TRANSACTION NETWORK SERVICES INC, 10-K, 1997-03-19

TRANSACTION NETWORK SERVICES INC
10-K, 1997-03-19
TELEGRAPH & OTHER MESSAGE COMMUNICATIONS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10 K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EX-
CHANGE ACT OF 1934

COMMISSION FILE NO. 0-23856

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TRANSACTION NETWORK SERVICES, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 54-1555332
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

1939 ROLAND CLARKE PLACE, RESTON, VIRGINIA 20191
(Address of principal executive offices) (zip code)

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

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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 PAR VALUE
(Title of Class)

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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 requirements for the past 90 days. Yes No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

Based on the closing price on February 24, 1997, the aggregate market value
of the voting stock held by non-affiliates of the Registrant was $100,425,329.
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, was 12,335,142 on February 24, 1997.

DOCUMENTS INCORPORATED BY REFERENCE

Part III, Items 10, 11, 12 and 13 are incorporated by reference from the
Company's Proxy Statement related to the Annual Meeting of Stockholders to be
held on April 22, 1997.

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PART I

ITEM 1. BUSINESS

GENERAL OVERVIEW
Transaction Network Services, Inc. (the "Company" or "TNS") is a nationwide
communications network company specializing in transaction-oriented data
services. The Company is organized around its three service divisions: (1)
Point-of-Sale ("POS") services include the Company's TransXpress(R) network
services for the POS transaction processing industry. (2) Telecom services
includes CARD*TEL(R) telephone call billing validation and fraud control
services and other services targeted primarily to the telecommunications
industry. (3) International activities--In 1996, the Company began to
recognize revenue from a third area, the sale of products and services in
international markets. The Company currently has international agreements in
Canada and the United Kingdom, and in Ireland the Company has formed a
majority-owned subsidiary, Transaction Network Services Limited ("TNSL"),
which plans to provide POS network services in Ireland and to manage future
opportunities throughout Europe and the Middle East region. The Company
continues to actively market its products and services to potential customers
in other international markets.

The majority of the Company's revenues are derived from the transmission of
POS transactions (predominantly credit and debit card transactions) which are
processed electronically by a small number of third party POS transaction
processors. The Company's TransXpress(R) network services implement
proprietary technology that provides a fast communications link between the
merchant site and the transaction processor at a cost generally lower than
current alternatives. The Company was the first provider of "950" service to
third party POS transaction processors and currently provides "950" service in
170 local access transport areas ("LATAs"), which cover approximately 98% of
the United States population. In June 1991, the Company transmitted its first
POS transaction, and since then has increased its average daily transaction
volume from approximately 17,000 in the third quarter of 1991 to more than 6.0
million in the fourth quarter of 1996. The Company markets its TransXpress(R)
network services directly to third party POS transaction processors, who in
turn resell the Company's network services as a part of the processors' own
services. Of the eight leading third party POS transaction processors in the
nation, five (First Data Corporation, Electronic Payment Services, Inc.,
Alliance Data Systems, First USA Paymentech and Global Payment Systems)
purchase the Company's network services.

The Company's principal executive offices are located at 1939 Roland Clarke
Place, Reston, Virginia 20191, and its telephone number at that location is
(703) 453-8300. The Company's Internet website address is http://www.tnsi.com.

POS SERVICES BACKGROUND
Until the 1980s, most POS credit card transactions were processed manually,
using paper-based systems. During the 1980s, major changes in POS equipment
and telecommunications technology, together with financial incentives offered
by the credit card associations VISA and MasterCard, led to the development of
automated systems that authorized and processed transactions electronically.
Electronic authorization involves the use of a POS terminal that reads the
cardholder's account information from the card's magnetic stripe and combines
this information with the amount of the sale entered via a keypad on the
terminal. The terminal electronically transmits this transaction information
over a communications network to an authorization computer data center and
then displays the returned authorization or verification response on the POS
terminal.

The processing of a typical POS credit card transaction involves several
parties: the consumer, the merchant, the merchant bank, the credit card
issuing bank and, in most cases, a third party POS transaction processor.
Historically, merchant banks processed almost all POS credit card
transactions. As the market evolved, merchant banks reduced their discount
rates (fees charged for completing credit card transactions) to attract
additional merchants, and larger, more sophisticated merchants began to demand
lower discount rates more aggressively. As competitive pressures further
reduced discount rates, merchant banks were required to process a higher
volume of transactions to operate profitably. Many merchant banks could not
compete in this environment and contracted with third party POS transaction
processors. The third party POS transaction processors maintain the large host
computer processing capability and transaction volume
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necessary to process credit card transactions efficiently for merchant banks.
Third party POS transaction processors have become the major provider of POS
transaction processing services. The POS transaction processing industry has
become highly concentrated, with eight third party processors accounting for a
substantial majority of transaction volume.

The electronic processing of POS credit card transactions requires the use
of a communications network that links merchant POS terminals to transaction
processing host computers. The need to link merchants and POS transaction
processors has been met primarily by one of two alternatives: dedicated leased
lines and dial up services. Dedicated leased lines offer high speed data
transmission, but involve significant fixed monthly charges, making them
economically viable only in high-volume merchant locations such as department
stores and supermarkets. As a result, a majority of electronically processed
POS transactions are transmitted using dial-up services. Prior to the
Company's entrance into this market, dial-up services included those offered
by "800" service providers, including AT&T, Sprint and MCI, and by public data
networks, including MCI (BT North America), SprintNet and Compuserve. While
both of these traditional dial-up alternatives had certain attributes that
were attractive to the transaction processing industry, neither was optimized
for POS transaction data communications. The "800" service providers offered
reverse call billing and wide geographic coverage, but such services could be
slow and expensive on a per transaction basis. Public data networks were often
faster and less expensive than "800" services, but were not as widely
available as "800" services and did not offer reverse call billing, resulting
in service charges to merchants in some areas. As the POS processing industry
has become more sophisticated and competitive, both merchants and third party
POS transaction processors have increasingly demanded faster service, lower
cost and value-added features from their transaction automation systems and
network services suppliers.

In response to the growth of the POS transaction processing market, the
Company developed the TNS network, a data communications network designed
specifically to provide high speed, low cost, reliable and widely accessible
network transmission services for POS transaction processing. The Company's
TransXpress(R) network services include the reverse call billing and wide
geographic coverage of traditional "800" services, while delivering
transactions at speeds and levels of reliability that are often greater than
public data networks and at a cost per transaction that typically is lower
than these traditional alternatives. The Company offers these benefits through
"950" dial access service with proprietary network routing technology that
provides faster call connection and more efficient network utilization than
previous dial up alternatives. In addition, the proprietary TNS network
software provides the Company's customers with dynamic rerouting and several
value added features such as real time call tracking and trouble shooting.

TELECOM SERVICES BACKGROUND
Following the divestiture by AT&T of the regional Bell operating companies
and the advent of tariffed "equal access" to the local telephone exchange
facilities during the 1980's, the telecommunications industry became open to
growing competition among numerous market entrants, including interexchange
carriers, operator service providers and pay telephone operators. In providing
their telecommunications services to consumers, these companies connected
increasing volumes of "0+" calls, or calls which were being billed to accounts
other than the originating phone, such as commercial credit cards, telephone
company calling cards and the billable line numbers used for third party or
collect calls. To process these calls without incurring a significant exposure
to fraud and uncollectible accounts, the need developed among the numerous
competitors in the telecommunications marketplace for real time validation and
fraud control screening services.

Real time validation databases contain information regarding the status of
telephone accounts that allow carriers connecting "0+" calls to validate the
current status of the billed account. These databases are known as Line
Information Databases, or "LIDBs," and are maintained by local exchange
carriers and other telecommunications companies with direct end-user telephone
account information. Each LIDB can be accessed directly by telecommunications
carriers through specialized data communications network connections, but the
cost of connecting to all of the databases, which is necessary to obtain the
full benefit of such databases, is prohibitive for smaller companies. As a
result, gateway providers have evolved to access LIDBs economically by
aggregating LIDB traffic from many smaller carriers. Positive validation from
one or more LIDBs, however, does not guarantee a collectible bill.
Consequently, fraud control services that supplement LIDB access have been
developed.

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In June 1994, the Company acquired Fortune Telecommunications, Inc. ("FTI"),
a provider of telephone call billing validation and fraud control services to
the telecommunications industry through its CARD*TEL(R) service offering. The
Company's Telecom Services Division now offers the CARD*TEL(R) service, which
provides the telecommunications customer with an integrated service that
combines real time access to LIDB validation information along with the
Company's proprietary fraud control technology and databases. This
sophisticated fraud control system assists customers in the detection of
fraudulent or unbillable calls. TNS strengthened its position in the telephone
call billing validation and fraud control market through the purchase of
assets--primarily contract rights, marketing and services agreements, non-
compete agreements and computer software and databases--from Intellicall Inc.
("Intellicall") in June of 1995 and from AMNEX, Inc. ("AMMEX") in March of
1996.

INTERNATIONAL SERVICES BACKGROUND
The technology developed by the Company to serve the customers of the POS and
Telecom Services Divisions has direct applicability around the world. The
International Systems Division has been formed to introduce the products and
services from the Company's domestic operating divisions to the international
marketplace. The Company currently has international agreements in Canada, the
United Kingdom ("UK"), and Ireland. In the UK and Canada, the Company has
entered into technology transfer arrangements whereby TNS provides POS network
equipment and software to its international customers and will receive royalty
payments based upon transaction volumes transmitted over the international
networks. In Ireland, the Company has formed a majority-owned subsidiary,
Transaction Network Services Limited ("TNSL") which intends to provide POS
network services in Ireland and to manage future opportunities throughout
Europe and the Middle East regions.

TNS STRATEGY
The Company's objective is to enhance its position as a leading provider of
transaction-oriented data services. The Company's future growth and
profitability will depend, in part, upon the further expansion of the POS
transaction network services market and the telecommunications services
market, the emergence of other markets for electronic transaction network
services, such as services for healthcare claims processing, electronic
benefits transfer and securities trading, and the Company's ability to
penetrate these other markets. Further market expansion is dependent upon the
continued growth in the number of transactions and the continued automation of
traditional paper-based processing systems. There can be no assurance that
markets for the Company's network and telecommunications services will
continue to expand and develop or that the Company will be successful in its
efforts to penetrate new markets.

The specific elements of the Company's strategy include the following:

Increase Network Usage
While the Company expects to benefit from the overall growth of the
electronic transaction processing market, the Company has implemented certain
programs designed to enhance network usage. The Company intends to increase
TNS network usage by encouraging existing customers to connect additional POS
terminals to the network and by attracting new customers. Historically, a
number of the Company's largest customers entered into two- to five-year
contracts that specify tiered pricing schedules and/or minimum revenue
commitments which lower the customer's effective per transaction price at
certain transaction volume levels. This approach provided an incentive for
these customers to add POS terminals to the Company's network in order to
realize the most favorable pricing terms. In 1996, the Company re-negotiated a
number of these contracts which provide for a flat-rate price structure in
return for increasing volume commitments during the life of the contract, as
opposed to volume price discounts which become effective only after certain
volume thresholds are met. Additionally, in order to maintain a high level of
network utilization, the Company works closely with its existing customers to
identify opportunities for further network expansion.

Maintain Technical Leadership
The Company's network has been specifically designed to address transaction
processing applications, and the Company's management, technical and sales
personnel have been assembled for their experience in this industry. The
Company intends to maintain the technical leadership it has established by
continuing to enhance network performance and respond to customer needs. The
Company's proprietary network software

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provides customers with many value-added features, including multiple network
protocol and message format support and conversion as well as real time call
tracking. The Company also has recently developed a line of Signaling System
No. 7 ("SS7") services that can provide fast, cost-efficient access to LIDBs
as well as connectivity for call processing. The Company has ongoing
development programs to support new technologies to enhance local access, such
as support for higher speed modem rates.

Expand into New Transaction Processing Markets
The Company has ongoing programs to develop services for new transaction
processing markets. Among these markets are the following:

Telephone Call Billing Validation and Fraud Control. The Company provides
telephone call billing validation and fraud control services for the
telecommunications industry through its CARD*TEL(R) telecommunications
services. TNS has strengthened the competitive position of its CARD*TEL(R)
telecommunications services by replacing FTI's former network service
providers with TNS's SS7 network capability, which leverages key elements of
the Company's backbone network. In June 1995, the Company purchased from
Intellicall, Inc. the right to provide fraud control and billing validation
services to over 200 private pay telephone companies. In March 1996, the
Company completed an asset purchase from AMNEX, Inc. ("AMNEX") of AMNEX's
proprietary fraud-control system and related databases. The transaction also
provided for a ten year exclusive service agreement and a joint marketing
agreement to cross-sell each other's services.

Electronic Benefits Transfer Programs. The application of the Company's
network services to electronic benefits transfer ("EBT") programs, including
food stamps and Aid to Families with Dependent Children, provides another
growth opportunity for the Company. A significant number of the Company's
current EBT transactions are provided to Deluxe Data Systems which services
programs in Colorado, Connecticut, Kansas, Louisiana, Utah, Maryland and New
Jersey. In addition, several other states are in the process of awarding
contracts for similar EBT programs for which TNS has been identified as the
proposed network provider.

Healthcare Processing. The Company believes that healthcare processing
presents a significant opportunity for its future growth. There were over 3.7
billion medical claims processed in 1996, and of these only 56% were processed
electronically. The Company currently provides network services for healthcare
eligibility verification and intends to provide network services to customers
involved in the healthcare eligibility, payment and claims processing
industry. While this application currently accounts for a small percentage of
the Company's transaction volume, the Company believes that the potential
market is large and intends to actively market its services to healthcare
transaction processors.

Financial Services. In response to the developing demand within the
securities brokerage industry for a reliable, secure network solution for the
electronic exchange of trading information between brokerage firms, financial
institutions and the securities markets, the Company recently announced the
roll-out of its TNS FASTLink(R) data services. This new line of services is
currently being deployed and will offer a secure private network for the
electronic communication of indications of interest, orders, and execution
reports between traders.

International Expansion. The Company continues to seek new international
markets through joint ventures, equipment sales agreements, technology
transfers and licenses, and the establishment of subsidiaries using Company
resources. The Company has completed agreements to provide its technology and
network design in Canada, the United Kingdom and Ireland. The agreements in
Canada and the United Kingdom produce an ongoing revenue stream for the
Company based on a per transaction royalty. The Company is currently
negotiating to provide its proprietary network technology for use in other
markets throughout Europe, South America, Mexico, and the Far East.

Other Related Markets. The Company currently provides network services to
customers in other emerging transaction processing markets, such as home
banking, secure credit card transactions over the Internet, and other
telecommunications database services which leverage the Company's network,
industry relationships and expertise.

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TNS SERVICES
The Company's network services are designed specifically for the
transmission of transaction data. The Company's primary services are offered
through its TransXpress(R) network services, which are currently used
predominantly for POS credit card authorizations. The Company also provides
other data transmission services, primarily for the telecommunications
industry. The Company's continued success will depend on its ability to
enhance its existing TransXpress(R) and CARD*TEL(R) services and to develop
and introduce, on a timely and cost effective basis, new services such as the
TNS FASTLink(R) data services that keep pace with technological developments
and address increasingly sophisticated customer requirements. There can be no
assurance that the Company will be successful in identifying, developing and
marketing service enhancements or new services that respond to technological
change, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of service
enhancements or new services, or that its service enhancements and new
services will adequately meet the requirements of the marketplace and achieve
market acceptance.

TransXpress(R) Network Services
The Company's TransXpress(R) network services utilize "950" service obtained
from local exchange carriers and supplemental "800" service obtained from
interexchange carriers to provide access to its network. The Company was the
first provider of "950" service to third party transaction processors and
currently provides "950" service in 170 LATAs, which cover approximately 98%
of the United States population. The Company contracts with multiple
interexchange carriers to provide "800" access to supplement its "950"
service. Of the eight leading third party POS transaction processors in the
United States, five purchase the TransXpress(R) network services.
TransXpress(R) network services offer several advantages resulting from the
proprietary technology and architecture of the TNS network. TransXpress(R) and
related network services for the POS industry accounted for approximately 70%
of the Company's total revenue in 1996.

CARD*TEL(R) Telecommunications Services
The Company's CARD*TEL(R) telecommunications services utilize proprietary
fraud control technology and databases to provide real time telephone call
billing validation and fraud control services to the telecommunications
industry, including long distance telephone companies, operator services
providers, information services providers and private pay telephone companies.
By providing access to both negative and positive files maintained on
databases throughout the country, CARD*TEL(R) telecommunications services can
help telecommunications customers determine whether telephone company calling
cards, bank credit cards, travel and entertainment cards and telephone company
line numbers are likely to constitute valid accounts and billable line
numbers. Fraud control services involve the use of various databases,
algorithms and computer modeling techniques to detect fraud based on
transaction irregularities and predetermined parameters. Customers of
CARD*TEL(R) telecommunications services also benefit from the advanced fraud
control technology and database management that distinguishes CARD*TEL(R)
telecommunications services from its competitors. CARD*TEL(R)
telecommunications services represented approximately 27% of the Company's
total revenue in 1996.

In June 1995, the Company acquired from Intellicall, the right to provide
fraud control and billing validation services to over 200 private pay
telephone companies. In March 1996, the Company completed an asset purchase
from AMNEX, of AMNEX's proprietary fraud-control system and related databases.
The transaction also provided for a ten year exclusive Service Agreement and a
joint marketing agreement to cross-sell each other's services. The Company has
integrated these customers into the Company's existing CARD*TEL(R) operations
and provides network services to Intellicall and AMNEX.

SS7 Network Services
The Company has also developed a line of SS7 services that will provide
smaller telecommunications companies, including local exchange carriers, with
an affordable alternative to costly network enhancements. The Company's SS7
network is a special purpose, packet-switched data network designed to provide
call processing information that can support a variety of applications,
including number translation, billing verification, calling number
identification, call set up information, busy/idle station status, maintenance
and control information. An SS7 system, unlike conventional telephone
switching that transmits call processing information via normal voice trunk
circuits using traditional "in-band" multifrequency ("MF") signaling, is an

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"out-of-band" digital signaling protocol that carries information over data
links separate from the voice trunk network. By storing information such as
call routing data, billing information and technical system data and controls,
an SS7 network will allow call set-up and routing to be accomplished
independent of the voice circuits, thus enabling a faster, more efficient
transmission of telecommunications signaling.

Virtual Private Line Network
As an alternative to leased lines, the Company offers a service known as
Virtual Private Line Network ("VPLN"). The Company's VPLN service provides
host to host computer communications through its backbone data communications
network at speeds comparable to a traditional leased line connection and with
value-added advantages of increased reliability, lower cost and greater host
flexibility. Customers of the Company are currently using the VPLN service to
function as the gateway connection for transaction information transmitted
between their merchant customers that do business on the Internet and third
party POS transaction processors/financial institutions.

FASTLink(R) Data Services
In March 1997, the Company announced a new product line called TNS
FASTLink(R) data services. This new line of services is currently being
deployed and is intended to offer a secure private network for transmitting
securities trading orders electronically between brokerage firms and financial
institutions. The FASTLink(R) network will route Financial Information
Exchange ("FIX") protocol messaging over a secure TCP/IP network that will be
developed, operated, and maintained by the Company. FIX is an open
communication messaging protocol that enables a high-speed electronic exchange
of trading information in a common language between brokerages, institutions,
and securities markets. The FIX protocol facilitates the electronic
communication of indications of interest, orders, and execution reports which
are normally exchanged by telephone between traders. The advantages of the TNS
FASTLink(R) data services include its application level security features for
financial services transactions.

Other
The Company has developed an interactive voice response ("IVR") capability,
which will enable the Company to provide services to transaction processors
who require a synthesized voice response in connection with the authorization
of a transaction. The Company has also developed a platform that will allow a
user to minimize communications costs for calls placed between countries by
automatically comparing the rates for the origination of a call in the two
countries and then originating the call in the less expensive of the two by
signaling the appropriate phone with a message to dial the other party.

TNS NETWORK
The TNS network is designed specifically for the requirements of the
transaction processing industry to provide fast call connection times, a high
level of system redundancy, dynamic rerouting, wide geographic coverage and
value added features, at a low cost per transaction. While the TNS network was
originally designed for POS transaction processing, the TNS network serves as
the infrastructure for the Company's expansion into new transaction processing
markets. The TNS network consists primarily of the Company's hardware and
software located at various sites around the United States and leased digital
transmission circuits which interconnect the Company's service areas.

Network Architecture
The Company has configured the network's major equipment components with
fully redundant hardware subsystems and/or complete backup systems in order to
eliminate any single point-of-failure in the network. The main equipment
components which comprise the Company's network are as follows:
. Company-developed Automatic Call Distributors ("ACDs") which efficiently
route incoming calls from the local exchange carriers in certain
geographic areas served by the Company's network to available ports on
the Company's network access controllers;
. Network Access Controllers ("NACs") which convert the format of incoming
calls into the X.25 data format used on the Company's backbone data
communications network by its POS services customers;
. Signal Transfer Points ("STPs") which are packet switches that provide
routing and screening functions used for SS7 packet switching;

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. Company-developed network access controllers ("T-NAC") which is a
specialized NAC that enables higher-speed transactions for the healthcare
processing market as well as the Company's international expansion.
. Company-developed network interface processors ("NIPs") which connect the
Company's network to the customer's host computer. The NIPs provide many
of the value-added features offered by the Company to its POS customers
and are specifically designed to satisfy each customer's unique data
communications requirements;
. Security access routers deployed at customer subscriber sites which use
sophisticated encryption and authorization technology to control access
to the Company's TCP/IP backbone network;
. Company-developed PC-based computer systems which are used for network
control and administration;
. Company-developed micro-STPs ("mSTPs") which serve as SS7 link
concentrators.

The X.25 and SS7 packet switching devices together with leased digital
transmission lines and circuit management equipment form the backbone data
communications network which the Company utilizes for X.25 and SS7 packet
switching. This backbone network provides circuit redundancy, automatic
circuit reconnection, dynamic rerouting and several levels of traffic
priority. The Company has developed an SS7 link concentrator which will be
utilized to provide economically priced SS7 services. In addition, the Company
currently plans to roll-out a TCP/IP backbone network for use by its private
financial services network.

The Company houses its ACDs, NACs, integrated packet circuit switches and
TCP/IP routers in approximately 40 point-of-presence facilities ("POPs")
located throughout the U.S. These facilities are either owned and maintained
by the Company's several telecommunications circuit providers or are leased by
the Company and provide environments comparable to public telephone company
facilities, with battery back-up and emergency generator power systems. The
Company coordinates the physical routing of circuits with its digital
telecommunications circuit suppliers in order to ensure diverse paths for its
network and thereby increase network reliability. Company personnel work with
interexchange carriers and local exchange carriers to order and coordinate the
acquisition of leased digital transmission circuits and local access service.

Network Operations
The Company provides 24-hour, seven day a week network control coverage
through its primary network control center located in Reston, Virginia. The
Company also maintains a network control center in Ft. Lauderdale, Florida,
which serves as the backup network control center. The major equipment
components of the network have their own monitoring and control systems, or
network management systems, which allow network technicians to control the
equipment and troubleshoot any hardware, software or circuit problems that may
occur. These network management systems allow Company technicians not only to
react to problems but also to be proactive in the maintenance of the various
network components.

The Company maintains multiple remote PC-based computer systems with
proprietary software to collect accounting information. These systems provide
for subsequent file transfer procedures to move the data to the Company's
primary network control center. Should an interruption occur at the Company's
primary network control center, network billing data would still be recorded
by these remote accounting collection processors.

Because of the redundancy of network components and because the equipment is
located primarily at manned facilities, minor problems do not require the
immediate intervention of a Company technician. Most problems can be
independently identified and corrected remotely by the Company's technicians
or by coordinating activities with on-site telecommunications services
providers or customer personnel.

Network Engineering and Development
The Company's network incorporates several proprietary features which
address the particular needs of its markets and distinguish its services and
performance from its competitors. Value-added features provided by the Company
include:
. Multiple network protocol and message format support and conversion,
which makes costly POS terminal and customer host computer re-
programming, network enhancements and software upgrades unnecessary.

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. Real-time call tracking, which allows for fast resolution of host,
terminal or network problems and which facilitates proactive Company
input and suggestions for the overall improvement of customers' systems.
. Telecommunications and processing expertise to assist customers in
solving networking and processing issues.

All of these value-added features are incorporated in software which is
either developed internally or, in certain cases, written by vendors to
Company specifications. The Company believes that these features allow
customers' host computers to process a greater volume of transactions than by
using alternative dial-up network providers, and thus increase the capacity of
the most expensive capital item in many customers' operations.

The Company acts as a systems integrator by incorporating off-the-shelf
components and the Company's internally developed software applications into
an industrial grade PC chassis. The Company's systems development department
developed the T-NAC, ACD, the NIP, a message switch, the real-time accounting
collector, the network management system and the mSTP, which are deployed in
the network.

All of the equipment and software applications used in the TNS network,
whether developed internally or by outside vendors, are subjected to rigorous
quality assurance testing and certified for use by the Company's network
engineering department prior to their deployment. The network engineering
department is responsible for the overall system integrity and capacity of the
Company's network design.

CUSTOMERS
The Company's major customers are primarily third party POS transaction
processors. Other customers include regional debit card processors, healthcare
eligibility processors, electronic benefits transfer processors, long distance
telephone companies, operator services providers, information services
providers and private pay telephone companies. The following is a partial
listing of the Company's customers.

Alliance Data Systems (formerly BSI First Tennessee Bank
Business Services Incorporated) First USA, Inc.
BUYPASS Corporation (a subsidiary of Gensar Technologies Inc. (a
Electronic Payment Services, Inc.) subsidiary of First USA, Inc.)
Consolidated Communications Operator Global Payment Systems (formerly
Services, Inc. MasterCard International)
Deluxe Data Systems, Inc. Long Distance USA
Electronic Data Systems Corporation The Potomac Group/Medifax
EFS, Inc./Concord Computing Transactive Corporation (a
Corporation subsidiary of GTECH Corporation)
ENVOY Corporation US Long Distance
First Data Corporation WorldCom Inc.

Sales to First Data Corporation, Alliance Data Systems, First USA, Inc.,
BUYPASS Corporation, and Global Payment Systems accounted for approximately
17%, 12%, 9%, 8% and 6%, respectively, of the Company's total revenues for the
year ended December 31, 1996. All of the Company's major customers use other
network service providers for some portion of their total transaction
processing traffic. The Company has multi-year contracts with minimum monthly
commitments from all five of its largest customers, which contracts expire
between April 1998 and December 2000. The loss of any of these five customers
would have a material adverse impact on the Company. There can be no assurance
that these contracts will be renewed.

8
<PAGE>

During 1996, the Company renewed contracts with most of its largest
customers. Several of these contracts called for a single flat rate basic
price structure with increasing volume commitments during the life of the
contract, rather than volume discounts which become effective only after
certain volume thresholds are met. The pricing of these new contracts was
significantly lower than the pricing these customers received prior to these
renewals.

SALES AND MARKETING

POS Services
The Company markets its TransXpress(R) network services through its POS
Services Division directly to third party POS transaction processors, who in
turn resell the Company's TransXpress(R) network services as a part of the
processors' own services, and to other transaction processing customers. The
market for third party POS transaction processing is highly concentrated.
Consequently, the Company has been able to sustain a successful marketing
effort within the POS transaction processing industry with a relatively small
sales force and has been able to establish high level contacts with all of its
customers and many of its potential customers. The POS transaction processing
industry is extremely competitive, and large merchant retailers and certain
merchant banks have significant influence over third party POS transaction
processors in their choice of network alternatives. Thus, the Company believes
that greater industry awareness of the advantages of the Company's
TransXpress(R) network services will result in greater customer pressure on
third party POS transaction processors to choose the Company over alternative
network services.

Telecom Services
The Company markets its CARD*TEL(R) telecommunications services, SS7 network
and other telecommunications services to the telecommunications industry both
directly through its Telecom Services Division and also through a
telecommunications services reseller. The market for these services is broad
and consists of a wide variety of telecommunications companies, such as
interexchange carriers, operator services providers, information services
providers and private pay telephone companies. Certain members of the
Company's core customer base for fraud control and billing validation services
have been adversely impacted by so-called "dial-around" services which route
telephone calls via toll-free access numbers to telecommunications carriers
other than those presubscribed by the pay phone operators on whose facilities
the telephone calls are originated. While there can be no assurance of the
Company's success in new marketing efforts, the Company is currently pursuing
several business opportunities from which it could take advantage of the
continuing trend toward the use of "dial-around" services by providing fraud
control and/or billing validation services to several potential customers who
are vendors of "dial-around" services.

To supplement the sales efforts of the Company's Telecom Services Division,
the Company has entered into an exclusive marketing arrangement with ICG
Communications to resell certain SS7 call processing services. As part of the
Intellicall transaction, Intellicall agreed to exclusively market the
Company's fraud control and billing validation services to its private pay
telephone customers. The Company may enter into other similar reselling
arrangements.

International Services
The Company markets its international products and services in Europe and
the Middle East directly through TNSL. The Company is marketing its
international products and services in Mexico, South America and the Far East
either directly through its own sales personnel or through the use of
consulting firms in certain markets. The Company seeks expansion into global
markets where there is or soon will be an open, deregulated and competitive
telecommunications environment and where the marketplace for the Company's
services include multiple transaction processing companies.

COMPETITION

POS Services
The Company's POS Services Division competes on the basis of price,
transaction speed, network service quality and reliability, value added
features, customer support and industry knowledge. The Company's management
believes that it has developed both a technical leadership and industry
expertise within the POS transaction processing industry which will allow it
to maintain its current customer base as well as to continue to attract new
customers during the foreseeable future.

9
<PAGE>

The POS network services market is highly competitive, and the Company
expects competition to increase. The Company's competitors include public data
networks and major interexchange carriers. Several of these competitors have
recently introduced new products competitive with those of the Company.
Increased competition experienced during 1996 has resulted in price reductions
and reduced margins. Continuing competition could result in additional price
reductions, reduced margins and loss of market share, all of which could
materially and adversely affect the Company's business, operating results and
financial condition. Many of the Company's current and potential competitors
have significantly greater financial, technical, marketing and other resources
than the Company. As the POS network services market continues to grow, the
Company's competitors may devote greater resources to the development and
marketing of new competitive services and the marketing of existing
competitive services. Federal legislation enacted in 1996 has removed former
regulations restricting the regional Bell operating companies from competing
in this industry. There can be no assurance that the Company will be able to
compete successfully with existing or new competitors or that competitive
pressure faced by the Company will not materially and adversely affect its
business, operating results and financial condition.

AT&T, Sprint, Advantis, CompuServe and other companies market their own
"950" services. While these companies may be able to procure their "950"
services at the same prices as the Company, the Company believes that it
maintains several network and market advantages, including the speed provided
by the Company's proprietary routing technology and the value added features
provided by the TNS network.

Local exchange carriers are currently deploying SS7, which will improve the
connection time for "800" service. Competitors to the Company including AT&T
have begun offering "800" services that implement SS7 capabilities. The
Company has developed and plans to deploy its own SS7 capability for POS
transactions. Once SS7 is deployed throughout the country, the Company will be
able to improve its call set up times on "800" for those customers for whom
the additional cost of "800" service is warranted.

Other organizations offer alternative technologies to transmit POS
transactions. Currently, transmission mediums such as satellite (VSAT) and
digital and cellular radio are being used in some form to complete POS
transactions. All of these technologies are viable but comparatively expensive
and limited in their coverage and capabilities. In remote locations where land
lines are unavailable, TNS now offers wireless access to transaction
processors through Bell Atlantic NYNEX Mobile's Cellular Digital Packet Data
("CDPD") services in areas where CDPD coverage is available. While there exist
smaller applications for these technologies, the Company believes that the
high costs involved in operating and installing these technologies will limit
their growth.

Another source of competition faced by the Company is the potential for
third party POS transaction processors to develop or utilize their own private
networks. Some of the major processors have the transaction volume to justify
the cost of building their own private networks or utilizing their existing
networks in certain metropolitan areas. Several of the Company's customers
operate their own networks in some cities. The continued growth of private
networks by the larger third party POS transaction processors could divert
transaction volume away from the Company's network. However, these private
networks can only be justified in areas of highly concentrated transaction
volumes, and the industry trend has been the increased outsourcing of network
services to providers like TNS in order to allow processors to focus on their
core businesses. Furthermore, the pricing schedules of certain of the
Company's recently negotiated service contracts require increasing volume
commitments from customers as a condition of maintaining certain price per
transaction levels. These contracts create a financial disincentive for the
movement by these customers of traffic from the Company's network to private
networks, which movement could result in these customers paying a higher rate
for their remaining traffic.

Telecom Services
The Company's Telecom Services Division competes on the basis of price,
value added database services such as its fraud control system, superior
technology, network service quality and reliability, customer support and
industry expertise. Major competitors to the Company's CARD*TEL(R) and SS7
network telecommunications services include GTE Intelligent Network ("GTE"),
The Southern New England Telephone Company ("SNET") and Independent
Telecommunications Network, Inc. ("ITN"). In addition, it is possible that
larger interexchange carriers that have or are currently developing their own
SS7 connectivity

10
<PAGE>

into the LIDBs for internal use may decide to resell these services. The
Company believes that the CARD*TEL(R) validation and fraud control technology
is more sophisticated and comprehensive than these competitors' technology.
There can be no assurance that the Company will be able to compete
successfully with existing or new competitors or that competitive pressure
faced by the Company will not materially and adversely affect its business,
operating results and financial condition.

International Services
The Company's primary competition in the international markets is the
existing telecommunications infrastructure of the transaction processors. The
International Systems Division strategy has been to enter a foreign market
through either a partnership agreement with a local company or through the
creation of a majority-owned subsidiary and to compete for market share based
on the following variables: price, transaction speed, network service quality
and reliability, value added features, customer support and industry
knowledge. The Company's management believes that it has developed both a
technical leadership and expertise within the financial transaction processing
industry which can be exported to emerging overseas markets.

GOVERNMENT REGULATION
Although the FCC retains general regulatory jurisdiction over the Company's
sale of interstate services, the Company, as a provider of enhanced
communications services, is not required to maintain a certificate of public
convenience and necessity with the FCC or to file tariffs with the FCC
covering its services. State regulators may regulate purely intrastate
enhanced services and may regulate mixed intrastate/interstate enhanced
services to the extent their regulation does not impede federal policies. The
Company is not currently subject to any state regulation for its existing
services, but believes that even if subjected to state regulation the Company
could obtain all necessary approvals. However, FCC and state regulations can
affect the costs of business for the Company and its competitors by changing
the rate structure for access services purchased from the local exchange
carriers to originate and terminate calls. Interim revised federal regulations
on access transport rates became effective on December 30, 1993. In
conjunction with the implementation of the Telecommunications Act of 1996 (the
"1996 Act"), the FCC instituted a rulemaking proceeding in December 1996
referred to as Access Charge Reform that will seek to reform the current
system of interstate access charges and make it compatible with the local
competition provisions of the 1996 Act. The FCC is currently considering the
comments and reply comments that it has solicited from interested parties as
part of the Access Charge Reform proceeding, and the FCC has indicated that it
intends to issue final rules in connection with Access Charge Reform during
1997. Under certain Access Charge Reform proposals, TNS would be placed at the
risk of substantial rate increases under the Access Charge Reform proposals
that would allow incumbent LECs to include a call-setup charge in their local
switching rate structures or to permit incumbent LECs to charge nothing for
terminating access service and instead recover the costs of providing such
services by increasing their originating access charges. Conversely, TNS would
benefit greatly from other proposals, such as proposals to reduce access rates
based on increased costs, that would drastically reduce some network access
costs. The final impact of Access Charge Reform on the Company's future
network access costs is unknown, and the Company cannot predict the timing,
outcome or effects of the FCC's deliberations or of any future tariff matters.

The 1996 Act also removes current restrictions on the ability of the
regional Bell operating companies to provide inter-LATA enhanced services,
specifically including credit card verification services. Under the
legislation, the regional Bell operating companies ultimately will be
permitted to provide inter-LATA long distance telecommunications, out-of-
region immediately and in-region after satisfaction of certain network
unbundling and related requirements. As a result, the Company and its
telecommunications services customers likely will face additional competition.

11
<PAGE>

is uncertain what impact the new rules will have on dial-around usage and
therefore on demand for traditional TNS's Telecom services offerings, many
industry observers believe that the use of "dial-around" services will
continue to grow at the expense of the traditional pay telephone long distance
services upon which the Company's core customer base for fraud control and
billing validation services relies.

The Company is considering an expansion of its services into markets which
may involve the provision of voice-grade or data common carrier
telecommunications services. To the extent that the Company enters into any
such service offerings, it will be required to comply with applicable FCC
and/or state authorization and tariffing regulations.

PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
The Company relies principally upon trade secret and copyright law to protect
its proprietary technology, including a copyright on the CARD*TEL(R) fraud
control software. The Company enters into confidentiality or license
agreements with its employees, distributors, customers and potential customers
and limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that these measures will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.

The Company is subject to the risk of adverse claims and litigation alleging
infringement of intellectual property rights. There can be no assurance that
third parties will not assert infringement claims in the future with respect
to the Company's current or future products or that any such claims will not
require the Company to enter into royalty arrangements or result in costly
litigation. While the Company believes that it currently has all licenses
necessary to conduct its business, no assurance can be given that additional
licenses will not be required in the future. Furthermore, no assurance can be
given that, if any additional licenses are required, such licenses could be
obtained on commercially reasonable terms.

Although the Company continues to implement protective measures and intends
to vigorously defend its proprietary rights, there can be no assurance that
these measures will be successful. The Company believes, however, that because
of the rapid pace of technological change in the data communications industry,
the legal protections for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the Company's
employees and the timeliness and quality of services provided by the Company.

EMPLOYEES
As of January 31, 1997, the Company employed 108 persons, of whom 77 were
engaged in systems operation, development and maintenance and 31 were engaged
in sales, finance, management and administration. None of the Company's
employees is currently represented by a labor union. The Company has not
experienced any work stoppages and considers its relationship with its
employees to be good.

ITEM 2. PROPERTIES
The Company's principal executive offices and primary network control center
are located in Reston, Virginia and consist of approximately 44,500 square
feet of office space near Dulles International Airport under a lease expiring
in February 2008 with an unaffiliated third party. The Company maintains
additional office space as well as its backup network control center in
facilities located in Ft. Lauderdale, Florida, consisting of approximately
4,600 square feet under a lease expiring in September 1999 with an
unaffiliated third party. The Company also leases and occupies regional sales
offices in Atlanta, Georgia, Dallas, Texas, and Northford, Connecticut. The
Company houses its remote network switching equipment both in facilities owned
and maintained by certain of the Company's digital telecommunications circuit
providers and also in its own "point-of-presence" facilities, or "POPs,"
located in various cities pursuant to five year leases with unaffiliated third
parties totaling approximately 6,500 square feet and expiring from June 1999
to January 2007. The Company believes that its existing and planned facilities
are adequate to meet current requirements and that suitable additional space
will be available as needed to accommodate the expansion of its operations and
development after 1997.

12
<PAGE>

ITEM 3. LEGAL PROCEEDINGS
The Company currently has no material legal proceedings pending.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

13
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ National Market
under the symbol "TNSI" since the Company's initial public offering in April
1994. The following table reflects the range of high and low sale quotations
for each period indicated as reported by NASDAQ. This table reflects inter-
dealer prices, without retail mark-up, mark-down or commission. In April 1996,
the Company declared a 3-for-2 stock split. All price per share amounts have
been retroactively adjusted to reflect the stock split.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ----------------------------------- ------ ------
<S> <C> <C>
First quarter ended March 31, 1996............................... $23.38 $15.50
Second quarter ended June 30, 1996............................... $26.38 $21.50
Third quarter ended September 30, 1996........................... $22.50 $11.00
Fourth quarter ended December 31, 1996........................... $16.50 $11.00
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1995 HIGH LOW
- ----------------------------------- ------ ------
<S> <C> <C>
First quarter ended March 31, 1995............................... $12.00 $ 9.00
Second quarter ended June 30, 1995............................... $11.92 $ 9.33
Third quarter ended September 30, 1995........................... $17.92 $10.67
Fourth quarter ended December 31, 1995........................... $18.33 $14.00
</TABLE>

As of February 24, 1997, there were 83 stockholders of record of the
Company's Common Stock, including shares held in street name by various
brokerage firms. In addition, the Company estimates that there are
approximately 2,000 beneficial owners of the Company's Common Stock.

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings for future growth
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. Under a bank line of credit agreement, the Company is
restricted from paying any dividends on its stock without the prior written
consent of the lender.

14
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each of the three years ended December 31,
1996 and as of December 31, 1996 and 1995 have been derived from the Company's
financial statements included elsewhere in this Annual Report on Form 10-K
which have been audited by Arthur Andersen LLP, independent public
accountants, whose report thereon is also included elsewhere in this report.
The selected financial data for the years ended December 31, 1993 and 1992,
and as of December 31, 1994, 1993, and 1992 have been derived from the audited
financial statements of the Company not included in this Annual Report on Form
10-K. No dividends have been paid on the Common Stock in any of the periods
shown. The selected financial data set forth below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 (1) 1993 1992
------- ------- -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND TRANSACTION DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................. $52,291 $41,365 $26,526 $11,457 $4,077
Cost of network services............ 28,771 21,819 14,200 6,153 2,883
------- ------- ------- ------- ------
Gross profit........................ 23,520 19,546 12,326 5,304 1,194
Other operating expenses:
Engineering & development.......... 2,692 2,241 1,575 713 387
Selling, general & administrative.. 7,491 5,697 3,842 1,789 906
Depreciation....................... 4,068 3,081 1,830 887 431
Amortization of intangibles........ 1,485 1,138 566 -- --
------- ------- ------- ------- ------
Total other operating expenses.... 15,736 12,157 7,813 3,389 1,724
------- ------- ------- ------- ------
Income (loss) from operations....... 7,784 7,389 4,513 1,915 (530)
Interest income, (expense), net..... 1,670 918 220 (64) (21)
------- ------- ------- ------- ------
Income (loss) before income taxes... 9,454 8,307 4,733 1,851 (551)
Provision for income taxes.......... 3,640 3,157 1,491 25 --
------- ------- ------- ------- ------
Net income (loss)................... $ 5,814 $ 5,150 $ 3,242 $ 1,826 $ (551)
======= ======= ======= ======= ======
Net income per common and equivalent
share (2).......................... $ 0.46 $ 0.45 $ 0.33 $ 0.22 $ --
======= ======= ======= ======= ======
Shares used in per share
computations (2)................... 12,591 11,534 9,947 8,144 --
======= ======= ======= ======= ======
POS TRANSACTION VOLUME (IN
MILLIONS)........................... 1,900 1,218 824 408 117
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $34,851 $25,779 $ 7,749 $ 813 $ 653
Total assets........................ 68,551 61,348 30,835 7,561 4,613
Long term debt...................... -- -- 18 16 623
Redeemable Convertable Preferred
Stock.............................. -- -- -- 8,298 7,910
Total stockholders' equity
(deficit).......................... 62,191 54,593 24,733 (3,179) (5,255)
</TABLE>
- ---------------------
(1) Includes the results of Fortune Telecommunications, Inc. from June 6,
1994, the closing date of its acquisition by the Company, through December
31, 1994. (See Note 3 of Notes to Financial Statements.)
(2) Pro forma for 1994, 1993 and 1992 for the conversion of the Company's
Redeemable Convertible Preferred Stock into Common Stock. The conversion
took place upon the closing of the Company's April 1994 IPO. (See Note 1
of Notes to Financial Statements.)

15
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL OVERVIEW
The Company was incorporated in August 1990 to build and operate a
communications network focused on the network services needs of the POS
(Point-of-Sale/Point-of-Service) transaction processing industry. Between
August 1990 and May 1991, the Company was primarily engaged in raising capital
from investors and in the initial development of its network. In June 1991 the
Company transmitted its first POS transaction, and since then has increased
its average daily transaction volume from approximately 17,000 in the third
quarter of 1991 to more than 6.0 million in the fourth quarter of 1996. In
June 1994, the Company acquired Fortune Telecommunications, Inc. ("FTI") of
Ft. Lauderdale, Florida, which provided customers in the telecommunications
industry with telephone call fraud control and billing validation services.
The Company is organized around its three key service divisions: (1) POS
services include the Company's TransXpress(R) network services for the POS
transaction processing industry. (2) Telecom services includes FTI's
CARD*TEL(R) telephone call billing validation and fraud control services and
other services targeting primarily the telecommunications industry. TNS
strengthened its position in the telephone call billing validation and fraud
control market through the purchase of assets--primarily contract rights,
marketing and services agreements, non-compete agreements and computer
software and databases--from Intellicall, Inc. ("Intellicall") in June of 1995
and from AMNEX, Inc. in March of 1996. (3) International activities--In 1996,
the Company began to recognize revenue from a third area, the sale of products
and services in international markets. In Ireland, the Company has formed a
majority-owned subsidiary which intends to provide POS network services in
Ireland in the future. The Company continues to actively market its products
and services to potential international customers.

In March 1997, the Company announced a new product line--TNS FASTLink(R)
data services. This new line of services is currently being deployed and will
offer a secure private network for transmitting securities trading orders
electronically between brokerage firms and financial institutions. TNS
FASTLink(R) services revenues will consist of a one-time installation fee and
fixed monthly recurring revenues thereafter based on the number of
connections. This FASTLink(R) service offering will require the Company to
build and support a TCP/IP backbone network as well as acquire a significant
amount of dedicated hardware. Current equipment facilities are sufficient to
house the additional hardware requirements. The Company does not expect to
generate significant revenues from this new service during 1997.

The Company achieved revenue per employee of more than $480,000 in 1996 and
in excess of $400,000 in 1995.

FORWARD LOOKING STATEMENTS
Statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this annual report that are not
descriptions of historical fact may be forward looking statements that are
subject to risks and uncertainties. Actual results could differ materially
from those currently anticipated due to a number of factors, including the
Company's reliance on a limited number of major customers, dependence on
market expansion, competition, technological change and necessity of
developing new services, dependence on proprietary rights, changes in
government regulation (including the Telecommunications Act of 1996) and
seasonality and fluctuations in quarterly results, which are further discussed
in this annual report. See Item 1: "Business--Customers," "--TNS Strategy,"
"--Competition," "--Proprietary Rights," "--Government Regulation," and Item
7: "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

POS SERVICES OVERVIEW
The Company's POS services revenues are derived primarily from the
transmission through its network of transaction information between merchant
or service provider POS terminals and transaction-processing computer centers.
The Company's POS services customers, primarily third party transaction
processors, are typically charged a set price per transaction and an
additional "excess seconds" charge for transactions which utilize the
Company's network facilities for a period of time greater than that which is
specified in the customers' contract. In addition to revenues derived directly
from transaction volume, POS services revenue

16
<PAGE>

includes certain other revenues composed primarily of fixed monthly fees
charged to customers for the use of digital transmission circuits which
connect their processing facilities to the Company's network.

The vast majority of POS services revenue is derived from customers involved
in the electronic processing of point of sale credit card transactions. To a
much lesser extent, the Company derives POS service revenue from the
electronic processing of other types of POS transactions such as healthcare
insurance eligibility verification, electronic transfer of government benefits
such as food stamps and Aid to Families with Dependent Children ("electronic
benefits transfer" or "EBT"), point of sale transactions using debit cards and
other smaller POS markets.

The Company's transaction volume and revenue growth to date has resulted
primarily from increasing the Company's transaction volumes from existing
customers and from attracting new customers to the TNS network. The majority
of the Company's revenue growth has resulted from increasing its market share.
To a lesser extent, the Company has benefited from the growth in electronic
transaction processing markets. This growth has resulted primarily from an
increase in the number of credit card transactions processed electronically.
The Company believes that in the future the use of electronic transaction
processing in markets other than the credit card market, including
transactions for the healthcare industry and EBT transactions, will also
contribute to overall market growth.

During 1996, five of the eight largest third party POS credit card
transaction processors were customers of the Company. These five customers
comprised approximately 74% of the Company's 1996 POS services revenue and 52%
of its total 1996 revenue. Due to certain of the Company's contractual
commitments and certain third party processors' relationships with their
network affiliates, the Company does not believe that the remaining three of
the current eight largest POS credit card transaction processors are currently
prospects for the Company's services. Consequently, while the Company will
continue to pursue certain of the remaining large third party processors as
well as smaller processors, it expects that the predominant source of growth
within POS services will come from increasing its transaction volume from
existing credit card processing customers and growth from new POS transaction
markets. As a result, the Company does not expect that its POS services
revenue growth rate will continue at historical levels.

Average revenue per POS transaction decreased to $0.018 in 1996 from $0.023
in 1995 and from $0.024 in 1994 for several reasons. A number of the Company's
largest customers reached predetermined levels of transaction volumes per
month, qualifying these customers for volume discounts in accordance with
their contracts. Also, during 1996, the Company re-negotiated contracts with
most of its largest customers. Several of these contracts called for a single
flat rate basic price structure with increasing volume commitments during the
life of the contract, rather than volume discounts which become effective only
after certain volume thresholds are met. The pricing of these new contracts
was significantly lower than the pricing these customers received prior to
these re-negotiations. As a result of this new pricing structure, combined
with lower pricing for certain customers with traditional volume discount
contracts, average revenue per transaction declined by 22% in 1996 from 1995,
significantly greater than the approximately 4% to 8% average experienced in
prior periods. The majority of these customers benefited from the re-
negotiated contracts during 1996; however, the remaining contracts take effect
January 1, 1997. The full effect of the 1996 contract re-negotiations will be
reflected in the average revenue per POS transaction during the first quarter
of 1997. Future average revenue per POS transaction will also depend on the
relative contribution to total transaction volume of each of the Company's
sources of POS transactions. Increasing competition from other network
services providers could also contribute to future declining prices per
transaction.

TELECOM SERVICES OVERVIEW
TNS's June 1994 acquisition of FTI added a second significant service
offering (Telecom Services) to the Company's business. TNS's
telecommunications services revenue is currently derived primarily from its
activities in providing fraud control and billing validation services to
telecommunications carriers which allow telephone users to bill charges to an
alternate billing source such as a calling card, collect or third party
account. Revenues from these activities are derived primarily from a per query
fee charged to the Company's customers for each processed fraud control and
billing validation query. In addition to revenues derived directly from the
volume of queries, telecommunications services revenue includes certain other
revenues

17
<PAGE>

composed primarily of fixed monthly fees charged to customers for the use of
transmission circuits, network equipment or access ports on the Company's
computer and communications facilities.

Customers for the Company's current telecommunications services include long
distance telephone carriers, operator services providers, information services
providers and private pay telephone companies. Management believes it has
substantially penetrated the current available transaction volume from
existing customers and revenue growth will be dependent on adding new
customers and new services as well as on potential market growth. In June
1995, the Company acquired from Intellicall the right to provide fraud control
and billing validation services to over 200 private pay telephone companies.
In March 1996, the Company completed an asset purchase from AMNEX, Inc.
("AMNEX") of AMNEX's proprietary fraud-control system and related databases.
The transaction also provided for a ten year exclusive service agreement and a
joint marketing agreement to cross-sell each other's services.

Certain of the Company's telecommunications services customers have long
term contracts while others have extended beyond their contract term or do not
have long term contracts. Many of the Company's telecommunications services
customers are small and have limited resources. As a result, revenues from
these customers are subject to a higher degree of credit risk than is the case
for the Company's POS services customers. Management believes the Company is
adequately reserved for the credit risk associated with this customer base.

Since its inception in 1994, the Company's Telecom services division has
grown principally through the addition of new customers, through the
acquisition of contract rights and other intangible assets, and through the
provision of new service offerings. The Company's core customers in the fraud
control and billing validation services market have not achieved growth rates
comparable with those experienced by many of the Company's POS customers, and
in some cases have experienced some erosion in call and query volumes and
revenues. The market for third party billing validation and fraud control
services has also been adversely impacted by so-called "dial-around" and pre-
paid calling card services which use 800 WATS services to route telephone
calls made from pay phones, hotel phones, or other public use telephones to
long distance carriers other than those chosen by the telephone proprietor.
These "dial-around" offerings effectively divert telephone calls away from the
Company's traditional customer base for fraud control and billing validation
services (primarily operator services providers and pay telephone providers)
to other telecommunications companies with separate billing validation
databases (in many cases MCI and AT&T).

As part of the 1996 Act, the FCC was authorized to mandate a payment scheme
pursuant to which pay telephone operators are "fairly compensated" for all
access code calls, debit card calls, subscriber 800 and other toll-free calls
which originate on the pay phone service providers facilities but which are
routed to telecommunications carriers other than those pre-subscribed by the
pay phone operators ("dial-around compensation"). In October 1996, an interim
solution for dial-around compensation was announced by the FCC. Under the new
regulations, pay telephone operators are to receive an increased fixed monthly
fee of $45 per pay telephone from the long distance voice carriers which use
these pay telephone facilities. While it is uncertain what impact the new
rules will have on dial-around usage and therefore on demand for traditional
TNS's Telecom services offerings, many industry observers believe that the use
of "dial-around" services will continue to grow at the expense of the
traditional pay telephone long distance services upon which the Company's core
customer base for fraud control and billing validation services relies.
Recently, several Local Exchange Carriers ("LECs") have furthered this trend
by introducing proprietary calling cards which utilize dial-around 800 access.
Management believes that the success of "dial-around" services to date is
related to both the method of compensation chosen for the interim solution,
which does not directly tie the cost of "dial-around compensation" to the
usage of "dial-around" services, and also to other market forces favoring the
growth of these type of services. While there can be no assurance of the
Company's success in new marketing efforts, the Company is currently pursuing
several business opportunities from which it could take advantage of the
continuing trend toward the use of "dial-around" services by providing fraud
control and/or billing validation services to several potential vendors of
"dial-around" services.

INTERNATIONAL SERVICES OVERVIEW
The Company currently has international activities primarily in the United
Kingdom ("UK"), Canada and Ireland and recognized $1,600,000 of international
revenue in 1996. In the UK and Canada, the Company

18
<PAGE>

has entered into technology transfer arrangements whereby TNS provides POS
equipment and software to its international customers through one-time sales,
but also has agreements entitling it to receive recurring revenues in the form
of software license fees, maintenance fees and royalties. These fees are based
on the POS revenues generated by its international customers resulting through
the use of the Company's POS technology. Management currently expects to begin
to record royalty revenue under these arrangements in 1997. In Ireland, the
Company has formed a majority-owned subsidiary, Transaction Network Services
Limited ("TNSL") which intends to provide POS network services in Ireland in
the future. TNSL is in a start-up phase and has not generated revenue to date.
TNSL losses of approximately $280,000 were absorbed and not capitalized by the
Company.

NETWORK COST OVERVIEW
The majority of the Company's operating expenses relate to the costs of its
communications network. The largest component of expense, cost of network
services, is composed of five elements: (1) usage costs charged by local
exchange carriers for local access to the TNS network and by inter-exchange
carriers for their "800" service; (2) per transaction costs charged to the
Company by local exchange carriers and others for access to information from
line information databases ("LIDBs"); (3) recurring costs for salaries and
expenses related to the personnel responsible for managing, operating and
servicing the network and computer facilities; (4) recurring monthly charges
for digital transmission circuits for network access and backbone capacity
connecting the Company's sites, site co-location fees or site leases and other
network expenses, and recurring charges related to the Company's computer
facilities; and (5) network expansion charges which include charges related to
the activation of new customer "950" numbers across the network and
installation charges for incremental digital transmission capacity, new sites
and other elements of network expansion. Network expansion charges are
expensed by the Company at the time such costs are incurred.

Pursuant to the Telecommunications Act of 1996 (the "1996 Act"), the FCC is
currently considering the reform of the current system of interstate access
charges, and the Commission has indicated that it intends to issue final rules
in connection with Access Charge Reform during 1997. Under certain Access
Charge Reform proposals, TNS would be placed at the risk of substantial rate
increases that would allow incumbent LECs to include a call-setup charge in
their local switching rate structures or to permit incumbent LECs to charge
nothing for terminating access service and instead recover the costs of
providing such services by increasing their originating access charges.
Conversely, TNS would benefit greatly from any proposal that would have the
net result of lowering its overall network access costs. The final impact of
Access Charge Reform on the Company's future network access costs is unknown,
and the Company cannot predict the timing, outcome or effects of the FCC's
deliberations or of any future tariff matters.

The Company expanded its backbone and access network capacity significantly
during 1995 and 1996 in order to ensure adequate capacity and an appropriate
network architecture for expected increases in network traffic from current
and new markets. In 1996, a significant portion of the expansion cost was
incurred in connection with the First Data Corporation ("FDC") contract
renewal which called for a significant increase in transaction volume. In
1997, the Company will continue to monitor and expand its backbone and access
network capacity as required to handle traffic growth from existing customers.
During 1997, the Company will incur significant non-recurring network
expansion costs as well as a significant increase in certain recurring costs.
A significant portion of these costs are associated with the increase in
transaction volume from existing POS and Telecom customers and the
implementation of FASTLink (R) data services' TCP/IP backbone network. Costs
also include the implementation of the Company's "800" service and
establishment of several network equipment sites. The "800" service
implementation and establishment of its own site facilities will reduce the
variable cost of providing "800" access service and provide greater control
and flexibility with its digital backbone network while reducing reliance upon
third party service providers. Depending on the demand for some of the POS and
telecommunications services expected to be offered by the Company during 1997,
significant additional incremental expansion of network costs may be required.

19
<PAGE>

RESULTS OF OPERATIONS
The following table sets forth the applicable percentage of total revenues
for the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994 (1)
------- ------- ----------
<S> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0%
Cost of network services........................... 55.0 52.7 53.5
------- ------- -------
Gross profit....................................... 45.0 47.3 46.5
------- ------- -------
Other operating expenses
Engineering & development.......................... 5.1 5.4 5.9
Selling, general & administrative.................. 14.3 13.8 14.5
Depreciation....................................... 7.8 7.4 6.9
Amortization of intangibles........................ 2.8 2.8 2.1
------- ------- -------
Total other operating expenses................... 30.1 29.4 29.5
------- ------- -------
Income from operations............................. 14.9 17.9 17.0
Interest income, net............................... 3.2 2.2 0.8
------- ------- -------
Income before income taxes......................... 18.1 20.1 17.8
Provision for income taxes (2)..................... 7.0 7.6 5.6
------- ------- -------
Net income......................................... 11.1% 12.5% 12.2%
======= ======= =======
</TABLE>
- ---------------------
(1) Includes the results of FTI from June 6, 1994, the closing date of its
acquisition by the Company, through December 31, 1994. (See Note 3 of
Notes to Financial Statements.)
(2) TNS utilized net operating loss carry forwards to reduce its income tax
expense in 1994. (See also Note 6 of Notes to Financial Statements.)

1996 COMPARED TO 1995

REVENUES
Total revenues increased by 26% to $52,291,000 from $41,365,000 in 1996. POS
services revenue contributed 70% of the growth which was due to the increased
usage of the TNS network by the Company's POS services customers.
Telecommunications service customers contributed 15% of the growth and the
remaining 15% resulted primarily from development fees and equipment sales
derived from the Company's International activities. As of January 1, 1996 the
Company began reporting a single line item of revenue which includes POS
services revenue, Telecom services revenue and International revenue.

POS services revenue increased by 26% to $36,745,000 from $29,135,000 in
1996. The growth in POS services revenue resulted primarily from an increase
in transaction volume and associated revenue from the Company's existing POS
customers. POS transaction volume increased by 58% to 1,900 million from 1,218
million transactions in 1995. Substantially all of the 1996 revenues that were
derived from POS services were generated by existing customers and
accordingly, most of the increase in POS services resulted from growth in
transaction volume from existing customers. The Company's five largest POS
customers represented 74% of total POS revenues in 1996 and 75% in 1995. The
Company does not expect that its revenue growth rate will continue at
historical levels.

The transaction volume growth rate exceeded the revenue growth rate
primarily because the average revenue per transaction declined by
approximately 22% during 1996. This decline in average revenue per transaction
occurred as a result of several factors. First Data Corporation ("FDC"), the
Company's largest customer, entered into a new five year service contract with
TNS which resulted in a significant price reduction for FDC effective January
1, 1996. Under the terms of the contract, FDC has agreed to a minimum revenue
commitment to TNS of $55 million over the term of the contract, which extends
to December 31, 2000. Several of the Company's other largest customers also
entered into new long term contracts with the Company which resulted in
significant price reductions for those customers. Including FDC, three of the
Company's five largest customers benefited from new long term contracts which
incorporated immediate 1996 price reductions. In July 1996, the Company
entered into a new contract with one of its customers which

20
<PAGE>

resulted in lower pricing in exchange for a significant transaction commitment
extending to the year 2000. Subsequent to the execution of the new contract,
this customer acquired one of the Company's five largest customers and
included that customer's transaction volume under the new contract. The effect
of this acquisition on average revenue per transaction was fully reflected in
the fourth quarter of 1996 as the new pricing was in place for the entire
quarter. Average revenue per transaction also declined as a result of price
discounts based on increasing transaction volumes for many customers and from
the relative contribution to total transaction volume of certain of the
Company's customers. Price reductions set forth in certain other contracts
took effect on January 1, 1997.

Telecommunications revenue increased by 14% to $13,891,000 from $12,230,000
during 1996. This revenue was generated primarily by fees charged on a per
query basis to telecommunications customers for the Company's telephone call
fraud control and billing validation services. The growth in revenue came from
growth in queries processed for the Company's telecommunications customers,
from the inclusion of the revenues derived from the June 30, 1995 Intellicall
asset purchase and, to a much lesser extent, from the purchase of intangible
assets including an exclusive services agreement from AMNEX, Inc. in March
1996. These contract rights generated approximately $2.9 million in revenue in
1996.

International revenue, a new source of revenue for TNS in 1996, was
$1,655,000 for 1996. The Company has entered into technology transfer
agreements whereby the Company provides POS equipment and software to its
international customers. To date, International revenue has primarily
consisted of equipment and software sales. Future revenues will consist of
recurring revenue in the form of software license fees, maintenance fees and
royalties. In Ireland, the Company has formed a majority-owned subsidiary,
TNSL, which intends to provide POS network services in Ireland in the future.
TNSL is in a start-up phase and has not generated revenue to date. TNSL losses
of approximately $280,000 were absorbed and not capitalized by the Company.

COST OF NETWORK SERVICES
Cost of network services increased by 32% to $28,771,000 from $21,819,000
during 1996. This growth resulted primarily from increases in local access,
"800" usage charges and charges for billing validation information resulting
from increased transaction and query volume. Growth in cost of network
services also resulted from costs associated with increases in network
capacity purchased from outside vendors and from increases in other costs
associated with operating the Company's network. Lastly, the growth of cost of
network services was also increased by the cost of goods sold related to
equipment sales.

The reduction in average revenue per transaction for POS network services
was significantly, but not fully, offset by several factors. The Company was
able to continue to achieve economies of scale on its network as the growth in
transaction and query volume and associated revenue was larger than the
increase in recurring costs for network capacity and network management. In
addition, the Company has consistently been able to negotiate better rates
from its large vendors of network capacity and 800 services as it has
increased its consumption of these services. In August 1995, a reduction in
the cost per minute of usage for local access charged by LECs went into effect
by FCC mandate, effectively reducing the Company's variable cost per
transaction. In July 1996, most of the major LECs modestly reduced the cost
per minute rate charged to the Company for local access. However, several of
the carriers substantially increased certain rate elements which had the
effect of raising the effective per minute rate for these carriers, more than
offsetting the benefit of cost reductions from the other carriers. Pursuant to
the Telecommunications Act of 1996 (the "1996 Act"), the FCC is currently
considering the reform of the current system of interstate access charges, and
the FCC has indicated that it intends to issue final rules in connection with
Access Charge Reform during 1997. The final impact of Access Charge Reform on
the Company's future network access costs is unknown but could have a material
effect on the Company's current access cost structure.

GROSS PROFIT
Gross profit increased by 20% to $23,520,000 from $19,546,000 during 1996.
This represented 45% and 47% of total revenues for 1996 and 1995,
respectively. The 2% decrease in gross profit as a percentage of total
revenues reflects the fact that the reduction in average revenue per POS
transaction over the periods was largely, but not completely, offset by
network efficiencies and local access rate reductions. As a result of the
expected decline in average revenue per transaction, resulting from normal
volume price discounts combined with the FDC contract renewal, the Company did
not maintain the levels of gross profit margin

21
<PAGE>

experienced in 1994 and 1995. Under the new FDC contract, which took effect
January 1, 1996, overall average revenue per transaction declined
significantly more than has been the case in recent years and both one-time
costs for network expansion and recurring network operating costs increased
substantially. The gross margin on equipment sales was not significantly
different than the 1996 gross margin on network services during the year. The
reduction in gross profit as a percentage of total revenue is expected to
continue in 1997 as a result of contract negotiations in 1996 that took effect
on January 1, 1997. While there can be no assurance, management believes,
based on current trends and conditions with its customers and vendors, that
the Company will eventually return to its historical pattern of price
reductions being offset by increased network efficiencies from transaction
volume increases and unit cost reductions for key network costs. However, in
1997, the incremental increase in transaction volume and revenue is not
anticipated to offset significant price reductions and network cost increases,
and a further reduction in gross profit margin is likely.

The Company is continuously engaged in the review and dispute of improperly
billed charges from its largest vendors, the LECs. The amount of billing
disputes resolved in the Company's favor during 1996 was larger than had been
experienced in prior periods. Pursuant to the Telecommunications Act of 1996
(the "1996 Act"), the FCC is currently considering the reform of the current
system of interstate access charges, and the FCC has indicated that it intends
to issue final rules in connection with Access Charge Reform during 1997. The
final impact of Access Charge Reform on the Company's future network access
costs is unknown but could have a material effect on the Company's gross
profit margin.

The eventual level of the gross profit margin will depend upon a number of
factors including total transaction and query volume growth, the relative
growth and contribution to total transaction volume of each of the Company's
customers, the timing and extent of the Company's network expansion and the
timing and extent of any network cost reductions of which the Company may be
able to take advantage. In addition, any significant loss or significant
reduction in the growth of transaction volume could lead to a decline in gross
margin because a significant portion of network costs are fixed costs, and
maintaining the historical gross margin level depends in part on growth in
transaction volume generating economies of scale.

ENGINEERING AND DEVELOPMENT
Engineering and development expense increased by 20% to $2,692,000 from
$2,241,000 during 1996. Engineering and development expense is composed of the
salaries, personnel expenses and other expenses related to the Company's
network equipment systems integration, software development and technology
assessment activities. These expenses are incurred primarily to develop and
enhance network software and systems, to develop specialized software and
equipment for new customers, to conduct research and develop new service
offerings, and to build, test, maintain and modify existing network software
and systems. Engineering and development expenses also increased as a result
of the formation of TNSL in July 1996. TNSL is currently in a start-up phase
and intends to provide POS network services in Ireland. Failure to
successfully implement the Ireland POS services in a timely manner may result
in increased engineering and development costs as a percentage of total
revenue. The Company has not capitalized any costs associated with software or
other development performed by its engineering and development groups. Future
engineering and development cost may increase due to additional resource
requirements associated with the introduction of new product services.

SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by 31% to $7,491,000
from $5,697,000 during 1996. Selling, general and administrative expenses
include sales, marketing, finance, accounting and administrative costs. The
increase in these expenses is attributable to several factors. Additional
expenses were incurred as a result of an increase in administrative staff and
expenses associated with the growth of the Company. An increase in sales costs
resulting primarily from an increase in sales staff and salary expense also
contributed to the growth in selling, general and administrative expenses. On
June 30, 1995, TNS entered into a billing agreement with Intellicall. For a
$1,500,000 prepayment, Intellicall provides billing services to TNS for
telecommunications services provided by TNS to customers whose contract rights
were acquired from Intellicall by TNS. During the third quarter of 1995, TNS
began recognizing the billing services expenses associated with the
Intellicall agreement and expects that it will have fully utilized the
prepayment for these services during the next three to five years, depending
on the volume of telecommunications services billed

22
<PAGE>

through this agreement. In March 1996, the Company relocated to a new
headquarters facility and began incurring lease expense on the new building at
that time. Increased lease costs and other expenses related to the relocation
also contributed to the growth in selling, general and administrative
expenses. Total lease costs and building expenses related to the new
headquarters facility were approximately $736,000 for the full year of 1996
compared to approximately $200,000 in 1995. Selling, general and
administrative expenses also increased as a result of the formation of TNSL.
Failure to successfully implement the Ireland POS services in a timely manner
may result in increased selling, general and administrative costs as a
percentage of total revenue.

DEPRECIATION
Depreciation expense increased by 32% to $4,068,000 from $3,081,000 during
1996. Depreciation expense increased primarily as a result of the acquisition
of capital equipment for network expansion to support growth in the Company's
business. Capital expenditures for network and office equipment amounted to
$6,250,000 for 1996. Depreciation expense relating to network and office
equipment is recorded using the straight line method over estimated useful
lives ranging from three to five years.

AMORTIZATION OF INTANGIBLES
The amortization of intangible assets increased by 30% to $1,485,000 from
$1,138,000 during 1996. The increase resulted primarily from two factors.
First, the amortization of certain intangible assets acquired from Intellicall
for approximately $3,000,000 on June 30, 1995 was recognized for the entire
period of 1996 versus six months of 1995. Second, on March 29, 1996, the
Company completed an asset purchase from AMNEX of AMNEX's proprietary fraud-
control system and related databases and entered into long term marketing and
service agreements with AMNEX. The Company paid approximately $1,500,000 in
cash for these intangible assets resulting in increased amortization.
Amortization of all existing intangible assets is expected to be approximately
$380,000 per quarter over the next several years.

INCOME TAXES
Provision for income taxes was $3,640,000 for the period ended December 31,
1996 compared to $3,157,000 for the period ending December, 31 ,1995. The
effective tax rate in the year ending December 31, 1995 was approximately 38%.
In 1996, the effective tax rate has increased to approximately 38.5% as a
result of the Company's activities in Ireland. Continued losses experienced by
TNSL may continue to increase the Company's future effective tax rate. The
Company has not recorded a tax asset for these losses due to TNSL's brief
operating history. If TNSL becomes profitable, TNSL may cause a reduction in
the effective tax rate due to a lower effective tax rate in Ireland than in
the United States.

NET INCOME AND EARNINGS PER SHARE
Net income increased by 13% to $5,814,000 from $5,150,000 during 1996. In
April, 1996, the Company declared a 3-for-2 stock split of the outstanding
shares of Common Stock. This stock split entitled shareholders to receive one
additional share for each two outstanding shares of Common Stock held of
record as of the close of business on April 30, 1996. The payable date was May
10, 1996. All share and per share data have been retroactively adjusted to
reflect the stock split. Earnings per share grew to $0.46 from $0.45 during
1996. The weighted average number of shares outstanding used to calculate
earnings per share increased to 12,591,000 from 11,534,000 during 1996. Shares
outstanding increased primarily because the 1,500,000 shares of Common Stock
issued by the Company in August of 1995 were outstanding for all of 1996.

1995 COMPARED TO 1994

REVENUES
Total revenues increased by 56% to $41,365,000 from $26,526,000 in 1994. The
growth in revenue resulted from an increase in POS transaction volume and
associated revenue, from the inclusion of revenue for Telecom services for the
full year of 1995 versus approximately seven months of 1994 after the June 6,
1994 acquisition of FTI, and from growth in query volume and associated
revenue from Telecom services as well as the addition of new revenue resulting
from the June 1995 purchase of certain contract rights from Intellicall.

23
<PAGE>

POS services revenue increased by 38% to $29,135,000 in 1995 from
$21,056,000 in 1994. The growth in POS services revenue resulted predominantly
from an increase in transaction volume and associated revenue. POS transaction
volume increased by 48% to 1,218 million transactions in 1995 from 824 million
in 1994. In addition to growth in revenue derived directly from POS
transaction volume, a small proportion of revenue growth resulted from growth
in other revenue, primarily for fees charged to customers for the use of
digital transmission circuits and network equipment which connect customer
processing facilities to the TNS network. Non-transaction revenue composed 5%
of POS revenue in 1995 and 1994. The transaction volume growth rate exceeded
the revenue growth rate primarily because the average revenue per POS
transaction declined to $0.023 from $0.024. Substantially all of the 1995
revenues that were derived from POS services were generated by existing
customers and accordingly, most of the increase in POS services revenues
resulted from growth in transaction volume from existing customers. The
Company's five largest POS customers represented 75% of total POS revenues in
1995 and 78% in 1994. The Company does not expect that its revenue growth rate
will continue at historical levels.

Telecommunications services revenue grew by 124% to $12,230,000 in 1995 from
$5,470,000 for the period from June 6, 1994 through December 31, 1994. This
growth was primarily a result of recognizing a full year of Telecom services
revenue in 1995 versus approximately seven months in 1994, from growth in
query volume resulting from the addition of new Telecom services customers,
and from growth in transaction volume resulting from the addition of new pay-
phone customers associated with the purchase of certain contract rights from
Intellicall in June 1995. Telecom services revenue was generated primarily by
fees charged on a per query basis to the Company's customers for its telephone
call fraud-control and billing validation services. Certain revenue was
related to fixed fees charged to customers primarily for network connection
and port availability on the Company's computer and communication facilities.

On June 30, 1995, TNS paid $3,000,000 for certain contract rights and
certain marketing, service and non-compete agreements with Intellicall. As a
result, TNS derives POS services revenue from providing TransXpress(R) network
services and Telecom services revenue from providing CARD*TEL(R) telephone
call fraud control and billing validation services for transactions generated
by "0+" pay telephone calls for certain customers operating Intellicall's pay
telephone equipment. TNS transmits over its network the short data messages
("queries") containing telephone call billing information from these pay
telephones to the Company's telecommunications services data processing system
where it provides fraud control and billing validation services. These
contract rights generated approximately $1.4 million in revenue in 1995.

COST OF NETWORK SERVICES
Cost of network services increased by 54% to $21,819,000 in 1995 from
$14,200,000 in 1994. This growth resulted primarily from increases in local
access and "800" usage charges resulting from increased transaction volume,
from costs associated with increases in network capacity purchased from
outside vendors and from the inclusion of the cost of network services for
telecommunications services. Cost of network services for telecommunications
services consists primarily of costs for access to LIDBs and of costs related
to the maintenance and control of the division's communications and data
processing computer systems. Cost of network services remained relatively
constant as a percentage of revenue at 53% in 1995 and 54% in 1994, despite
declining prices for POS transactions averaging 4% to 8% per annum and a
similar decrease in the average revenue per query for Telecom services in
1995, resulting from several factors. In August 1995, a reduction in the cost
per minute of usage for POS transactions charged by local exchange carriers
went into effect by FCC mandate, resulting in a lower than expected increase
in overall cost of network services. Also, the increase in transaction and
query volume and associated revenue was greater than the associated increase
in access and backbone network costs, network management costs and associated
costs.

GROSS PROFIT
Gross profit increased by 59% to $19,546,000 in 1995 from $12,326,000 in
1994, representing 47% and 46% of revenues in 1995 and 1994, respectively. In
1995 as in 1994, TNS was able to maintain a gross profit margin in the 46-47%
range, primarily by offsetting the decline in the average revenue per
transaction by cost reductions and network efficiencies as cited above.

24
<PAGE>

ENGINEERING AND DEVELOPMENT
Engineering and development expense increased by 42% to $2,241,000 in 1995
from $1,575,000 in 1994. Engineering and development expense is composed of
the salaries, personnel expenses and other expenses related to the Company's
network equipment systems integration, software development and technology
assessment activities. These expenses are incurred primarily to develop and
enhance network software and systems, to develop specialized software and
equipment for new customers, to conduct research and develop new service
offerings, and to test, maintain and modify existing network software and
systems. The Company has not capitalized any costs associated with software or
other development performed by its engineering and development groups. The
growth in engineering and development expenses resulted from both the addition
of new staff and resources to the development and engineering activities of
the Company's POS services business, and from the addition of FTI's
engineering and development expenses and new engineering and development
activities undertaken to support the Company's Telecom services.

SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by 48% to $5,697,000
in 1995 from $3,842,000 in 1994. Selling, general and administrative expenses
include sales, marketing, finance, accounting and administrative costs. The
increase in these expenses was attributable to several factors. Additional
expenses were incurred as a result of an increase in administrative staff and
expenses associated with the growth of the Company. Expenses also grew as a
result of the inclusion of Telecom services administrative expenses for the
full year in 1995 versus less than seven months in 1994. Also, an increase in
sales costs resulting primarily from an increase in sales staff and salary
expense in both the POS Services Division and the Telecom Services Division
contributed to the growth in selling, general and administrative expenses. On
June 30, 1995, TNS entered into a billing agreement with Intellicall whereby,
for a $1.5 million prepayment, Intellicall provides billing services to TNS
for Telecom services provided by TNS to customers whose contract rights were
acquired from Intellicall by TNS. TNS expects to recognize these expenses over
four to six years, depending on the volume of telecommunications services
generated by the acquired contract rights.

DEPRECIATION
Depreciation expense increased by 68% to $3,081,000 in 1995 from $1,830,000
in 1994. Depreciation expense increased primarily as a result of the
acquisition of capital equipment for network expansion to support growth in
the Company's POS services business. To a lesser extent, depreciation expense
increased due to the acquisition of FTI's fixed assets and to the acquisition
of network equipment used to support the Company's Telecom services business.
Capital expenditures for network and office equipment amounted to $5.6 million
in 1995 and $6.4 million in 1994. Depreciation expense relating to network and
office equipment is recorded using the straight line method over an estimated
useful life of three to five years.

AMORTIZATION OF INTANGIBLES
The amortization of intangible assets increased by 101% to $1,138,000 in
1995 from $566,000 in 1994. The increase resulted from the inclusion of
amortization expense relating to the FTI acquisition for the full year in 1995
versus seven months in 1994. On June 30, 1995, TNS acquired certain contract
rights from Intellicall for $3.0 million. Total intangible assets, including
contract rights, software, customer lists, other agreements and goodwill, of
approximately $12.1 million as of December 31, 1995 are being amortized over
five to ten year periods.

INCOME TAXES
Provision for income taxes was $3,157,000 in 1995 and $1,491,000 in 1994.
The utilization of net operating loss carry forwards resulted in an effective
tax rate of approximately 32% in 1994. The effective tax rate in 1995 was
approximately 38%. (See Note 6 of Notes to Financial Statements.)

NET INCOME AND EARNINGS PER SHARE
Net income increased by 59% to $5,150,000 from $3,242,000 in 1994. Earnings
per share grew to $0.45 in 1995 from $0.33 in 1994. The income tax benefit of
net operating losses utilized reduced income tax expense and increased net
income by $339,000 or $0.03 per share in 1994. The weighted average number of
shares outstanding used to calculate earnings per share increased to 11.5
million in 1995 from 9.9 million in

25
<PAGE>

1994. Shares outstanding increased primarily because of the Company's public
offering in 1995 in which 1.5 million shares were issued by the Company.

QUARTERLY RESULTS
The following table presents certain unaudited operating results for each of
the eight fiscal quarters in the two year period ended December 31, 1996. This
information has been prepared by the Company on the same basis as the audited
financial statements and includes all adjustments necessary to present this
information fairly when considered in conjunction with the Company's audited
consolidated financial statements and notes thereto. Quarterly information may
not total to annual amounts in some cases due to rounding.

<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996(1) 1996
-------- -------- --------- -------- -------- -------- --------- --------
QUARTER ENDED
-------------
(IN THOUSANDS, EXCEPT PER SHARE DATA )
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $8,421 $9,743 $11,386 $11,815 $10,933 $13,168 $14,840 $13,350
Income from operations.. 1,013 1,643 2,183 2,550 1,050 1,926 2,683 2,125
Income before income
taxes.................. 1,115 1,744 2,400 3,048 1,450 2,376 3,080 2,548
Net income.............. $ 691 $1,081 $ 1,488 $ 1,890 $ 899 $ 1,473 $ 1,867 $ 1,575
====== ====== ======= ======= ======= ======= ======= =======
Net income per common
and equivalent share... $ 0.06 $ 0.10 $ 0.13 $ 0.15 $ 0.07 $ 0.12 $ 0.15 $ 0.13
====== ====== ======= ======= ======= ======= ======= =======
Shares used in per share
computations........... 10,949 10,983 11,810 12,338 12,603 12,710 12,618 12,584
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1)Includes non-recurring revenue of approximately $1.2 million from
International equipment sales.

Merchant credit card transactions and credit card transactions from gasoline
stations account for a major percentage of the transaction volume processed by
the Company's POS customers. The volume of such transactions on the Company's
network is expected to be weakest in the first quarter, stronger in the second
quarter, greater still in the third quarter high travel season and peak in the
fourth quarter holiday season. The Company adds network capacity and
associated recurring monthly costs during the year in order to handle expected
fourth quarter peak volumes. As a result of these seasonal patterns, revenues,
earnings and profit margins from POS credit card transactions in the first
quarter, when revenues are lower and network utilization is lower, are
expected to be significantly lower relative to the fourth quarter of the
immediately preceding year, when revenues and network utilization are high. To
date, the strong underlying growth of the Company's POS business has
alleviated this seasonal effect to some extent, but the Company expects that
its operating results in the foreseeable future will be significantly affected
by seasonal trends. The Company's revenues from calling card transactions tend
to be greatest during the second and third quarters, although this revenue
composes a smaller percentage of total revenues than does POS services
revenue. Variability also occurs in operating expenses due to the timing of
network expansion and price discounts. The Company will incur significant non
recurring network expansion costs as well as a significant increase in certain
recurring network costs during 1997. A significant portion of these costs are
associated with the increase transaction volume from existing POS and Telecom
customers and from the implementation of FASTLink (R) services. Costs also
include the implementation of the Company's "800" service and build-out of
several network equipment sites which will provide the Company less reliance
on "800" service and network access providers. The Company may experience a
reduction in gross margin in certain quarters depending on the timing of these
costs. As a result of all these factors, significant variability in quarterly
earnings is expected.

LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 principal sources of liquidity were cash and cash
equivalents of $3,169,000, short term investments of $15,700,000, reverse
repurchase agreements of $11,566,000 and a bank line of credit of up to
$1,000,000, with an annual interest rate of 2% above the prime rate of
interest, all of which is currently available for borrowing. The Company
believes that its existing cash and investment balances, line of credit,

26
<PAGE>

other current assets and cash generated by operating activities will be
sufficient to meet the capital needs of its current business activities for
the foreseeable future.

At December 31, 1996 the Company had commitments to purchase capital
equipment in the amount of approximately $2.6 million over an 18 month period,
$1.7 million of which is contingent upon a vendor reaching technical
development milestones. Except for these arrangements, the Company does not
have long-term supply contracts with these or any other limited source
vendors. In the past the Company has utilized a portion of its excess cash
reserves for acquisitions of businesses and other revenue generating assets.
While no acquisitions are currently being negotiated, from time to time the
Company reviews potential acquisition candidates and it is not unlikely that
the Company will utilize some or all of its current cash and investment
balances for acquisitions in the future.

The following table summarizes sources and uses of cash from the Company's
Statement of Cash Flows for the year ended December 31, 1996.

<TABLE>
<S> <C> <C>
Cash and cash equivalents as of December 31, 1995....... $ 15,539,000
Net cash provided by operations......................... $ 10,001,000
Investing activities:
Cash used in AMNEX asset acquisition................... (1,682,000)
Purchases of equipment................................. (6,250,000)
Repayment of note receivable........................... 3,600,000
Net investment purchases............................... (19,735,000)
Other investing activities............................. 107,000
------------
(23,960,000)

Net cash provided by financing activities............... 1,561,000
Effect of exchange rate on cash......................... 28,000
Net decrease in cash and cash equivalents............... $(12,370,000)
------------
Cash and cash equivalents as of December 31,1996........ $ 3,169,000
</TABLE>

On September 21, 1995 the Company entered into a lease which commenced in
March 1996 on an office building which the Company began to use as its
headquarters facility beginning in March 1996. The lease term is 12 years and
calls for the payment of approximately $620,000 in 1996, and for the payment
to escalate every year thereafter based a factor tied to the change in the
Consumer Price Index, but not to exceed 3% per annum, and for a fixed increase
in year six of approximately $67,000.

During the period ended December 31, 1996 operations provided $10,001,000 in
cash.

Investing activities used $23,960,000 in cash during the period ended
December 31, 1996. During 1996, purchases of equipment used $6,250,000, the
purchase of certain assets and agreements from AMNEX, Inc. used $1,682,000,
purchases of long term investment-grade fixed-income securities with original
maturities of more than one year used $162,000, purchases of short-term
investments with original maturities of less than one year but more than three
months used $11,149,000, purchases of overnight reverse repurchase agreements
used $8,424,000, repayment of a note receivable provided $3,600,000 and other
investing activities provided $107,000.

During the year ended December 31, 1996, financing activities provided net
cash of $1,561,000 due to the exercise of stock options.

The Company believes that the proceeds from its 1995 public offering of
common stock, its other existing cash balances and line of credit, other
current assets and cash flow generated by operating activities will be
sufficient to meet the capital needs of its current business activities for
the foreseeable future.

27
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants............. 29
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. 30
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994...................................................... 31
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995
and 1994................................................................. 32
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994...................................................... 33
Notes to Consolidated Financial Statements................................ 34
</TABLE>

28
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Transaction Network Services, Inc.:

We have audited the accompanying consolidated balance sheets of Transaction
Network Services, Inc. (a Delaware corporation) and subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transaction Network
Services, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.,
January 24, 1997

29
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 3,169 $15,539
Short-term investments............................. 15,700 4,551
Reverse repurchase agreements...................... 11,566 3,142
Accounts receivable, net of allowance for doubtful
accounts of $598 and $432, respectively........... 9,350 7,716
Other current assets............................... 617 630
------- -------
Total current assets............................. 40,402 31,578
------- -------
EQUIPMENT, at cost:
Network equipment.................................. 21,472 17,067
Office equipment................................... 2,688 1,249
Less--Accumulated depreciation..................... (10,074) (6,291)
------- -------
14,086 12,025
------- -------
INTANGIBLE ASSETS:
Software and intangibles (Notes 1 and 4)........... 13,772 12,090
Less--Accumulated amortization..................... (3,186) (1,701)
------- -------
10,586 10,389
------- -------
OTHER ASSETS........................................ 909 1,350
NOTE RECEIVABLE (Note 10)............................ -- 3,600
LONG-TERM INVESTMENTS................................ 2,568 2,406
------- -------
Total assets..................................... $68,551 $61,348
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES:
Accounts payable and accrued expenses.............. $ 5,281 $ 5,676
Current portion of deferred income tax............. 270 123
------- -------
Total current liabilities........................ 5,551 5,799
DEFERRED INCOME TAX.................................. 809 956
------- -------
Total liabilities................................ 6,360 6,755
------- -------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 6, 7 and 8)
Common Stock, $0.01 par value, 30,000 shares
authorized, 12,328 and 12,138 shares issued and
outstanding in 1996 and 1995, respectively........ 123 121
Additional paid-in capital......................... 49,844 48,120
Unearned compensation.............................. (76) (106)
Retained Earnings.................................. 12,272 6,458
Foreign currency translation....................... 28 --
------- -------
Total stockholders' equity....................... 62,191 54,593
------- -------
Total liabilities and stockholders' equity....... $68,551 $61,348
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

30
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $ 52,291 $ 41,365 $ 26,526
Cost of network services........................... 28,771 21,819 14,200
-------- -------- --------
Gross profit....................................... 23,520 19,546 12,326
-------- -------- --------
Other operating expenses:
Engineering & development........................ 2,692 2,241 1,575
Selling, general & administrative................ 7,491 5,697 3,842
Depreciation..................................... 4,068 3,081 1,830
Amortization of intangibles...................... 1,485 1,138 566
-------- -------- --------
Total other operating expenses................. 15,736 12,157 7,813
-------- -------- --------
Income from operations............................. 7,784 7,389 4,513
Interest income, net............................... 1,670 918 220
-------- -------- --------
Income before provision for income taxes........... 9,454 8,307 4,733
Provision for income taxes......................... 3,640 3,157 1,491
-------- -------- --------
Net income......................................... $ 5,814 $ 5,150 $ 3,242
======== ======== ========
Net income per common and equivalent share......... $ 0.46 $ 0.45 $ 0.33
======== ======== ========
Weighted average common and equivalent shares
outstanding....................................... 12,591 11,534 9,947
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

(IN THOUSANDS)

<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED TREASURY STOCK FOREIGN
------------------ -------------- PAID-IN COMPENSATION -------------- CURRENCY RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (NOTE 8) SHARES AMOUNT TRANSLATION EARNINGS
------- --------- ------ ------ ---------- ------------ ------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993.................... 39 $ 8,298 2,609 $ 26 $ 521 $ (85) 840 $(1,873) -- $(1,767)
Accretion of redemption
price differential...... -- 167 -- -- -- -- -- -- -- (167)
Compensation element of
stock options granted... -- -- -- -- 168 (168) -- -- -- --
Amortization of unearned
compensation............ -- -- -- -- -- 89 -- -- -- --
Stock issued through
IPO..................... (39) (8,465) 8,247 82 23,063 -- -- -- -- --
Options/Warrants
exercised through IPO... -- -- 155 1 127 -- -- -- -- --
Stock issued under 401K
plan.................... -- -- 6 -- 20 -- -- -- -- --
Exercise of stock
options................. -- -- 51 1 18 -- -- -- -- --
Employee Stock Purchase
Plan.................... -- -- 4 -- 25 -- -- -- -- --
Purchase of subsidiary.. -- -- 225 2 1,011 -- -- -- -- --
Retirement of treasury
shares.................. -- -- (840) (8) (1,865) -- (840) 1,873 -- --
Tax benefit of exercise
of non-qualified
options................. -- -- -- -- 397 -- -- -- -- --
Net income.............. -- -- -- -- -- -- -- -- -- 3,242
----- --------- ------ ---- ------- ----- ---- ------- --- -------
BALANCE, December 31,
1994.................... -- -- 10,457 104 23,485 (164) -- -- -- 1,308
Amortization of unearned
compensation............ -- -- -- -- -- 58 -- -- -- --
Stock issued through
public offering......... -- -- 1,500 15 23,354 -- -- -- -- --
Stock issued under 401K
Plan.................... -- -- 6 -- 56 -- -- -- -- --
Exercise of stock
options................. -- -- 160 2 394 -- -- -- -- --
Employee Stock Purchase
Plan.................... -- -- 15 -- 130 -- -- -- -- --
Tax benefit of exercise
of non-qualified
options................. -- -- -- -- 701 -- -- -- -- --
Net income.............. -- -- -- -- -- -- -- -- -- 5,150
----- --------- ------ ---- ------- ----- ---- ------- --- -------
BALANCE, December 31,
1995.................... -- -- 12,138 121 48,120 (106) -- -- -- 6,458
Amortization of unearned
compensation............ -- -- -- -- -- 30 -- -- -- --
Stock issued under 401K
Plan.................... -- -- 11 -- 165 -- -- -- -- --
Exercise of stock
options................. -- -- 155 2 466 -- -- -- -- --
Employee Stock Purchase
Plan.................... -- -- 24 -- 260 -- -- -- -- --
Tax benefit of exercise
of non-qualified
options................. -- -- -- -- 833 -- -- -- -- --
Foreign currency
translation............. -- -- -- -- -- -- -- -- 28 --
Net income.............. -- -- -- -- -- -- -- -- -- 5,814
----- --------- ------ ---- ------- ----- ---- ------- --- -------
BALANCE, December 31,
1996.................... -- $ -- 12,328 $123 $49,844 $ (76) -- $ -- $28 $12,272
===== ========= ====== ==== ======= ===== ==== ======= === =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

32
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income..................................... $ 5,814 $ 5,150 $ 3,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 5,553 4,219 2,396
Stock option compensation.................... 30 58 91
Loss on disposals of equipment............... 14 60 --
Changes in assets and liabilities:
Accounts receivable........................ (1,634) (2,186) (2,159)
Other current assets....................... 13 (445) (76)
Other assets............................... 441 (1,150) (200)
Accounts payable and accrued expenses...... (230) 896 644
Deferred tax liability..................... -- 82 997
-------- -------- --------
Net cash provided by operating activi-
ties.................................... 10,001 6,684 4,935
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment....................... (6,250) (5,638) (6,423)
Purchase of subsidiary, net of cash ac-
quired...................................... -- -- (6,768)
Purchases of intangible assets............... (1,682) (3,503) --
Proceeds from disposals of equipment......... 107 58 --
Repayment (issuance) of note receivable...... 3,600 (3,600) --
Purchases of short-term investments.......... (11,149) (4,551) --
Net (purchases) sales of reverse repurchase
agreements.................................. (8,424) (2,465) 224
Purchases of long-term investments........... (162) (2,406) --
-------- -------- --------
Net cash used in investing activities.... (23,960) (22,105) (12,967)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock...... -- 23,369 14,680
Proceeds from options and employee stock pur-
chase plan.................................. 728 526 172
Income tax benefit of deduction for income
tax purposes on exercise of stock options... 833 701 397
Repayment of note payable to stockholder..... -- -- (492)
Repayment of equipment notes and capital
leases...................................... -- (272) (208)
-------- -------- --------
Net cash provided by financing activi-
ties.................................... 1,561 24,324 14,549
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... 28 -- --
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (12,370) 8,903 6,517
CASH AND CASH EQUIVALENTS, beginning of year..... 15,539 6,636 119
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year........... $ 3,169 $ 15,539 $ 6,636
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest....... $ -- $ 20 $ 60
Cash paid during the year for income taxes... 3,088 1,502 495
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in exchange for subsidi-
ary......................................... -- -- 1,013
Common stock issued for 401K matching contri-
bution...................................... 165 56 20
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

33
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Transaction Network Services, Inc. (the "Company" or "TNS") was incorporated
on August 20, 1990, in the state of Delaware, and is a nationwide
communications network company specializing in transaction-oriented data
services. The Company currently addresses three primary markets through its
service offerings: (1) the domestic point-of-sale/point-of-service ("POS")
transaction market through its TransXpress(R) network services, (2) the
domestic telephone call billing validation and fraud control market through
its CARD*TEL(R) telecommunications services ("Telecom"), and (3) international
markets for the Company's products and services. The Company provides
participants in these markets with communications for real-time validation
necessary to reduce losses resulting from the bad debt and fraud often
associated with credit cards, debit cards and "0+" telephone calls.

The consolidated financial statements include the accounts of TNS, Fortune
Telecommunications, Inc. ("FTI") and Transaction Network Services Limited
("TNSL"). FTI was a wholly owned subsidiary from the date of its acquisition,
June 6, 1994. Effective February 28, 1995, FTI was merged into TNS. TNSL,
formed in June 1996, is a majority-owned subsidiary located in Ireland.
Significant intercompany accounts have been eliminated in consolidation.

The majority of the Company's revenues are derived from the transmission of
POS transactions (predominantly credit and debit card transactions), which are
processed electronically by a small number of third party POS transaction
processors. The Company's TransXpress(R) network services implement
proprietary technology that provides a communications link between the
merchant site and the transaction processor. The Company markets its
TransXpress(R) network services directly to third party POS transaction
processors, who in turn resell the Company's network services as a part of the
processors' own services.

The Company's CARD*TEL(R) telecommunications services utilize proprietary
fraud control technology and databases to provide real-time telephone call
billing validation and fraud control services to the telecommunications
industry, including long distance telephone companies, operator services
providers, information services providers and private pay telephone companies.

The Company's international business currently consists of equipment and
software sales. The majority of the Company's international activities are
located in the United Kingdom ("UK"), Canada and Ireland. In the UK and
Canada, the Company has entered into technology transfer arrangements whereby
TNS provides POS equipment and proprietary billing and network software. Under
these arrangements the Company receives recurring revenues in the form of
software license and maintenance fees, and royalties based on revenues
generated by its international customers. Management expects to begin to
recognize royalty revenue under these arrangements in 1997. TNSL intends to
provide POS network services and did not generate revenues in 1996.

The Company's operations are subject to certain risks and uncertainties
including, among others, reliance on major customers, rapidly changing
technology, limited suppliers, current and potential competitors with
significantly greater financial, technical and marketing resources and
government regulation.

Stock Split
In April 1996, the Company declared a 3-for-2 stock split of the outstanding
shares of its common stock. This stock split entitled shareholders to receive
one additional share for each two outstanding shares of common stock held of
record as of the close of business on April 30, 1996. All share and per share
data have been retroactively adjusted to reflect the stock split.

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

34
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Net Income Per Common and Equivalent Share
Net income per common and equivalent share was computed on a pro forma basis
for the year ended December 31, 1994, and is based on the weighted average
number of common equivalent shares outstanding during each period. Common
equivalent shares included redeemable convertible preferred stock for 1994,
and the dilutive effect of all options outstanding for each period. Fully
diluted earnings per share is not presented because the difference between
these amounts and the amounts presented was not material.

Financial Instruments
The Company considers all securities purchased with an original maturity of
three months or less at the date of purchase to be cash equivalents.

At December 31, 1996 and 1995, the Company's securities consisted primarily
of money market accounts (classified as cash equivalents), U.S. government and
government agency securities, investment grade corporate bonds, and overnight
reverse repurchase agreements, all of which the Company has both the positive
intent and ability to hold until maturity. These securities are reported at
amortized cost.

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it was practicable to
estimate that value:

Current Assets and Current Liabilities
The carrying amounts approximate fair value due to the short maturity of
those amounts.

Investments
The fair values of investments, which consist of U.S. government and
government agency securities and investment grade corporate bonds, were
estimated based on quoted market prices on national exchanges and
approximated the carrying amounts.

Credit Risk
The Company's assets that are exposed to credit risk consist primarily of
cash equivalents, investments and accounts receivable. Accounts receivable
consist of geographically dispersed customers, and the Company has not
experienced significant losses related to uncollectible accounts from its POS
customers. Revenues from its telecommunications services customers, which
became TNS' customers with the June 1994 acquisition of FTI and the June 1995
purchase of certain contract rights from Intellicall, Inc. ("Intellicall")
(Note 4), are subject to a higher degree of credit risk than is the case for
the Company's POS services customers. The Company reserves for the credit risk
associated with this customer base. The Company has investments in overnight
reverse repurchase agreements with banks. As of December 31, 1996 and 1995,
the Company had invested approximately $11,566,000 and $3,142,000 in overnight
reverse repurchase agreements with NationsBank. NationsBank provides
underlying collateral consisting of U.S. government securities which fully
secures the carrying value of the reverse repurchase agreements. Because the
transactions are entered into and settled daily, management believes that the
risk of market value impairment on a given day is nominal.

Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," ("SFAS No. 121") as of January 1, 1996. As of December 31,
1996, the Company's long-lived assets consisted of network equipment and
intangible assets. The Company periodically reviews the value of these assets
to determine if an impairment has occurred. The adoption of SFAS No. 121 did
not have a material impact on the Company's financial statements.

Equipment
Network and office equipment is recorded at cost. Depreciation expense is
calculated using the straight-line method over estimated useful lives of three
to five years.

35
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Intangible Assets
The Company recorded intangible assets as a result of its acquisition of FTI
(Note 3), the purchase of certain contract rights from Intellicall, Inc. (Note
4), and an asset purchase from AMNEX, Inc. (Note 4). These intangible assets
are being amortized over useful lives ranging from five to ten years.

Other Assets
Other assets include prepaid billing services of approximately $1.2 million
paid to Intellicall (Note 4). This prepayment will be expensed as the services
are provided. The Company expects to recognize these expenses over four to six
years, depending on the volume of transactions covered by the agreement. The
portion expected to be expensed within the next year has been classified in
other current assets.

Revenue Recognition
The Company recognizes POS and Telecom services revenue as the related
services are performed. Advance payments for services are deferred and
recognized as revenue when earned. POS services revenue is derived primarily
from the transmission through its network of transaction information between
merchant or service provider POS terminals and transaction-processing computer
centers. Telecom services revenue consists primarily of fees charged on a per
query basis to customers for telephone call fraud-control and billing
validation services. International revenue consists primarily of consulting
fees and equipment sales revenue. Revenue from equipment sales is recognized
upon shipment. The Company expects to recognize maintenance, software license
and royalty fees in the future related to its international customers. Revenue
from maintenance and software licenses will be recognized ratably over the
term of the agreement. Revenue from royalties will be recognized when earned.

Cost of Network Services
Cost of network services principally includes usage charges for data
transmission and database access, leased digital transmission capacity
charges, transmission capacity installation charges, new customer "950" number
activation charges, salaries, equipment maintenance and other related network
costs. Depreciation expense on network equipment was approximately $3,623,000,
$2,811,000, and $1,670,000 for the years ended December 31, 1996, 1995 and
1994, respectively, and is included in depreciation expense in the
accompanying statements of operations.

Engineering and Development Costs
Expenditures for engineering and development activities are charged to
expense as incurred.

Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). Under SFAS No. 109, 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 rate. Deferred income tax
expense or credits are based upon the changes in the asset or liability from
period to period.

Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.

36
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following as of
December 31 (in thousands).

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accounts payable and accrued network costs................. $3,554 $3,662
Accrued payroll and related expenses....................... 449 540
Deferred revenue........................................... 440 153
Other...................................................... 838 1,303
------ ------
Total.................................................... $5,281 $5,658
====== ======
</TABLE>

3. ACQUISITION AND SUBSIDIARY:

Fortune Telecommunications, Inc.
On June 6, 1994, the Company completed the acquisition of FTI. In connection
with the acquisition, the Company paid $6.6 million in cash and issued 150,000
unregistered and previously unissued shares of common stock valued at $1.0
million to the shareholders of FTI. The Company also incurred acquisition
expenses and assumed liabilities of FTI totaling approximately $3.2 million.
The acquisition was accounted for as a purchase, and the results of FTI are
included with the Company's results from the date of acquisition. The purchase
price together with direct acquisition costs and liabilities assumed were
allocated to the assets acquired based upon the estimated fair values of such
assets as described in the table below.

<TABLE>
<S> <C>
Current assets.............................................. $ 1.5 million
Equipment................................................... $ 0.7 million
Intangible assets:
Software................................................... $ 1.0 million
Other intangibles.......................................... $ 7.6 million
-------------
Total..................................................... $10.8 million
=============
</TABLE>

Equipment is being depreciated over its expected remaining useful life (up
to five years). Software is being amortized over five years and other
intangible assets acquired, including customer lists, trademarks and goodwill,
are being amortized over 10 years.

The unaudited pro forma information presented below reflects the June 1994
acquisition of FTI as if it had occurred on January 1, 1994. These results are
not necessarily indicative of future operating results or of what would have
occurred had the acquisition been consummated at that time.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Revenues (thousands)........................................ $30,617
Net income (thousands)...................................... 3,126
Net income per share........................................ $ 0.30
</TABLE>

Transaction Network Services, Limited

In 1996, the Company formed TNSL in Ireland, a majority owned subsidiary.
The Company has provided the minority shareholders the right to put their
shares to the Company at the fair value of TNSL shares at the exercise date.
The Company also has the right to call the minority shares at fair value. Both
the put and call provisions expire on December 31, 2001.

37
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. PURCHASES OF INTANGIBLE ASSETS
On June 30, 1995, the Company completed a purchase from Intellicall, Inc.
("Intellicall") of certain contract rights related to Intellicall's telephone
call validation and fraud control services, including Intellicall's validation
services contracts with customers. The Company also purchased a validation
services contract with Intellicall and an exclusive U.S. license to
Intellicall's VICS software (excluding certain markets). Intellicall agreed
not to compete for ten years with the Company in the provision of validation
services and to exclusively market the Company's validation services to
Intellicall's customers (excepting, in each case, such excluded markets). The
Company paid $3 million in cash for these assets. The cost of these assets has
been included in intangible assets in the consolidated accompanying balance
sheets. The Company is amortizing the cost of these assets over ten years.

On March 29, 1996, the Company completed an asset purchase from AMNEX, Inc.
("AMNEX") of AMNEX's proprietary fraud-control system and related databases
used to provide fraud control and billing validation services. The transaction
also included a ten year exclusive service agreement, a joint marketing
agreement to cross-sell each other's services and a warrant agreement giving
the Company the right to purchase 100,000 shares of AMNEX Common Stock at
$3.91. The Company paid approximately $1.5 million in cash for these assets.
The Company is amortizing the cost of these assets over five to ten years.

5. BORROWING ARRANGEMENTS:

Line-of-Credit Agreement
The Company has a line-of-credit with a bank which expires on October 31,
1997. Borrowings on the line are limited to $1,000,000. Amounts outstanding
under the line bear interest at the prime rate plus 2 percent (10.25 percent
at December 31, 1996), are secured by the Company's accounts receivable, as
defined, and are subject to restrictions on additional borrowings and certain
non-financial covenants. The line-of-credit has not been used.

6. INCOME TAXES:
The components of income tax expense for the years ending December 31, 1996,
1995 and 1994 consist of the following (in thousands).
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current provision:
Federal............................................ $3,262 $2,649 $ 717
Federal alternative minimum tax.................... -- -- 31
State.............................................. 378 426 85
Deferred provision:
Federal............................................ -- 71 892
State.............................................. -- 11 105
Benefit of net operating loss carry-forwards........ -- -- (339)
------ ------ ------
$3,640 $3,157 $1,491
====== ====== ======
</TABLE>

The provision for income taxes results in effective rates for the years
ending December 31, 1996, 1995 and 1994 which differ from the Federal
statutory rate as follows.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate....................... 35.0% 35.0% 35.0%
Impact of graduated rates............................... (1.0) (1.0) (1.0)
State income taxes, net of Federal tax benefit.......... 4.0 4.0 4.0
Federal alternative minimum tax......................... -- -- 0.7
Effect of foreign tax rates............................. 0.5 -- --
Benefit of net operating loss carry-forwards............ -- -- (7.2)
---- ---- ----
Effective rate.......................................... 38.5% 38.0% 31.5%
==== ==== ====
</TABLE>

38
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1994, the Company had net operating loss carry-forwards
for tax purposes of approximately $0.6 million. These net operating loss
carry-forwards were extinguished as of December 31, 1995. In 1996, the
effective tax rate has increased as a result of TNSL's activities in Ireland.
TNSL intends to provide POS network services in Ireland by the end of 1997.
Failure to successfully implement these services in a timely manner may result
in an adverse effect of future effective tax rates.

The components of the net deferred tax liability are as follows at December
31 (in thousands).

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Depreciation.......................................... $(1,048) $ (989)
Differences between cash and accrual accounting
methods.............................................. (406) (369)
Other................................................. 375 279
------- -------
Net deferred income tax liability..................... $(1,079) $(1,079)
======= =======
</TABLE>

7. PUBLIC OFFERINGS:
In April 1994, the Company completed an initial public offering ("IPO") of
2,700,000 shares of its common stock at a price per share of $6.67. Of the
2,700,000 shares offered, 2,040,000 were sold by the Company and 660,000 were
sold by selling shareholders. After underwriting discounts, commissions and
other professional fees, net proceeds to the Company from the offering were
approximately $12.2 million. In May 1994 the underwriters of the IPO exercised
their option to purchase an additional 405,000 shares at a price of $6.20 per
share. Net proceeds to the Company were approximately $2.5 million.

On August 16, 1995, the Company completed a second public offering of
2,700,000 shares of common stock at a price per share of $16.67. Of the
2,700,000 shares, 1,500,000 were sold by the Company and 1,200,000 were sold
by selling shareholders. After underwriting discounts, commissions and other
professional fees, net proceeds to the Company from the offering were
approximately $23.4 million.

8. STOCKHOLDERS' EQUITY:

Treasury Stock
As of December 31, 1993, the Company had 839,880 shares of common stock in
treasury. In April 1994, the Company's Board of Directors directed the return
of these treasury shares to authorized but unissued shares of common stock.

Stock Option Plans
The Company has a stock option plan (the "1991 Plan") which provides for the
issuance of both qualified and nonqualified options to purchase up to 690,000
shares of common stock. Options may be granted under the 1991 Plan at any time
prior to December 31, 2000, and are exercisable for periods up to ten years
from the date of grant. In 1994, the Company adopted an additional stock
option plan ("1994 Plan") and authorized the issuance of 600,000 shares also
exercisable for ten years from date of grant. As of December 31, 1996, a total
of 167,150 shares were available for future awards under these plans.

39
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes the 1991 and 1994 plan activity for the three
years ended December 31, 1996.

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES PRICE AVERAGE
UNDER OPTION PER SHARE EXERCISE PRICE
------------ -------------- --------------
<S> <C> <C> <C>
Options outstanding, December 31,
1993............................... 493,394 $ 0.13 -$ 4.00 $ 1.11
Granted............................ 328,800 $ 4.00 -$ 9.25 $ 4.65
Exercised.......................... (130,168) $ 0.13 -$ 1.17 $ 0.36
Canceled/expired................... (6,300) $ 4.00 -$ 9.25 $ 5.21
-------- -------------- ------
Options outstanding, December 31,
1994............................... 685,726 $ 0.13 -$ 9.25 $ 2.91
Granted (weighted average fair val-
ue--$3.27)........................ 262,200 $ 6.25 -$16.33 $ 9.81
Exercised.......................... (160,950) $ 0.13 -$ 9.25 $ 2.46
Canceled/expired................... (124,200) $ 0.27 -$16.33 $ 4.05
-------- -------------- ------
Options outstanding, December 31,
1995............................... 662,776 $ 0.13 -$16.33 $ 5.54
Granted (weighted average fair val-
ue--$8.11)........................ 15,400 $14.25 -$20.17 $16.54
Exercised.......................... (155,061) $ 0.13 -$10.67 $ 3.02
Canceled/expired................... (10,500) $ 6.25 -$ 6.25 $10.67
-------- -------------- ------
Options outstanding, December 31,
1996............................... 512,615 $ 0.13 -$20.17 $ 6.52
======== ============== ======
</TABLE>

OUTSTANDING AND EXERCISABLE BY PRICE RANGE

AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------- -----------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/31/96 LIFE-YEARS EXERCISE PRICE AS OF 12/31/96 EXERCISE PRICE
- --------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.13 -
$ 0.13 10,526 4.13 $ 0.13 10,526 $ 0.13
$ 0.67 -
$ 0.67 55,775 5.56 $ 0.67 55,775 $ 0.67
$ 1.17 -
$ 2.13 72,650 6.42 $ 1.61 26,150 $ 1.38
$ 4.00 -
$ 4.00 70,564 7.03 $ 4.00 19,564 $ 4.00
$ 6.25 -
$ 8.33 51,900 7.47 $ 6.60 19,050 $ 6.64
$ 9.25 -
$ 9.25 4,200 7.75 $ 9.25 1,800 $ 9.25
$ 9.33 -
$ 9.33 204,150 8.32 $ 9.33 61,054 $ 9.33
$ 9.83 -
$16.17 39,250 8.86 $13.99 11,625 $14.38
$16.33 -
$16.33 600 8.92 $16.33 150 $16.33
$20.17 -
$20.17 3,000 9.16 $20.17 -- $ --
- -------- ------- ---- ------ ------- ------
$ 0.13 -
$20.17 512,615 7.44 $ 6.52 205,694 $ 5.03
======== ======= ==== ====== ======= ======
</TABLE>

Compensation equal to the difference between the estimated fair market value
of common stock at the grant date and the exercise price of the options is
recognized over the four year vesting period. Compensation expense of
approximately $30,000, $58,000 and $89,000 was recognized in 1996, 1995 and
1994, respectively, in connection with stock options.

In April 1996, the Company's Board of Directors authorized an increase in
shares authorized under the 1994 Plan to 1,800,000 shares and the issuance of
674,000 options, which are both subject to shareholder approval. The exercise
price will be the fair value on approval date. These events are not reflected
in the amounts presented above.

Employee Stock Purchase Plan
In 1994, the Company adopted an Employee Stock Purchase Plan ("ESPP").
Eligible employes may contribute up to 10% of their base earnings toward the
semi-annual purchase of common stock. Under the

40
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

terms of the plan, 150,000 shares of authorized common stock were reserved for
purchase at 85% of the fair market price at the beginning or end of each six-
month offering period, whichever is lower. During 1994, employees purchased a
total of 3,809 shares at $6.45 a share. During 1995, employees purchased 6,925
shares at $7.51 per share and 8,799 shares at $8.89 per share. During 1996,
employees purchased 9,124 shares at $12.18 per share and 14,582 shares at
$10.20 per share. The weighted average fair value of shares under the ESPP was
$2.79 for 1996 and $1.70 for 1995.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized for stock option and stock purchase plans. Had compensation cost
for the Company's stock option and stock purchase plans been determined based
on the fair value at the grant date for awards in 1995 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings
per share would have been the pro forma amounts indicated below.

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net Earnings (thousands)--pro
forma............................. $5,633 $5,042
Earnings per share--pro forma...... $ 0.45 $ 0.44
</TABLE>

The fair value is estimated on the date of grant using the Black-Scholes
option-pricing model. For 1995 grants, the following weighted-average
assumptions were used: dividend yield of 0%, expected volatility of 48%, risk-
free interest rate of 5.94%; and expected lives of approximately 3 years. For
1996 grants, the following weighted-average assumptions were: dividend yield
of 0%, expected volatility of 49%; risk-free interest rate of 5.50%; and
expected lives of approximately 3 years. The effects of applying SFAS No. 123
in the proforma disclosures are not indicative of future amounts. SFAS No. 123
does not apply to awards prior to 1995.

9. COMMITMENTS AND CONTINGENCIES:

Operating Leases
The Company leases office space under operating leases. On September 21,
1995, the Company entered into an office lease with Pond Building, L.L.C.
commencing in March 1996 on an office building (the "Office Building") which
it uses as its headquarters facility. The lease term is 12 years and calls for
total payments of approximately $734,000 in 1996. Payments escalate every year
thereafter based a factor tied to the change in the Consumer Price Index, but
not to exceed 3% per annum. There is a fixed increase in year six of
approximately $67,000. The Company records rent expense on the Office Building
on a straight-line basis. The Company also leases space for network equipment
sites and certain office equipment under operating leases. Future annual
commitments under the Company's operating leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------ (IN THOUSANDS)
<S> <C>
1997............................... $ 1,108
1998............................... 1,096
1999............................... 1,035
2000............................... 859
2001............................... 907
Thereafter......................... 5,460
-------
$10,465
=======
</TABLE>

Rent expense for the years ended December 31, 1996, 1995, and 1994 was
approximately $1,433,000, $581,000, and $297,000, respectively.

Benefit Plans
The Company has a 401(k) profit sharing plan which covers eligible
employees. The Company makes discretionary matching contributions to the plan.
For 1994 and 1993, the Company's Board of Directors

41
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

elected to make a matching contribution of in the form of common stock in lieu
of cash. Matching shares are issued at market price on the date of the Board
of Directors' election and have a vesting period of 3 years. The Company
issued 5,319 and 5,604 shares in 1995 and 1994, respectively, to serve as a
match for 1994 and 1993, respectively. For 1995, a discretionary matching
contribution of 10,754 shares was approved and was paid in 1996. For 1996, the
Company approved a discretionary matching contribution of approximately
$98,000 (25% of each eligible employee's contribution made during 1996) to be
paid in cash.

The Company does not offer postretirement or postemployment benefits.

Significant Customers and Suppliers
A significant portion of the Company's sales is made to a limited number of
customers. For the years ended December 31, 1996, 1995 and 1994, the Company
recorded sales to these customers as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Customer A.............................................. $8,962 $6,614 $5,292
Customer B.............................................. * * 2,845
Customer C.............................................. 6,244 5,059 2,788
Customer D.............................................. * 4,147 3,221
</TABLE>
- ---------------------
* Revenue was less than 10% of total revenues for the period.

In June 1995, the Company's then sixth largest customer purchased the
Company's then largest customer. The above sales amounts reflect this
transaction, and other combinations, as if they had occurred on January 1,
1994.

Certain key components used in the Company's network are currently available
only from limited sources. The Company does not have long-term supply
contracts with these or any other limited source vendors and purchases this
network equipment on a purchase order basis. The inability to obtain
sufficient quantities of limited source equipment as required, or to develop
alternative sources as required in the future, could result in delays or
reductions in the Company's development and deployment of network equipment,
which could adversely affect the Company's business, operating results and
financial condition. As of December 31, 1996, the Company had long-term
commitments to purchase approximately $2.6 million in capital equipment of
which $1.7 million is contingent upon delivery of development milestones by a
vendor. Except for these arrangements, the Company does not have long-term
supply contracts.

10. NOTE RECEIVABLE:
On October 10, 1995, the Company loaned $3.6 million to Pond Building,
L.L.C., the purchaser of the Office Building. The note was due in full on June
15, 1996, but could have been extended for up to three periods of six months
each under certain circumstances and as a result was classified as long term
in the accompanying consolidated balance sheet. The note was secured by a
first lien on the property under a deed of trust with Pond Building, L.L.C.
The note carried interest at approximately 9.5% per annum. The note was paid
in full during 1996.

42
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

(A) IDENTIFICATION OF DIRECTORS
The information required by this Item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors,"
contained in the Proxy Statement related to the Annual Meeting of Stockholders
to be held on April 22, 1997 (the "Proxy Statement").

(B) IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this Item concerning the Company's executive
officers is incorporated by reference from the section captioned "Non-Director
Officers," contained in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from the
section captioned "Compensation of Executive Officers," contained in the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Beneficial Ownership of Common Stock," contained in the
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions," contained
in the Proxy Statement.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on Form 10-
K:

(a) 1. Financial Statements. The following consolidated financial statements
of the Company and Report of Independent Public Accountants relating thereto
are filed as Item 8 of this report.

DESCRIPTION
Report of Arthur Andersen LLP, Independent Public Accounts
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements

2. Financial Statements Schedules. The Financial Statement Schedule
described below is filed as part of this report.

DESCRIPTION
Report of Arthur Andersen LLP, Independent Public Accountants
Schedule II Valuation and Qualifying Accounts

(b) Reports on Form 8-K
None.

43
<PAGE>

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(c) Exhibits
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Registrant, as amended. (1)
3.2 Bylaws of the Registrant. (1)
4.1 Fourth Amended and Restated Investors Rights Agreement dated as of June
3, 1994 by and among the Registrant and certain investors. (2)
10.1 1991 Stock Option Plan, as amended. (1)
10.2 1994 Stock Option Plan, as amended. (1)
10.3 1994 Employee Stock Purchase Plan, as amended. (3)
10.4 Service Agreement dated June 1, 1993 between the Company and First Data
Corporation, as amended ("FDC Service Agreement") (confidential
treatment has been granted for portions of this exhibit). (4)
10.5 Addendum IV to the FDC Service Agreement dated as of February 13, 1996
(confidential treatment has been granted for portions of this exhibit).
(5)
10.6 Deed of Lease dated September 21, 1995 between the Company and Pond
Building, L.L.C. (6)
23.1 Consent of Arthur Andersen LLP. (7)
</TABLE>

(d) Financial Statement Schedules see Item (a)2 above
- ---------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-76426).
(2) Incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K, dated June 6, 1994 and as amended by Amendment No. 1, dated
August 19, 1994.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-85434).
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-95132).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K,
dated March 8, 1996.
(6) Incorporated by reference to the Company's Quarterly Report on From 10-Q,
dated September 30, 1995.
(7) Filed herewith.

44
<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into Transaction Network Services, Inc.
and subsidiary's previously filed Registration Statements on Form S-8, File
Nos. 33-85432 and 33-85434.

ARTHUR ANDERSEN LLP

Washington, D.C., March 14, 1997

45
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Transaction Network Services, Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Transaction Network Services, Inc. (a
Delaware corporation) and subsidiary included in this Form 10-K and have
issued our report thereon dated January 24, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in item 14(a) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.,
January 24, 1997

46
<PAGE>

SCHEDULE I

TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARY VALUATION AND QUALIFYING
ACCOUNTS

<TABLE>
<CAPTION>
DESCRIPTION:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS BALANCE AT CHARGED TO BALANCE
(DEDUCTED FROM ACCOUNTS BEGINNING OF COSTS AND OTHER AT END OF
RECEIVABLE) PERIOD EXPENSES CHARGES* DEDUCTIONS PERIOD
- ----------------------- ------------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996................... $432,386 $490,991 $ -- $(325,266) $598,111
YEAR ENDED DECEMBER 31,
1995................... $373,976 $141,718 $ -- $ (83,308) $432,386
YEAR ENDED DECEMBER 31,
1994................... $ 42,000 $201,895 $209,758 $ (79,677) $373,976
</TABLE>
- ---------------------
* Other charges include purchased reserves from acquisition.

<TABLE>
<CAPTION>
DESCRIPTION: BALANCE AT CHARGED TO BALANCE
VALUATION ALLOWANCE FOR BEGINNING OF COSTS AND OTHER AT END OF
NET OPERATING LOSS PERIOD EXPENSES CHARGES DEDUCTIONS PERIOD
- ----------------------- ------------ ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1994................... $339,000 $-- $-- $(339,000) $--
</TABLE>

47
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN THE COUNTY OF
FAIRFAX, STATE OF VIRGINIA, ON THE 11TH DAY OF MARCH, 1997.

TRANSACTION NETWORK SERVICES, INC.

By: /s/ John J. McDonnell, Jr.
---------------------------------
JOHN J. MCDONNELL, JR. CHIEF
EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:

SIGNATURE TITLE DATE

/s/ John J. McDonnell, Jr. President, Chief March 14, 1997
- ------------------------------------- Executive Officer
JOHN J. MCDONNELL, JR. and Director
(Principal
Executive Officer)

/s/ Elizabeth A. Crawford Vice President, March 13, 1997
- ------------------------------------- Finance (Principal
ELIZABETH A. CRAWFORD Financial and
Accounting Officer)

/s/ Jurgen Manchot Director March 17, 1997
- -------------------------------------
JURGEN MANCHOT

/s/ William N. Melton Director March 14, 1997
- -------------------------------------
WILLIAM N. MELTON

/s/ John S. McCarthy Director March 14, 1997
- -------------------------------------
JOHN S. MCCARTHY

/s/ Henry R. Nichols Director March 17, 1997
- -------------------------------------
HENRY R. NICHOLS

/s/ Paolo L. Guidi Director March 17, 1997
- -------------------------------------
PAOLO L. GUIDI

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDING DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000920231
<NAME> TRANSACTION NETWORK SERVICES, INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,169
<SECURITIES> 29,834
<RECEIVABLES> 9,948
<ALLOWANCES> 598
<INVENTORY> 0
<CURRENT-ASSETS> 40,402
<PP&E> 24,160
<DEPRECIATION> 10,074
<TOTAL-ASSETS> 68,551
<CURRENT-LIABILITIES> 5,551
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 62,068
<TOTAL-LIABILITY-AND-EQUITY> 68,551
<SALES> 52,291
<TOTAL-REVENUES> 52,291
<CGS> 0
<TOTAL-COSTS> 28,771
<OTHER-EXPENSES> 15,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,454
<INCOME-TAX> 3,640
<INCOME-CONTINUING> 7,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,814
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46

</TABLE>