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 14, 2012 and available directly from the SEC at www.sec.gov and the consolidated financial statements and the related condensed 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; increases in the prices charged by telecommunication providers for services used by the Company; 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; fluctuations in the Company's quarterly results because of the seasonal nature of the business and other factors outside of the Company's control, including fluctuations in foreign exchange rates and the continuing impact of the current economic conditions; the Company's ability to identify, execute or effectively integrate acquisitions; uncertainties related to the updated international tax planning strategy implemented by the Company; the Company's ability to adapt to changing technology; the Company's ability to refinance its senior secured credit facility and its ability to borrow funds in amounts sufficient to enable it to service its debt or meet its working capital and capital expenditure requirements; additional costs related to compliance with any regulatory changes such as Securities and Exchange Commission (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 14, 2012. 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 Securities Exchange Act.

Business Overview

TNS is an international data communications company which provides networking, managed connectivity, data communications and value added services to many of the world's leading telecommunication firms, retailers, banks, payment processors and financial institutions. Our services enable secure and reliable transmission of time-sensitive data 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 more than 60 countries including Canada and Mexico and countries in Europe, Latin America and the Asia-Pacific region.

We provide services through our data network, which is designed specifically for data-oriented applications and incorporates multi-protocol label switching, or MPLS, based topology. Our network supports a variety of widely accepted communications' protocols and is designed to be scalable, interoperable and accessible by multiple methods, including broadband, dedicated, dial-up, wireless and internet connections.

We generate revenues through three business divisions:

† Telecommunication services. Our telecommunication services division provides innovative communications infrastructure services to fixed, mobile, broadband and VoIP operators around the world. We collaborate with customers, sharing our expertise, resources and infrastructure to leverage rapidly evolving technologies. Our suite of services includes a reliable, nationwide SS7 network, intelligent database and registry services, identity and verification services, hosted roaming and clearing solutions, and mobile applications that simplify our customers' operations, expand their reach and provide a foundation that helps them increase their profitability.

† Payment services. We deliver 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, ATM deployers, card schemes, and alternative payment providers. Our 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 we provide around the world.

† Financial services. As one of the industry's leading electronic connectivity solutions, our 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. Our private Secure Trading Extranet provides low latency to support Direct Market Access, algorithmic trading and market data distribution. Organizations utilizing our network can benefit from a range of value added services, including co-location and hosting services, interoffice WAN solutions and connectivity to our large community of interest.

Our most significant expense is cost of network services, which is comprised primarily of the following: telecommunications charges, including data transmission and database access, leased digital capacity charges, circuit installation charges and activation charges; salaries and other costs related to supporting our data platforms and systems; and compensation paid to providers of calling name and line information database records. The cost of data transmission is based on a contract, or in the United States potentially a 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 cost of accessing database records from external providers is based on a per query fee for the use of that data. 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. Depreciation expense on our network equipment, amortization of capitalized software and amortization of developed technology is excluded from our cost of network services and is included in depreciation and amortization of property and equipment and amortization of intangible assets in our consolidated statements of comprehensive income.

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.

Our contingent consideration fair value adjustment includes the change in fair value of contingent consideration relating to the acquisition of Cequint (See Note 2).

Acquisition

On October 1, 2010, we completed the acquisition of Cequint, Inc. (Cequint) in accordance with the terms and conditions of the Agreement and Plan of Merger dated September 8, 2010 (see Note 2). The purchase price, following working capital adjustments, included an initial payment of $50.0 million, consisting of $46.9 million in cash and $3.1 million (178,823 shares) in TNS common stock issued to certain Cequint shareholders, and may be adjusted in the future for a potential additional $52.5 million in cash based upon the achievement of four specified profit milestones not to extend past May 31, 2014, for a potential total purchase price of $102.5 million. In addition to the contingent consideration of up to $52.5 million, there are additional performance payments which may be payable to key personnel, based on the achievement of the same four profit-related milestones of up to $10.0 million. To the extent the additional $10.0 million is probable to be earned, it will be amortized over the expected service period and included in operating expenses in our consolidated statements of comprehensive income. During the three and six months ended June 30, 2012, $0.3 million and $0.5 million, respectively, of compensation expense has been included in selling, general, and administrative expense. During the three and six months ended June 30, 2011, $0.1 million of compensation expense has been included in selling, general, and administrative expense. We funded the transaction through a new $50.0 million term loan facility using a portion of the accordion feature of our November 2009 Credit Facility (see Note 4).

Cequint provides carrier grade caller identification products and enhanced services to top U.S.-based mobile operators. We have integrated Cequint into our telecommunication services division. This acquisition has been accounted for as a business combination under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations.

Divestiture

On August 31, 2011, we divested our ATM processing assets in Canada for a sale price of $1. Upon closing of the transaction, we recorded a loss on the sale of this business of $27,000. Management made the decision to divest this business in order to focus our resources more on our network services offerings in Canada and investments in our payment gateway initiatives. In accordance with FASB ASC 205, Presentation of Financial Statements, we have reported the results of our ATM processing business in Canada as discontinued operations in the accompanying consolidated statements of comprehensive income for all periods presented (see Note 3).

Share Repurchase Plan

In July 2012, the Company's Board of Directors authorized a share repurchase program for up to $30 million of the Company's common stock over the period ending July 31, 2015, subject to compliance with financial and other covenants of the Company's February 2012 Credit Facility.

Results of Operations



The following table sets forth, for the periods indicated selected statements of
comprehensive income data (in thousands):



                                       Three months ended            Six months ended
                                            June 30,                     June 30,
                                       2011           2012          2011          2012
Revenues                            $   141,636    $  136,902    $  274,676    $  275,688
Operating expenses:
Cost of network services,
exclusive of the items shown
separately below                         71,237        71,919       138,833       143,528
Engineering and development              11,692        10,937        22,341        21,924
Selling, general, and
administrative                           25,409        24,401        49,254        49,827
Contingent consideration fair
value adjustment                            874           196           750           851
Depreciation and amortization of
property and equipment                   11,378        13,173        22,926        25,793
Amortization of intangible
assets                                   10,117         9,374        20,182        18,811
Total operating expenses                130,707       130,000       254,286       260,734
Operating income                         10,929         6,902        20,390        14,954
Interest expense                         (6,518 )      (3,402 )     (13,128 )     (13,483 )
Interest income                              51            65           142           106
Other (expense) income, net                (202 )         322        (1,322 )         (63 )
Income from continuing
operations before income tax
provision                                 4,260         3,887         6,082         1,514
Income tax provision                     (2,733 )      (1,571 )      (3,377 )      (3,050 )
Income (loss) from continuing
operations                                1,527         2,316         2,705        (1,536 )
Loss from discontinued
operations                                 (380 )           -          (853 )           -
Net income (loss)                   $     1,147    $    2,316    $    1,852    $   (1,536 )

Three months ended June 30, 2012 compared to the three months ended June 30, 2011

Revenues. Total revenues decreased $4.7 million, or 3.3%, to $136.9 million for the three months ended June 30, 2012, from $141.6 million for the three months ended June 30, 2011. The negative effect of foreign exchange translation on a year-over-year basis was $2.6 million. Excluding the effect of foreign exchange rates, total revenues decreased $2.1 million, or 1.5%, to $139.5 million for the three months ended June 30, 2012.

Telecommunication services division. Revenues from the telecommunication services division decreased $0.8 million, or 1.0%, to $70.7 million for the three months ended June 30, 2012, from $71.5 million for the three months ended June 30, 2011 as follows:

† Mobile applications (Cequint) revenue increased $0.8 million, or 29.9%, to $3.6 million due to an increase of $1.1 million in the wireless caller name product that was introduced in partnership with a tier one mobile operator in the third quarter of 2011. This was partially offset by a $0.3 million reduction in CityID revenues primarily from another tier one mobile operator that is transitioning to the wireless caller name product.

† Identity and verification services revenue increased $0.2 million, or 1.0%, to $30.2 million due to $1.8 million from caller name storage contract wins and $1.7 million due primarily to market share gains and volume growth in our caller name access business. These were partially offset by decreases of $1.5 million due to an anticipated contract price concession given to a peering partner in connection with the anticipated launch of our wireless caller name service with our second tier one mobile operator, $1.2 million due to lower queries to wireless data in connection with the launch of our wireless caller name product, $0.3 million due to the renewal of certain customer contracts, and $0.3 million from lower volumes in legacy payphone fraud and validation services.

† Network services revenue decreased $1.3 million, or 4.6%, to $26.5 million. Included in this decrease was a reduction of $0.8 million of pass-through revenues from regulatory message signaling unit charges (MSUs). Excluding this decrease, network services revenue decreased $0.5 million, or 1.9%, due to $1.4 million related primarily to price concessions on call signaling routes which primarily resulted from industry consolidation. This was partially offset by increased revenue of $0.9 million due to higher demand for connectivity and cellular signaling services from existing customers.

† Roaming and clearing revenue increased $0.3 million, or 6.2%, to $5.1 million due primarily to increased demand for data services. This was partially offset by a reduction in traffic from certain customers entering into direct peering relationships.

† Registry services revenue decreased $0.9 million, or 14.7%, to $5.2 million due to $0.2 million related to the expiry in May 2011 of a transition services agreement acquired through the CSG acquisition and $0.7 million due to price concessions on the renewal of certain customer contracts due primarily to industry consolidation.

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 products acquired through our purchase of Cequint (see Note 2). We have also experienced a reduction in query volumes from certain of our wireline caller name peering partners. We currently estimate that this may reduce 2012 revenues by approximately $5 million.

Payment services division. Revenues from the payment services division decreased $3.5 million, or 6.5%, to $49.7 million for the three months ended June 30, 2012 from $53.2 million for the three months ended June 30, 2011. The negative effect of foreign currency translation on a year-over-year basis was $2.4 million. Excluding the effect of foreign exchange rates, revenues decreased $1.1 million to $52.1 million as follows:

Network services decreased $1.1 million, or 2.7%, to $40.7 million, as follows:

† North America: revenue decreased $0.9 million, or 6.7%, due to $0.5 million in lower average transaction pricing from the renewal of certain customer contracts at the end of the second quarter 2011 and $0.4 million of reductions in dial transaction volumes.

† Europe: revenue decreased $0.2 million, or 0.7%, due to $0.9 million decrease in dial-based network services from existing customers primarily in the UK, France and Spain, partially offset by an increase of $0.7 million in market share gains for dial services and IP-based network services, primarily in the UK, Spain and Romania.

† Asia Pacific: revenue was flat due to $0.6 million from the expansion of a global customer's agreement to provide services in multiple markets in Asia, beginning in Taiwan, offset by $0.6 million in lower transaction volumes in Australia.

Payment gateway services increased $0.6 million, or 6.6%, to $9.6 million. 2011 amounts have been reclassified to the North American region from the Asia Pacific region to conform to current-period presentation of revenue. The increase is due to the following:

† North America: revenue increased $0.2 million, or 7.9%, to $2.8 million. Included in second quarter 2011 results was an additional $0.3 million related to the expansion of an existing customer's contract. Excluding this amount, revenue increased $0.5 million from market share gains in cardholder-not-present services.

† Europe: revenue increased $1.0 million, or 45.7%, to $3.3 million due primarily to $0.6 million in market share gains and to a lesser extent from increases in transaction volumes of cardholder present services from existing customers in the UK and an increase in development revenue of $0.4 million in France.

† Asia Pacific: revenue decreased $0.6 million, or 15.0%, to $3.5 million, due to $1.0 million decrease in development revenue, partially offset by an increase of $0.4 million related to increased volumes from new and existing customers.

Payment processing and other services decreased $0.6 million, or 23.8%, to $1.8 million, due primarily to a decrease in transaction volumes and to a lesser extent from lower average transaction pricing.

Future revenue growth in the payment services division depends on a number of factors including the success of our IP-related network services and payment gateway applications, the success of our payment products in countries we have recently entered, the total number of transactions we transport, and the effect of global economic conditions on merchant transaction volumes. Smaller merchants, which represent a large portion of the user base for our dial-up services, 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 primarily attribute to the overall weakness of the global economy.

Financial services division. Revenues from the financial services division decreased $0.5 million, or 3.2%, to $16.5 million for the three months ended June 30, 2012, from $17.0 million for the three months ended June 30, 2011. The negative effect of foreign exchange translation on a year-over-year basis was $0.2 million. Excluding the impact of foreign exchange rates, financial services revenue decreased 1.9% or $0.3 million to $16.7 million on a constant currency basis as follows:

Network services revenues decreased due to the following:

† North America: revenue decreased $0.9 million, or 8.6%, to $10.1 million. On October 1, 2011, we restructured an agreement with a customer which resulted in a reduction of both revenue and commission payable (which was included in sales, general, and administrative expenses) to this customer by $0.8 million. Excluding this change, revenue decreased $0.1 million, or 1.5%, due to $0.8 million from the loss of endpoints and market data access services believed to be

attributable to negative economic factors impacting the financial services industry. This was partially offset by $0.7 million in sales of bandwidth-based services marketed primarily to participants in the foreign exchange community.

† Asia Pacific: revenue increased $0.4 million, or 14.8%, to $2.9 million due to the continued expansion of the number of customer endpoints connected to the network, partially offset by disconnects of customer trading connections as the financial services industry consolidates in certain markets in this region.

† Europe: revenue increased $0.3 million, or 7.6%, to $3.7 million due to market share gains of $0.4 million which were partially offset by $0.1 million related to the loss of endpoints.

Future revenue growth in the financial services division depends on a number of factors including the number of connections to and through our network as well as the success of our new product offerings. During 2011 and into 2012, a number of our equity trading customers, primarily in North America and Europe, and to a lesser extent Asia, consolidated the number of connections to other customers on our network resulting in lower average revenue per endpoint.

Cost of network services. Cost of network services increased $0.7 million, or 1.0%, to $71.9 million for the three months ended June 30, 2012, from $71.2 million for the three months ended June 30, 2011. On a constant dollar basis, cost of network services would have increased $1.7 million to $72.9 million. This was due to the following increases: $2.3 million due to higher volumes in our telecommunication services division primarily related to increased demand for our identity and verification services and to a lesser extent from increased compensation paid to providers of calling name and line information database records; $0.7 million in shared network, payroll and overhead expense primarily to support our IP network services, roaming and clearing and payment gateway platforms; and $0.4 million in our financial services division due primarily to increased connectivity costs in North America and to a lesser extent increases to support revenue growth in Europe and Asia Pacific. These increases were partially offset by a decrease of $0.8 million of regulatory charges which are passed through to our customers and $0.9 million primarily due to cost savings initiatives to reduce network services costs in the payment services and telecommunication divisions.

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, changes in revenue share within our identity and verification services, 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 decreased $0.8 million, or 6.5%, to $10.9 million for the three months ended June 30, 2012, from $11.7 million for the three months ended June 30, 2011. On a constant dollar basis, engineering and development expense decreased $0.6 million, or 5.8%, to $11.1 million, and represented 7.9% and 8.3% of revenues for the three months ended June 30, 2012 and 2011, respectively. The decrease in engineering and development costs was primarily due to an increase in capitalized software development costs, which are offset against engineering and development costs, of $1.2 million due to increased utilization of current employees and new resources to focus on our investment in our growth initiatives, partially offset by additional headcount related costs of $0.6 million.

Selling, general and administrative expense. Selling, general and administrative expenses decreased $1.0 million, or 4.0%, to $24.4 million for the three months ended June 30, 2012, from $25.4 million for the three months ended June 30, 2011. On a constant dollar basis selling, general and administrative expenses would have decreased $0.5 million, or 2.0%, to $24.9 million and represented 17.9% of revenues for each the three months ended June 30, 2012 and 2011. The decrease is primarily due to a $1.5 million decrease in variable cash incentive compensation and $0.8 million reduction in third party commission expense to a financial services division customer in connection . . .