Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission File Number: 001-32033

TNS, INC.(Exact name of registrant as specified in its charter)

DELAWARE(State or jurisdiction of
incorporation or organization)

36-4430020(I.R.S. Employer
Identification Number)


11480 Commerce Park Drive, Suite 600
Reston, VA 20191(Address of principal executive offices)

(703) 453-8300(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


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

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

Shares Outstanding as of July 1, 201026,155,076 Shares of Common Stock, $0.001 par value



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Table of Contents

TNS, INC.

INDEX



PagePart I: FINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial Statements (Unaudited)

3Condensed Consolidated Balance Sheets as of December 31, 2009 and June 30, 2010

3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2010

4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2010

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

23Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35Item 4.

Controls and Procedures

36Part II: OTHER INFORMATIONItem 1.

Legal Proceedings

37Item 1A.

Risk Factors

37Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37Item 3.

Default Upon Senior Securities

37Item 4.

Removed and Reserved

37Item 5.

Other Information

37Item 6.

Exhibits

37


2

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PART IFINANCIAL INFORMATION



Item 1.    Condensed Consolidated Financial Statements



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

December 31,
2009

June 30,
2010(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents

$
32,480

$
30,388Accounts receivable, net of allowance for doubtful accounts of $6,013 and $3,689, respectively


97,840


83,945Prepaid expenses


8,207


9,635Deferred tax assets


7,355


7,339Other receivables


12,180


Other current assets


4,872


6,437Total current assets


162,934


137,744Property and equipment, net


125,596


122,207Identifiable intangible assets, net


268,925


247,451Goodwill


14,844


15,019Deferred tax assets, net


24,720


27,073Other assets


4,427


4,607Total assets

$
601,446

$
554,101LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable, accrued expenses and other current liabilities

$
88,009

$
67,062Deferred revenue


13,970


10,087Current portion of long-term debt, net of discount


15,119


9,234Total current liabilities


117,098


86,383Long-term debt, net of current portion and discount


354,594


331,128Deferred tax liabilities


3,416


3,107Other liabilities


4,998


11,819Total liabilities


480,106


432,437Stockholders' equity:Common stock, $0.001 par value; 130,000,000 shares authorized; 25,957,444 shares issued and 25,795,767 shares outstanding and 26,228,145 shares issued and
26,155,076 shares outstanding, respectively


26


26Treasury stock, 161,677 shares and 73,069 shares, respectively


(2,439
)

(1,750
)Additional paid-in capital


168,780


170,676Accumulated deficit


(42,859
)

(35,259
)Accumulated other comprehensive loss


(2,168
)

(12,029
)Total stockholders' equity


121,340


121,664Total liabilities and stockholders' equity

$
601,446

$
554,101


See
accompanying notes to condensed consolidated financial statements (unaudited).

3

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

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Revenues

$
121,950

$
131,199

$
197,217

$
260,775Operating expenses:Cost of network services, exclusive of the items shown separately below


58,314


64,890


95,104


129,331Engineering and development


9,069


9,106


15,476


18,553Selling, general, and administrative


25,610


23,215


43,367


49,544Depreciation and amortization of property and equipment


7,994


13,540


13,828


23,792Amortization of intangible assets


8,153


8,553


13,757


19,882Total operating expenses


109,140


119,304


181,532


241,102Income from operations


12,810


11,895


15,685


19,673Interest expense


(11,417
)

(5,806
)

(12,869
)

(11,946
)Interest income


61


70


239


206Other (expense) income, net


(345
)

2,903


(452
)

5,704Income before income tax benefit and equity in net loss of unconsolidated affiliate


1,109


9,062


2.603


13,637Income tax provision


(633
)

(2,570
)

(2,121
)

(5,972
)Equity in net loss of unconsolidated affiliate


(23
)




(53
)

(65
)Net income

$
453

$
6,492

$
429

$
7,600Basic net income per common share

$
0.02

$
0.25

$
0.02

$
0.29Diluted net income per common share

$
0.02

$
0.24

$
0.02

$
0.28Basic weighted average common shares outstanding


25,228,319


26,129,527


25,177,974


26,028,707Diluted weighted average common shares outstanding


25,522,433


26,881,601


25,445,218


26,800,181


See
accompanying notes to condensed consolidated financial statements (unaudited).

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

Six months ended June 30,2009

2010Cash flows from operating activities:Net income

$
429

$
7,600Adjustments to reconcile net income to net cash provided by operating activities:Non-cash items:Depreciation and amortization of property and equipment


13,828


23,792Amortization of intangibles


13,757


19,882Loss on disposal of property and equipment


16


110Deferred income tax provision (benefit)


2,734


(2,563
)Amortization of deferred financing costs


4,738


1,063Equity in net loss of unconsolidated affiliate


53


65Stock compensation expense


4,532


3,568Changes in operating assets and liabilities:Accounts receivable, net


6,575


10,832Other current assets


(1,584
)

8,888Other noncurrent assets


(132
)

(668
)Accounts payable and accrued expenses


(5,530
)

(18,357
)Deferred revenue


1,160


(1,712
)Other noncurrent liabilities


81


4,876Net cash provided by operating activities:


40,657


57,376Cash flows from investing activities:Purchases of property and equipment


(11,136
)

(21,142
)Business combinations, net of cash acquired


(226,196
)

(544
)Net cash used in investing activities:


(237,332
)

(21,686
)Cash flows from financing activities:Proceeds from issuance of long-term debt, net of financing costs


201,612


Repayments of long-term debt


(20,000
)

(30,000
)Proceeds from stock option exercises, inclusive of tax benefit


381


1,898Payment of long-term debt financing costs


(175
)

Purchase of treasury stock


(812
)

(2,884
)Net cash provided by (used in) financing activities:


181,006


(30,986
)Effect of exchange rates on cash and cash equivalents


(56
)

(6,796
)Net decrease in cash and cash equivalents


(15,725
)

(2,092
)Cash and cash equivalents, beginning of period


38,851


32,480Cash and cash equivalents, end of period

$
23,126

$
30,388Supplemental disclosures of cash flow information:Cash paid for interest

$
6,761

$
10,119Cash paid for income taxes

$
1,960

$
2,208


See
accompanying notes to condensed consolidated financial statements (unaudited).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of Business and Basis of Presentation

Transaction Network Services (TNS or the Company) is one of the leading global providers of data communications and interoperability solutions. TNS's global secure network and innovative
value added services enable transactions and the exchange of information to many of the world's leading retailers, banks, payment processors, financial institutions and telecommunication firms.

Founded
in 1990 in the United States, TNS has grown steadily and now provides services to customers in over 40 countries across the Americas, Europe and the Asia Pacific region, with our
reach extending to many more. TNS has designed and implemented a global data network that supports a variety of widely accepted communication protocols and is designed to be scalable and accessible by
multiple methods.

TNS
reports its results by revenue generated in three industry verticals.

Payments

TNS' Payments division delivers a broad portfolio of secure and resilient transaction delivery services as well as innovative value
added solutions to many of the world's top banks, retailers, ISOs, transaction processors and ATM deployers. TNS' PCI DSS certified global backbone network and range of payment gateways securely
deliver billions of card present and card not present transactions each year from the Point-of-Sale (POS) to their destination. Protocol/message conversion, ATM and POS processing, payment
encryption and file settlement form part of the comprehensive payment solutions that TNS provides around the world.

Telecom

TNS' Telecoms division provides innovative communications infrastructure services to fixed, mobile, broadband and VoIP operators around
the world. TNS collaborates with customers, sharing expertise, resources and infrastructure to leverage rapidly evolving technologies. TNS's suite of services includes reliable SS7 networks (the
largest independent provider in North America), intelligent database and registry services, identity and verification services and hosted roaming and clearing solutions that simplify the Company's
customers' operations, expand their reach and provide a foundation that helps them facilitate their profitability.

Financial

As one of the industry's leading electronic connectivity solutions, TNS' Secure Trading Extranet brings together an extensive global
financial community of interest and delivers mission-critical low latency connectivity solutions to some of the largest and most prominent financial organizations in the world. The private TNS Secure
Trading Extranet ensures the lowest latencies to support Direct Market Access, algorithmic trading and market data distribution. Organizations utilizing the TNS network can benefit from a range of
value added services, including co-location and hosting services, interoffice WAN solutions and connectivity to the Company's large community of interest.

The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim
financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual
financial statements, required by GAAP, have been condensed or omitted pursuant to those rules and

6

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

regulations,
although the Company believes that the disclosures made are adequate to make the information presented not misleading.

In
the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect adjustments (all of which are of a normal and recurring nature) that are
necessary for the fair presentation of the periods presented. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be
expected for any subsequent interim period or for the fiscal year. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the Company's annual report on Form 10-K filed with the SEC on March 16, 2010, which includes audited
consolidated financial statements and the notes thereto for the year ended December 31, 2009.

Capital Structure

During the six months ended June 30, 2010, the Company issued 128,610 shares of common stock following the exercise of stock
options and 347,588 shares of common stock following the vesting of restricted stock units, of which 116,889 shares were surrendered by employees to satisfy payroll tax withholding obligations and
held by the Company as treasury shares. The Company retired 205,497 treasury shares during the six months ended June 30, 2010. During the six months ended June 30, 2009, the Company
issued 30,717 shares of common stock following the exercise of stock options and 265,422 shares of common stock following the vesting of restricted stock units, of which 90,306 shares were surrendered
by employees to satisfy payroll tax withholding obligations and held by the Company as treasury shares.

Acquisitions

On March 2, 2009, the Company entered into an Asset Purchase Agreement (the Purchase Agreement), by and between the Company and
VeriSign, Inc. (the Seller) pursuant to which the Company agreed to purchase certain assets and assume certain liabilities of the Seller's Communications Services Group (CSG). On May 1,
2009, the Company completed the acquisition in accordance with the terms and conditions of the Purchase Agreement. The initial purchase price was approximately $226.2 million in cash and
subject to a post-closing working capital adjustment. During the third quarter of 2009 and fourth quarter of 2009, working capital and other adjustments were made resulting in a
$4.5 million increase in the purchase price to $230.7 million. The purchase price was finalized in May 2010 resulting in an additional $0.5 million increase in the purchase price
to $231.2 million. The Company funded the transaction through a new $230 million term loan facility as part of its May 2009 Credit Facility (see Note 2). CSG provides call
signaling services and intelligent database services such as caller ID, toll-free call routing and local number portability to the U.S. telecommunications industry. In addition, CSG
provides wireless roaming and clearing services to mobile phone operators. The Company is integrating CSG into its telecommunications services division. In conjunction with the CSG acquisition, the
Company incurred total acquisition related costs of $2.5 million. During the three and six months ended June 30, 2009, acquisition related costs of $1.6 million and
$2.2 million, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statement of operations.

The
acquisition of CSG has been accounted for as a business combination under FASB ASC 805, Business Combinations. During the second quarter of 2010, the Company completed the
appraisals

7

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

necessary
to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. As a result of the
purchase price finalization, $1.7 million was adjusted retrospectively to certain working capital amounts on the December 31, 2009 balance sheet with a corresponding decrease in
goodwill. Such adjustment had no impact in our statement of operations.

The
fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on
significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in FASB ASC 820, Fair Value Measurements and Disclosures. Developed
technology, research and development and customer relationships were valued using the excess earnings method, a variation on the income method. The excess earnings method considers the use of other
assets in the generation of the projected cash flows in order to determine the economic benefit generated by the subject intangible asset. Non competition agreements were valued using the income
approach. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flow is discounted at a rate of return
that reflects the relative risk of achieving the cash flow and the time value of money. Fixed assets and real estate were valued using the market and cost approaches, as appropriate. The market
approach indicates value for a subject asset based on available market pricing for comparable assets. The cost approach indicates value by determining the current cost of replacing an asset with
another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to
depreciation.

The
purchase price for CSG was allocated as follows (in thousands):

Preliminary
allocation

Additional
consideration
paid

Measurement
period
adjustments

Final
allocationPurchase price allocation:Accounts receivable

$
33,852

$
914

$
6

$
34,772Prepaid expenses


2,963








2,963Property and Equipment


43,633


1,198





44,831Land and buildings


10,034








10,034Goodwill


3,984


649


(1,737
)

2,896Identifiable intangible assetsCustomer relationships


141,500








141,500Developed technology


4,800








4,800Non competition agreements


600








600Research and development


300








300Total assets


241,666


2,761


(1,731
)

242,696Accounts payable, accrued expenses and other current liabilities


(15,469
)

2,242


1,731


(11,496
)Total purchase price

$
226,197

$
5,003

$


$
231,200


The
amounts allocated to property and equipment are being depreciated on a straight line basis over their weighted average estimated useful lives of 4 years. The amount allocated
to buildings is

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

being
depreciated on a straight line basis over their estimated useful lives of 39 years. The customer relationships included in intangible assets are being amortized on a straight line basis
over 9 years and other intangible assets are being amortized on a straight line basis over 2 to 4 years. The goodwill of $2.9 million is expected to be deductible for income tax
purposes.

The
weighted average amortization period by each major class of assets and in total is as follows (in years):

Weighted average amortization periodCustomer relationships


9Developed technology


4Non competition agreements


2Research and development


4Total weighted average amortization period


8.8


Pro Forma Information

The unaudited pro forma information presents the combined operating results of TNS and CSG, with the results prior to the acquisition
date adjusted to include the pro forma impact of: the elimination of transactions between TNS and CSG; the adjustment of amortization of intangibles assets and depreciation of fixed assets based on
the preliminary purchase price allocation; and the adjustment of interest expense to reflect the incremental borrowings incurred by TNS to complete the acquisition of CSG.

The
unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, or any related integration costs.

The
following unaudited pro forma consolidated results of operations assume that the acquisition of CSG was completed as of January 1, 2009 (dollars in thousands, except per share
amounts):

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Operating revenues

$
143,843

$
131,199

$
279,007

$
260,775Net income


2,184


6,492


239


7,600Earnings per common share:Basic

$
0.09

$
0.25

$
0.01

$
0.29Diluted

$
0.09

$
0.24

$
0.01

$
0.28


The
CSG historical operating results include the direct costs related to the business and certain allocated costs for services and support functions provided by Verisign, Inc.
Included in net income for the three months ended June 30, 2009 are allocated after tax costs of $0.5 million, or ($0.02) per share
related to those functions. Included in net income for the six months ended June 30, 2009 are allocated after tax costs of $4.7 million, or ($0.18) per share. These pro forma results do
not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of January 1, 2009, nor does the pro forma data intend to be a projection
of results that may be obtained in the future.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

Due to the extent and nature of the integration of CSG's operations into the operations of TNS as well as the overlap with the Company's telecommunication services division, amounts
related to the contribution of CSG to the Company's consolidated results are not separately identifiable. Accordingly, the stand alone results of CSG for the three and six months ended June 30,
2010 have not been disclosed.

Goodwill, intangible and other long-lived assets

The Company accounts for goodwill and intangible assets in accordance with FASB ASC 350, IntangiblesGoodwill and
Other (ASC 350). Under this standard, goodwill and intangible assets deemed to have indefinite lives are not amortized and are subject to
annual impairment tests. The Company has elected to perform the impairment test annually as of October 1 of each year. An interim goodwill impairment test is performed if an event occurs or
circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If facts and circumstances indicate goodwill may be
impaired, the Company performs a recoverability evaluation based upon a determination of fair value.

In
accordance with FASB ASC 360, Property, Plant and Equipment (ASC 360) and ASC 350, the Company reviews long-lived assets including property and
equipment, capitalized software development costs and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine the recoverability of long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than
the carrying amount of the assets. If the Company estimates that assets are impaired, the assets are written down to their fair value. For purposes of measuring and recognizing impairment of
long-lived assets, the Company will assess whether separate cash flows can be attributed to the individual asset. The Company groups long-lived assets where separately
identifiable cash flows are available. In the event that long-lived assets, including intangibles are abandoned or otherwise disposed of, the Company recognizes an impairment charge upon
disposition. For the Company's customer relationship intangible assets, the Company evaluates impairment upon the significant loss of revenue from a customer. The fair value measurement of a customer
relationship intangible is primarily based on an income approach using significant inputs that are not observable in the market, therefore representing a Level 3 measurement as defined in FASB
ASC 820, Fair Value Measurements and Disclosures. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset.
Projected cash flow is discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. During the six months ended June 30, 2009 and 2010,
the Company accelerated amortization on a portion of customer relationship intangible assets by $0.2 million and $1.9 million, respectively, due to the loss of certain customers or
certain declines in expected revenues. As a result, these customer relationship intangible assets held as of June 30, 2009 and 2010, with carrying amounts of $0.2 million and
$2.8 million, respectively, were written down to their fair values of $0.0 million and $0.9 million.

During
the three months ended June 30, 2010, the Company identified $6.2 million of network equipment and software and office equipment that will no longer be utilized
following the completion of the CSG integration, which is expected to be September 30, 2010. Accordingly, the Company recorded additional depreciation and amortization expense related to these
assets of $3.2 million during

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

the
three months ended June 30, 2010, or $0.12 per share, and expects to incur additional accelerated depreciation charges of $3.0 million during the three months ended
September 30, 2010.

The
calculation of fair value in accordance with ASC 350 and 360 contains uncertainties due to judgment in estimates and assumptions, including projections of future income and
cash flows, the identification of appropriate market multiples and the choice of an appropriate discount rate. The Company's estimates of anticipated future income and cash flows used in determining
fair value contain
uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions. Therefore, those estimates could be reduced
significantly in the future due to changes in technologies, regulation, available financing, competition or other circumstances. As a result, the carrying amount of the Company's
long-lived assets could be reduced through impairment charges in the future. Additionally, changes in estimated future cash flows could result in a shortening of estimated useful lives for
long-lived assets including intangibles.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Significant estimates affecting the consolidated
financial statements include management's judgments regarding the allowance for doubtful accounts, future cash flows from long-lived assets, accrued expenses for probable losses and
estimates of the fair value of assets and liabilities assumed in business acquisitions. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an agreement exists, the terms are fixed and determinable, services are
performed, and collection is probable. Cash received in advance of revenue recognition is recorded as deferred revenue.

Payments
revenue is derived primarily from per transaction fees paid by the Company's customers for the transmission of transaction data, through the Company's network, between payment
processors and Point of Sale (POS) or ATM terminals and monthly recurring fees for broadband and wireless offerings. TSD revenue is derived primarily from fixed monthly fees for call signaling
services and per message fees charged for database access, call validation and roaming and clearing services. FSD revenue is derived primarily from monthly recurring fees based on the number of
customer connections to and through the Company's network as well as dedicated bandwidth usage.

The
Company considers the criteria established primarily by FASB ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent," in determining whether
revenue should be recognized on a gross versus a net basis. Factors considered in determining if gross or net basis recognition is appropriate include whether the Company is primarily responsible to
the client for the services, has discretion on vendor selection, or bears credit risk. These revenues primarily include database access services to external third-party databases and regulatory
network charges levied on our
customers. Included in revenue for the three months ended June 30, 2009 and 2010, are $6.8 million and $8.4 million, respectively, related to these pass-through charges. Included
in revenue for the six months ended June 30, 2009 and 2010, are $8.5 million and $16.5 million, respectively, related to these pass-through charges.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

In
certain of our international locations, the Company enters into revenue sharing arrangements with third parties. Revenue is recognized on a net basis for these arrangements as the
telecommunication service provider is the primary obligor and the Company does not bear the credit risk for these transactions. For the six months ended June 30, 2009 and 2010, revenue share
was $15.2 million and $15.5 million, respectively.

Incentives
granted to new customers or upon contract renewals are deferred and recognized ratably as a reduction of revenue over the contract period to the extent that the incentives are
recoverable against the customer's minimum purchase commitments under the contract. In addition, the Company receives installation fees related to the configuration of the customers' systems. Revenue
from installation fees is deferred and recognized ratably over the customer's contractual service period, generally three years. The Company performs periodic evaluations of its customer base and
establishes allowances for estimated credit losses.

Cost of Network Services

Cost of network services is comprised primarily of telecommunications charges, which include data transmission and database access
charges, leased digital capacity charges, circuit installation charges, activation charges and compensation paid to the providers of calling name and line information database records. The cost of
data transmission is based on a contract or tariff rate per minute of usage in addition to a prescribed rate per transaction for certain vendors. The costs of database access, circuits, installation
and activation charges are based on fixed fee contracts with local exchange carriers and interexchange carriers. The compensation charges paid to the providers of calling name and line information
database records are based on a percentage of query revenue generated from the Company's customers accessing those records. The cost of network services also includes salaries, equipment maintenance
and other costs related to the ongoing operation of the Company's data networks. These costs are expensed by the Company as incurred. The Company recognizes a liability for telecommunications charges
based upon network services utilized at historical invoiced rates. Direct costs of installations are deferred and amortized over the customer's contracted service period, generally three years.

Fair Value of Financial Instruments

The fair value of the Company's long-term debt is based upon quoted market prices for the same and similar issues giving
consideration to quality, interest rates, maturity and other characteristics. As of June 30, 2010, the Company believes the carrying amount of its long-term debt approximates its
fair value since the variable interest rate of the debt approximates a market rate.

Stock-Based Compensation

The Company accounts for stock-based compensation under FASB ASC 718, Compensation-Stock Compensation, using the modified
prospective transition method. FASB ASC 718 requires all stock-based compensation to employees be measured at fair value and expensed over the requisite service period and also requires an
estimate of forfeitures when calculating compensation expense. Stock-based compensation for all non-vested awards outstanding as of January 1, 2006, are being recognized based on
the grant date fair value estimated in accordance with the provisions of SFAS No. 123 "Accounting

12

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

for
Stock-Based Compensation" and in accordance with FASB ASC 718 for all awards granted or modified after January 1, 2006.

Stock-based
compensation expense has been included in the following categories in the accompanying condensed consolidated statements of operations (in thousands):

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Cost of network services

$
229

$
140

$
481

$
339Engineering and development


325


206


695


516Selling, general and administrative


1,973


1,008


3,356


2,713$
2,527

$
1,354

$
4,532

$
3,568


As
of June 30, 2010, there was a total of $9.6 million of unrecognized compensation cost related to stock-based awards, which is expected to be recognized over a weighted
average period of approximately two years.

Time-Vested Awards

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

During
the three months ended June 30, 2010 the Company granted no stock options and 188,950 restricted stock units at a weighted average estimated fair value of $26.80. During
the six months ended June 30, 2010, the Company granted 669 stock options and 200,511 restricted stock units at weighted average estimated fair values of $11.43 and $26.64, respectively. During
the three months ended June 30, 2009, the Company granted no stock options and restricted stock units. During the six months ended June 30, 2009 the Company granted 2,000 options and
5,050 restricted stock units at weighted average estimated fair values of $3.33 and $7.00, respectively. As of June 30, 2010, there was a total of $6.6 million of unrecognized
compensation expense related to these awards, which is included in the $9.6 million total unrecognized compensation cost mentioned above.

Performance-Based Awards

Performance-based awards are tied to the Company's annual performance against pre-established internal targets for revenues
and adjusted earnings per share, based upon the Company's actual performance over the performance period. The Company uses the Black Scholes option pricing model to determine the grant date fair value
of any performance-based stock options. The Company uses the market price of the Company's stock on the date of grant to determine the fair value of any performance-based restricted stock units.
Performance-based awards are also subject to vesting requirements, and generally vest in installments over three or four years. Compensation cost is based on the expected payout level that will be
achieved and is adjusted in subsequent periods as changes in

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

the
estimates occur until the performance criteria have been satisfied. The Company recognizes compensation cost on these performance based awards using an accelerated attribution method.

In
April 2009, the Company made certain long-term performance-based stock compensation awards (the 2009 Equity Performance Awards). The 2009 Equity Performance Awards were
granted under the Company's 2004 Long Term Incentive Plan. Based upon the Company's performance in 2009, the results of which were approved by the Company's board of directors in February 2010, the
plan participants earned 100% of the potential payout under the Company's 2009 Equity Performance Awards. The total number of awards issued under the Company's 2009 Equity Performance Awards was
311,500 restricted stock units which represented 100% of an employee's target payout. The weighted average grant date fair value of restricted stock units granted was $16.85. As of June 30,
2010, there was a total of $1.5 million of unrecognized compensation expense related to these performance based awards which is included in the $9.6 million total unrecognized
compensation cost mentioned above.

In
February 2010, the Company made certain long-term performance-based stock compensation awards (the 2010 Equity Performance Awards). The 2010 Equity Performance Awards were
granted under the Company's 2004 Long Term Incentive Plan. The total number of awards that would be issued under the Company's 2010 Equity Performance Awards, assuming that the target payout level was
achieved, would be 235,086 restricted stock units. The potential payout under the 2010 Equity Performance Awards will range from 0% to 150% of an employee's target payout. The weighted average grant
date fair value of restricted stock units granted was $23.66. As of June 30, 2010, there was a total of $1.3 million of unrecognized compensation expense related to these performance
based awards which is included in the $9.6 million total unrecognized compensation cost mentioned above.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes. Under FASB ASC 740, deferred tax
assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a
valuation allowance on its net deferred tax assets when it is more likely than not that such assets will not be realized. Deferred income tax expense or benefits are based upon the changes in the
asset or liability from period to period. The Company also recognizes interest and penalties related to uncertain tax positions in income tax expense.

Effective
January 1, 2007, the Company adopted an amendment to FASB ASC 740, Income Taxes, which prescribes a method of recognition 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 and transition. The adoption of the
amendment did not result in a cumulative adjustment to the Company's accumulated deficit.

A
reconciliation of the beginning and ending balance for liabilities associated with unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands) as of
June 30, 2010, respectively.

Balance as of January 1, 2010

$
4.294Additions for tax positions related to the current period


4,056Balance as of June 30, 2010

$
8,350


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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

The
entire balance of unrecognized tax benefits as of June 30, 2010 would impact the effective tax rate if recognized.

As
of June 30, 2010, the Company's accrual for potential interest and penalties associated with uncertain tax positions was $704,000. To the extent interest and penalties are not
assessed with respect to uncertain tax positions, amounts accrued will be reversed and reflected as a reduction of the overall income tax provision.

It
is reasonably possible that the Company's liability for unrecognized tax benefits will decrease in the next 12 months by $0.8 million as a result of the expiration of
certain statutes of limitation.

The
Company's effective tax rate for the six months ended June 30, 2009 and 2010 of 83.2% and 43.7%, respectively, differ from the U.S. Federal statutory rate primarily due to
stock-based compensation expense not deductible for income tax purposes, increases in FASB ASC 740 reserves due to certain income tax exposures, and profits of our international subsidiaries being
taxed at rates different than the U.S. Federal statutory rate.

With
few exceptions, the Company remains subject to examination by U.S. Federal, state, local and foreign tax authorities for tax years 2003 through 2009.

Reclassifications

During the three and six months ended June 30, 2009, expenses of $1.4 million which were previously included in
engineering and development costs have been reclassified to selling, general and administrative expenses to conform to the current period presentation.

Expenses
of $1.3 million incurred in the three months ended March 31, 2010, which were included in selling, general and administrative expenses in the statement of
operations included within our Form 10-Q for that period, have been reclassified to cost of network services in the accompanying statement of operations for the six months ended June 30,
2010.

Recent Accounting Pronouncements

In May 2009, the FASB issued FASB ASC 855, Subsequent Events, which is effective for interim or annual periods beginning on or after
June 15, 2009. The standard establishes principles and requirements for subsequent events, including disclosure of the date through which an entity has evaluated subsequent events. We adopted
FASB ASC 855 effective September 30, 2009 and the adoption of the standard did not significantly impact our financial statements.

Effective
June 30, 2009, the Company adopted ASC 825-10, Financial Instruments, which requires an entity to provide disclosures about fair value of financial
instruments in interim financial statements. See note (1).

Effective
September 30, 2009, the Company adopted Accounting Standards Update No. 2009-01, "Statement of Financial Accounting Standards
No. 168The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles," (ASU 2009-01). ASU 2009-01 is
not expected to change U.S. generally accepted accounting principles but combines all nongovernmental authoritative standards into a comprehensive, topically organized online database. All other
accounting literature excluded from ASU 2009-01 will be considered nonauthoritative. All references to authoritative accounting literature have been made in accordance with
ASU 2009-01.

15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. Description of Business and Basis of Presentation (Continued)

In
February 2010, the Company adopted Accounting Standards Update No. 2010-09, which modifies "Statement of Financial Accounting Standards No,
855Subsequent Events." (ASU 2010-09). ASU 2010-09 was issued on February 24, 2010 and removes the requirement for SEC filers to disclose the
date through which an entity has evaluated subsequent events, due to potential conflicts with current SEC guidance. ASU 2010-10 is effective upon issuance for interim and annual
reporting periods. The adoption of this standard did not significantly impact our financial statements.

Effective
January 1, 2010, the Company adopted Accounting Standards Update No. 2010-06, which modifies "Statement of Financial Accounting Standards
No, 820Fair Value Measurement and Disclosures." (ASU 2010-06). ASU 2010-06 requires new disclosures on the amount and reason for transfers in
and out of Level 1 and 2 fair value measurements. ASU 2010-06 also requires disclosure of activities, including purchases, sales, issuances, and settlements within the
Level 3 fair value measurements and clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. ASU 2010-06
is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this standard on January 1, 2010 did not significantly impact our financial
statements.

2. Long-term Debt

Debt consists of the following (in thousands):

December 31, 2009

June 30, 2010Revolving credit facility

$
49,371

$
34,370Term Loan


325,000


310,000Total credit facility outstanding


374,371


344,370Unamortized discount


(4,658
)

(4,008
)369,713


340,362Less: Current portion, net of discount


(15,119
)

(9,234
)Long-term portion

$
354,594

$
331,128


May 2009 Credit Facility

On May 1, 2009, the Company entered into a $423.5 million amended and restated senior secured credit facility (May 2009
Credit Facility) to finance the acquisition of the CSG assets from Verisign, Inc. and to refinance the 2007 Credit Facility. The May 2009 Credit Facility consisted of a fully funded term loan
facility with an outstanding principal amount equal to $178.5 million, a new fully funded term loan facility with an outstanding principal amount equal to $230.0 million and a senior
secured revolving credit facility in an aggregate principal amount of
$15.0 million. Interest on the May 2009 Credit Facility was payable, at the Company's option, at the Base Rate plus a margin of 5.0%, or at LIBOR plus a margin of 6.0%. In no event was the Base
Rate to be less than 4.5%, or the LIBOR Rate less than 3.5%.

November 2009 Credit Facility

On November 19, 2009 the Company entered into a new secured credit facility (the November 2009 Credit Facility) and refinanced
the May 2009 Credit Facility primarily to take advantage of a more

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2. Long-term Debt (Continued)

favorable
interest rate environment. The November 2009 Credit Facility consists of a senior secured term loan facility in an aggregate principal amount of $325 million (the "Term Facility") and
a senior secured revolving credit facility in an aggregate principal amount of $75 million (the "Revolving Facility") of which $49.4 million was funded at closing and outstanding as of
December 31, 2009 and $34.4 million was outstanding as of June 30, 2010.

Payments
on the Term Facility are due in quarterly installments over the term beginning March 31, 2010, with the remainder payable on November 18, 2015. Voluntary
prepayments on the Term Facility are applied as directed by the Company. In January 2010, the Company made a voluntary payment of $15 million on the Term Facility. In April and June 2010, the
Company made voluntary payments of $9 million and $6 million, respectively, on the Revolving Facility. The outstanding balance on the Revolving Facility is due on November 18,
2014.

The
total scheduled remaining payments on the November 2009 Credit Facility are as follows (in thousands):

2010

$
1,2502011


16,2502012


16,2502013


16,2502014


50,620Thereafter


243,750$
344,370


Interest
on the outstanding balances under the Revolving Facility is payable, at the Company's option, at a rate equal to the higher of the prime rate announced by SunTrust Bank, the
federal funds rate plus 50 basis points, or the one-month London Interbank Offered Rate ("LIBOR") rate plus 100 basis points (the "Base Rate"), in each case, plus a margin of 3.0% or at
LIBOR, plus a margin of 4.0%. Interest on the outstanding balances under the Term Facility is payable, at the Company's option, at the Base Rate plus a margin of 3.0%, or at LIBOR plus a margin of
4.0%. Additionally, in no event will the LIBOR rate be less than 2.0%. The applicable margins on the Revolving Facility and Term Facility are subject to step-downs based on the Company's
leverage ratio. The Revolving Facility is subject to an annual commitment fee in an amount equal to between 0.375% and 0.50% (based on the Company's leverage ratio) per annum multiplied by the amount
of funds available for borrowing under the Revolving Facility. Interest payments on the November 2009 Credit Facility are due biweekly, monthly, bimonthly or quarterly at the Company's option.

The
terms of the November 2009 Credit Facility require the Company 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 Credit Agreement) depending on the Company's Leverage Ratio for any fiscal year. Prepayments are also required to be made in other circumstances, including upon asset sales and
sale-leaseback transaction in excess of $2 million. The Company is permitted to repay borrowings under the November 2009 Credit Facility at any time in whole or in part without
premium or penalty.

The
obligations under the November 2009 Credit Facility are unconditionally and irrevocably guaranteed, subject to certain exceptions, by the Company and each existing and future direct
and indirect domestic subsidiary of the Company. In addition, the November 2009 Credit Facility is secured,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2. Long-term Debt (Continued)

subject
to certain exceptions, by a first priority perfected security interest in substantially all of the present and future property and assets (real and personal) of the Company and a pledge of
100% of the Company's capital stock of its respective domestic subsidiaries and 65% of the Company's capital stock of its respective first-tier foreign subsidiaries.

The
terms of the November 2009 Credit Facility require the Company to comply with financial and nonfinancial covenants, including maintaining a maximum specified leverage ratio at the
end of each fiscal quarter and a minimum consolidated fixed charge coverage ratio and complying with specified annual limits on capital expenditures. As of June 30, 2010, the Company is
required to maintain a leverage ratio of less than 2.75 to 1.0. The Company's leverage ratio as of June 30, 2010 was 2.3 to 1.0. The maximum leverage ratio declines over the term of the 2009
Credit Facility. Also beginning December 31, 2009 and as of the end of each subsequent quarter for the twelve month period then ended, the Company is required to maintain a consolidated fixed
charge coverage ratio of not less than 1.2 to 1.0. The Company's consolidated fixed charge coverage ratio as of June 30, 2010 was 2.4 to 1.0. The November 2009 Credit Facility also contains
nonfinancial covenants that restrict some of the Company's corporate activities, including its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, make
capital expenditures and engage in specified transactions with affiliates. Non compliance with any of the financial or nonfinancial covenants without cure or waiver would constitute an event of
default under the November 2009 Credit Facility. An event of default resulting from a breach of a financial or nonfinancial covenant may result, at the option of the lenders, in an acceleration of the
principal and interest outstanding, and a termination of the Revolving Facility. The November 2009 Credit Facility also contains other customary events of default (subject to specified grace periods),
including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of
representations and warranties. The Company was in compliance with the financial and non-financial covenants of the November 2009 Credit Facility as of June 30, 2010.

On
closing of the November 2009 Credit Facility, the Company incurred approximately $2.9 million in financing costs. These financing costs were deferred and are being amortized
using the effective interest method over the life of the November 2009 Credit Facility.

3. Comprehensive Income

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

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Net income

$
453

$
6,492

$
429

$
7,600Foreign currency translation adjustments


6,425


(5,617
)

4,173


(9,861
)Total comprehensive income (loss)

$
6,878

$
875

$
4,602

$
(2,261
)


4. Net Income Per Common Share

FASB ASC 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per common share is computed by dividing income attributable to
common stockholders by the weighted average number of common shares outstanding for the period. The

18

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4. Net Income Per Common Share (Continued)

diluted
earnings per common share data is computed using the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents, unless the common stock
equivalents are anti-dilutive.

The
treasury stock effect of options to purchase 94,954 shares of common stock that were outstanding as of June 30, 2010, and options to purchase 1,100,129 shares of common stock
that were outstanding as of June 30, 2009 were excluded from the computation of diluted net loss per common share for the three months ended June 30, 2009 and 2010, respectively, as
their effect would have been anti-dilutive.

The
treasury stock effect of options to purchase 94,954 shares of common stock that were outstanding as of June 30, 2010, and options to purchase 1,237,053 shares of common stock
that were outstanding as of June 30, 2009 were excluded from the computation of diluted net loss per common share for the six months ended June 30, 2009 and 2010, respectively, as their
effect would have been anti-dilutive.

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Net income

$
453

$
6,492

$
429

$
7,600Weighted average common share calculation:Basic weighted average common shares outstanding


25,228,319


26,129,527


25,177,974


26,028,707Treasury stock effect of outstanding options to purchase


145,583


297,899


83,976


327,980Treasury stock effect of unvested restricted stock units


148,531


454,175


183.268


443,493Diluted weighted average common shares outstanding


25,522,433


26,881,601


25,455,218


26,800,181Net income per common share:Basic net income per common share

$
0.02

$
0.25

$
0.02

$
0.29Diluted net income per common share

$
0.02

$
0.24

$
0.02

$
0.28


5. Segment Information

Prior to 2010, the Company evaluated revenue in four divisions. In connection with a reorganization of the Company's divisional management team structure in 2010, the Company no longer
reports or evaluates operating results for the international services division. The Company's management evaluates revenues for three business divisions: payments, telecommunication services and
financial services. Revenues from the former international services division are included in the payments and financial services division in accordance with the types of services the Company provides.
The Company operates as one reportable segment since the chief operating decision maker allocates resources based on the consolidated financial results.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5. Segment Information (Continued)

Revenue for the Company's three business divisions is presented below (in thousands):

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Revenues:Payments

$
48,761

$
50,282

$
93,127

$
97,984Telecommunication services


56,917


64,262


71,936


129,723Financial services


16,272


16,655


32,154


33,068Total revenues

$
121,950

$
131,199

$
197,217

$
260,775


Management
evaluates the Company's performance on EBITDA before stock compensation expense. The Company defines EBITDA before stock compensation expense as net income before
depreciation, amortization, stock compensation expense, interest expense, other income (expense), equity in net loss of unconsolidated affiliate and provision for income taxes. EBITDA before stock
compensation expense is not a generally accepted accounting principle measure, but rather a measure employed by
management to view operating results. The Company believes that this measure, viewed in addition to and not in lieu of the Company's reported GAAP results, provides additional useful information to
the investors regarding the Company's performance and overall operating results exclusive of selected significant non-cash items, as described below. This metric is frequently requested by
investors and is also an integral part of the Company's internal reporting to measure the performance of senior management. The Company's definition of EBITDA before stock compensation expense may not
be comparable to similarly titled measures used by other entities.

EBITDA
before stock compensation expense was approximately $31.5 million and $35.3 million for the three months ended June 30, 2009 and 2010, respectively. EBITDA
before stock compensation expense was approximately $47.8 million and $66.9 million for the six months ended June 30, 2009 and 2010, respectively. Management evaluates performance
before consideration of certain intercompany transactions. Accordingly, these transactions are not reflected in EBITDA. In addition, certain corporate expenses are reflected consistent with
information reviewed by our chief operating decision maker.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5. Segment Information (Continued)

EBITDA
before stock compensation expense differs from net income reported in the condensed consolidated statements of operations as follows (in thousands):

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010EBITDA before stock compensation expense

$
31,484

$
35,342

$
47,802

$
66,915Reconciling items:Depreciation and amortization of property and equipment


(7,994
)

(13,540
)

(13,828
)

(23,792
)Amortization of intangible assets


(8,153
)

(8,553
)

(13,757
)

(19,882
)Stock compensation expense


(2,527
)

(1,354
)

(4,532
)

(3,568
)Interest expense


(11,417
)

(5,806
)

(12,869
)

(11,946
)Interest income and other income (expense), net


(284
)

2,973


(213
)

5,910Equity in net loss of unconsolidated affiliate


(23
)




(53
)

(65
)Provision for income taxes


(633
)

(2,570
)

(2,121
)

(5,972
)Net income

$
453

$
6,492

$
429

$
7,600


Geographic Information

The Company sells its services through foreign subsidiaries in Australia, Austria, Bermuda, Canada, France, Germany, Hong Kong, India,
Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Poland, Romania, Singapore, South Korea, Spain, Sweden, Thailand, Turkey and the United Kingdom. Information regarding revenues
and long-lived tangible assets attributable to each geographic region is stated below.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5. Segment Information (Continued)

The
Company's revenues were generated in the following geographic regions (in thousands):

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Payments DivisionNorth America

$
19,609

$
19,924

$
37,338

$
37,006Europe


23,949


24,076


45,152


48,113Asia-Pacific


5,203


6,283


10,636


12,866$
48,761

$
50,282

$
93,126

$
97,984Financial Services DivisionNorth America

$
12,149

$
11,670

$
24,199

$
23,187Europe


2,600


3,015


4,972


6,145Asia-Pacific


1,523


1,970


2,983


3,735$
16,272

$
16,655

$
32,154

$
33,067Telecommunications Services DivisionNorth America

$
56,917

$
64,262

$
71,936

$
129,723North America

$
88,676

$
95,856

$
133,474

$
189,916Europe


26,548


27,091


50,123


54,258Asia-Pacific


6,726


8,253


13,619


16,601Total Revenues

$
121,950

$
131,199

$
197,216

$
260,775


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

December 31,
2009

June 30,
2010North America

$
368,168

$
348,407Europe


22,527


18,776Asia-Pacific


18,670


17,494Total long lived assets

$
409,365

$
384,677


6. Litigation and Claims

We are from time to time a party to legal proceedings, which arise in the normal course of business. We are not currently involved in any material legal proceedings or litigation, and
management is not aware of any legal proceedings or material litigation threatened against us that could have a material adverse effect on the financial condition or the future operating results of
the Company.

7. Related Parties

On September 21, 2005, the Company entered into a lease to rent office space in the United Kingdom with Trustees of the Low Milner Macmillan Group of Individual SIPPS, a company
that is 75% owned by a Company executive. Prior to entering into this lease, the Company obtained an independent evaluation confirming that the terms of the lease were consistent with market
standards. The lease provides for quarterly payments in equal installments of approximately £26,350 and expires on September 20, 2017. During the years ended December 31,
2007, 2008 and 2009, the Company made payments of £105,400, £105,400 and £105,400, respectively, related to this operating lease.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the financial condition and results of operations of TNS, Inc. in conjunction with
the consolidated financial statements and the related notes included in our annual report on Form 10-K filed with the SEC on March 16, 2010 and available directly from the
SEC at www.sec.gov and the condensed consolidated financial statements and the related notes of TNS, Inc., included elsewhere in this quarterly report.

There
are statements made herein which may not address historical facts and, therefore, could be interpreted to be forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results
to differ materially from those set forth in, or implied by, the forward-looking statements. The Company has attempted, whenever possible, to identify these forward-looking statements using words such
as "may," "will," "should," "projects," "estimates," "expects," "plans," "intends," "anticipates," "believes," and variations of these words and similar expressions. Similarly, statements herein that
describe the
Company's business strategy, prospects, opportunities, outlook, objectives, plans, intentions or goals are also forward-looking statements. Actual results may differ materially from those indicated by
such forward-looking statements as a result of various important factors, including: the Company's reliance upon a small number of customers for a significant portion of its revenue; competitive
factors such as pricing pressures; our customer's ability to direct their data communications from the Company's networks to other networks; the Company's ability to grow its business domestically and
internationally by generating greater transaction volumes, longer than expected sales cycles, customer delays in migration, acquiring new customers or developing new service offerings; current
difficulties in the financial services sector may continue to have a negative impact on our future growth rates in our financial services division; fluctuations in the Company's quarterly results
because of the seasonal nature of the business; unfavorable fluctuations in foreign exchange rates; the continuing impact of the current economic conditions; the Company's substantial debt could
adversely affect its financial health because the Company may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes, the
Company may not generate sufficient cash flow to repay the debt on a timely basis or to pre-pay the debt, and a significant portion of the Company's cash flow from operations will be
dedicated to the repayment or servicing of indebtedness, thereby reducing the amount of cash available for other purposes; the Company's ability to refinance its senior secured credit facility; the
Company's ability to identify, execute or effectively integrate acquisitions including the acquisition of CSG; the Company's ability to realize additional overall cost savings from the acquisition of
CSG, including consolidating SS7 call signaling networks, eliminating duplicate intelligent database platforms and eliminating duplicate facilities; increases in the prices charged by
telecommunication providers for services used by the Company; uncertainties related to the updated international tax planning strategy implemented by the Company; the Company's ability to identify,
execute or effectively integrate future acquisitions; the Company's ability to adapt to changing technology; additional costs related to compliance with the SEC rule changes or other corporate
governance issues; and other risk factors described in the Company's annual report on Form 10-K filed with the SEC on March 16, 2010 and in the Company's quarterly report on
Form 10-Q filed with the SEC on May 10, 2010. In addition, the statements in this quarterly report are made as of the date of this filing. The Company expects that subsequent
events or developments will cause its views to change. The Company undertakes no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future
events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to the date of this filing. The
forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act and 21E of the Exchange Act.

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Overview

We are an international data communications company which provides networking, data communications and value added services to many of
the world's leading retailers, banks, payment processors, financial institutions and telecommunication firms. Our data communication
services enable secure and reliable transmission of time-sensitive, transaction-related information critical to our customers' operations. Our customers outsource their data communications
requirements to us because of our substantial expertise, comprehensive customer support and cost-effective services. We provide services to customers in the United States and increasingly
to international customers in over 40 countries including Canada, Mexico and countries in Europe, Latin America and the Asia-Pacific region. We currently maintain operations and/or
employees in 28 countries.

We
provide services through our data network, which is designed specifically for transaction-oriented applications. Our network supports a variety of widely accepted communications
protocols and is designed to be scalable, interoperable and accessible by multiple methods, including dial-up, dedicated, wireless, broadband and Internet connections.

We
generate revenues through three business divisions:



Our
most significant expense is cost of network services, which is comprised primarily of telecommunications charges, including data transmission and database access, leased digital
capacity charges, circuit installation charges, activation charges, and compensation paid to providers of calling name and line information database records. The cost of data transmission is based on
a contract or tariff rate per minute of usage in addition to a prescribed rate per transaction for some vendors. The costs of database access, circuits, installation charges and activation charges are
based on fixed fee contracts with local exchange carriers and interexchange carriers. The compensation charges paid to providers of calling name and line information database records are based on a
percentage of query revenue generated from our customers accessing those records. The cost of network services also

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Table of Contents

includes
salaries, equipment maintenance and other costs related to the ongoing operation of our data networks. Depreciation expense on our network equipment and amortization of developed technology
are excluded from our cost of network services and included in depreciation and amortization of property and equipment and amortization of intangible assets in our consolidated statements of
operations.

Our
engineering and development expenses include salaries and other costs related to product development, engineering, hardware maintenance and materials. The majority of these costs are
expensed as incurred, including costs related to the development of internal use software in the preliminary project, the post-implementation and operation stages. Development costs we
incur during the software application development stage are capitalized and amortized over the estimated useful life of the developed software.

Our
selling, general and administrative expenses include costs related to sales, marketing, administrative and management personnel, as well as external legal, accounting and consulting
services.

Acquisition of the Communications Services Group (CSG)

On March 2, 2009, we entered into an asset purchase agreement with VeriSign, Inc. pursuant to which we agreed to purchase
from Verisign, Inc. certain assets and assume certain liabilities of CSG. On May 1, 2009, we completed the acquisition in accordance with the terms and conditions of the asset purchase
agreement. The initial purchase price was approximately $226.2 million in cash and was subject to a post-closing working capital adjustment. During the third and fourth quarters of
2009, working capital and other adjustments were negotiated resulting in a $4.5 million increase in the purchase price to $230.7 million. The purchase price was finalized in May 2010
resulting in an additional $0.5 million increase in the purchase price to $231.2 million. As a result of the purchase price finalization, $1.7 million was adjusted retrospectively
to certain working capital amounts on the December 31, 2009 balance sheet with a corresponding decrease in goodwill. Such adjustment had no impact on the statement of operations. We funded the
transaction through a new $230.0 million term loan facility as part of the May 2009 Credit Facility. CSG provides call signaling services, intelligent database services such as caller ID,
toll-free call routing and local number portability to the U.S. telecommunications industry. In addition, CSG provides wireless roaming and clearing services to mobile phone operators. We
are integrating CSG into our telecommunication services division. Our statement of operations for the three and six months ended June 30, 2010 includes the results of CSG and is therefore not
comparable to the three and six months ended June 30, 2009. Please refer to our amended Current Report on Form 8-K/A filed with the SEC on July 15, 2009 for more
detail on the historical and pro-forma results of CSG and Note 1 to the consolidated financial statements included elsewhere in this report.

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Results of Operations

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

Three months ended
June 30,

Six months ended
June 30,2009

2010

2009

2010Revenues

$
121,950

$
131,199

$
197,217

$
260,775Operating expenses:Cost of network services, exclusive of the items shown separately below


58,314


64,890


95,104


129,331Engineering and development


9,069


9,106


15,476


18,553Selling, general, and administrative


25,610


23,215


43,367


49,544Depreciation and amortization of property and equipment


7,994


13,540


13,828


23,792Amortization of intangible assets


8,153


8,553


13,757


19,882Total operating expenses


109,140


119,304


181,532


241.102Income from operations


12,810


11,895


15,685


19,673Interest expense


(11,417
)

(5,806
)

(12,869
)

(11,946
)Interest income


61


70


239


206Other (expense) income, net


(345
)

2,903


(452
)

5,704Income before income tax benefit and equity in net loss of unconsolidated affiliates


1,109


9,062


2,603


13,637Income tax provision


(633
)

(2,570
)

(2,121
)

(5,972
)Equity in net loss of unconsolidated affiliates


(23
)




(53
)

(65
)Net income

$
453

$
6,492

$
429

$
7,600


Three months ended June 30, 2010 compared to the three months ended June 30, 2009

Revenues.Total revenues increased $9.2 million, or 7.6%, to $131.2 million for the three months ended June 30,
2010, from
$122.0 million for the three months ended June 30, 2009. The negative effect of foreign exchange translation on a year-over-year basis was $0.1 million.
Excluding the effect of foreign exchange rates, total revenues increased $9.3 million, or 7.7%, to $131.3 million for the three months ended June 30, 2010.

We
enter into arrangements with our customers in the currency of the markets we operate in. As a result, our reported results are affected by fluctuations in the value of the U.S. dollar
as compared to foreign currencies, predominantly the British Pound, the Euro and the Australian dollar. The following table shows the currency composition of our revenues for the three months ended
June 30, 2010 and 2009 and the weighted average exchange rates used to translate our local currency results to the U.S. dollar:

2010

2009% of
Revenue

Weighted Average
Exchange Rates

% of
Revenue

Weighted Average
Exchange RatesBritish Pound


11
%

1.49


12
%

1.55Euro


9
%

1.28


9
%

1.36Australian Dollar


5
%

0.88


4
%

0.76


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A $0.01 change in exchange rates for each of the major foreign currencies we operate in would have the following annual impact on revenue: British Pound,
$0.4 million, Euro, $0.3 million and Australian Dollar $0.3 million.

We
generate revenues through three business divisions; the payments division, the telecommunication services division (TSD), and the financial services division (FSD).

Payments division.Revenues from the payments division increased $1.5 million, or 3.1%, to $50.3 million for the three
months ended
June 30, 2010, from $48.8 million for the three months ended June 30, 2009. The negative effect of foreign exchange translation on a year-over-year basis
was $0.2 million. Excluding the impact of foreign exchange rates, payments revenue increased $1.7 million, or 3.5%, to $50.5 million for the three months ended June 30,
2010. This increase was due to market share gains of $1.9 million in Europe, an equipment sale of $1.4 million in North America and an increase of $0.8 million in Asia Pacific due
to higher sales of our payment gateway services of $0.6 million and market share gains of $0.2 million. These increases were partially offset by decreases of $0.8 million from our
ATM software services product, which we ceased selling in the fourth quarter of 2009, $0.6 million due to the previously disclosed loss by our Australian telecommunications partner of a
significant portion of its business, $0.5 million in North America due to lower dial transactions and to a lesser extent pricing decreases and $0.4 million in Europe due to the
previously disclosed loss of an ATM processing customer.

Future
revenue growth in the payments division depends on a number of factors including the success of our managed broadband products and payment gateway applications, the success of our
card-not-present service offerings, the success of payments products in countries we have recently entered, the total number of payments dial-up transactions we
transport and global economic conditions. Smaller merchants, which represent a large portion of the customer base for our dial-up services in the US, in our opinion have been more
adversely impacted by recent global economic conditions than the larger merchants and may take longer to recover if and when the economy improves. We have continued to see a reduction in the growth
rates of our dial-up transaction volumes in many of the markets in which we operate, which we attribute to the overall weakness of the global economy. As previously disclosed, our
Australian telecommunications partner has indicated that they have lost business from one of their largest customers. Traffic from this Australian entity was substantially transitioned off of our
network by the end of the first quarter of 2010. We anticipate that our revenues will be reduced by approximately $3.0 million in 2010 due to this loss.

Telecommunication services division.Revenues from the telecommunication services division increased $7.4 million, or 12.9%,
to
$64.3 million for the three months ended June 30, 2010, from $56.9 million for the three months ended June 30, 2009. Included in revenues were pass-through
charges of $7.4 million and $6.3 million for the three months ended June 30, 2010 and 2009, respectively. Excluding the increase in pass through charges, revenues increased
$6.3 million to $56.9 million for the three months ended June 30, 2010 primarily due to the inclusion of acquired CSG operations. This increase was partially offset by the
following decreases: $1.1 million due to volume declines from a customer following the acquisition of CSG based on the expectation that we will compete with the customer, $0.5 million
due to a reduction in volumes in our payphone fraud and validation service and $0.4 million related to the previously disclosed loss of a wireless customer who decided to consolidate their
calling name access and storage services under an alternative provider.

Future
revenue growth in the telecommunication services division depends on a number of factors including the number of database access queries we transport, the number of call signaling
routes our customers purchase, and the success of our new product offerings, which potentially may be offset by customers seeking pricing discounts due to industry consolidation or other reasons, as
well as the successful integration of the business acquired through our purchase of CSG. In addition, we have recently seen an increase in the sales lead times for certain of our telecommunication
services division

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products
which has impacted our ability to grow our revenue base. We attribute these delays primarily to what we believe to be resource constraints at our potential customers, as a result of the
overall weakness of the global economy. As previously disclosed, subsequent to the end of the first quarter we lost a wireless customer who decided to consolidate their calling name access and storage
services under an alternative provider. We anticipate that this loss will negatively impact revenue by approximately $3.0 million in 2010 and approximately $4.0 million on an annual
basis thereafter.

Financial services division.Revenues from the financial services division increased $0.4 million, or 2.4%, to
$16.7 million for the
three months ended June 30, 2010, from $16.3 million for the three months ended June 30, 2009. The positive effect of foreign exchange translation on a
year-over-year basis was $0.1 million. Excluding the impact of foreign exchange rates, financial services revenue increased $0.3 million the three months ended
June 30, 2010. Revenues increased $0.5 million in Europe and $0.3 million in Asia Pacific due to continued expansion of the number of customer endpoints in those regions which was
offset by a decrease of $0.5 million due to the continued rationalization of market data access services by our customers in North America.

Future
revenue growth in the financial services division depends on a number of factors including the number of connections to and through our network which have been declining due to
what we believe is a result of the consolidation in the financial services industry as well as the success of our new product offerings.

Cost of network services.Cost of network services increased $6.6 million, or 11.3%, to $64.9 million for the three
months ended
June 30, 2010, from $58.3 million for the three months ended June 30, 2009. This was primarily due to increased costs related to the operation of assets acquired from CSG and to a
lesser extent an increase of $0.8 million in our payments division in North America due to higher dial access rates which was partially offset by a 3% decrease in dial transaction volumes. The
increases were further partially offset by decreased costs due to lower transaction volumes in our legacy telecommunications services businesses and a decrease of $0.2 million in variable
incentive cash compensation.

Gross
profit represented 50.5% of total revenues for the three months ended June 30, 2010, compared to 52.2% for the three months ended June 30, 2009. This decrease was
primarily due to pricing concessions and volume reductions from our telecommunications services division customers and to a lesser extent from increases in our POS dial access rates in North America.
This was partially offset by a reduction in our fixed network expense from the continued integration of the legacy CSG and TNS networks and to a lesser extent a decrease of $0.2 million in
variable incentive cash compensation.

Future
cost of network services depends on a number of factors including total transaction and query volumes, the relative growth and contribution to total transaction volume of each of
our customers, the success of our new service offerings, the timing and extent of our network expansion and the timing and extent of any network cost increases or reductions.

Engineering and development expense.Engineering and development expense was flat year over year at $9.1 million for the
three months ended
June 30, 2010 and 2009. On a constant dollar basis, engineering and development expense would have decreased $0.1 million to $9.0 million. Engineering and development
expense represented 6.9% and 7.4% of revenues for the three months ended June 30, 2010 and 2009, respectively. Capitalized software development costs, which are offset against
engineering and development costs, increased $1.2 million to $3.0 million from $1.7 million for the three months ended June 30, 2010 and 2009, respectively. The
increase in capitalized software development costs is primarily due to investment in our roaming and clearing and IP registry platforms acquired through the CSG acquisition and to a lesser extent from
development of our payment gateway platforms. Variable incentive cash compensation decreased $0.5 million to zero from $0.5 million for

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the
three months ended June 30, 2010 and 2009, respectively. Included in engineering and development expense for the three months ended June 30, 2010 and 2009 is stock
compensation expense of $0.2 million and $0.3 million, respectively. Excluding stock compensation, the increase in capitalized software, the decrease in variable incentive cash
compensation and the effects of foreign exchange, engineering and development expense would have increased $1.8 million to $11.8 million for the three months ended June 30, 2010
from $10.0 million for the three months ended June 30, 2009. This increase was primarily attributable to additional headcount and other costs necessary to support the acquired CSG
operations.

Selling, general and administrative expense.Selling, general and administrative expenses decreased $2.4 million, or 9.4%,
to
$23.2 million for the three months ended June 30, 2010, from $25.6 million for the three months ended June 30, 2009. Selling, general and administrative expenses
represented 17.7% of revenues for the three months ended June 30, 2010, compared to 21.0% of revenues for the three months ended June 30, 2009. Variable incentive cash compensation
decreased $2.0 million for the three months ended June 30, 2010. Included in selling, general and administrative expenses for the three months ended June 30, 2010 and 2009 is
$1.0 million and $2.0 million of stock compensation expense, respectively. The decrease in stock compensation expense is due to a reduction in performance related stock compensation.
Included in selling, general and administrative expenses for the three months ended June 30, 2010 are $0.5 million of pre-tax severance charges. Included in selling, general
and administrative expenses for the three months ended June 30, 2009 are $1.6 million in professional fees related to our acquisition of CSG that were expensed in accordance with the
provisions of FASB ASC 805, Business Combinations. Excluding these items and the effects of foreign exchange, selling, general and administrative expenses increased $1.7 million to
$22.0 million for the three months ended June 30, 2010 from $20.3 million for the three months ended June 30, 2009. This increase was primarily attributable to additional
headcount and other costs necessary to support the acquired CSG operations.

Depreciation and amortization of property and equipment.Depreciation and amortization of property and equipment increased
$5.5 million, or
69.4%, to $13.5 million for the three months ended June 30 2010,
from $8.0 million for the three months ended June 30, 2009. On a constant dollar basis, depreciation and amortization of property and equipment was $13.5 million. Depreciation and
amortization of property and equipment represented 10.3% and 6.6% of revenue for the three months ended June 30, 2010 and 2009, respectively. The increase in depreciation expense was primarily
due to an accelerated depreciation charge of $3.2 million following an exercise completed during the period to identify surplus network assets and office equipment that will no longer be
required following the integration of the legacy CSG and TNS operations. We estimate the total value of these assets to be $6.2 million and expect to recognize an additional $3.0 million
accelerated depreciation charge in the three months ended September 30, 2010 as these assets are removed from service. The balance of the increase is due to an incremental $1.0 million
related to the acquired CSG assets and $1.3 million related to capital expenditures made to support our revenue growth and integration efforts.

Amortization of intangible assets.Amortization of intangible assets increased $0.4 million, or 4.9%, to $8.6 million
for the three
months ended June 30, 2010, from $8.2 million for the three months ended June 30, 2009. On a constant dollar basis, amortization of intangible assets would have increased
$0.3 million, or 4.7% to $8.5 million. The increase was due to additional amortization expense of $1.4 million related to the CSG acquisition. This was partially offset by a
decrease of $1.0 million as certain intangible assets reached the end of their economic useful lives.

Interest expense.Interest expense decreased $5.6 million to $5.8 million for the three months ended June 30, 2010,
 from
$11.4 million for the three months ended June 30, 2009. Included in interest expense for the three months ended June 30, 2009 was a $1.7 million charge related to the
write-off of the deferred financing fees related to the 2007 Credit Facility in connection with the closing of the May 2009 Credit Facility. Amortization of deferred financing fees and
discount for the three months ended

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June 30,
2010 and June 30, 2009, was $0.4 million and $2.9 million, respectively. Excluding these charges, cash interest expense decreased $1.4 million from
$5.4 million to $6.8 million for the three months ended June 30, 2010 and 2009, respectively, primarily due to the benefit from the November refinancing of our senior credit
facilities, which lowered our effective borrowing rate and to a lesser extent from reduced borrowing levels resulting from our early prepayment of debt.

Other income.Other income was a gain of $2.9 million for the three months ended June 30, 2010 compared to
$0.1 million for the
three months ended June 30, 2009. Included in other income for the three months ended June 30, 2010, was a foreign currency revaluation gain of approximately $2.9 million due to
fluctuations in the value of the U.S. dollar, principally against the Euro.

Income tax provision.For the three months ended June 30, 2010, our income tax provision was approximately
$2.6 million compared to
$0.6 million for the three months ended June 30, 2009. The increase in our income tax provision is primarily related to higher income from operations, U.S. tax expense on undistributed
foreign earnings and increases in FASB ASC 740 reserves due to certain income tax exposures, partially offset by the effect of adjustments to the provision from prior years. Our effective tax
rate was 28.4% and 57.0% for the three months ended June 30, 2010 and 2009, respectively. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to stock-based
compensation expense not deductible for income tax purposes, increases in FASB ASC 740 reserves due to certain income tax exposures, and profits of our international subsidiaries being taxed at
rates different than the U.S. Federal statutory rate.

Six months ended June 30, 2010 compared to the six months ended June 30, 2009

Revenues.Total revenues increased $63.6 million, or 32.2%, to $260.8 million for the six months ended June 30,
2010, from
$197.2 million for the six months ended June 30, 2009. The positive effect of foreign exchange translation on a year-over-year basis was $3.7 million.
Excluding the effect of foreign exchange rates, total revenues increased $59.9 million, or 30.3%, to $257.1 million for the six months ended June 30, 2010.

We
enter into arrangements with our customers in the currency of the markets we operate in. As a result, our reported results are affected by fluctuations in the value of the U.S. dollar
as compared to foreign currencies, predominantly the British Pound, the Euro and the Australian dollar. The following table shows the currency composition of our revenues for the six months ended
June 30, 2010 and 2009 and the weighted average exchange rates used to translate our local currency results to the U.S. dollar:

2010

2009% of
Revenue

Weighted Average
Exchange Rates

% of
Revenue

Weighted Average
Exchange RatesBritish Pound


11
%

1.53


14
%

1.49Euro


9
%

1.33


11
%

1.33Australian Dollar


5
%

0.90


6
%

0.71


A
$0.01 change in exchange rates for each of the major foreign currencies we operate in would have the following annual impact on revenue: British Pound, $0.4 million, Euro,
$0.3 million and Australian Dollar $0.3 million.

We
generate revenues through three business divisions; the payments division, the telecommunication services division (TSD), and the financial services division (FSD).

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Payments division.Revenues from the payments division increased $4.8 million, or 5.2%, to $97.9 million for the six
months ended
June 30, 2010, from $93.1 million for the six months ended June 30, 2009. The positive effect of foreign exchange translation on a year-over-year basis was
$3.2 million. Excluding the impact of foreign exchange rates, payments revenue increased $1.6 million, or 1.7% to $94.8 million for the six months ended June 30, 2010. This
increase was due to $2.9 million of market share gains in the European and Asia Pacific regions, $1.4 million in North America related to an equipment sale, $0.7 million in ATM
processing revenue, primarily from our Canadian subsidiary, $0.6 million in Asia Pacific due to increases in our payment gateway service revenue, and $0.2 million from the sale of our
managed broadband products in North America and Europe. These increases were offset by decreases of $1.7 million in legacy dial revenue in North America due primarily to lower transactions and
to a lesser extent pricing decreases, $1.1 million from our ATM software product, which we ceased selling in the fourth quarter of 2009, $0.6 million due to the loss by our Australian
telecommunications partner of a significant portion of its business, $0.3 million related to lower development revenue from our Dialect subsidiary and $0.4 million in Europe due to the
previously disclosed loss of an ATM processing customer.

Telecommunication services division.Revenues from the telecommunication services division increased $57.8 million, or
80.3% to
$129.7 million for six months ended June 30, 2010, from $71.9 million for the six months ended June 30, 2009. Included in revenues were pass-through charges of
$14.5 million and $7.5 million for the six months ended June 30, 2010 and 2009, respectively. Excluding
the increase in pass through charges, revenues increased $50.8 million to $115.2 million for the six months ended June 30, 2010 primarily due to the inclusion of acquired CSG
operations. This increase was partially offset by the following decreases: $2.5 million due to volume declines from a customer following the acquisition of CSG based on the expectation that we
will compete with the customer, $1.1 million due to a reduction in volumes in our payphone fraud and validation service and $0.4 million related to the loss of a wireless customer who
decided to consolidate their calling name access and storage services under an alternate provider.

Financial services division.Revenues from the financial services division increased $0.9 million, or 2.8%, to
$33.1 million for the
six months ended June 30, 2010, from $32.2 million for the six months ended June 30, 2009. The positive effect of foreign exchange translation on a
year-over-year basis was $0.5 million. Excluding the impact of foreign exchange rates, financial services revenue increased $0.4 million, to $32.6 million
as of June 30, 2010. Revenues increased $1.0 million in Europe and $0.4 million in Asia Pacific due to continued expansion of the number of customer endpoints in those regions
which was offset by a decrease of $1.0 million due to the continued rationalization of market data access services by our customers in North America.

Cost of network services.Cost of network services increased $34.3 million, or 36.0%, to $129.4 million for the six
months ended
June 30, 2010, from $95.1 million for the six months ended June 30, 2009. On a constant dollar basis, cost of network services would have increased $33.2 million, or 34.8%,
to $128.3 million. This was primarily due to increased costs related to the operation of the assets acquired from CSG and to a lesser extent an increase of $2.1 million in our payments
division in North America, due to higher dial access rates which was partially offset by a 4% decrease in dial transaction volumes, and an increase of $0.2 million in our financial services
division in order to support our revenue growth. These increases were partially offset by decreased costs due to lower transaction volumes in our legacy telecommunications services businesses, a
decrease of $0.2 million in our payments division in Asia Pacific due primarily to lower transaction volumes and a decrease of $0.2 million in variable incentive cash compensation.

Gross
profit represented 50.4% of total revenues for the six months ended June 30, 2010, compared to 51.8% for the six months ended June 30, 2009. On a constant dollar
basis, gross margins for the six months ended June 30, 2010 decreased 170 basis points to 50.1%. This decrease was

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primarily
due to pricing concessions and volume reductions from our telecommunications services division customers and to a lesser extent from increases in our POS dial access rates in North America.
This was partially offset by a reduction in our fixed network expense from the continued integration of the legacy CSG and TNS networks and to a lesser extent a reduction of $0.2 million in
variable incentive cash compensation.

Engineering and development expense.Engineering and development expense increased $3.1 million, or 19.9%, to
$18.6 million for the six
months ended June 30, 2010, from $15.5 million for the six months ended June 30, 2009. On a constant dollar basis, engineering and development expenses would have increased
$2.5 million, or 16.1%, to $18.0 million. Engineering and development expense represented 7.1% and 7.8% of revenues for the six months ended June 30, 2010 and 2009, respectively.
Capitalized software development costs, which are offset against engineering and development costs, increased $2.1 million to $5.4 million from $3.3 million for the six months
ended June 30, 2010 and 2009, respectively. The increase in capitalized software development costs is primarily due to investment in our roaming and clearing and IP registry platforms acquired
through the CSG acquisition and to a lesser extent from development of our payment gateway platforms. Variable incentive cash compensation decreased $0.5 million to $0.2 million from
$0.7 million for the six months ended June 30, 2010 and 2009, respectively. Included in engineering and development expense for the six months ended June 30, 2010 and 2009 is
stock compensation expense of $0.5 million and $0.7 million, respectively. The decrease in stock compensation expense of $0.2 million is due to the issuing of fewer grants.
Excluding stock compensation, the increase in capitalized software, the decrease in variable incentive cash compensation and the effects of foreign exchange, engineering and development expense would
have increased $5.3 million to $22.7 million for the six months ended June 30, 2010 from $17.4 million for the six months ended June 30, 2009. The increase relates
primarily to additional headcount and other costs required to support our acquisition of CSG.

Selling, general and administrative expense.Selling, general and administrative expenses increased $6.1 million, or 14.2%,
to
$49.5 million for the six months ended June 30, 2010, from $43.4 million for the six months ended June 30, 2009. On a constant dollar basis, selling, general and
administrative expenses would have increased $5.4 million, or 12.4%, to $48.8 million. Selling, general and administrative expenses represented 19.0% of revenues for the six months ended
June 30, 2010, compared to 22.0% of revenues for the six months ended June 30, 2009. Variable incentive cash compensation decreased $1.7 million to $0.8 million from
$2.5 million for the six months ended June 30, 2010 and 2009, respectively. Included in selling, general and administrative expenses for the six months ended June 30, 2010 and
2009 is $2.7 million and $3.4 million of stock compensation expense, respectively. The decrease in stock compensation expense is due to a reduction in performance related stock
compensation. Included in selling, general and administrative expenses for the six months ended June 30, 2010 is $1.0 million in severance expenses. Included in selling, general and
administrative expenses for the six months ended June 30, 2009 are $2.2 million in professional fees related to our acquisition of CSG that were expensed in accordance with the
provisions of FASB ASC 805, Business Combinations. Excluding these items and the effects of foreign exchange, selling, general and administrative expenses increased $9.0 million to
$44.3 million for the six months ended June 30, 2010 from $35.3 million for the six months ended June 30, 2009. This increase was primarily attributable to additional
headcount and other costs necessary to support the acquired CSG operations and to a lesser extent an increase in costs incurred to support our Canadian ATM processing business.

Depreciation and amortization of property and equipment.Depreciation and amortization of property and equipment increased
$10.0 million, or
72.0%, to $23.8 million for the six months ended June 30, 2010, from $13.8 million for the six months ended June 30, 2009. On a constant dollar basis, depreciation and
amortization of property and equipment would have increased $9.7 million, or 70.4% to $23.5 million. Depreciation and amortization of property and equipment represented 9.1% and 7.0% of
revenue for the six months ended June 30, 2010 and 2009, respectively. The increase in depreciation

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expense
was primarily due to an accelerated depreciation charge of $3.2 million following an exercise completed during the period to identify surplus network assets and office equipment that
will no longer be required following the integration of the legacy CSG and TNS operations. We estimate the total value of these assets to be $6.2 million and expect to recognize an additional
$3.0 million accelerated depreciation charge in the three months ended September 30, 2010 as these assets are removed from service. The balance of the increase is due to an incremental
$3.9 million related to acquired CSG assets and $2.6 million related to capital expenditures made to support our revenue growth.

Amortization of intangible assets.Amortization of intangible assets increased $6.1 million, or 44.5%, to
$19.9 million for the six
months ended June 30, 2010, from $13.8 million for the six months ended June 30, 2009. On a constant dollar basis, amortization of intangible assets would have increased
$5.9 million, or 42.9% to $19.7 million. The increase was due to additional amortization expense of $5.7 million related to the CSG acquisition and a charge of $1.9 million
related to the impairment of certain customer relationship intangible assets. This was partially offset by a decrease of $1.7 million as certain intangible assets reached the end of their
economic useful lives.

Interest expense.Interest expense decreased $1.0 million to $11.9 million for the six months ended June 30, 2010,
 from
$12.9 million for the six months ended June 30, 2009. Included in interest expense for the six months ended June 30, 2009 was a $1.7 million charge related to the
write-off of the deferred financing fees related to the 2007 Credit Facility in connection with the closing of the May 2009 Credit Facility. Amortization of deferred financing fees and
discount for the six months ended June 30, 2010 and June 30, 2009 was $1.1 million and $3.0 million, respectively. Excluding these charges, cash interest expense increased
$2.6 million to $10.8 million from $8.2 million for the six months ended June 30, 2010 and 2009, respectively, primarily due to the higher borrowing levels associated with
the CSG acquisition offset by a decrease in the weighted average interest rate in the second quarter of 2010.

Other income.Other income was a gain of $5.7 million for the six months ended June 30, 2010 compared to
$0.4 million expense
for the six months ended June 30, 2009. Included in other income for the six
months ended June 30, 2010, was a foreign currency revaluation gain of approximately $5.4 million due to fluctuations in the value of the U.S. dollar, principally against the Euro.

Income tax provision.For the six months ended June 30, 2010, our income tax provision was approximately $6.0 million
compared to
$2.1 million expense for the six months ended June 30, 2009. The increase in our income tax provision is primarily related to higher income from operations, U.S. tax expense on
undistributed foreign earnings and increases in FASB ASC 740 reserves due to certain income tax exposures, partially offset by the effect of adjustments to the provision from prior years. Our
effective tax rate was 43.7% and 83.2% for the six months ended June 30, 2010 and 2009, respectively. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to
stock-based compensation expense not deductible for income tax purposes, increases in FASB ASC 740 reserves due to certain income tax exposures, and profits of our international subsidiaries
being taxed at rates different than the U.S. Federal statutory rate.

Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to finance the costs of our operations, to make capital expenditures and to
service our debt. Based upon our current level of operations, we expect that our cash flow from operations, together with the amounts we are able to borrow under our November 2009 Credit Facility,
will be adequate to meet our anticipated needs for the foreseeable future.

Our
operations provided us cash of $57.4 million for the six months ended June 30, 2010, which was attributable to net income of $7.6 million, depreciation,
amortization and other non-cash charges of $45.9 million and a decrease in working capital of $3.9 million. Our operations provided us cash of $40.6 million for the
six months ended June 30, 2009, which was attributable to net income of $0.4 million, depreciation, amortization and other non-cash charges of $39.6 million and a
decrease in working capital of $0.7 million.

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We used cash of $21.7 million in investing activities for the six months ended June 30, 2010, which was comprised primarily of $21.2 million
of capital expenditures to support our revenue growth. We used cash of $237.3 million in investing activities for the six months ended June 30, 2009 which consisted of
$11.1 million in capital expenditures to support our revenue growth and $226.2 million for the acquisition of the CSG business.

We
used cash of $31.0 million from financing activities for the six months ended June 30, 2010. This consisted primarily of a $30.0 million voluntary
pre-payment on the November 2009 Credit Facility. In addition, $2.9 million was used to repurchase stock to satisfy employee tax withholding requirements on the vesting of
restricted stock units and we received $1.9 million from the exercise of employee stock options. Our financing activities provided us cash of $181.0 million for the six months ended
June 30, 2009. This consisted of proceeds from the new term loan from the 2009 Credit Facility of $230.0 million less discount of $23.0 million and financing fees of
$5.4 million. The net proceeds from the 2009 Credit Facility were used to partially fund the CSG acquisition. In addition, we made $20.0 million of repayments on our 2009 Credit
Facility.

Commitments

The following table summarizes our contractual obligations as of June 30, 2010 that require us to make future cash payments
(dollars in thousands):

Year ending December 31,Total

2010

2011

2012

2013

2014

ThereafterContractual Cash Obligations by Period:Long-term debt under the senior secured credit facility

$
344,370

$
1,250

$
16,250

$
16,250

$
16,250

$
50,620

$
243,750Supplier commitments


46,727


15,548


19,683


5,483


2,174


1,772


2,067Operating lease obligations


38,538


6,488


8,947


7,392


5,028


3,257


7,426$
429,635

$
23,286

$
44,880

$
29,125

$
23,452

$
55,649

$
253,243


Due
to uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at June 30, 2010, the Company is unable to make reasonably reliable
estimates of the period of cash settlement. Therefore $8.3 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 1 to the
condensed consolidated financial statements for further discussion of income tax.

Not
included in the table above are commitments to make interest payments under the terms of our November 2009 Credit Facility due to the variable nature of the interest rates. See
note 2 to the condensed consolidated financial statements for further details on interest rates and other terms and conditions of this facility.

We
expect that we will be able to fund our remaining obligations and commitments with cash flow from operations. To the extent we are unable to fund these obligations and commitments
with cash flow from operations, we intend to fund these obligations and commitments with proceeds from borrowings under our November 2009 Credit Facility or future debt or equity financings.

Outlook

We expect to experience operational benefits from the acquisition of CSG, primarily through consolidating our two SS7 call signaling
networks and eliminating duplicate intelligent database platforms and duplicate telecommunications facilities. We also expect reduced overall combined capital expenditures as a result of greater
economies of scale and the rationalization of network assets. We

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realized
incremental pretax operational cost savings of $1 million in 2009, and expect to realize an additional $5 million to $6 million in 2010, and an additional
$2 million to $3 million in 2011, for total expected annualized pretax operating expense reductions of $8 million to $10 million. We anticipate that these savings will be
fully implemented on a run rate basis by the beginning of the fourth quarter of 2010.

Seasonality

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

Effects of Inflation

Our monetary assets, consisting primarily of cash and receivables, and our non-monetary assets, consisting primarily of
intangible assets and goodwill, are not affected significantly by inflation. However, the rate of inflation affects our expenses, such as those for employee compensation and costs of network services,
which may not be recoverable in the price of services offered by us.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Interest rates

Our principal exposure to market risk relates to changes in interest rates. As of June 30, 2010 we had $344.4 million
outstanding under our November 2009 Credit Facility with interest rates tied to changes in the lender's base rate or the LIBOR rate. Interest on outstanding balances under the November 2009 Credit
Facility, is payable, at the Company's option, at the base rate plus a margin of 3%, or at LIBOR plus a margin of 4%. Additionally, in no event will the base rate be less than 3.0% or the LIBOR rate
be less than 2.0%. At June 30, 2010 the one-month LIBOR rate was 0.35%. Based upon the outstanding borrowings on June 30, 2010 and assuming repayment of the Term Loan in
accordance with scheduled maturities, each 1.0% increase or decrease in these rates, once the LIBOR rate exceeds the 2.0% minimum, could affect our annual interest expense by $3.4 million.

As
of June 30, 2010, we did not hold derivative financial or commodity instruments and all of our cash and cash equivalents were held in money market or commercial accounts.

Foreign currency risk

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

We
provide services to customers in the United States and increasingly to international customers in over 40 countries including Canada and Mexico and countries in Europe, Latin America
and the Asia-Pacific region. We currently maintain operations and/or employees in 28 countries. We provide services in these countries using networks deployed in each country. We manage
foreign exchange risk through the structure of our business. In the substantial majority of our transactions, we receive payments denominated in the U.S. dollar, British Pound, Euro or Australian
dollar. Therefore, we do not rely on international currency markets to obtain and pay illiquid currencies. The foreign currency

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exposure
that does exist is limited by the fact that the majority of transactions are paid according to our standard payment terms, which are generally short-term in nature. Our policy is
not to speculate in foreign currencies, and we promptly buy and sell foreign currencies as necessary to cover our net payables and receivables, denominated in foreign currencies. However, in December
2009 our subsidiary in Ireland entered into a $25.8 million loan agreement with our subsidiary in Bermuda to provide it with the ability of making loans and working capital funding to our
subsidiaries. As this loan agreement is of a long-term nature we are exposed to movements in the euro compared to the U.S. dollar. As it relates to this specific loan agreement, each $0.01
movement in the euro to U.S. dollar exchange rate could affect our other income (loss) by $0.2 million. For the six months ended June 30, 2010, we recorded a gain on foreign currency
revaluation of approximately $5.4 million.

Item 4.    Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

Evaluation

The Company carried out an evaluation, under the supervision, and with the participation, of the Company's management, including the
Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of June 30, 2010. Based on the
foregoing, the Company's Chief Executive Officer and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of June 30, 2010 at the
reasonable assurance level.

On
May 1, 2009, the Company completed its acquisition of CSG. Management has considered the CSG acquisition material to the results of operations, cash flows and financial
position from the date of acquisition through June 30, 2010 and believes that the internal controls and procedures of CSG have a material effect on internal controls over financial reporting.
The Company is currently in the process of incorporating the internal controls and procedures of CSG into the overall assessment of, and report on, internal controls over financial reporting for
December 31, 2010. There have been no other changes during the six months ended June 30, 2010 covered by this report in the Company's internal control over financial reporting or in
other factors that could materially affect or are reasonably likely to materially affect the internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

None.

Item 1A.    Risk Factors

None.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Default Upon Senior Securities

None.

Item 4.    Removed and Reserved

Item 5.    Other Information

None.

Item 6.    Exhibits

(10.1
)
Amendment to Chief Executive Officer Employment Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 20, 2010).(10.2
)
Amendment to Chief Operating Officer Employment Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K filed May 20, 2010).(31.1
)
CertificationChief Executive Officer(31.2
)
CertificationChief Financial Officer(32.1
)
Written Statement of Chief Executive Officer and Chief Financial Officer


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SIGNATURES

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

TNS, Inc.
(Registrant)Date: August 9, 2010

By:

/s/ HENRY H. GRAHAM, JR. Henry H. Graham, Jr. Chief Executive OfficerDate: August 9, 2010

By:

/s/ DENNIS L. RANDOLPH, JR. Dennis L. Randolph, Jr. Executive Vice President, Chief Financial Officer & Treasurer


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