TRANSACTION NETWORK SERVICES INC, 10-K, 1998-03-12

TRANSACTION NETWORK SERVICES INC
10-K, 1998-03-12
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, 1997

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
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)

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

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

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 _X_ 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 16, 1998, the aggregate market value
of the voting stock held by non-affiliates of the Registrant was $179,169,466.
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, was 12,275,982 on February 16, 1998.

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 14, 1998.

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PART I

ITEM 1. BUSINESS

GENERAL OVERVIEW

Transaction Network Services, Inc. (the "Company" or "TNS") 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. In June 1994, the Company acquired Fortune
Telecommunications, Inc. ("FTI") of Ft. Lauderdale, Florida, which provides
customers in the telecommunications industry with telephone call fraud control
and billing validation services. In June 1996, the Company formed Transaction
Network Services Limited ("TNSL"), a majority-owned subsidiary. TNSL provides
POS network services in Ireland and serves as TNS' European technology and
marketing center to support current and future European operations. In October
1997, through TNSL, the Company acquired a majority interest in Pronoma Systems
AB. This company has been renamed Transaction Network Services TNS AB ("TNSAB")
and operates as a TNS subsidiary located in Stockholm, Sweden.

The Company currently operates four divisions: (1) The POS Division which
includes the Company's TransXpress-Registered Trademark- network services for
the POS transaction processing industry, (2) The Telecom Services Division
("TSD") which includes FTI's CARD*TEL-Registered Trademark- telephone call
billing validation and fraud control services and other services targeting
primarily the telecommunications industry, (3) The Financial Services Division
("FSD") which provides the TNS FastLink-Registered Trademark- Data Service in
support of the Financial Information eXchange ("FIX") messaging protocol and
other transaction oriented trading applications primarily to the financial
services industry, and (4) The International Systems Division ("ISD") which
markets the Company's products and services internationally.

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-Registered Trademark- 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 165 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 7.1 million in the fourth quarter of 1997. The Company markets its
TransXpress-Registered Trademark- 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 ten leading third party POS
transaction processors in the nation, six (First Data Corporation, Electronic
Payment Services, Inc., Alliance Data Systems, Paymentech Inc., National Data
Corporation and American Express) 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

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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 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 ten 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-Registered Trademark- 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
primarily 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 ("Telecom") 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

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by telecommunications carriers through specialized data communications network
connections, however, 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.

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-Registered Trademark-
service offering. The Company's Telecom Services Division now offers the
CARD*TEL-Registered Trademark- 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.

FINANCIAL SERVICES BACKGROUND

The TNS Financial Services Division was created to serve the data
communications needs of the financial services industry. As a leading provider
of transaction-oriented data transport services to POS and telecommunications
customers in the US and abroad, TNS has leveraged its transaction transport
expertise to develop the first secure, independent, Internet Protocol ("IP")
Extranet service for Financial Information eXchange ("FIX") message transport.
The result is a high-performance, cost effective data transport solution that is
made to order for investment institutions and brokerages.

INTERNATIONAL SERVICES BACKGROUND

The technology developed by the Company to serve the customers of the POS,
Telecom Services, and Financial Services Divisions has direct applicability
around the world. The International Systems Division was formed to introduce the
products and services from the Company's domestic operating divisions to the
international marketplace. In the United Kingdom and Canada, the Company has
entered into technology transfer arrangements whereby TNS provides POS network
equipment and software to its international customers and receives royalty
payments based upon transaction volumes. In Ireland, the Company formed TNSL
which provides POS network services in Ireland. TNSL serves as the TNS' European
technology and marketing center to support TNS' current and future European
operations. In October 1997, the Company, through TNSL, acquired a majority
interest in an electronic commerce company named Pronoma Systems AB ("Pronoma").
Pronoma changed its name to Transaction Network Services TNS AB ("TNSAB") and
serves as TNS' hub for providing transaction transport services throughout the
Scandinavian countries.

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, the telecommunications services market, and
the financial services market, as well as the emergence of other markets for
electronic transaction network services including the ability to provide
existing services internationally. Further market expansion is dependent upon,
in part, 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 its network and by attracting new customers. Historically, a number
of the Company's largest customers

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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 now 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 became effective only
after certain volume thresholds were 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 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 has 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 TRANSACTION PROCESSING SERVICES

The Company has ongoing programs to develop new services for transaction
processing markets. Among these services 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-Registered Trademark-
telecommunications services. TNS has strengthened the competitive position of
its CARD*TEL-Registered Trademark- 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.

FINANCIAL SERVICES. In response to the developing demand within the
financial services industry for a reliable, secure network solution for the
electronic exchange of trading information between brokerage firms, financial
institutions and the securities markets, in 1997 the Company began offering its
TNS FastLink-Registered Trademark- Data Service. This new line of services
offers a secure private Extranet for the electronic communication of indications
of interest, orders, and execution reports which are normally phoned between
traders or transmitted via proprietary systems. The Company made capital
expenditures of approximately $2.0 million through December 31, 1997 while
building this secure TCP/IP Extranet network which is operated and maintained by
the Company. The Company intends to leverage this investment by offering
additional transaction processing services which will utilize this network.

LECONNECT-SM- DATA SERVICE. The Company provides interexchange carriers
("IXC's") and information service providers a fast, reliable digital message
transport of billing and collection information to and from Local Exchange
Carrier ("LEC") data centers over the Company's secure IP data network. The
LEConnect-SM- Data Service replaces the current system which previously required
the numerous IXC's and information service providers to send billing data via
magnetic data tapes to the LECs. The LEC then processes the IXC's billing data
and includes the service providers' charges on the LEC bill to the appropriate
consumer for collection. The LEConnect-SM- Data Service minimizes the data
transmission errors and time lags associated with the current approach.

LOCAL NUMBER PORTABILITY SERVICE. The Federal Communications Commission
("FCC") adopted an order in June 1996, which required incumbent local exchange
carriers in the one hundred largest markets to implement permanent local number
portability ("LNP"). As a result of LNP, consumers will be able to switch local
service providers without changing their phone numbers. The deployment of LNP is
to be completed in

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several phases by December 31, 1998. Due to LNP, telecommunications providers
need access to the information resident in the regional number portability
administration centers ("NPAC's") in order to accurately process and bill for
calls to numbers that have been ported to an alternative carrier. The Company
has combined its expertise in dedicated data transmission and SS7 networking
with its own proprietary network architecture and in-house software engineering
to design what the Company believes to be a dependable LNP solution. The Company
acts as an independent transport service provider for both wireline and wireless
carriers and offers connectivity to the NPACs as well as providing the
information necessary for call completion and billing to complement its fraud
control and other telecommunications services.

DIAL AROUND COMPENSATION SERVICE. As part of the Telecommunications Act of
1996 (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
telephone proprietor ("dial-around compensation"). In October 1997, the FCC
established a rate of $0.284 per call as the default per-call compensation rate
for subscriber 800 and access code calls made from payphones during the next two
years. After the first two years of per-call compensation, a payphone's
market-based local coin rate, as adjusted for certain costs, will become the
default rate. While it is uncertain what impact the new rules will have on
"dial-around" usage and therefore on demand for traditional TNS
telecommunications service 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
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.

The Company is developing a dial-around compensation ("DAC") service
offering for both the payphone owners and carriers. As a result of DAC, the
payphone owner will require an accurate accounting of all calls eligible for the
per call compensation of $0.284 per call. Carriers will want to ensure that the
$0.284 per call payment is made only for calls that require this payment. In
certain instances both the payphone owner and carrier may wish to outsource this
data collection process. The Company's DAC service is intended to provide
auditing, call tracking and other services to both payphone owners and carriers
associated with the per call compensation mandate. While there can be no
assurance of the Company's success in new marketing efforts, the Company
believes that this new service will take advantage of the continuing trend
toward the use of "dial-around" services and provide its customer base with a
desirable service.

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
multiple states. Several other states are in the process of awarding contracts
for similar EBT programs.

HEALTHCARE PROCESSING. The Company believes that healthcare processing
presents another significant opportunity for its future growth. 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.

INTERNATIONAL EXPANSION. The Company continues to seek new international
markets through joint ventures, technology transfers, licensing arrangements,
and the establishment of subsidiaries. The Company has completed agreements to
provide its technology and network design in Canada, the United Kingdom, Ireland
and Sweden. The agreements in Canada and the United Kingdom produce a recurring
revenue stream for the Company based on per transaction royalties. The Company's
majority-owned subsidiaries in Ireland (TNSL) and Sweden (TNSAB), provide
transaction processing and other services. The Company is currently negotiating
to provide its proprietary network technology for use in other markets including
Europe, South America, Mexico, and other regions. There can be no assurance that
these efforts will be successful.

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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.

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-Registered Trademark- 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-Registered Trademark-,
CARD*TEL-Registered Trademark-, and FastLink-Registered Trademark- Data Service
and to develop and introduce, on a timely and cost-effective basis, new 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-REGISTERED TRADEMARK- NETWORK SERVICES

The Company's TransXpress-Registered Trademark- 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 165 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 ten leading third party POS transaction processors in the United
States, six purchase the TransXpress-Registered Trademark- network services.
TransXpress-Registered Trademark- network services offer several advantages
resulting from the proprietary technology and architecture of the TNS network.
TransXpress-Registered Trademark- and related network services for the POS
industry accounted for approximately 67% of the Company's total revenue in 1997.

CARD*TEL-REGISTERED TRADEMARK- TELECOMMUNICATIONS SERVICES

The Company's CARD*TEL-Registered Trademark- telecommunications services
utilize proprietary fraud control technology and database access to provide
real-time telephone call billing validation and fraud control services to the
telecommunications industry. The Company's customers for these services include
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-Registered Trademark- 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-Registered Trademark-
telecommunications services also benefit from the advanced fraud control
technology and database management that distinguishes
CARD*TEL-Registered Trademark- telecommunications services from its competitors.
The Company has introduced various new services which complement its traditional
CARD*TEL-Registered Trademark- telecommunications services including LNP
Services, LEConnenct Data Services and Dial Around Compensation Services.
CARD*TEL-Registered Trademark- telecommunications services represented
approximately 31% of the Company's total revenue in 1997.

FASTLINK-REGISTERED TRADEMARK- DATA SERVICE

In March 1997, the Company announced a new product line--the TNS
FastLink-Registered Trademark- Data Service. This new service line offers a
secure private Extranet for transacting securities trading orders and associated
data electronically between brokerage firms and financial institutions. This
network routes Financial Information Exchange ("FIX") protocol messaging over a
secure TCP/IP network developed, operated, and maintained by

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the Company. FIX is an open communication messaging protocol that enables a
high-speed electronic exchange of trading information in a common language
between brokerage firms, financial 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 or transmitted via proprietary systems.

SIGNALING SYSTEM 7 ("SS7") NETWORK SERVICES

The Company has developed a line of SS7 services that provide smaller
telecommunications companies, including local exchange carriers ("LECs"), 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 "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
allows call set-up and routing to be accomplished by way of independent 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 involved in electronic commerce over the
Internet and third party POS transaction processors/ financial institutions.

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 including its telecommunications and financial services. The TNS network
consists primarily of the Company's hardware and software located at various
sites, or points-of-presence ("POPs"), around the United States and leased
digital transmission circuits which interconnect the Company's service areas.

During 1997, the Company established an additional network infrastructure in
support of the Financial Services Division. The new Financial Services Network
("FSN") infrastructure is Internet Protocol ("IP") based and leverages the
Company's existing POPs and operational structure. The FSN infrastructure
consists of hardware and software located at various sites around the United
States and leased digital transmission circuits which interconnect the Company's
service areas. The Company has designed, implemented, and now operates the FSN
infrastructure.

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"950" installation costs. However, the Company's own on-network "800" service
will reduce the recurring cost of providing "800" access service and provide the
Company greater control of the service while reducing the Company's reliance
upon third party service providers. The per minute charges from third party
service providers are significantly greater than those expected to be incurred
by the Company's own "800" access service. Additionally, management believes
that the Company's own on-network "800" access service reduces a barrier to
entry in obtaining additional transaction volumes from the Company's existing
customers and from new customers by facilitating the customers conversion from
another service provider to the Company. Generally, when a POS terminal is
reprogrammed it requires physical changes to be made at the terminal location.
An "800" terminal, once the Company's own on-network "800" service is available,
may be switched to the TNS service utilizing "800" portability at no virtually
cost to the customer.

The Company considers the availability of its own on-network "800" access
service necessary to continue to increase transaction volumes on its network.
The costs of establishing an on-network "800" access service will negatively
impact gross margins until the installation costs are offset by an increase in
transaction volumes. After a certain transaction volume level, the Company
believes that gross margins will increase due to a significantly lower variable
cost per transaction from the Company's own on-network "800" access service
versus the variable cost per transaction charged by third party service
providers. The ultimate impact on gross margins will primarily depend upon the
timing of the roll-out of the Company's own on-network "800" access service,
competitive pricing pressures, and transaction volumes. The Company's own
on-network "800" access service also is expected to provide the Company with an
opportunity to be more competitive on pricing new business due to the lower
variable cost per transaction. These additions to the TNS family of network
offerings will require both non-recurring installation costs and recurring
network costs which will increase the cost of network services in 1998. The new
services offered by the Telecom Services Division (including LNP, LEConnect-SM-,
and DAC) will also result in additional network costs. The Company believes that
the gross margin percentage on new service offerings may be greater than those
on traditional TSD and POS services. The impact on 1998 and future gross margins
will be largely dependent upon the Company's ability to successfully market
these additional services. In 1998, the Company also expects to continue to
monitor and expand its backbone and access network capacity as required to
handle traffic growth from existing customers and new services.

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 Company's newly
established FSN infrastructure has been designed and implemented with a high
level of system redundancy, dynamic routing, and sophisticated engineering
techniques to support the financial services industry. This has been
accomplished to date with commercially available hardware and software. The main
equipment components which comprise the Company's FSN infrastructure include IP
router hardware and software, and UNIX hosts. The Company expects to invest and
grow the new Financial Services IP infrastructure as the existing services
generate revenue and new services are added.

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;

- 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;

8
<PAGE>
- Security access routers deployed at customer subscriber sites which use
sophisticated encryption and authorization technology to control access to
the Company's TCP/IP 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 houses its ACDs, NACs, integrated packet-circuit switches and
TCP/IP routers in over 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. The
facilities 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;

- 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;

- Secure, independent IP service for Financial Information eXchange ("FIX")
message transport, which provides a high-performance, cost-effective data
transport solution for brokerage firms and financial institutions;

- Telecommunications and processing expertise to assist customers in solving
networking and processing issues.

9
<PAGE>
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 NAC, ACD, 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.

Certain key components used in the Company's network are currently available
only from limited sources. Except for long-term commitments to purchase capital
equipment in the amount of approximately $3.8 million over a 12 month period of
which $710,000 is dependent upon certain development milestones, the Company
does not have long-term supply contracts 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. This may adversely affect the Company's
business, operating results and financial condition.

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, ATM transaction
processors, long distance telephone companies, operator services providers,
information services providers, private pay telephone companies, financial
institutions, and brokerage firms.

Sales to First Data Corporation, Alliance Data Systems, Paymentech, Inc.,
Electronic Payment Systems, Inc., and National Data Corporation accounted for
approximately 19%, 8%, 8%, 8% and 5%, respectively, of the Company's total
revenues for the year ended December 31, 1997. 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 July 2000 and December 2000. The loss of any of these
customers would have a material adverse impact on the Company. There can be no
assurance that these contracts will be renewed.

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 obtained the current available transaction volume from
existing customers. As a result, revenue growth will be dependent on the ability
to add new customers, transaction growth from existing customers through their
intrinsic growth and acquisitions, overall market growth and the ability to
develop new 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. Accordingly, 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.

10
<PAGE>
SALES AND MARKETING

POS SERVICES

The Company markets its TransXpress-Registered Trademark- network services
through its POS Services Division directly to third party POS transaction
processors, who in turn resell the Company's TransXpress-Registered Trademark-
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-Registered Trademark- 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-Registered Trademark- telecommunications
services, SS7 network and other telecommunications services to the
telecommunications industry both directly through its Telecom Services Division
and also through telecommunications services resellers. 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. To
supplement the sales efforts of the Telecom Services Division, the Company has
entered into an exclusive marketing arrangement with ICG Communications to
resell certain SS7 call processing services. The Company has also entered into
arrangements with certain customers to market the Company's telecommunications
services. In the future, the Company may enter into similar reselling and joint
marketing arrangements.

FINANCIAL SERVICES

The Company markets its FastLink-Registered Trademark- Data Service to the
financial services industry both directly through its Financial Services
Division as well as through specific arrangements with third party service
providers who already maintain relationships with potential customers. The
market for these services consists primarily of the securities trading groups
within brokerage firms and financial institutions. In its marketing efforts, the
Company emphasizes the fact that its FastLink-Registered Trademark- Data Service
is an independent network service offering focused upon the financial services
industry and unbundled from additional application services such as proprietary
news and information services.

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 other regions
either directly through its own sales personnel or through the use of consulting
firms. 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 includes 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.

11
<PAGE>
The POS transaction 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 introduced new products competitive with those of the Company.
Increased competition to date 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 transaction 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" and "800" services. While these companies may be able to procure their
services at the same or lower prices than 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 begun to deploy its own SS7 capability for POS transactions. Once SS7 is
fully 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. 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. As
a result, the Company believes that these contracts include a financial
disincentive for the movement by these customers of traffic from the Company's
network to private networks since this 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-Registered Trademark- and SS7 network telecommunications services
include GTE Intelligent Network ("GTE"), The Southern New England Telephone
Company ("SNET") and Illuminet, formerly known as Independent Telecommunications
Network, Inc. ("ITN"). In addition, it is possible that larger interexchange
carriers that have or are currently developing their own SS7 connectivity into
the LIDBs for internal use may decide to resell these services. The Company
believes that the

12
<PAGE>
CARD*TEL-Registered Trademark- validation and fraud control technology is more
sophisticated and comprehensive than these competitors' technology. Another
source of competition faced by the Company is the potential for certain of its
larger customers to develop or utilize their own fraud control systems. 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.

FINANCIAL SERVICES

The Financial Services Division mission is to provide best-in-class Internet
Protocol ("IP") based Extranet services in support of mission critical
transaction-oriented applications to the financial services industry with the
best available technology, state-of-the-art design and engineering techniques,
and customer focused service. The Company believes that some of FSD's major
competitors include Thomson Financial Services, Bridge Systems, and Trinitech
Systems, Inc. There can be no assurance that the Company will be able to compete
successfully with existing or new competitors.

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. The International Systems Division
competes 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 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.

Pursuant to the Telecommunications Act of 1996 (the "1996 Act"), the FCC
instituted a rulemaking proceeding in December 1996 referred to as Access Charge
Reform ("Access Reform") that seeks to reform the current system of interstate
access charges and make it compatible with the competitive paradigm established
by the 1996 Act. The initial phase of Access Reform was implemented in July
1997. The initial phase of Access Reform resulted in a decrease in certain
components of the Company's variable cost per transaction and as a result,
lowered its network costs. The second phase of Access Reform took place in
January 1998. The second phase of Access Reform resulted in an additional
decrease in certain components of the Company's variable cost per transaction;
however, the second phase increased certain fixed monthly recurring charges and
instituted certain new fixed monthly recurring charges. As a result, the Company
may experience an increase in its network costs at least until the next phase of
Access Reform is instituted in July 1998. The Company believes that future
revisions to its costs under Access Reform may reduce its network costs since
the Company believes that it is not subject to certain of the new charges
instituted by Access Reform and that, in any event, the increased charges are
not in accordance with the spirit of Access Reform which is intended to reduce
overall access charges. However, there can be no assurance that the future
phases of Access Reform will result in reductions to the Company's network costs
and in fact, they may increase. The ultimate impact of Access Reform

13
<PAGE>
is dependent upon, among other things, 1) the ability to increase transaction
volumes, which benefits the Company when lower variable costs are instituted, 2)
the nature and amount of fixed charges, which are primarily based upon the
number of connections in the Company's network, which increases network costs,
3) future actions by the FCC, 4) the ability of the Company to modify its
network design to react to pricing revisions, and 5) the ability of the Company
to successfully defend and receive credits for improperly billed charges.
Accordingly, the impact of Access 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 orders 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.

In addition, 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-Registered Trademark- 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 December 31, 1997, the Company employed 134 persons worldwide, of whom
97 were engaged in systems operation, development and maintenance and 37 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.

14
<PAGE>
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's European technology and marketing center is located in Dublin, Ireland
and consists of approximately 14,500 square feet of office space under a lease
expiring in January 2022 with an unaffiliated third party . The Company
subleases a significant portion of this office space to unaffiliated third
parties. The Company also leases and occupies regional sales offices in Atlanta,
Georgia, Dallas, Texas, Northford, Connecticut, Seattle, Washington, Lansing,
Michigan and Stockholm, Sweden. 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.

ITEM 3. LEGAL PROCEEDINGS

On October 28, 1997, the Company filed a formal complaint with the Federal
Communications Commission ("FCC") against AT&T Corp. ("AT&T"). The complaint
alleges that AT&T, through the provision of common carrier services to its
Transaction Access Services Group ("TAS Group") on terms and conditions more
favorable than those listed in AT&T's tariffs, is in violation of several
provisions of the Communications Act of 1934 and the FCC's rules. TAS Group
competes with the Company's TransXpress-Registered Trademark- network services.
The complaint seeks an order requiring AT&T to cease and desist from engaging in
the contested conduct and seeks monetary damages for lost business
opportunities. The parties are in the process of taking discovery and the
ultimate outcome of this action is uncertain.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

15
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock trades on The NASDAQ Stock Market-SM- ("NASDAQ")
under the symbol "TNSI". The following table reflects the range of high and low
closing prices for each period indicated as reported by NASDAQ. This table
reflects inter-dealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First quarter ended March 31, 1997............................................................. $ 14.63 $ 9.63
Second quarter ended June 30, 1997............................................................. $ 16.50 $ 9.88
Third quarter ended September 30, 1997......................................................... $ 18.38 $ 13.00
Fourth quarter ended December 31, 1997......................................................... $ 22.50 $ 15.13

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
</TABLE>

As of February 16, 1998, there were 70 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.

16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for each of the three years ended December 31,
1997 and as of December 31, 1997 and 1996 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, 1994 and 1993, and as of December 31,
1995, 1994, and 1993 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,
-----------------------------------------------------
1997 1996 1995 1994 (1) 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND TRANSACTION DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................. $ 63,344 $ 52,291 $ 41,365 $ 26,526 $ 11,457
Cost of network services................................. 35,322 28,771 21,819 14,200 6,153
--------- --------- --------- --------- ---------
Gross profit............................................. 28,022 23,520 19,546 12,326 5,304
Other operating expenses:
Engineering & development.............................. 3,431 2,692 2,241 1,575 713
Selling, general & administrative...................... 7,941 7,491 5,697 3,842 1,789
Depreciation........................................... 4,793 4,068 3,081 1,830 887
Amortization of intangibles............................ 1,570 1,485 1,138 566 --
--------- --------- --------- --------- ---------
Total other operating expenses....................... 17,735 15,736 12,157 7,813 3,389
--------- --------- --------- --------- ---------
Income from operations................................... 10,287 7,784 7,389 4,513 1,915
Interest income, (expense), net.......................... 1,939 1,670 918 220 (64)
--------- --------- --------- --------- ---------
Income before income taxes............................... 12,226 9,454 8,307 4,733 1,851
Provision for income taxes............................... 4,840 3,640 3,157 1,491 25
--------- --------- --------- --------- ---------
Net income............................................... $ 7,386 $ 5,814 $ 5,150 $ 3,242 $ 1,826
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share............................... $ 0.59 $ 0.46 $ 0.45 $ 0.33 $ 0.22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in diluted per share computations............ 12,619 12,591 11,534 9,947 8,144
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
POS TRANSACTION VOLUME (IN MILLIONS)....................... 2,386 1,900 1,218 824 408

DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 33,230 $ 34,851 $ 25,779 $ 7,749 $ 813
Total assets............................................. 76,109 68,551 61,348 30,835 7,561
Long term debt........................................... -- -- -- 18 16
Redeemable Convertable Perferred Stock................... -- -- -- -- 8,298
Total stockholders' equity (deficit)..................... 68,475 62,191 54,593 24,733 (3,179)
</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.

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

GENERAL OVERVIEW

Transaction Network Services, Inc. (the "Company" or "TNS") was incorporated
in August 1990 to build and operate a communications network focused on the
network services needs of the Point-of-Sale/Point-of-Service ("POS") transaction
processing industry. 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 7.1 million
in the fourth quarter of 1997. In June 1994, the Company acquired Fortune
Telecommunications, Inc. ("FTI") of Ft. Lauderdale, Florida, which provides
customers in the telecommunications industry with telephone call fraud control
and billing validation services. In June 1996, the Company formed Transaction
Network Services Limited ("TNSL"), a majority-owned subsidiary. TNSL provides
POS network services in Ireland and serves as TNS' European technology and
marketing center to support current and future European operations. In October
1997, through TNSL, the Company acquired a majority interest in Pronoma Systems
AB. This company has been renamed Transaction Network Services TNS AB ("TNS AB")
and operates as a TNS subsidiary located in Stockholm, Sweden.

The Company operates four divisions: (1) The POS Division which includes the
Company's TransXpress-Registered Trademark- network services for the POS
transaction processing industry, (2) The Telecom Services Division ("TSD") which
includes FTI's CARD*TEL-Registered Trademark- telephone call billing validation
and fraud control services and other services targeting primarily the
telecommunications industry, (3) The Financial Services Division ("FSD") which
provides the TNS FastLink-Registered Trademark- Data Service in support of the
Financial Information eXchange ("FIX") messaging protocol and other
transaction-oriented trading applications primarily to the financial services
community, and (4) The International Systems Division ("ISD") which markets the
Company's products and services internationally.

The Company achieved revenue per employee of approximately $524,000 in 1997
and more than $480,000 in 1996 on a weighted average employee basis.

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 and suppliers, dependence on
market expansion, competition, technological change and necessity of developing
new services, dependence on proprietary rights, changes in government regulation
(specifically 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
greater than a specified period of time. POS services revenue also includes
other revenues composed primarily of fixed monthly fees charged to customers for
the use of digital transmission circuits. These circuits 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 POS credit card transactions. To a lesser
extent, the Company derives POS service revenue from the

18
<PAGE>
electronic processing of other types of 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,
automated teller machine ("ATM") transactions 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. 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 and debit card transactions processed electronically. The
Company believes that the use of electronic transaction processing in markets
other than the credit card market, including transactions for the healthcare
industry and ATM and EBT transactions, will also contribute to future overall
market growth.

During 1997, six of the ten largest third party POS credit card transaction
processors were customers of the Company. These six customers comprised
approximately 75% of the Company's 1997 POS services revenue and 50% of its
total 1997 revenue. The ability of the Company to attract the remaining four of
the current ten largest POS credit card transaction processors is dependent
primarily upon those customers' contractual commitments with their current
network provider(s). Consequently, while the Company will continue to pursue 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 POS services
revenue growth rate may not continue at historical levels.

Average revenue per POS transaction decreased to $0.016 in 1997 from $0.018
in 1996 and from $0.023 in 1995. This resulted in a decline in average revenue
per POS transaction of 11% comparing 1997 to 1996 and 22% comparing 1996 to
1995. The reduction is primarily related to a decision made by the Company in
1996 to re-negotiate its contracts with most of its largest customers in
exchange for contract extensions. The pricing of these new contracts is
significantly lower than the pricing these customers received prior to these
re-negotiations and the majority of these customers benefited from the
re-negotiated contracts during 1996. The remaining contracts became effective on
January 1, 1997. As a result, the full effect of the 1996 contract
re-negotiations was fully reflected in the average revenue per POS transaction
during the first quarter of 1997. The decline in POS revenue per transaction has
stabilized in 1997 and revenue per POS transaction was relatively constant for
all of 1997. The Company's revenue per transaction varies between a "950"
transaction, an "800" transaction and other types of transactions (e.g. ATM,
EBT). The revenue per transaction for a "950" transaction is generally less than
that for an "800" transaction and the revenue per transaction for an EBT or ATM
transaction (and other types of transactions) are generally greater than POS and
EBT transactions. The Company is anticipating an increase in the relative
percentage of "800" transactions and to a lesser extent a relative increase in
other types of transactions, and as a result, the revenue per transaction may
increase. However, future average revenue per POS transaction amounts will
depend primarily on the relative contribution to total transaction volume from
each of the Company's sources of POS transactions and competitive pressures.

TELECOM SERVICES OVERVIEW

TNS's June 1994 acquisition of FTI added a second significant service
offering (Telecom Services) to the Company's business. Telecommunications
services revenue is derived primarily from providing fraud control and billing
validation services to telecommunications carriers. 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.
Telecommunications services revenue also includes 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 primarily
include long-distance telephone carriers, operator services providers,
information services providers and private pay telephone companies. Management
believes it has substantially obtained the current available transaction volume
from existing customers. As a result, revenue growth will be dependent on the
ability to add new customers, transaction

19
<PAGE>
growth from existing customers through their intrinsic growth and acquisitions,
overall market growth, and the ability to develop new services.

TSD has grown through the addition of new customers, through the Company's
acquisition of contract rights and other intangible assets, through customers of
the Company's services acquiring customers who used another service provider,
and through the provision of new service offerings. Many of 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 erosion in call and query
volumes and revenues. The reduction in call and query volumes is directly
related to so-called "dial-around", cellular, and pre-paid calling card services
which 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 proprietary
billing validation databases (in many cases MCI and AT&T).

As part of the Telecommunications Act of 1996 (the "1996 Act"), the Federal
Communications Commission ("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
telephone proprietor ("dial-around compensation"). In October 1997, the FCC
established a rate of $0.284 per call as the default per-call compensation rate
for subscriber 800 and access code calls made from payphones during the next two
years. After the first two years of per-call compensation, a payphone's
market-based local coin rate, as adjusted for certain costs, will become the
default rate. While it is uncertain what impact the new rules will have on
"dial-around" usage and therefore on demand for traditional TNS 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 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.

The Company has developed a dial-around compensation service offering
("DAC") for both the payphone owners and carriers. While there can be no
assurance of the Company's success in new marketing efforts, the Company
believes that this new service will take advantage of the continuing trend
toward the use of "dial-around" services and may provide some offset to the
impact of "dial around" on the Company's telecommunications services.

FINANCIAL SERVICES OVERVIEW

In March 1997, the Company announced the building of a new network--the
Financial Services Network--and a new product line--the TNS
FastLink-Registered Trademark- Data Service--offered by its Financial Services
Division. This new line of services offers a secure private Extranet for
executing securities trading orders electronically between brokerage firms and
financial institutions. The TNS FastLink-Registered Trademark- Data Service
routes FIX protocol messaging over a secure TCP/IP network--an IP backbone
network. 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 or
proprietary systems. The Financial Services Network was engineered and developed
by the Company.

20
<PAGE>
TNS' FastLink-Registered Trademark- Data Service revenue consists of a one-time
installation fee and fixed monthly recurring revenues thereafter based on the
number of network connections.

The FastLink-Registered Trademark- Data Service offering required the
Company to build and support the Financial Services Network. Through December
31, 1997 the Company made capital expenditures of approximately $2.0 million in
network equipment to build the Financial Services Network. These costs were
primarily for network equipment located at the Company's Reston headquarters,
various TNS points-of-presence ("POPs") located around the country, and at
customer sites. The Company seeks to leverage the cost associated with the
Financial Services Network through additional service offerings.

INTERNATIONAL SERVICES OVERVIEW

The Company currently has significant international activities in the United
Kingdom ("UK"), Canada, Ireland, and Sweden and recognized $893,000 of
international revenue in 1997. In the UK and Canada, the Company has entered
into technology transfer arrangements whereby TNS sells POS equipment and
software to its international customers. The equipment sales are generally one
time sales, but the Company also has agreements entitling it to receive
recurring revenues in the form of royalties, software license fees and
maintenance fees. Royalties are based on the POS revenues generated by its
international customers resulting from the use of the Company's POS technology.
The Company began to record royalty revenue under these arrangements in 1997.
The Company intends to seek growth in its international operations through
partnering and joint venture arrangements with existing companies and the
establishment of its own subsidiaries.

In 1996, the Company formed TNSL as its European technology and marketing
center. TNSL has a dual mission. In addition to building and operating a POS
network for the Irish market, TNSL provides technical support for the Company's
international customers and operations. TNSL is in a start-up phase and has not
generated significant revenue to date. In October 1997, the Company acquired a
majority interest in Pronoma Systems AB through TNSL. This company has been
renamed Transaction Network Services TNS AB ("TNSAB") and operates as a TNS
subsidiary located in Stockholm, Sweden. Currently, all TNSL and TNSAB losses
are being absorbed and consolidated with the Company's operating results. TNSL
and TNSAB's losses consolidated with the Company's operating results were
approximately $932,000 for 1997 and $282,000 for 1996.

NETWORK COST OVERVIEW

The majority of the Company's operating expenses relate to the costs of its
family of network offerings. The largest component of expense, cost of network
services, is composed primarily 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 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
including charges for digital transmission circuits for network access and
backbone capacity, 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 when incurred.

21
<PAGE>
certain new fixed monthly recurring charges. As a result, the Company may
experience an increase in its network costs at least until the next phase of
Access Reform is instituted in July 1998. The Company believes that future
revisions to its costs under Access Reform may reduce its network costs since
the Company believes that it is not subject to certain of the new charges
instituted by Access Reform and that, in any event, the increased charges are
not in accordance with the spirit of Access Reform which is intended to reduce
overall access charges. However, there can be no assurance that the future
phases of Access Reform will result in reductions to the Company's network costs
and, in fact, they may increase. The ultimate impact of Access Reform is
dependent upon, among other things 1) the ability to increase transaction
volumes, which benefits the Company when lower variable costs are instituted, 2)
the nature and amount of fixed charges which are primarily based upon the number
of connections in the Company's network, which increases network costs, 3)
future actions by the FCC, 4) the ability of the Company to modify its network
design to react to pricing revisions, and 5) the ability of the Company to
successfully defend and receive credits for improperly billed charges.
Accordingly, the impact of Access 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.

During 1998, the Company plans to implement it's own on-network "800" access
service and to continue to expand its SS7 capabilities. The installation costs
of "800" service are significantly more expensive compared to "950" installation
costs. However, the Company's own on-network "800" service will reduce the
recurring cost of providing "800" access service and provide the Company greater
control of the service while reducing the Company's reliance upon third party
service providers. The per minute charges from third party service providers are
significantly greater than those expected to be incurred by the Company's own
"800" access service. Additionally, management believes that the Company's own
on-network "800" access service reduces a barrier to entry in obtaining
additional transaction volumes from the Company's existing customers and from
new customers by facilitating the customer's conversion from another service
provider to the Company. Generally, when a POS terminal is reprogrammed it
requires physical changes to be made at the terminal location. An "800"
terminal, once the Company's own on-network "800" service is available, may be
switched to the TNS service utilizing "800" portability at virtually no cost to
the customer.

The Company has recently significantly expanded its backbone and access
network capacity in order to ensure adequate capacity and an appropriate network
architecture for expected increases in network traffic from current and new
markets. In addition, in 1997, the Company made capital expenditures of over
$3.0 million in network equipment in connection with the TNS Financial Services
Network and the implementation of its own on-network "800" access service. The
Company expects to make further capital expenditures in these areas in 1998.
These additions to the TNS family of network offerings will require both
non-recurring installation costs and recurring network costs which will increase
the cost of network services in 1998. The new services offered by the Telecom
Services Division (including LNP, LEConnect-SM-, and DAC) will also result in
additional network costs. The Company believes that the gross margin percentage
on new service offerings may be greater than those on traditional TSD and POS
services. The impact on 1998 and future gross margins will be largely dependent
upon the Company's ability to successfully market these additional services. In
1998, the Company also expects to continue to monitor and expand its backbone
and access network capacity as required to handle traffic growth from existing
customers and new services.

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<PAGE>
Depending on the demand for some of the POS and telecommunications services
expected to be offered by the Company during 1998, significant additional
network costs may be required. In addition, the Company is continuing its effort
to establish certain of its own site facilities rather than co-locating with
other telecommunications companies in order to obtain greater control and
flexibility with its digital backbone network. All of these activities will
increase the cost of network services.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................................... 100.0% 100.0% 100.0%
Cost of network services............................................................... 55.8 55.0 52.7
--------- --------- ---------
Gross profit........................................................................... 44.2 45.0 47.3
--------- --------- ---------
Other operating expenses
Engineering & development............................................................ 5.4 5.1 5.4
Selling, general & administrative.................................................... 12.5 14.3 13.8
Depreciation......................................................................... 7.6 7.8 7.4
Amortization of intangibles.......................................................... 2.5 2.8 2.8
--------- --------- ---------
Total other operating expenses................................................... 28.0 30.1 29.4
--------- --------- ---------
Income from operations................................................................. 16.2 14.9 17.9
Interest income........................................................................ 3.1 3.2 2.2
--------- --------- ---------
Income before provision for income taxes............................................... 19.3 18.1 20.1
Provision for income taxes............................................................. 7.6 7.0 7.6
--------- --------- ---------
Net income....................................................................... 11.7% 11.1% 12.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>

1997 COMPARED TO 1996

REVENUES

Total revenues increased by 21.1% to $63,344,000 from $52,291,000 in 1996.

POS services revenue increased by 15.8% to $42,565,000 from $36,744,000 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 26.3% to 2.4 billion from 1.9
billion in 1996. The Company's five largest POS customers represented 70% of
total POS revenues in 1997 and 74% of total POS revenues in 1996. As the Company
increases its market share, its historical rate of POS services revenue growth
is not likely to continue.

The transaction volume growth rate exceeded the revenue growth rate
primarily because the average revenue per transaction declined approximately 11%
from $0.018 in 1996 to $0.016 in 1997. During 1996, the Company re-negotiated
contracts with most of its largest customers. These contracts now call for a
single flat rate basic price structure with increasing volume commitments during
the life of the contract, rather than volume discounts which became effective
only after certain volume thresholds were met. In exchange for extending the
term of these contracts, the customers received significant price reductions.
The majority of these customers benefited from the re-negotiated contracts
during 1996; however, the remaining contracts took effect on January 1, 1997.
Accordingly, the full effect of the 1996 contract re-negotiations was reflected
in the average revenue per POS transaction during the first quarter of 1997. The
decline in POS revenue per transaction stabilized in 1997 and revenue per POS
transaction was relatively constant for all of 1997. The Company's revenue per
transaction varies between a "950" transaction, an "800" transaction and other
types of transactions (e.g. ATM, EBT). The revenue per transaction for a "950"
transaction is generally less than that for an "800"

23
<PAGE>
transaction and the revenue per transaction for an ATM transaction (and other
types of transactions) are generally greater than both POS and EBT transactions.
The Company is anticipating an increase in the percentage of "800" transactions
and a significant increase in other types of transactions, and as a result, the
revenue per transaction may increase. Future average revenue per POS transaction
will depend on the relative contribution to total transaction volume from each
of the Company's sources of POS transactions and increasing competition to
obtain new business.

Telecommunications services revenue increased by 41.2% to $19,609,000 in
1997 from $13,891,000 in 1996. The growth in revenue was primarily due to growth
in queries processed for the Company's existing telecommunications customers as
well as the successful introduction of new services.

The Company began offering its FastLink-Registered Trademark- Data Service
in 1997 through its Financial Services Division. Financial services revenue was
$267,000 in 1997.

International revenue was $893,000 in 1997 and $1,656,000 for 1996. The
significant decline in International revenue was due to approximately $1,100,000
of equipment sales in 1996 which did not reoccur in 1997. Recurring
international revenue (revenue excluding equipment sales) was approximately
$700,000 in 1997 and $550,000 in 1996.

COST OF NETWORK SERVICES

Cost of network services increased by 22.7% to $35,322,000 in 1997 from
$28,771,000 for 1996. This growth resulted primarily from increases in usage
charges and charges for billing validation information resulting from increased
transaction and query volumes.

GROSS PROFIT

Gross profit represented 44.2% and 45.0% of total revenues for 1997 and
1996, respectively. The 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 not fully offset by local access rate
reductions and network efficiencies. Future gross profit margins depend on a
number of factors including, but not limited to, total transaction and query
volume growth, the impact of Access Reform, the relative growth and contribution
to total transaction volume of each of the Company's customers and types of
services, the timing and extent of the Company's network expansion including its
own on-network "800" access and Financial Services Network, the ability of the
Company to successfully resolve improperly billed charges (primarily from the
LECs) and the gross margins on new service offerings. 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. As a result, maintaining historical gross margin levels
depends in part on growth in transaction volume generating economies of scale
and on the ultimate impact of Access Reform.

ENGINEERING AND DEVELOPMENT

Engineering and development expense increased by 27.5% to $3,431,000 in 1997
from $2,692,000 in 1996 as a result of the growth of the Company. 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. The Company has not
capitalized any costs associated with software or other development performed by
its engineering and development groups. Future engineering and development costs
may increase due to additional resource requirements associated with the
introduction of new services. The Company does not anticipate incurring material
costs associated with its computer systems to accommodate the year 2000 issue.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased by 6.0% to $7,941,000
in 1997 from $7,491,000 in 1996. Selling, general and administrative expenses
include sales, marketing, finance, accounting and administrative costs. The
increase in these expenses is attributable to growth of the Company.

24
<PAGE>
DEPRECIATION

Depreciation expense increased by 17.8% to $4,793,000 in 1997 from
$4,068,000 in 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.

AMORTIZATION OF INTANGIBLES

The amortization of intangible assets was increased by 5.7% to $1,570,000 in
1997 from $1,485,000 in 1996. Amortization of all existing intangible assets is
expected to be approximately $400,000 per quarter over the next several years.

INCOME TAXES

The effective tax rate increased to 39.6% in 1997 from 38.5% in 1996. The
increase is primarily a result of the losses related to the Company's activities
in Ireland. 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 27.1% to $7,386,000 in 1997 from $5,814,000 in 1996.
Diluted earnings per share grew 28.2% to $0.59 in 1997 from $0.46 in 1996. The
weighted average number of shares outstanding used to calculate diluted earnings
per share increased to 12,619,000 during 1997 from 12,591,000 in 1996. Shares
outstanding increased primarily because of an increase in common stock
equivalents used in the Company's calculation of common equivalent shares under
the treasury stock method. This effect was partially offset by the Company's
purchase of 211,500 shares of its common stock during the second quarter of
1997. Basic earnings per share was $0.60 for 1997 and $0.47 in 1996. Basic
earnings per share was greater than diluted earnings per share by $0.01 for 1997
and 1996 due to the dilutive impact of stock options.

1996 COMPARED TO 1995

REVENUES

Total revenues increased by 26% to $52,291,000 from $41,365,000 in 1995.

POS services revenue increased by 26% to $36,745,000 in 1996 from
$29,135,000 in 1995. The growth in POS services revenue resulted predominantly
from an increase in transaction volume and associated revenue. POS transaction
volume increased by 58% to 1.9 billion transactions in 1996 from 1.2 billion in
1995. The transaction volume growth rate exceeded the revenue growth rate
primarily because the average revenue per POS transaction declined by
approximately 22% to $0.018 in 1996 from $0.023 in 1995. The Company's five
largest POS customers represented 74% of total POS revenues in 1996 and 75% in
1995.

TSD revenue grew by 14% to $13,891,000 in 1996 from $12,230,000 in 1995
primarily a result of growth in query volume resulting from the addition of new
and existing Telecom services customers. Telecom services revenue growth also
increased from the inclusion of the revenues derived from the June 30, 1995
asset purchase from Intellicall, Inc. 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 of revenue in 1996.

International revenue, a new source of revenue for TNS in 1996, was
$1,655,000 for 1996 of which approximately $1,100,000 related to equipment
sales. The Company has entered into technology transfer agreements whereby the
Company provides POS equipment and software to its international customers.
TNSL's losses were approximately $280,000 for 1996.

25
<PAGE>
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.

GROSS PROFIT

Gross profit increased by 20% to $23,520,000 from $19,546,000 during 1996.
This represented 45.0% and 47.3% of total revenues for 1996 and 1995,
respectively. The 2.3% 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 not completely offset by local access rate
reductions and network efficiencies. The Company is also 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.

ENGINEERING AND DEVELOPMENT

Engineering and development expense increased by 20% to $2,692,000 from
$2,241,000 during 1996. The growth in these costs is due to the growth of the
Company.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased by 31% to $7,491,000
in 1996 from $5,697,000 in 1995. 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.
In March 1996, the Company relocated to a new headquarters facility and began
incurring lease expense on the new building. 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.

DEPRECIATION

Depreciation expense increased by 32% to $4,068,000 in 1997 from $3,081,000
in 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.

AMORTIZATION OF INTANGIBLES

The amortization of intangible assets increased by 30% to $1,485,000 in 1997
from $1,138,000 in 1996. The increase resulted primarily from two factors.
First, the amortization of approximately $3,000,000 of intangible assets
acquired from Intellicall 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.

INCOME TAXES

Provision for income taxes was $3,640,000 for 1996 compared to $3,157,000
for 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. The
Company has not recorded a tax asset for these losses due to TNSL's brief
operating history.

26
<PAGE>
NET INCOME AND EARNINGS PER SHARE

Net income increased by 13% to $5,814,000 from $5,150,000 during 1996.
Earnings per diluted share grew to $0.46 for 1996 from $0.45 for 1995. The
weighted average number of shares outstanding used to calculate earnings per
share increased to 12,591,000 for 1996 from 11,534,000 for 1995. Shares
outstanding increased primarily because 1,500,000 shares of common stock issued
by the Company in August of 1995 were outstanding for all of 1996. Basic
earnings per share was $0.47 for 1996 and $0.46 in 1995. Basic earnings per
share was greater than diluted earnings per share by $0.01 for 1996 and 1995 due
to the dilutive impact of stock options.

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, 1997. 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>
QUARTER ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA )
Revenues..................................... 10,933 13,168 14,840 13,350 13,115 15,444
Income from operations....................... 1,050 1,926 2,684 2,125 1,357 2,325
Income before income taxes................... 1,450 2,376 3,081 2,548 1,766 2,757
Net income................................... $ 899 $ 1,473 $ 1,867 $ 1,575 1,002 1,609
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per share................... $ 0.07 $ 0.12 $ 0.15 $ 0.13 $ 0.08 $ 0.13
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Shares used in diluted per share
computations............................... 12,603 12,710 12,618 12,584 12,556 12,560
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share..................... $ 0.07 $ 0.12 $ 0.15 $ 0.13 $ 0.08 $ 0.13
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Shares used in basic per share
computations............................... 12,187 12,247 12,283 12,319 12,343 12,256
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

SEPT. 30, DEC. 31,
1997 1997
----------- -----------
<S> <C> <C>

Revenues..................................... 17,170 17,615
Income from operations....................... 3,098 3,507
Income before income taxes................... 3,640 4,063
Net income................................... 2,256 2,519
----------- -----------
----------- -----------
Diluted earnings per share................... $ 0.18 $ 0.20
----------- -----------
----------- -----------
Shares used in diluted per share
computations............................... 12,755 12,841
----------- -----------
----------- -----------
Basic earnings per share..................... $ 0.18 $ 0.21
----------- -----------
----------- -----------
Shares used in basic per share
computations............................... 12,229 12,236
----------- -----------
----------- -----------
</TABLE>

SEASONALITY

Merchant credit card transactions and credit card transactions from
retailers and to a much lesser extent gasoline stations account for a
significant 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 gross
profit margins from POS credit card transactions in the first quarter, when
revenues are lower and network utilization is lower, are expected to be 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
affected by seasonal trends. The Company's revenues from calling card
transactions from its TSD customers 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. The Company is expecting to
incur significant non-recurring network expansion costs as well as a significant
increase in certain recurring network costs during the first and second quarters
of 1998. A significant portion of these costs are associated with the Company's
roll out of its own on-network "800" access service, circuits required for
increases in transaction volumes from POS and Telecom customers and from the
implementation of its

27
<PAGE>
FastLink-Registered Trademark- Data Service. The Company may experience a
reduction in gross margin in certain quarters depending on the timing of these
costs. Network expansion charges are expensed by the Company at the time such
costs are incurred. As a result of all these factors, significant variability in
quarterly earnings may occur and is expected.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, principal sources of liquidity were cash and cash
equivalents of $18,516,000, short term investments of $9,899,000 and a bank line
of credit of up to $5,000,000. The line of credit bears interest at the prime
rate and was not used in 1997. The Company's short term investments are
classified as held to maturity investments. In February 1998, the Company
entered into an asset purchase agreement with Suntech Processing Systems LLC
("Suntech"). Under the Agreement, the Company will acquire substantially all of
Suntech's assets and will assume certain liabilities. Suntech is engaged
primarily in the business of providing third-party transaction processing
services for automated teller machines. The total purchase price is $17.5
million composed of $12.25 million in cash and the number of shares of TNS
common stock determined by dividing $5.25 million by the average closing price
for TNS common stock for the ten days immediately preceding the closing. This
represents approximately 287,500 shares of TNS common stock .

Net cash provided by operating activities was $12,302,000 for 1997 up from
$10,001,000 for 1996. The increase is primarily from increases in net income and
depreciation, a decrease in the rate of increase in accounts receivable, and an
increase in accounts payable and accrued expenses.

Investing activities used $7,389,000 for 1997 as compared to a use of
$15,536,000 for 1996. The Company purchased $11,365,000 of equipment in 1997, an
increase of $5,115,000 from $6,250,000 for 1996. The increase was primarily due
to the build-out of the IP backbone network, the continued expansion of the
existing network to accommodate increasing transaction volumes, purchases of
network equipment for the Company's own on-network "800" access service, and
other network enhancements. Investing activities in 1996 included the receipt of
$3,600,000 in proceeds from the maturity of a note receivable. Investing
activities in 1997 included approximately $3,700,000 of investments made in
certain customers. The remaining net difference between 1997 and 1996 results
primarily from significant ($11,149,000) purchases of short-term investments and
purchases of intangible assets of $1,682,000 in 1996. Short-term investments
maturing in 1997 totaled $5,801,000 and long term investments maturing in 1997
totaled $2,835,000.

Financing activities used $1,041,000 in 1997 and provided $1,561,000 of cash
in 1996. The Company purchased 211,500 shares of its common stock in 1997 for
$2,491,000. Proceeds from the exercise of stock options and the employee stock
purchase plan provided $1,107,000 in 1997 and $728,000 in 1996.

At December 31, 1997 the Company had long-term commitments to purchase
capital equipment in the amount of approximately $3.8 million over a 12 month
period, of which approximately $710,000 is contingent upon the vendor meeting
delivery in accordance with development milestones. Except for these
arrangements, the Company does not have long-term supply contracts with any of
its vendors.

The Company believes that its existing cash, investment balances, line of
credit and cash flows generated by operations will be sufficient to meet the
capital needs of its current business activities for the foreseeable future.

NEW ACCOUNTING STANDARDS

In July 1997, the FASB issued Statement No. 130 "Reporting Comprehensive
Income" and Statement No. 131 "Disclosures About Segments of an Enterprise and
Related Information." Statement No. 130 requires the Company to present an
aggregate amount of "comprehensive income" and the components of "other
comprehensive income" in its 1998 financial statements and/or notes thereto. The
Company's only component of "other comprehensive income" consists of foreign
currency translation adjustments and has not been material. Statement No. 131
will require the Company to disclose segment information using a "management
approach" beginning with its December 31, 1998 financial statements.

EFFECTS OF INFLATION

Inflation is not a material factor affecting the Company's business and has
not had a significant effect on the Company's operations to date.

28
<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.............................................. 30
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... 31
Consolidated Statements of Operations for the years ending December 31, 1997, 1996 and 1995................ 32
Consolidated Statements of Stockholders' Equity for the years ending December 31, 1997, 1996 and 1995...... 33
Consolidated Statements of Cash Flows for the years ending December 31, 1997, 1996 and 1995................ 34
Notes to Consolidated Financial Statements................................................................. 35
</TABLE>

29
<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 subsidiaries as of December
31, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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 subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.,
January 20, 1998 (except with respect to the matter discussed in
Note 9, as to which the date is February 27, 1998)

30
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 18,516 $ 14,735
Short-term investments............................................................ 9,899 15,700
Accounts receivable, net of allowance for doubtful accounts of $530 and $598,
respectively.................................................................... 10,618 9,350
Other current assets.............................................................. 1,453 617
------------- -------------
Total current assets............................................................ 40,486 40,402
------------- -------------
EQUIPMENT, at cost:
Network equipment................................................................. 30,101 21,472
Office equipment.................................................................. 4,802 2,688
Less--Accumulated depreciation.................................................... (14,314) (10,074)
------------- -------------
20,589 14,086
------------- -------------
INTANGIBLE ASSETS:
Software and intangibles.......................................................... 14,119 13,772
Less--Accumulated amortization.................................................... (4,742) (3,186)
------------- -------------
9,377 10,586
------------- -------------
OTHER ASSETS........................................................................ 1,327 909
LONG-TERM INVESTMENTS............................................................... 4,330 2,568
------------- -------------
Total assets.................................................................... $ 76,109 $ 68,551
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................. $ 7,256 $ 5,551
DEFERRED INCOME TAX, net of current amount.......................................... 378 809
------------- -------------
Total liabilities............................................................... 7,634 6,360
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Common stock, $0.01 par value, 20,000 shares authorized, 12,476 and 12,328 shares
issued, respectively............................................................ 125 123
Additional paid-in capital........................................................ 51,292 49,844
Treasury stock, 211 shares, at cost............................................... (2,491) --
Unearned compensation............................................................. (46) (76)
Retained earnings................................................................. 19,658 12,272
Foreign currency translation...................................................... (63) 28
------------- -------------
Total stockholders' equity...................................................... 68,475 62,191
------------- -------------
Total liabilities and stockholders' equity...................................... $ 76,109 $ 68,551
------------- -------------
------------- -------------
</TABLE>

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

31
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues......................................................................... $ 63,344 $ 52,291 $ 41,365
Cost of network services......................................................... 35,322 28,771 21,819
--------- --------- ---------
Gross profit..................................................................... 28,022 23,520 19,546
--------- --------- ---------
Other operating expenses:
Engineering & development...................................................... 3,431 2,692 2,241
Selling, general & administrative.............................................. 7,941 7,491 5,697
Depreciation................................................................... 4,793 4,068 3,081
Amortization of intangibles.................................................... 1,570 1,485 1,138
--------- --------- ---------
Total other operating expenses............................................. 17,735 15,736 12,157
--------- --------- ---------
Income from operations........................................................... 10,287 7,784 7,389
Interest income.................................................................. 1,939 1,670 918
--------- --------- ---------
Income before provision for income taxes......................................... 12,226 9,454 8,307
Provision for income taxes....................................................... 4,840 3,640 3,157
--------- --------- ---------
Net income....................................................................... $ 7,386 $ 5,814 $ 5,150
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share....................................................... $ 0.59 $ 0.46 $ 0.45
--------- --------- ---------
--------- --------- ---------
Basic earnings per share......................................................... $ 0.60 $ 0.47 $ 0.46
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

32
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL TREASURY STOCK FOREIGN
---------------------- PAID-IN UNEARNED ---------------------- CURRENCY
SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT TRANSLATION
--------- ----------- ----------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.......... 10,457 $ 104 $ 23,485 $ (164) -- $ -- $ --
Amortization of unearned
compensation...................... -- -- -- 58 -- -- --
Stock issued through public
offering.......................... 1,500 15 23,354 -- -- -- --
Stock issued under benefit plans.... 181 2 580 -- -- -- --
Tax benefit of exercise of non-
qualified options................. -- -- 701 -- -- -- --
Net income.......................... -- -- -- -- -- -- --
--
--------- --- ----------- ----- --------- -----------
BALANCE, December 31, 1995.......... 12,138 121 48,120 (106) -- -- --
Amortization of unearned
compensation...................... -- -- -- 30 -- -- --
Stock issued under benefit plans.... 190 2 891 -- -- -- --
Tax benefit of exercise of non-
qualified options................. -- -- 833 -- -- -- --
Foreign currency translation........ -- -- -- -- -- -- 28
Net income.......................... -- -- -- -- -- -- --
--
--------- --- ----------- ----- --------- -----------
BALANCE, December 31, 1996.......... 12,328 123 49,844 (76) -- -- 28
Amortization of unearned
compensation...................... -- -- -- 30 -- -- --
Stock issued under benefit plans.... 148 2 1,105 -- -- -- --
Purchase of treasury stock.......... -- -- -- -- 211 (2,491) --
Tax benefit of exercise of non-
qualified options................. -- -- 343 -- -- -- --
Foreign currency translation........ -- -- -- -- -- -- (91)
Net income.......................... -- -- -- -- -- -- --
--
--------- --- ----------- ----- --------- -----------
BALANCE, December 31, 1997.......... 12,476 $ 125 $ 51,292 $ (46) 211 $ (2,491) $ (63)
--
--
--------- --- ----------- ----- --------- -----------
--------- --- ----------- ----- --------- -----------

RETAINED
EARNINGS
-----------
<S> <C>
BALANCE, December 31, 1994.......... $ 1,308
Amortization of unearned
compensation...................... --
Stock issued through public
offering.......................... --
Stock issued under benefit plans.... --
Tax benefit of exercise of non-
qualified options................. --
Net income.......................... 5,150

-----------
BALANCE, December 31, 1995.......... 6,458
Amortization of unearned
compensation...................... --
Stock issued under benefit plans.... --
Tax benefit of exercise of non-
qualified options................. --
Foreign currency translation........ --
Net income.......................... 5,814

-----------
BALANCE, December 31, 1996.......... 12,272
Amortization of unearned
compensation...................... --
Stock issued under benefit plans.... --
Purchase of treasury stock.......... --
Tax benefit of exercise of non-
qualified options................. --
Foreign currency translation........ --
Net income.......................... 7,386

-----------
BALANCE, December 31, 1997.......... $ 19,658

-----------
-----------
</TABLE>

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

33
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................... $ 7,386 $ 5,814 $ 5,150
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 6,363 5,553 4,219
Unearned compensation...................................................... 30 30 58
Loss on disposals of equipment............................................. 39 14 60
Deferred income taxes...................................................... (314) -- 82
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable...................................................... (1,549) (1,634) (2,186)
Other current assets..................................................... (827) 13 (445)
Other assets............................................................. (399) 441 (1,150)
Accounts payable and accrued expenses.................................... 1,573 (230) 896
--------- --------- ---------
Net cash provided by operating activities.............................. 12,302 10,001 6,684
--------- --------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment....................................................... (11,365) (6,250) (5,638)
Purchases of intangible assets............................................... (227) (1,682) (3,503)
Purchase of subsidiary....................................................... (182) -- --
Proceeds from disposals of equipment......................................... 30 107 58
Collection (issuance) of note receivable..................................... -- 3,600 (3,600)
Maturities (purchases) of short-term investments, net........................ 5,801 (11,149) (4,551)
Purchases of long-term investments........................................... (4,281) (162) (2,406)
Maturities of long-term investments.......................................... 2,835 -- --
--------- --------- ---------
Net cash used in investing activities.................................. (7,389) (15,536) (19,640)
--------- --------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock....................................... -- -- 23,369
Proceeds from options and employee stock purchase plan....................... 1,107 728 526
Income tax benefit of deduction for income tax purposes on exercise of
non-qualified stock options................................................ 343 833 701
Purchases of treasury stock.................................................. (2,491) -- --
Repayment of equipment notes and capital leases.............................. -- -- (272)
--------- --------- ---------
Net cash (used in) provided by financing activities...................... (1,041) 1,561 24,324
--------- --------- ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................ (91) 28 --
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................................................. 3,781 (3,946) 11,368
CASH AND CASH EQUIVALENTS, beginning of period................................. 14,735 18,681 7,313
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period....................................... $ 18,516 $ 14,735 $ 18,681
--------- --------- ---------
--------- --------- ---------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Common Stock issued for 401k matching contribution......................... $ -- $ 165 $ 56
Cash paid for income taxes................................................. 4,846 3,088 1,502
Conversion of accounts receivable to term note............................. 316 -- --
</TABLE>

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

34
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

Transaction Network Services, Inc. (the "Company" or "TNS") was incorporated
in August 1990 to build and operate a communications network focused on the
network services needs of the Point-of-Sale/Point-of-Service ("POS") transaction
processing industry. 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 7.1 million
in the fourth quarter of 1997. In June 1994, the Company acquired Fortune
Telecommunications, Inc. ("FTI") of Ft. Lauderdale, Florida, which provides
customers in the telecommunications industry with telephone call fraud control
and billing validation services. In June 1996, the Company formed Transaction
Network Services Limited ("TNSL"), a majority-owned subsidiary. TNSL provides
POS network services in Ireland and serves as TNS' European technology and
marketing center to support current and future European operations. In October
1997, through TNSL, the Company acquired a majority interest in Pronoma Systems
AB. This company has been renamed Transaction Network Services
TNS AB ("TNSAB") and operates as a TNS subsidiary located in Stockholm, Sweden.

The Company currently operates four divisions: (1) The POS Division which
includes the Company's TransXpress-Registered Trademark- network services for
the POS transaction processing industry, (2) The Telecom Services Division
("TSD") which includes FTI's CARD*TEL-Registered Trademark- telephone call
billing validation and fraud control services and other services targeting
primarily the telecommunications industry, (3) The Financial Services Division
("FSD") which provides TNS' FastLink-Registered Trademark- Data Service in
support of the Financial Information eXchange ("FIX") messaging protocol and
other transaction oriented trading applications primarily to the financial
services community, and (4) The International Systems Division ("ISD") which
markets the Company's products and services internationally.

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
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-Registered Trademark- network services
implement proprietary technology that provides a communications link between the
merchant site and the transaction processor. The Company markets its
TransXpress-Registered Trademark- 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-Registered Trademark- 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 majority of the Company's international activities are located in the
United Kingdom ("UK"), Canada, Ireland, and Sweden. 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. The Company began to recognize royalty revenue under
these arrangements in 1997. TNSL provides POS network services primarily in
Ireland. TNSAB serves as TNS' hub for providing transaction transport services
throughout the Scandinavian countries.

The TNS FastLink-Registered Trademark- Data Service routes FIX protocol
messages over a secure TCP/IP network developed, operated and maintained by TNS.
The service includes primarily electronic communication of indications of
interest, orders and execution reports which are normally phoned between traders
or transmitted via proprietary systems.

35
<PAGE>
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.

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.

DILUTED AND BASIC EARNINGS PER SHARE

On March 3, 1997 the Financial Accounting Standards Board ("FASB") released
Statement No. 128, "Earnings Per Share." Statement No. 128 requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. The Company's previously reported primary earnings
per share amounts are identical to the diluted earnings per share amounts under
Statement No. 128. The Company adopted Statement No. 128 in 1997 and restated
all previously reported per share amounts. Options to purchase 74,967 shares of
common stock in the price range of $14.38 through $20.17 per share were
outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares. The options expire on dates ranging
from September 18, 2005 to December 18, 2007.

<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding (basic
earnings per share)............................... 12,255,729 12,259,533 11,104,944
Stock option equivalents............................ 362,807 331,424 427,926
------------ ------------ ------------
Weighted average shares and equivalents (diluted
earnings per share)............................... 12,618,536 12,590,957 11,532,870
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share.......................... $ 0.59 $ 0.46 $ 0.45
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per share............................ $ 0.60 $ 0.47 $ 0.46
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

RECENT AUTHORITATIVE PRONOUNCEMENTS

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.

The Company determines the appropriate classification of its investments at
the time of purchase and reevaluates such designation at each balance sheet
date. At December 31, 1997 and 1996, the Company's marketable securities
consisted primarily of money market accounts (classified as cash equivalents),
U.S.

36
<PAGE>
government and government agency securities, investment grade corporate bonds,
and overnight reverse repurchase agreements (classified as cash equivalents),
all of which the Company has both the positive intent and ability to hold until
maturity. These securities are reported at amortized cost. The contractual
maturities of held to maturity securities ranges from under one year to
twenty-two months.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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 amount approximated fair value because of the short maturity of
those instruments.

INVESTMENTS

At December 31, 1997, the fair values of marketable securities based on
quoted market prices, on national exchanges approximated the carrying amounts.
Certain of the Company's financial instruments included in investments have no
quoted market prices. However, the Company believes by reference to stated
interest rates and security held, the fair value of the assets would not differ
materially from their carrying values.

CREDIT RISK

The Company's assets that are exposed to credit risk consist primarily of
cash equivalents, investments (including non-marketable securities) of
approximately $3.6 million, 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, 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.

LONG-LIVED ASSETS

The Company's long-lived assets consist of network equipment and intangible
assets. The Company periodically reviews the value of its assets to determine if
an impairment has occurred. The Company considers expected cash flows and
estimated future operating results, trends, and other available information in
assessing whether the carrying value of the assets is impaired.

EQUIPMENT

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

INTANGIBLE ASSETS

Intangible assets are being amortized over useful lives ranging from five to
ten years.

REVENUE RECOGNITION

The Company recognizes 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. TSD revenue
consists primarily of fees charged on a per query basis to customers for
telephone call fraud-control and billing validation services. FSD revenue is
derived primarily from monthly recurring fees. International revenue consists
primarily of royalties, software license

37
<PAGE>
fees and equipment sales. Revenue from equipment sales is recognized upon
shipment. Revenue from maintenance and software licenses is recognized ratably
over the term of the agreement. Revenue from royalties are 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, activation charges, salaries,
equipment maintenance and other related network costs. These costs are expensed
by the Company at the time such costs are incurred. Depreciation expense on
network equipment was $4,124,000, $3,623,000 and $2,811,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, and is included in depreciation
expense.

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 tax rate. Deferred income tax expense
or credits are based upon the changes in the asset or liability from period to
period.

MAJORITY OWNED SUBSIDIARIES

In 1996, the Company formed TNSL in Ireland. In 1997, through TNSL, the
Company purchased a majority interest in TNSAB. The Company has provided the
minority shareholders of TNSL and TNSAB the right to put their shares to the
Company at the fair value of the 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 related toTNSL expire in 2007. The put and call provisions related to
TNSAB expire in 2003. Proforma information related to the TNSAB acquisition is
not included herein as the acquisition was not material.

RECLASSIFICATIONS

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

2. INVESTMENTS AND OTHER ASSETS:

On June 30, 1995, the Company purchased from Intellicall, Inc.
("Intellicall") 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 intangible assets. The Company is
amortizing the cost of these assets over ten years. The Company also prepaid
$1.5 million to Intellicall for billing services. The Company is recording the
expense as the services are provided, based upon volume of transactions covered
by the agreement.

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

38
<PAGE>
100,000 shares of AMNEX Common Stock . The Company paid approximately $1.5
million in cash for these assets. The Company amortizes the cost of these assets
over five to ten years.

In 1997, in connection with obtaining new customers for the Company's
service offerings, the Company made certain strategic investments discussed
below.

In July 1997, the Company obtained a five year exclusive data services
agreement and a joint marketing agreement from a customer. The Company invested
$2.0 million in this customer in the form of subordinated convertible debt.
Interest is payable each August, beginning in August 1998. Alternatively, the
customer may issue an additional note equal to the accrued interest on terms and
with rights identical to the original note. At any time, the Company may convert
all or any portion of the principal plus accrued interest into a minority
interest in the customers' common stock. The customer may redeem up to 50% of
the debt at any time up until August 1999 at a specified annual internal rate of
return. The principal and any unpaid accrued interest matures in August 2005,
and as a result, the investment is recorded as a long-term investment. This
investment is classified as an available for sale security due to its conversion
provisions. Fair value approximated carrying value at December 31, 1997.

In July 1997, the Company obtained agreements to provide
CARD*TEL-Registered Trademark- services for a five year period from a customer.
The Company paid this customer $500,000 for a software license to use the
customers' proprietary call monitoring and screening system and related
databases along with an option (the "Option") to purchase a minority ownership
interest in the customer. The Option is exercisable beginning in June 1998 and
expires in June 2002. The customer may cancel a portion of the Option at an
escalating call price. The Company is amortizing the cost of the software
license over five years. The Company also loaned the customer $250,000 as a term
loan (the "Term Loan") and $1.2 million under a secured revolving credit
agreement (the "Revolver"). In October 1997 all amounts due under the Revolver
were repaid. The remaining Term Loan is secured by certain collateral, interest
is payable monthly, and principal payments are due in three annual payments on
the next three loan anniversary dates.

In August 1997, the Company loaned a customer $500,000 under a secured term
loan. Interest is payable monthly and principal is due in February 1998. The
customer repaid $100,000 of principal in 1997.

In November 1997, the Company loaned a vendor $500,000. Principal and
interest are payable in November 1998. In connection with this loan the Company
received the exclusive European distribution rights to the borrowers' products
used in connection with the provision of POS and automated teller machine
services. A limited partnership (the "Partnership") controlled by the Company's
Chief Executive Officer and a venture capital firm, one of whose partners is a
Company director, are minority shareholders in this company. The Company's loan
is guaranteed by the Partnership.

In December 1997, the Company executed a $450,000 secured term note with a
POS customer. The principal balance includes the conversion of approximately
$316,000 of outstanding accounts receivable. Interest is payable monthly
beginning February 1998. Principal is payable in 36 monthly installments
beginning January 2000. The note is secured by certain collateral including the
stock of the borrower.

3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following as of
December 31 (in thousands).

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accounts payable and accrued network costs................................. $ 4,601 $ 3,554
Accrued payroll and related expenses....................................... 649 449
Deferred revenue........................................................... 638 440
Current portion of deferred income taxes................................... 387 270
Other...................................................................... 981 838
--------- ---------
Total.................................................................. $ 7,256 $ 5,551
--------- ---------
--------- ---------
</TABLE>

39
<PAGE>
4. LINE-OF-CREDIT AGREEMENT:

The Company has a line-of-credit with a bank which expires on June 30, 1998.
Borrowings on the line are limited to $5,000,000. Amounts outstanding under the
line bear interest at the prime rate, 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.

5. INCOME TAXES:

The components of income tax expense (benefit) for the years ending December
31, 1997 1996 and 1995 consist of the following (in thousands).

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal........................................................ $ 4,649 $ 3,262 $ 2,649
State.......................................................... 505 378 426
Deferred (benefit) provision:
Federal........................................................ (283) -- 71
State.......................................................... (31) -- 11
--------- --------- ---------
$ 4,840 $ 3,640 $ 3,157
--------- --------- ---------
--------- --------- ---------
</TABLE>

The provision for income taxes results in effective rates for the years
ending December 31, 1997, 1996 and 1995 which differ from the Federal statutory
rate as follows.

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<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..................... 3.7 4.0 4.0
Effect of foreign tax rates........................................ 1.9 0.5 --
--- --- ---
Effective rate..................................................... 39.6% 38.5% 38.0%
--- --- ---
--- --- ---
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Depreciation............................................................... $ (968) $ (1,048)
Differences between cash and accrual accounting methods.................... (202) (406)
Amortization of intangibles................................................ 590 441
Other...................................................................... (185) (66)
--------- ---------
Net deferred income tax liability.......................................... $ (765) $ (1,079)
--------- ---------
--------- ---------
</TABLE>

6. STOCKHOLDERS' EQUITY:

PUBLIC OFFERING

On August 16, 1995, the Company completed its second public offering. The
offering included 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.

TREASURY STOCK

In December 1996, the Board of Directors authorized the Company to purchase
up to 1,000,000 shares of its issued and outstanding Common Stock. Purchased
shares will be held in treasury for use in funding the

40
<PAGE>
Company's stock option program, or such other approved uses. During 1997, the
Company purchased a total of 211,500 shares for approximately $2.5 million.

STOCK OPTION PLAN

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"). In April 1997, the shares authorized under the 1994 Plan were
increased to 1,800,000 shares. As of December 31, 1997, a total of 220,319
shares were available for future awards under these plans.

The following table summarizes the activity for the Company's stock option
plans for the three years ended December 31, 1997.

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES PRICE EXERCISE
UNDER OPTION PER SHARE PRICE
------------------- ----------------- -------------
<S> <C> <C> <C>
Options outstanding, December 31, 1994..................... 685,726 $ 0.13--$9.25 $ 2.91
Granted (weighted average fair value $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 value $8.11).............. 10,800 $14.25--$20.17 $ 16.54
Exercised................................................ (155,061) $ 0.13--$10.67 $ 3.02
Canceled/expired......................................... (10,500) $ 6.25--$6.25 $ 6.25
-------- ----------------- ------
Options outstanding, December 31, 1996..................... 508,015 $ 0.13--$20.17 $ 6.52
Granted (weighted average fair value $4.81).............. 1,209,570 $10.00--$17.00 $ 11.31
Exercised................................................ (125,304) $ 0.13--$20.17 $ 6.90
Canceled/expired......................................... (58,139) $ 4.00--$20.17 $ 9.13
-------- ----------------- ------
Options outstanding, December 31, 1997..................... 1,534,142 $ 0.13--$20.17 $ 6.82
-------- ----------------- ------
-------- ----------------- ------
</TABLE>

OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
YEARS
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
AS OF LIFE EXERCISE AS OF EXERCISE
PRICES 12/31/97 YEARS PRICES 12/31/97 PRICES
- -------------------- --------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.13 - $ 4.00 154,614 4.20 $ 1.82 138,489 $ 1.57
$ 6.25 - $ 10.00 999,278 8.69 $ 9.77 228,730 $ 9.48
$ 10.38 - $ 15.88 318,050 9.49 $ 14.02 12,600 $ 14.56
$ 16.17 - $ 20.17 62,200 9.56 $ 16.85 1,950 $ 17.11
- --------- --------- ----------- --- ----------- ----------- -----------
$ 0.13 - $ 20.17 1,534,142 8.44 $ 6.82 381,769 $ 6.82
- --------- --------- ----------- --- ----------- ----------- -----------
- --------- --------- ----------- --- ----------- ----------- -----------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In 1994, the Company adopted an Employee Stock Purchase Plan ("ESPP").
Eligible employees may contribute up to 10% of their base earnings toward the
semi-annual purchase of Common Stock. Under the 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 1995,

41
<PAGE>
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. During 1997, employees purchased 11,265
shares at $10.20 per share and 12,958 shares at $10.94 per share. The weighted
average fair value for shares purchased under the ESPP was $3.60 for 1997, $2.79
for 1996 and $1.70 for 1995.

The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". 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 1997, 1996, and 1995 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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Earnings (thousands)--pro forma.............................. $ 6,667 $ 5,633 $ 5,042
Diluted earnings per share--pro forma............................ $ 0.53 $ 0.45 $ 0.44
Basic earnings per share--pro forma.............................. $ 0.54 $ 0.46 $ 0.45
</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 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 used: dividend yield of
0%, expected volatility of 49%; risk-free interest rate of 5.5%; and expected
lives of approximately 3 years. For 1997 grants, the following weighted-average
assumptions were used: a dividended yield of 0%; expected volatility of 51%;
risk-free interest of 5.46%; and expected lives of approximately 3 years. The
effects of applying SFAS No. 123 in the proforma disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995.

7. 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 payments
escalate every year based on a factor tied to the change in the Consumer Price
Index, but not to exceed 3% per annum. In connection with this lease, the
Company loaned the purchaser of the building $3.6 million which was repaid with
interest in 1996. 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 (IN
DECEMBER 31, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 1,463
1999........................................................................... 1,369
2000........................................................................... 1,183
2001........................................................................... 1,171
2002........................................................................... 1,171
Thereafter..................................................................... 3,005
------
$ 9,362
------
------
</TABLE>

Rent expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $1,555,000, $1,433,000, and $581,000, 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, the Company's Board of Directors elected to make a

42
<PAGE>
matching contribution in the form of Common Stock in lieu of cash. Matching
shares were 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 in 1995
as a 1994 contribution. For 1995, a discretionary matching contribution of
10,754 shares was approved and was issued in 1996. For 1997 and 1996, the
Company approved a discretionary matching contribution of approximately $100,000
(25% of each eligible employee's contribution made during each year) 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 revenue is made to a limited number
of customers. For the years ended December 31, 1997, 1996 and 1995, the Company
recorded sales to these customers as follows (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Customer A...................................................... $ 11,105 $ 8,962 $ 6,614
Customer B...................................................... * 6,244 5,059
Customer C...................................................... * * 4,147
</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, 1995.

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 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, 1997, the Company had long term commitments to purchase
approximately $3.8 million in capital equipment of which $710,000 is contingent
upon delivery of development milestones by a vendor. Except for these
arrangements, the Company does not have long-term supply contracts.

8. QUARTERLY DATA--UNAUDITED

The following quarterly financial data has been prepared from the financial
records of the Company without audit, and reflects all adjustments which, in the
opinion of management, were of a normal recurring nature and necessary for a
fair presentation of the results of operations for the interim periods
presented. Quarterly information may not total to annual amounts in some cases
due to rounding.

<TABLE>
<CAPTION>
QUARTERS ENDED
FOR THE YEAR ENDED DECEMBER 31, 1997 --------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------------------------------------------------------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues...................................................... $ 13,115 $ 15,444 $ 17,170 $ 17,615
Gross profit.................................................. 5,707 6,830 7,630 7,855
Income from operations before interest and taxes.............. 1,357 2,325 3,098 3,507
Net income.................................................... 1,002 1,609 2,256 2,519
Diluted earnings per share.................................... $ 0.08 $ 0.13 $ 0.18 $ 0.20
Basic earnings per share...................................... $ 0.08 $ 0.13 $ 0.18 $ 0.21
</TABLE>

43
<PAGE>

<TABLE>
<CAPTION>
QUARTERS ENDED
FOR THE YEAR ENDED DECEMBER 31, 1996 --------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------------------------------------------------------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues...................................................... $ 10,933 $ 13,168 $ 14,840 $ 13,350
Gross profit.................................................. 4,707 6,021 6,674 6,119
Income from operations before interest and taxes.............. 1,050 1,926 2,684 2,125
Net income.................................................... 899 1,473 1,867 1,575
Diluted earnings per share.................................... $ 0.07 $ 0.12 $ 0.15 $ 0.13
Basic earnings per share...................................... $ 0.07 $ 0.12 $ 0.15 $ 0.13
</TABLE>

9. SUBSEQUENT EVENTS

On February 27, 1998, the Company entered into an asset purchase agreement
(the "Agreement") with Suntech Processing Systems LLC ("Suntech"). Under the
Agreement, the Company acquired substantially all of Suntech's assets and
assumed certain liabilities. Suntech is engaged primarily in the business of
providing third-party transaction processing services for automated teller
machines. The total purchase price was $17.5 million composed of $12.25 million
in cash and the number of shares of TNS common stock determined by dividing
$5.25 million by the average closing price for TNS common stock for the ten days
immediately preceding the closing. This represents approximately 287,500 shares
of TNS common stock .

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

44
<PAGE>
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 14, 1998 (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 Accountants

Consolidated Balance Sheets as of December 31, 1997 and 1996

Consolidated Statements of Operations for the years ending December 31,
1997, 1996 and
1995

Consolidated Statements of Stockholders' Equity for the years ending
December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows for the years ending December 31,
1997, 1996 and 1995

Notes to Consolidated Financial Statements

2. Financial Statement 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.

45
<PAGE>
(c) Exhibits

None.

<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 requested 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 Form 10-Q,
dated September 30, 1995.

(7) Filed here with.

46
<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 subsidiaries included in this Form 10-K and have
issued our report thereon dated January 20, 1998 (except with respect to the
matter discussed in Note 9 to the consolidated financial statements, as to which
the date is February 27, 1998). 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 20, 1998

47
<PAGE>
SCHEDULE II

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

<TABLE>
<CAPTION>
DESCRIPTION BALANCE AT CHARGED TO BALANCE
Allowance for doubtful accounts BEGINNING OF COSTS AND AT END OF
(deducted from accounts receivable in thousands) PERIOD EXPENSES DEDUCTIONS PERIOD
--------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997.................................... $ 598 $ 60 $ (128) $ 530
YEAR ENDED DECEMBER 31, 1996.................................... $ 432 $ 491 $ (325) $ 598
YEAR ENDED DECEMBER 31, 1995.................................... $ 374 $ 142 $ (84) $ 432
</TABLE>

48
<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 9th day of March, 1998.

<TABLE>
<S> <C> <C>
TRANSACTION NETWORK SERVICES, INC.

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

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:

NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

President, Chief Executive
/s/ JOHN J. MCDONNELL, JR. Officer and Director
- ------------------------------ (Principal Executive March 9, 1998
John J. McDonnell, Jr. Officer)

/s/ THADDEUS G. WEED
- ------------------------------ Chief Financial Officer March 9, 1998
Thaddeus G. Weed and Treasurer

/s/ JURGEN MANCHOT
- ------------------------------ Director March 9, 1998
Jurgen Manchot

/s/ WILLIAM N. MELTON
- ------------------------------ Director March 9, 1998
William N. Melton

/s/ JOHN S. MCCARTHY
- ------------------------------ Director March 9, 1998
John S. McCarthy

/s/ HENRY R. NICHOLS
- ------------------------------ Director March 9, 1998
Henry R. Nichols

/s/ PAOLO L. GUIDI
- ------------------------------ Director March 9, 1998
Paolo L. Guidi

<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 subsidiaries' previously filed Registration Statements on Form S-8, File
Nos. 33-85432, 33-85434 and 333-27159.

ARTHUR ANDERSEN LLP

Washington, D.C.,
March 2, 1998

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,516
<SECURITIES> 9,899
<RECEIVABLES> 11,148
<ALLOWANCES> 530
<INVENTORY> 0
<CURRENT-ASSETS> 40,486
<PP&E> 34,903
<DEPRECIATION> 14,314
<TOTAL-ASSETS> 76,109
<CURRENT-LIABILITIES> 7,256
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 68,350
<TOTAL-LIABILITY-AND-EQUITY> 76,109
<SALES> 63,344
<TOTAL-REVENUES> 63,344
<CGS> 35,322
<TOTAL-COSTS> 35,322
<OTHER-EXPENSES> 17,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,226
<INCOME-TAX> 4,840
<INCOME-CONTINUING> 7,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,386
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.59

</TABLE>