, from $10.3 million for the six months ended June 30, 2006. Theamortization of intangible assets for the six months ended June 30, 2007 and2006 relates solely to the intangible assets resulting from acquisitions. Theincrease was primarily attributable to acquisitions we completed during 2006and 2007. For purposes of measuring and recognizing impairment of long-livedassets including intangibles, we assess whether separate cash flows can beattributed to the individual asset. For our customer relationship intangibleassets, we recognize and measure impairment upon the significant loss ofrevenue from a customer. Based upon our contract with one of our majorcustomers, we believe that revenues and related transaction volumes from thiscustomer will continue to decline in 2007 and may decline further thereafter.The intangible asset value attributable to this customer relationship wasapproximately $21.5 million as of June 30, 2007. We assessed the recoverabilityof this customer relationship asset based upon undiscounted anticipated futurecash flows and concluded no impairment existed as of June 30, 2007.

***Interest expense.***Interestexpense increased $3.9 million to $8.2 million for the six months ended June30, 2007, from $4.3 million for the six months ended June 30, 2006. Included ininterest expense for the six months ended June 30, 2007 is a $1.4 millioncharge related to the write-off of unamortized deferred financing fees relatedto the termination of the 2005 amended and restated senior secured credit facility.Excluding this charge, interest expense increased $2.5 million due to higher debtlevels incurred as a result of our recapitalization supporting our specialdividend.

 

23

----

 

*** Interest income.***Interest income was $0.7 million for the six months ended June 30, 2007compared to $0.3 million for the six months ended June 30, 2006. The increaseof $0.4 million in interest income is primarily due to the restricted cash wehad on hand for the payment of the special dividend and higher outstandingaverage cash balances during the six months ended June 30, 2007.

*** Other income, net.***Otherincome, net was $1.1 million for the six months ended June 30, 2007 compared to$0.5 million for the six months ended June 30, 2006. Included in other income,net for the six months ended June 30, 2007 is a gain on the sale of an asset of$0.3 million and a gain on foreign currency translation of approximately $0.7million due to fluctuations in the value of the U.S. dollar as compared withforeign currencies, principally, the pound sterling, Euro and Australiandollar, versus a gain on foreign currency translation of $0.5 million for thesix months ended June 30, 2006.

***Income tax benefit.***For the six months ended June 30, 2007, our income taxbenefit was approximately $1.3 million compared to $0.5 million for the sixmonths ended June 30, 2006. The increase in our income tax benefit is primarilyrelated to fewer losses from our unconsolidated equity method investments,which are not benefited.

***Equity in net lossof unconsolidated affiliates.***For the six months endedJune 30, 2007, our equity in net income of unconsolidated affiliates was $0.5million compared to a loss of $2.0 million for the six months ended June 30,2006. The increase was due primarily to the realized gain of $625,000 on thesale of all our outstanding shares of our investment in WAY Systems, Inc, whichhad a carrying value of zero resulting from the write downs we made in thefourth quarter of 2006. During the six months ended June 30, 2006 we recordedlosses on our investments in WAY Systems, Inc., IP Commerce Inc. and AK Jensen.As of June 30, 2007, we have a $0.9 million long-term investment in anotherunconsolidated affiliate, and we expect to incur additional losses on thisinvestment in 2007, and we may continue to incur losses thereafter.

 

24

----

 

**Liquidity and Capital Resources**

Our primary liquidity and capital resource needs areto finance the costs of our operations, to make capital expenditures and toservice our debt. Based upon our current level of operations, we expect thatour cash flow from operations, together with the amounts we are able to borrowunder our 2007 senior secured revolving credit facility, will be adequate tomeet our anticipated needs for the foreseeable future. Although we have nospecific plans to do so, to the extent we decide to pursue one or moresignificant strategic acquisitions, we will likely need to incur additionaldebt or sell additional equity to finance those acquisitions.

Our operations provided us cash of$27.8 million for the six months ended June 30, 2007, which wasattributable to a net loss of $2.7 million, depreciation, amortization andother non-cash charges of $23.9 million and an increase in working capitalof $6.6 million. Our operations provided us cash of $20.2 million forthe six months ended June 30, 2006, which was attributable to a net loss of$1.4 million, depreciation, amortization and other non-cash charges of$20.6 million and an increase in working capital of $1.0 million.

We used cash of $12.3 million in investingactivities for the six months ended June 30, 2007, which includes $4.2 millionfor our acquisition of Dialect and $8.1 million in capital expenditures primarilyto support our revenue growth. We used cash of $31.7 million in investingactivities for the six months ended June 30, 2006, which includes capitalexpenditures of $11.9 million. In addition we completed the acquisitionsof CommsXL in the UK, InfiniRoute and Sonic.

We used cash of$9.3 million from financing activities for the six months ended June 30, 2007, whichincludes net proceeds of $222 million from our senior secured credit facility,of which $98.3 million was used for payment of a special dividend and $123.3million was used to repay our 2005 amended and restated senior secured credit facility.In addition, we made $9.0 million of voluntary pre-payments on our 2007 seniorsecured credit facility. We received cash of $6.1 million from financingactivities for the six months ended June 30, 2006, which includes$6.0 million of borrowings under our 2005 amended and restated seniorsecured credit facility, the proceeds of which were used to finance the stockand asset purchase from Sonic.

**Seasonality**

Credit card anddebit card transactions account for a major percentage of the transactionvolume processed by our customers. The volume of these transactions on ournetworks generally is greater in the third and fourth quarter vacation andholiday seasons than during the rest of the year. Consequently, revenues andearnings from credit card and debit card transactions in the first and secondquarter generally are lower than revenues and earnings from credit card anddebit card transactions in the third and fourth quarters of the immediatelypreceding year. We expect that our operating results in the foreseeable futurewill be significantly affected by seasonal trends in the credit card and debitcard transaction market.

25

----

 

**2007Senior Secured Credit Facility**

On March 28, 2007, weentered into a $240.0 million senior secured credit facility to finance the$4.00 per share special cash dividend, described elsewhere in this report, andto refinance our 2005 amended and restated senior secured credit facility.  The 2007 senior secured credit facilityconsists of a senior secured term loan facility in an aggregate principalamount of $225.0 million and a senior secured revolving credit facility in anaggregate principal amount of $15.0 million, under which there were noborrowings as of June 30, 2007. The senior secured credit facility maturesMarch 27, 2013.  Payments on the seniorsecured term loans are due in quarterly installments over the seven year termbeginning June 30, 2007, with the remainder payable on March 28, 2014.  Voluntary prepayments on the senior secured termloans are applied as directed by us.  Wemade voluntary pre-payments on the senior secured term loans totaling $9.0million during the six months ended June 30, 2007 and an additional voluntarypre-payment of $4.0 million in July 2007.

As of June 30, 2007, total scheduled remainingpayments on the term loan are as follows (in thousands):

| Six months ending December  31, 2007 |   | $       | —  |   |
|--------------------------------------|--------|---------|---------|--------|
| 2008                                 |   | —  |    |
| 2009                                 |   | —  |    |
| 2010                                 |   | —  |    |
| 2011                                 |   | 1,688   |    |
| Thereafter                           |   | 214,312 |    |
|                                 |   | $       | 216,000 |   |

Interest on theoutstanding balances under the revolving credit facility is payable, at our option,at a rate equal to the higher of the Wall Street Journal published “base rateon corporate loans posted by at least 75% of the nation’s largest banks” or thefederal funds rate plus 50 basis points (the “Base Rate”), in each case, plus amargin of 1.0% or at the London Interbank Offered Rate (“LIBOR”), plus a marginof 2.0%.  Interest on the outstanding balances under the senior secured termloans are payable, at our option, at the Base Rate plus a margin of 1.0%, or atLIBOR plus a margin of 2.0%.  The seniorsecured revolving credit facility is subject to an annual commitment fee in anamount equal to 0.5% per annum multiplied by the amount of funds available forborrowing under the senior secured revolving credit facility.  Interest payments on the 2007 senior securedcredit facility are due biweekly, montly, bimonthly or quarterly at our option.

The terms of the 2007 senior secured credit facilityrequire us to make an annual prepayment in an amount that may range from 0% to50% of our “excess cash flow” (as such term is defined in the Credit Agreement)depending on our leverage ratio for any fiscal year.  Prepayments are alsorequired to be made in other circumstances, including upon asset sales.

The terms of the 2007 senior secured credit facilityrequire us to comply with financial and nonfinancial covenants, includingmaintaining a specified leverage ratio at the end of each fiscal quarter andcomplying with specified annual limits on capital expenditures.  As ofJune 30, 2007, we were required to maintain a leverage ratio of less than 4.4to 1.0.  The leverage ratio continues todecline over the term of the 2007 senior secured credit facility.  Our leverage ratio as of June 30, 2007 was3.3 to 1.0. The 2007 senior secured credit facility also contains nonfinancialcovenants that restrict some of our corporate activities, including our abilityto dispose of assets, incur additional debt, pay dividends, create liens, makeinvestments, make capital expenditures and engage in specified transactionswith affiliates.  Noncompliance with any of the financial or nonfinancialcovenants without cure or waiver would constitute an event of default under the2007 senior secured credit facility.  An event of default resulting from abreach of a financial or nonfinancial covenant may result, at the option of thelenders, in an acceleration of the principal and interest outstanding, and atermination of the revolving credit facility.  The 2007 senior securedcredit facility also contains other customary events of default (subject tospecified grace periods), including defaults based on events of bankruptcy andinsolvency, nonpayment of principal, interest or fees when due, breach ofspecified covenants, change in control and material inaccuracy of representationsand warranties.  We were in compliancewith the financial and non-financial covenants of the 2007 senior securedcredit facility as of June 30, 2007.

In connection withthe closing of the 2007 senior secured credit facility, we incurred approximately$3.1 million in financing costs. These financing costs were deferred andare being amortized using the effective interest method over the life of the2007 senior secured credit facility.   Inconnection with the repayment of the 2005 amended and restated senior securedcredit facility in March 2007, we wrote-off approximately $1.4 million inunamortized deferred financing costs related to the 2005 amended and restatedsenior secured credit facility.  Suchwrite-off has been included in interest expense in the accompanying condensedconsolidated statement of operations for the six months ended June 30, 2007.

26

----

 

**Item3.**                          Quantitativeand Qualitative Disclosures About Market Risk

***Interest rates***

Our principal exposure to market risk relates tochanges in interest rates. As of June 30, 2007, we had $216.0 millionoutstanding under our 2007 senior secured credit facility with interest ratestied to changes in the lender’s base rate or the LIBOR rate. Based upon theoutstanding borrowings on June 30, 2007 and assuming repayment of the Term Loanin accordance with scheduled maturities, each 1.0% increase in these ratescould add an additional $2.1 million to our annual interest expense.

As of June 30, 2007, we did not hold derivativefinancial or commodity instruments and all of our cash and cash equivalentswere held in money market or commercial accounts.

***Foreign currency risk***

Our earnings are affectedby fluctuations in the value of the U.S. dollar as compared with foreigncurrencies, predominately the Euro, the pound sterling and the Australiandollar due to our operations in Europe and Australia.

We have operations in 21 countries outside of theU.S., including the United Kingdom, Australia, Austria, Canada, Colombia,France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, theNetherlands, New Zealand, Poland, Romania, South Korea, Spain, Sweden andThailand. We provide services in these countries using networks deployed ineach country. We manage foreign exchange risk through the structure of our business.In the substantial majority of our transactions, we receive paymentsdenominated in the U.S. dollar, pound sterling, Euro or Australian dollar.Therefore, we do not rely on international currency markets to obtain and payilliquid currencies. The foreign currency exposure that does exist is limitedby the fact that the majority of transactions are paid according to ourstandard payment terms, which are generally short-term in nature. Our policy isnot to speculate in foreign currencies, and we promptly buy and sell foreigncurrencies as necessary to cover our net payables and receivables, which aredenominated in foreign currencies. For the six months ended June 30, 2007, werecorded a gain on foreign currency translation of approximately $0.7 million.

27

----

 

**Item 4.**           Controls and Procedures

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

**Evaluation**

The Company carried out an evaluation, under thesupervision, and with the participation, of the Company’s management, includingthe Company’s Chief Executive Officer and the Company’s Chief FinancialOfficer, of the effectiveness of the Company’s disclosure controls andprocedures as of June 30, 2007. Based on the foregoing, the Company’s ChiefExecutive Officer and principal financial officers concluded that the Company’sdisclosure controls and procedures were effective as of June 30, 2007.

There have been no significant changes during the sixmonths ended June 30, 2007 covered by this report in the Company’s internalcontrol over financial reporting or in other factors that could significantlyaffect the internal control over financial reporting.

 

28

----

 

**PART II—OTHERINFORMATION**

**Item1.**                          LegalProceedings

Information regarding legal proceedings is containedin Note 8 to the Condensed Consolidated Financial Statements contained inthis Report and is incorporated herein by reference.

**Item1A.**                 RiskFactors

There were no materialchanges from the risk factors previously disclosed in “Item 1A. Risk Factors”included in our Annual Report on Form 10-K for the year ended December 31,2006.

**Item2.**                          UnregisteredSales of Equity Securities and Use of Proceeds

None.

**Item3.**                          DefaultUpon Senior Securities

None.

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

The Annual Meeting ofStockholders was held on May 15, 2007. The stockholders voted on the followingmatters as set forth in the proxy statement.

1.ELECTION OF DIRECTORS. The stockholders voted to elect five directors to aone-year term expiring at the annual meeting of stockholders in 2007. Thevoting tabulation for each nominee was as follows:
| **Director**         | ** ** | ** ** | ** ** | **Votes in Favor** | ** ** | **Vote Withheld** | ** ** |
|----------------------|------------|------------|------------|------------------------------|------------|------------------------|------------|
| John B. Benton       |       | 18,510,128 |       | 539,285                      |       |
| Henry H. Graham, Jr. |       | 18,510,525 |       | 538,888                      |       |
| Stephen X. Graham    |       | 12,884,235 |       | 6,165,178                    |       |
| Jay E. Ricks         |       | 17,694,034 |       | 1,355,379                    |       |
| John V. Sponyoe      |       | 12,884,235 |       | 6,165,178                    |       |

 

2. RATIFICATION OFINDEPENDENT ACCOUNTANTS. The stockholders ratified the selection of Ernst &Young LLP as the Company’s independent registered public accounting firm forthe current fiscal year. The voting tabulation was as follows: 19,024,113 votesin favor of the ratification, 25,200 against the ratification, and 100abstentions.

**Item5.**                          OtherInformation

None.

29

----

 

**Item6.**                          Exhibits
|        |   | (4.8)   |   | Amendment to Credit Agreement, entered on June 6,  2007, by and among Transaction Network Services, Inc., a wholly owned  subsidiairy of Registrant, as Borrower, Registrant, as a credit Party, and  General Electric Capital Corporation, as agent, L/C Issuer, and a Lender.(1) |
|--------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (10.30) |   | Employment Agreement, dated as of August 2, 2007, by  and among the Registrant, Transaction Network Services, Inc. and Dennis  Randolph Jr.(2)                                                                                                                                          |
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (10.31) |   | Employment Agreement, dated as of August 2, 2007, by  and among the Registrant, Transaction Network Services, Inc. and Mark Cole                                                                                                                                                        |
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (10.32) |   | 2007 Annual Incentive Plan (3)                                                                                                                                                                                                                                                          |
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (10.33) |   | 2007 Executive Long-Term Incentive Plan (4)                                                                                                                                                                                                                                             |
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (31.1)  |   | Certification—Chief Executive Officer                                                                                                                                                                                                                                              |
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (31.2)  |   | Certification—Chief Financial Officer                                                                                                                                                                                                                                              |
|   |   |    |   |                                                                                                                                                                                                                                                                                    |
|   |   | (32.1)  |   | Written Statement of Chief Executive Officer and  Chief Financial Officer                                                                                                                                                                                                               |

----

(1)             Incorporatedby reference to exhibit 99.1 in the Registrant’s current report onForm 8-K filed June 8, 2007.

(2)             Incorporatedby reference to exhibit 99.3 in the Registrant’s current report onForm 8-K filed August 8, 2007.

(3)             Incorporatedby reference to exhibit 99.1 in the Registrant’s current report onForm 8-K filed August 8, 2007.

(4)             Incorporatedby reference to exhibit 99.2 in the Registrant’s current report onForm 8-K filed August 8, 2007.

30

----

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                           |   | TNS, Inc. |
|---------------------------|--------|----------------|
|                      |   | (Registrant)   |
|                      |   |           |   |   |
|                      |   |           |   |   |
| Date: August 9, 2007      |   | By:            |   | /s/ HENRY H. GRAHAM, JR. |
|                      |   |           |   | Henry H. Graham, Jr. |
|                      |   |           |   | Chief Executive Officer |
|                      |   |           |   |   |
| Date: August 9, 2007 |   | By:            |   | /s/ DENNIS L. RANDOLPH, JR. |
|                      |   |           |   | Dennis L. Randolph, Jr. |
|                      |   |           |   | Executive Vice President, Chief Financial Officer &  Treasurer |

 

 

31

----