UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from      To

Commission file number 1-10254

Total System Services, Inc.

(Exact name of registrant as specified in its charter)

Georgia (State or other jurisdiction of incorporation or organization)		58-1493818 (I.R.S. Employer Identification No.)

1600 First Avenue, Post Office Box 1755, Columbus, Georgia		31902
(Address of principal executive offices)		(Zip Code)

(706) 649-2262
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 þ           No o     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o           No þ     

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS		OUTSTANDING AS OF: November 6, 2006
Common Stock, $0.10 par value		196,936,671 shares

 

 

TOTAL SYSTEM SERVICES, INC.

		Page
		Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) – September 30, 2006 and December 31, 2005			3
Condensed Consolidated Statements of Income (unaudited) – Three and nine months ended September 30, 2006 and 2005			5
Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2006 and 2005			7
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			53
Item 4. Controls and Procedures			56
Part II. Other Information
Item 1A. Risk Factors			57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 6. Exhibits			58
Signatures			59
Exhibit Index			60
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO

TOTAL SYSTEM SERVICES, INC.

		September 30,				December 31,
(in thousands, except per share information)		2006				2005
Assets
Current assets:
Cash and cash equivalents (includes $160.1 million and $152.6 million on deposit with a related party at 2006 and 2005, respectively)		$	255,722				237,569
Restricted cash (includes $5.5 million and $4.1 million on deposit with a related party at 2006 and 2005, respectively)			38,069				29,688
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $11.5 million and $12.6 million at 2006 and 2005, respectively (includes $0.4 million and $0.1 million due from a related party at 2006 and 2005, respectively)			233,359				184,532
Deferred income tax assets			20,147				15,264
Prepaid expenses and other current assets			45,365				45,236
Total current assets			592,662				512,289
Property and equipment, net of accumulated depreciation and amortization of $218.4 million and $188.1 million at 2006 and 2005, respectively			266,993				267,979
Computer software, net of accumulated amortization of $378.6 million and $317.1 million at 2006 and 2005, respectively			230,715				267,988
Contract acquisition costs, net			172,988				163,861
Goodwill, net			143,595				112,865
Equity investments			60,410				42,731
Other intangible assets, net of accumulated amortization of $8.5 million and $5.4 million at 2006 and 2005, respectively			26,349				13,580
Other assets			26,245				29,604
Total assets		$	1,519,957				1,410,897

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)

		September 30,				December 31,
(in thousands, except per share information)		2006				2005
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable (includes $0.1 million and $0.1 million payable to related parties at 2006 and 2005, respectively)		$	44,673				29,464
Accrued salaries and employee benefits			65,451				84,348
Current portion of obligations under capital leases			2,337				2,078
Other current liabilities (includes $11.2 million and $9.9 million payable to related parties at 2006 and 2005, respectively)			163,557				161,122
Total current liabilities			276,018				277,012
Obligations under capital leases, excluding current portion			1,740				3,555
Deferred income tax liabilities			70,944				89,478
Other long-term liabilities			30,636				24,398
Total liabilities			379,338				394,443
Minority interests in consolidated subsidiary			4,114				3,682
Shareholders’ equity:
Common stock — $0.10 par value. Authorized 600,000 shares; 198,401 and 197,975 issued at 2006 and 2005, respectively; 196,653 and 197,283 outstanding at 2006 and 2005, respectively			19,840				19,797
Additional paid-in capital			62,634				50,666
Accumulated other comprehensive income, net			16,507				5,685
Treasury stock (1,748 shares at 2006 and 692 shares at 2005)			(34,601	)			(12,841	)
Retained earnings			1,072,125				949,465
Total shareholders’ equity			1,136,505				1,012,772
Total liabilities and shareholders’ equity		$	1,519,957				1,410,897

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

TOTAL SYSTEM SERVICES, INC.

		Three months ended
		September 30,
(in thousands, except per share information)		2006				2005
Revenues:
Electronic payment processing services (includes $1.2 million and $1.3 million from related parties for 2006 and 2005, respectively)		$	232,171				224,394
Merchant acquiring services			65,548				74,207
Other services (includes $2.0 million and $1.6 million from related parties for 2006 and 2005, respectively)			44,619				43,499
Revenues before reimbursable items			342,338				342,100
Reimbursable items (includes $0.4 million and $0.4 million from related parties for 2006 and 2005, respectively)			99,477				79,869
Total revenues			441,815				421,969
Expenses:
Salaries and other personnel expense			139,182				121,389
Net occupancy and equipment expense			75,811				77,134
Other operating expenses (includes $2.0 million and $2.2 million to related parties for 2006 and 2005, respectively)			55,088				71,245
Expenses before reimbursable items			270,081				269,768
Reimbursable items			99,477				79,869
Total expenses			369,558				349,637
Operating income			72,257				72,332
Nonoperating income (expense):
Interest income (includes $1.7 million and $867 from related parties for 2006 and 2005, respectively)			3,363				1,592
Interest expense			(235	)			(84	)
Gain on foreign currency, net			282				66
Total nonoperating income			3,410				1,574
Income before income taxes, minority interest and equity in income of equity investments			75,667				73,906
Income taxes			22,380				26,777
Income before minority interest and equity in income of equity investments			53,287				47,129
Minority interests in consolidated subsidiaries’ net income			(183	)			(64	)
Equity in income of equity investments			1,202				991
Net income		$	54,306				48,056
Basic earnings per share		$	0.28				0.24
Diluted earnings per share		$	0.28				0.24
Weighted average common shares outstanding			196,500				197,198
Increase due to assumed issuance of shares related to common equivalent shares			331				185
Weighted average common and common equivalent shares outstanding			196,831				197,383

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)

		Nine months ended
		September 30,
(in thousands, except per share information)		2006				2005
Revenues:
Electronic payment processing services (includes $3.7 million and $3.7 million from related parties for 2006 and 2005, respectively)		$	685,532				646,199
Merchant acquiring services (includes $2.4 million from related parties for 2005)			195,318				170,008
Other services (includes $5.7 million and $4.7 million from related parties for 2006 and 2005, respectively)			133,831				137,337
Revenues before reimbursable items			1,014,681				953,544
Reimbursable items (includes $1.4 million and $2.6 million from related parties for 2006 and 2005, respectively)			268,589				228,652
Total revenues			1,283,270				1,182,196
Expenses:
Salaries and other personnel expense			380,945				334,341
Net occupancy and equipment expense			226,864				212,770
Other operating expenses (includes $7.2 million and $6.7 million to related parties for 2006 and 2005, respectively)			178,027				191,449
Expenses before reimbursable items			785,836				738,560
Reimbursable items			268,589				228,652
Total expenses			1,054,425				967,212
Operating income			228,845				214,984
Nonoperating income (expense):
Interest income (includes $4.9 million and $1.7 million from related parties for 2006 and 2005, respectively)			9,297				3,889
Interest expense			(364	)			(259	)
Gain (loss) on foreign currency, net			195				(761	)
Total nonoperating income			9,128				2,869
Income before income taxes, minority interest and equity in income of equity investments			237,973				217,853
Income taxes			78,492				78,186
Income before minority interest and equity in income of equity investments			159,481				139,667
Minority interests in consolidated subsidiaries’ net income			(448	)			(176	)
Equity in income of equity investments			3,073				5,331
Net income		$	162,106				144,822
Basic earnings per share		$	0.82				0.73
Diluted earnings per share		$	0.82				0.73
Weighted average common shares outstanding			196,891				197,100
Increase due to assumed issuance of shares related to common equivalent shares			302				224
Weighted average common and common equivalent shares outstanding			197,193				197,324

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

TOTAL SYSTEM SERVICES, INC.

		Nine months ended
		September 30,
(in thousands)		2006				2005
Cash flows from operating activities:
Net income		$	162,106				144,822
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests in consolidated subsidiaries’ net income			448				176
(Gain) loss on foreign currency, net			(195	)			761
Equity in income of equity investments			(3,073	)			(5,331	)
Depreciation and amortization			130,306				108,698
Share-based compensation			6,574				849
Impairment of developed software			—				3,619
Provisions for bad debt expenses and billing adjustments			948				5,451
Charges for transaction processing provisions			7,914				7,634
Deferred income tax (benefit) expense			(24,150	)			6,574
Loss on disposal of equipment, net			105				1,802
(Increase) decrease in:
Accounts receivable			(40,765	)			(40,072	)
Prepaid expenses, other current assets and other long-term assets			8,923				6,962
Increase (decrease) in:
Accounts payable			14,323				(59,241	)
Accrued salaries and employee benefits			(18,936	)			4,408
Other current liabilities and other long-term liabilities			(16,495	)			(63,175	)
Net cash provided by operating activities			228,033				123,937
Cash flows from investing activities:
Purchases of property and equipment, net			(21,203	)			(33,540	)
Additions to licensed computer software from vendors			(9,650	)			(10,049	)
Additions to internally developed computer software			(13,699	)			(17,435	)
Cash acquired in acquisitions			4,341				38,798
Cash used in acquisitions			(74,919	)			(95,796	)
Dividends received from equity investments			2,371				1,658
Additions to contract acquisition costs			(39,578	)			(11,756	)
Net cash used in investing activities			(152,337	)			(128,120	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)

		Nine months ended
		September 30,
(in thousands)		2006				2005
Cash flows from financing activities:
Dividends paid on common stock (includes $30.3 million and $22.4 million paid to related parties during 2006 and 2005, respectively)		$	(37,504	)			(27,582	)
Repurchase of common stock			(21,843	)			—
Excess tax benefit from share-based payment arrangements			1,646				—
Principal payments on long-term debt borrowings and capital lease obligations			(1,561	)			(49,360	)
Proceeds from borrowings of long-term debt			—				48,143
Proceeds from exercise of stock options			3,725				2,920
Net cash used in financing activities			(55,537	)			(25,879	)
Effect of exchange rate changes on cash and cash equivalents			(2,006	)			(2,388	)
Net increase (decrease) in cash and cash equivalents			18,153				(32,450	)
Cash and cash equivalents at beginning of year			237,569				231,806
Cash and cash equivalents at end of period		$	255,722				199,356
Cash paid for interest		$	364				259
Cash paid for income taxes, net of refunds		$	118,649				100,839

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

TOTAL SYSTEM SERVICES, INC.

Note 1 — Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements of Total System Services, Inc.^® (TSYS^® or the Company) include the accounts of TSYS and its wholly owned subsidiaries and TSYS’ majority owned foreign subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationship with other entities to identify whether they are variable interest entities as defined by the Financial Accounting Standards Board’s (FASB’s) Interpretation No. 46(R) (FIN No. 46R), “Consolidation of Variable Interest Entities,” and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with FIN No. 46R.

     On July 11, 2006, TSYS acquired Card Tech, Ltd. and related companies, increasing TSYS card issuing and merchant acquiring capabilities and extending TSYS’ geographic reach to Asia Pacific, Europe, the Middle East and Africa. TSYS rebranded the group of companies as TSYS Card Tech, which companies are collectively hereafter referred to as TSYS Card Tech. TSYS has consolidated TSYS Card Tech’s balance sheet and results of operations since the acquisition.

     These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations for the periods covered by this report have been included.

     The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s summary of significant accounting policies, consolidated financial statements and related notes appearing in the Company’s 2005 annual report previously filed on Form 10-K. Results of interim periods are not necessarily indicative of results to be expected for the year.

     Certain reclassifications have been made to the 2005 financial statements to conform to the presentation adopted in 2006.

Note 2 — Supplementary Balance Sheet Information

Cash and Cash Equivalents

     Cash and cash equivalent balances are summarized as follows:

(in thousands)		September 30, 2006				December 31, 2005
Cash and cash equivalents in domestic accounts		$	224,953				191,837
Cash and cash equivalents in foreign accounts			30,769				45,732
Total		$	255,722				237,569

     The Company maintains accounts outside the United States denominated in U.S. dollars, Euros, British Pounds Sterling (BPS), Canadian dollars, Japanese Yen, Chinese Renminbi, Brazilian Real, Cypriot Pounds and Malaysian Ringgets. All amounts in domestic accounts are denominated in U.S. dollars.

Prepaid Expenses and Other Current Assets

     Significant components of prepaid expenses and other current assets are summarized as follows:

(in thousands)		September 30, 2006				December 31, 2005
Prepaid expenses		$	15,048				15,053
Supplies inventory			9,055				9,742
Other			21,262				20,441
Total		$	45,365				45,236

Contract Acquisition Costs, net

     Significant components of contract acquisition costs, net of accumulated amortization, are summarized as follows:

(in thousands)		September 30, 2006				December 31, 2005
Payments for processing rights, net		$	113,222				120,015
Conversion costs, net			59,766				43,846
Total		$	172,988				163,861

     Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $6.8 million and $3.5 million for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, amortization related to payments for processing rights was $20.6 million and $10.6 million, respectively.

     Amortization expense related to conversion costs was $4.5 million and $3.2 million for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, amortization related to conversion costs was $13.9 million and $9.3 million, respectively.

     The increase in the amortization of contract acquisition costs is the result of the acceleration of amortization costs related to clients’ portfolios scheduled to deconvert in 2006 and the consolidation of the financial results of TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring).

Other Current Liabilities

     Significant components of other current liabilities are summarized as follows:

(in thousands)		September 30, 2006				December 31, 2005
Client liabilities		$	42,327				34,381
Accrued expenses			41,155				39,882
Dividends payable			13,774				11,832
Deferred revenues			13,490				6,421
Transaction processing provisions			12,652				9,453

(in thousands)		September 30, 2006				December 31, 2005
Accrued income taxes			7,182				25,443
Client postage deposits			6,808				7,459
Other			26,169				26,251
Total		$	163,557				161,122

Note 3 — Comprehensive Income

     In June 1997, the FASB released Statement of Financial Accounting Standards No. 130 (SFAS No. 130), “Reporting of Comprehensive Income.” SFAS No. 130 established certain standards for reporting and presenting comprehensive income in the general-purpose financial statements. The purpose of SFAS 130 was to report all items that met the definition of “comprehensive income” in a prominent financial statement for the same period in which they were recognized. In accordance with the definition provided by Statement of Financial Accounting Concepts No. 6, comprehensive income includes all changes in owners’ equity that resulted from transactions of the business entity with nonowners.

     Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items such as an unrealized holding gain or loss from available for sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a more comprehensive picture of the organization as a whole. Items included in comprehensive income, but not net income, are reported under the accumulated other comprehensive income section of shareholders’ equity.

     Comprehensive income for TSYS consists of net income and foreign currency translation adjustments recorded as a component of shareholders’ equity.

     For the three and nine months ended September 30, comprehensive income is summarized below:

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2006				2005				2006				2005
Net income		$	54,306				48,056				162,106				144,822
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax			6,116				(2,325	)			10,822				(7,692	)
Total		$	60,422				45,731				172,928				137,130

     The income tax effects allocated to and the cumulative balance of accumulated other comprehensive income are as follows:

		Balance at				Pretax								Balance at
(in thousands)		December 31, 2005				amount				Tax effect				September 30, 2006
Foreign currency translation adjustments		$	5,685				14,406				(3,584	)		$	16,507

     In July 2006, TSYS restructured its European branch operation into a new statutory structure that facilitates continued expansion in the European region. As a result, TSYS’ UK branch structure was terminated with some of the former UK branch assets and workforce being contributed into the new European statutory structure. Consistent with its overall strategy of pursuing international investment opportunities, TSYS adopted the permanent reinvestment exception under Accounting Principles Board Opinion No. 23

(APB 23) “Accounting for Income Taxes – Special Areas,” with respect to future earnings of certain foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means TSYS will no longer allocate taxes to foreign currency translation adjustments associated with these foreign subsidiaries accumulated in other comprehensive income. This treatment is reflected beginning with the third quarter.

Note 4 – Segment Reporting and Major Customers

     The Company reports selected information about operating segments in accordance with Statement of Financial Accounting Standards No. 131 (SFAS No. 131), “Disclosures about Segments of an Enterprise and Related Information.” The Company’s segment information reflects the information that the chief operating decision maker (CODM) uses to make resource allocations and strategic decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the president and the three senior executive vice presidents.

     Through online accounting and electronic payment processing systems, TSYS provides electronic payment processing and other services to card-issuing institutions in the United States and internationally. The Company has three reportable segments: domestic-based support services, international-based support services and merchant acquiring services.

     On July 11, 2006, TSYS acquired TSYS Card Tech, increasing TSYS card issuing and merchant acquiring capabilities and extending TSYS’ geographic reach to Asia Pacific, Europe, the Middle East and Africa. Since the acquisition, TSYS has included the financial results of TSYS Card Tech in the international-based support services segment.

     In July 2006, TSYS restructured its European branch operation into a new statutory structure that will facilitate future expansion in the European region. As a result, TSYS terminated its UK branch structure and established a new statutory structure in Europe. In establishing the new structure, TSYS has contributed its European subsidiary investments as well as some of the assets of the prior UK branch. TSYS Card Tech will be included in the new statutory structure.

     In April 2006, TSYS renamed Vital Processing Services, L.L.C. as TSYS Acquiring. Effective January 1, 2006, Golden Retriever Systems L.L.C. became a wholly owned subsidiary of Enhancement Services Corporation (ESC). Also effective January 1, 2006, Merlin Solutions, L.L.C. became a wholly owned subsidiary of TSYS. Both entities were previously wholly owned subsidiaries of TSYS Acquiring and were reported under the merchant acquiring services segment. Effective January 1, 2006, the financial results of the two entities are included in the domestic-based support services segment. The results for previous periods have been reclassified to reflect these changes.

     On March 1, 2005, TSYS acquired the remaining 50% equity stake that Visa U.S.A. held in TSYS Acquiring. As a result of the acquisition, the Company revised its segment information to reflect the information that the CODM uses to make resource allocations and strategic decisions. The revision included adding a new segment, merchant acquiring services, to include the financial information of TSYS Acquiring.

     Domestic-based support services include electronic payment processing services and other services provided from within the United States. Domestic-based support services segment includes the financial results of TSYS, excluding its foreign branch offices and divisions, and including the following subsidiaries: Columbus Depot Equipment Company (CDEC), Columbus Productions, Inc. (CPI), TSYS Canada, Inc. (TSYS Canada), TSYS Total Debt Management, Inc. (TDM), ProCard, Inc. (ProCard), TSYS Technology Center, Inc. (TTC), TSYS Prepaid, Inc. (TPI), Merlin Solutions, L.L.C. (Merlin) and ESC and its wholly owned subsidiary, Golden Retriever Systems, L.L.C.

     International-based support services include electronic payment processing and other services provided from outside the United States. International-based support services include the financial results of GP Network Corporation (GP Net), TSYS Japan Co., Ltd. (TSYS Japan), TSYS Servicos De Transacoes Eletronicas Ltda. (TSYS Brazil), Total System Services Holding Europe LP and its subsidiaries and TSYS’ foreign branch offices and divisions. TSYS’ share of the equity earnings of its equity investments, Total System Services de México, S.A. de C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data), are included in international-based support services because TSYS de México’s and CUP Data’s operations and client bases are located outside the United States.

     Merchant acquiring services include the financial results of TSYS Acquiring. For periods prior to the acquisition, TSYS has reclassified TSYS’ share of its equity earnings of TSYS Acquiring from domestic-based support services to merchant acquiring services.

		Domestic-				International-				Merchant
(in thousands)		based support				based support				acquiring
Operating Segments		services				services				services				Consolidated
At September 30, 2006
Identifiable assets		$	1,410,363				285,917				240,979			$	1,937,259
Intersegment eliminations			(416,964	)			(195	)			(143	)			(417,302	)
Total assets		$	993,399				285,722				240,836			$	1,519,957
At December 31, 2005
Identifiable assets		$	1,320,552				178,135				230,712			$	1,729,399
Intersegment eliminations			(318,475	)			(1	)			(26	)			(318,502	)
Total assets		$	1,002,077				178,134				230,686			$	1,410,897
Three months ended September 30, 2006
Revenues before reimbursables		$	242,584				44,320				59,723			$	346,627
Intersegment revenues			(4,258	)			—				(31	)			(4,289	)
Revenues before reimbursables from external customers		$	238,326				44,320				59,692			$	342,338
Segment total revenues		$	325,919				51,591				70,592			$	448,102
Intersegment revenues			(6,256	)			—				(31	)			(6,287	)
Revenues from external customers		$	319,663				51,591				70,561			$	441,815
Depreciation and amortization		$	32,156				5,328				6,674			$	44,158
Intersegment expenses		$	3,668				(2,343	)			(7,599	)		$	(6,274	)
Segment operating income		$	48,666				7,946				15,645			$	72,257
Income before income taxes, minority interest and equity in income of equity investments		$	52,688				6,602				16,377			$	75,667
Income taxes		$	14,722				(31	)			7,689			$	22,380
Equity in income of equity investments		$	—				1,202				—			$	1,202
Net income		$	38,821				6,797				8,688			$	54,306
Three months ended September 30, 2005
Revenues before reimbursables		$	244,302				31,389				70,333			$	346,024
Intersegment revenues			(3,867	)			—				(57	)			(3,924	)
Revenues before reimbursables from external customers		$	240,435				31,389				70,276			$	342,100
Segment total revenues		$	308,889				37,862				81,948			$	428,699
Intersegment revenues			(6,673	)			—				(57	)			(6,730	)
Revenues from external customers		$	302,216				37,862				81,891			$	421,969

		Domestic-				International-				Merchant
(in thousands)		based support				based support				acquiring
Operating Segments		services				services				services				Consolidated
Depreciation and amortization		$	29,503				4,399				7,587			$	41,489
Intersegment expenses		$	5,627				(4,294	)			(8,064	)		$	(6,731	)
Segment operating income		$	52,834				6,137				13,361			$	72,332
Income before income taxes, minority interest and equity in income of equity investments		$	54,823				5,483				13,600			$	73,906
Income taxes		$	18,381				3,227				5,169			$	26,777
Equity in income of equity investments		$	—				991				—			$	991
Net income		$	36,238				3,353				8,465			$	48,056
Nine months ended September 30, 2006
Revenues before reimbursables		$	740,341				109,178				178,729			$	1,028,248
Intersegment revenues			(13,471	)			—				(96	)			(13,567	)
Revenues before reimbursables from external customers		$	726,870				109,178				178,633			$	1,014,681
Segment total revenues		$	963,855				128,163				211,659			$	1,303,677
Intersegment revenues		$	(20,311	)			—				(96	)		$	(20,407	)
Revenues from external customers		$	943,544				128,163				211,563			$	1,283,270
Depreciation and amortization		$	95,759				14,101				20,446			$	130,306
Intersegment expenses		$	18,949				(15,448	)			(23,864	)		$	(20,363	)
Segment operating income		$	176,412				12,029				40,404			$	228,845
Income before income taxes, minority interest and equity in income of equity investments		$	186,170				9,718				42,085			$	237,973
Income taxes		$	58,636				2,461				17,395			$	78,492
Equity in income of equity investments		$	—				3,073				—			$	3,073
Net income		$	128,352				9,064				24,690			$	162,106
Nine months ended September 30, 2005
Revenues before reimbursables		$	713,390				92,717				156,486			$	962,593
Intersegment revenues			(8,946	)			—				(103	)			(9,049	)
Revenues before reimbursables from external customers		$	704,444				92,717				156,383			$	953,544
Segment total revenues		$	904,700				109,604				182,877			$	1,197,181
Intersegment revenues			(14,882	)			—				(103	)			(14,985	)
Revenues from external customers		$	889,818				109,604				182,774			$	1,182,196
Depreciation and amortization		$	84,209				12,416				12,073			$	108,698
Intersegment expenses		$	24,861				(21,833	)			(18,022	)		$	(14,994	)
Segment operating income		$	176,346				8,143				30,495			$	214,984
Income before income taxes, minority interest and equity in income of equity investments		$	180,558				6,345				30,950			$	217,853
Income taxes		$	61,003				4,294				12,889			$	78,186
Equity in income of equity investments		$	—				2,090				3,241			$	5,331
Net income		$	118,692				4,773				21,357			$	144,822

     Revenues for domestic-based support services and merchant acquiring services include electronic payment processing and other services provided from the United States to clients domiciled in the United States or other countries. Revenues for international-based support services include electronic payment processing and other services provided from facilities outside the United States to clients based predominantly outside the United States.

     The following geographic data presents revenues for the three and nine months ended September 30, 2006 and 2005, respectively, based on the domicile of the Company’s customers.

		Three months ended								Nine months ended
		September 30,								September 30,
(in millions)		2006				2005				2006				2005
United States		$	359.6				358.1				1,069.8				998.0
Europe			43.7				34.2				112.6				98.9
Canada			25.4				23.2				71.5				66.6
Japan			5.0				4.0				13.4				11.6
Mexico			3.2				1.9				8.5				5.3
Other			4.9				0.6				7.5				1.8
Total		$	441.8				422.0				1,283.3				1,182.2

     The following table reconciles geographic revenues to revenues by reporting segment for the three months ended September 30, 2006 and 2005, respectively, based on the domicile of the Company’s customers.

		Domestic-based								International-based								Merchant acquiring
		support services								support services								services
(in millions)		2006				2005				2006				2005				2006				2005
United States		$	289.3				276.4				—				—				70.3				81.7
Europe			0.4				0.4				43.3				33.9				—				—
Canada			25.2				23.0				—				—				0.1				0.1
Japan			—				—				5.0				4.0				—				—
Mexico			3.2				1.9				—				—				—				—
Other			1.6				0.5				3.3				—				0.1				0.1
Total		$	319.7				302.2				51.6				37.9				70.5				81.9

Note: The 2005 geographic revenues by operating segment have been reclassified to reflect the changes in operating segments.

     The following table reconciles geographic revenues to revenues by reporting segment for the nine months ended September 30, 2006 and 2005, respectively, based on the domicile of the Company’s customers.

		Domestic-based								International-based								Merchant acquiring
		support services								support services								services
(in millions)		2006				2005				2006				2005				2006				2005
United States		$	859.0				815.7				—				—				210.7				182.1
Europe			1.1				1.0				111.5				98.0				—				—
Canada			71.1				66.4				—				—				0.4				0.3
Japan			—				—				13.4				11.6				—				—
Mexico			8.5				5.3				—				—				—				—
Other			3.8				1.4				3.3				—				0.5				0.4
Total		$	943.5				889.8				128.2				109.6				211.6				182.8

Note: The 2005 geographic revenues by operating segment have been reclassified to reflect the changes in operating segments.

     The Company maintains property and equipment, net of accumulated depreciation and amortization, in the following geographic areas:

		At September 30,				At December 31,
(in millions)		2006				2005
United States		$	206.2				211.2
Europe			57.3				55.3
Japan			2.0				1.4
Canada			0.1				0.1
Other			1.4				—
Total		$	267.0				268.0

Major Customers

     For the three months ended September 30, 2006, the Company had two major customers which accounted for approximately 35.3%, or $156.0 million, of total revenues. Bank of America, one of TSYS’ major customers, accounted for approximately 24.7%, or $109.1 million of total revenues for the three months ended September 30, 2006. For the three months ended September 30, 2005, the Company had two major customers that accounted for approximately 32.3%, or $136.4 million, of total revenues. Bank of America accounted for approximately 21.7%, or $91.5 million of total revenues for the three months ended September 30, 2005.

     For the nine months ended September 30, 2006, the Company had two major customers which accounted for approximately 34.5%, or $442.1 million, of total revenues. Bank of America accounted for approximately 23.9%, or $307.2 million of total revenues for the nine months ended September 30, 2006. For the nine months ended September 30, 2005, the Company had two major customers which accounted for approximately 31.9%, or $377.4 million, of total revenues. Bank of America accounted for approximately 22.1%, or $261.5 million of total revenues for the nine months ended September 30, 2005.

     Revenues from major customers for the periods reported are primarily attributable to the domestic-based support services and merchant acquiring services segments.

Note 5 – Share-Based Compensation

Accounting Policy

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised) (SFAS No. 123R), “Share-Based Payment.” SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

     SFAS No. 123R is effective for all awards granted on or after January 1, 2006, and to awards modified, repurchased or cancelled after that date. SFAS No. 123R requires the Company to recognize compensation costs for the nonvested portion of outstanding share-based compensation granted in the form of stock options based on the grant-date fair value of those awards calculated under Statement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accounting for Stock-Based Compensation,” for pro forma disclosures. Share-based compensation expenses include the impact of expensing the fair value of stock options in 2006, as

well as expenses associated with nonvested shares. In the future, the Company expects nonvested share awards to replace stock options as TSYS’ primary method of share-based compensation. TSYS adopted the provisions of SFAS No. 123R effective January 1, 2006 using the modified-prospective-transition method.

     Prior to 2006, the Company applied the intrinsic-value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” and related interpretations, including FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” to account for its fixed-plan stock options. Under this method, compensation expense was recorded only if, on the date of grant, the market price of the underlying stock exceeded the exercise price. The Company elected to adopt only the disclosure requirements of SFAS No. 123.

     The following table illustrates the effect on net income and earnings per share for the three and nine months ended September 30, 2005 if the Company had applied the fair value recognition provisions of SFAS No. 123, to share-based employee compensation granted in the form of TSYS and Synovus Financial Corp. (Synovus) stock options.

		Three months ended				Nine months ended
(in thousands, except per share data)		September 30, 2005				September 30, 2005
Net Income		$	48,056				144,822
Add: Stock-based employee compensation expense, net of related income tax effects			185				549
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related income tax effects			1,201				3,927
Net income, as adjusted		$	47,040				141,444
Earnings per share:
Basic – as reported		$	0.24				0.73
Basic – as adjusted		$	0.24				0.72
Diluted – as reported		$	0.24				0.73
Diluted – as adjusted		$	0.24				0.72

     Prior to the adoption of SFAS No. 123R, the Company elected to recognize compensation cost assuming all options would vest and reverse any recognized compensation costs for forfeited awards when the awards were actually forfeited. SFAS No. 123R eliminates this option and requires companies to estimate forfeitures when recognizing compensation cost. The estimate of forfeitures will be adjusted by a company as actual forfeitures differ from its estimates, resulting in compensation cost only for those awards that actually vest. The effect of the change in estimated forfeitures is recognized as compensation costs in the period of the change in estimate. In estimating its forfeiture rate, the Company stratified its data based upon historical experience to determine separate forfeiture rates for the different award grants. The Company currently estimates a forfeiture rate for existing Synovus stock option grants to TSYS non-executive employees, and a forfeiture rate for all other TSYS and Synovus share-based awards. Currently, TSYS estimates a forfeiture rate in the range of 0% to 9.0%.

General Description of Share-Based Compensation Plans

     TSYS has various long-term incentive plans under which the Compensation Committee of the Board of Directors has the authority to grant share-based compensation to TSYS employees. Long-term performance awards can be granted to TSYS employees under the TSYS Long-Term Incentive Plans as well as the Synovus Long-Term Incentive Plans.

     Vesting for stock options granted during 2006 accelerates upon retirement for plan participants who have reached age 62 and who also have no less than fifteen years of service at the date of their election to retire. For stock options granted in 2006, share-based compensation expense is fully recognized for plan participants upon meeting the retirement eligibility requirements of age and service.

     Stock options granted prior to 2006 generally become exercisable at the end of a two to three-year period and expire ten years from the date of grant. Vesting for stock options granted prior to 2006 accelerates upon retirement for plan participants who have reached age 50 and who also have no less than fifteen years of service at the date of their election to retire. Prior to adoption of SFAS No. 123R on January 1, 2006, share-based compensation expense was recognized in the pro forma disclosure over the nominal vesting period without consideration for retirement eligibility. Following adoption of SFAS No. 123R, stock-based compensation expense is recognized in income over the remaining nominal vesting period with consideration for retirement eligibility.

     The Company historically issues new shares or uses treasury shares to satisfy share option exercises. On April 20, 2006, TSYS announced that its board had approved a stock repurchase plan to purchase up to 2 million shares. The shares will be purchased from time to time over a two year period and purchases will depend on various factors including price, market conditions, acquisitions and the general financial position of TSYS. Repurchased shares will be used for general corporate purposes, including, but not limited to, fulfilling stock option exercises and the granting of nonvested shares.

Long-Term Incentive Plans — TSYS

TSYS 2002 Long-Term Incentive Plan: TSYS’ compensation program includes long-term performance awards under the Total System Services, Inc. 2002 Long-Term Incentive Plan (TSYS 2002 Plan), which is used to attract, retain, motivate and reward employees and non-employee directors who make a significant contribution to the Company’s long-term success. The TSYS 2002 Plan is administered by the Compensation Committee of the Company’s Board of Directors and enables the Company to grant stock options, stock appreciation rights, restricted stock and performance awards; 9.4 million shares of TSYS common stock are reserved for distribution under the TSYS 2002 Plan. Options granted under the TSYS 2002 Plan may be incentive stock options or nonqualified stock options as determined by the Committee at the time of grant.

     Incentive stock options are granted at a price not less than 100% of the fair market value of the stock on the grant date, and nonqualified options are granted at a price to be determined by the Committee. Option vesting terms are established by the Committee at the time of grant and presently range from one to five years.

     The expiration date of options granted under the TSYS 2002 Plan is determined at the time of grant and may not exceed ten years from the date of the grant. At September 30, 2006, there were options outstanding under the TSYS 2002 Plan to purchase 338,521 shares of the Company’s common stock, of which 316,021 were exercisable. The Company has also issued its common stock to directors and to certain employees under nonvested stock awards. There were 8.5 million shares available for grant at September 30, 2006 under the TSYS 2002 plan.

2000 Long-Term Incentive Plan: TSYS maintains the 2000 Long-Term Incentive Plan (LTI Plan) to attract, retain, motivate and reward employees who make a significant contribution to the Company’s long-term

success and to enable such employees to acquire and maintain an equity interest in the Company. The LTI Plan is administered by the Compensation Committee of the Company’s Board of Directors and enables the Company to grant stock options, stock appreciation rights, restricted stock and performance awards; 3.2 million shares of common stock were reserved for distribution under the LTI Plan. Options granted under the LTI Plan may be incentive stock options or nonqualified stock options as determined by the Committee at the time of grant.

     Incentive stock options are granted at a price not less than 100% of the fair market value of the stock on the grant date, and nonqualified options are granted at a price to be determined by the Committee. Option vesting terms are established by the Committee at the time of grant and presently range from one to five years. The expiration date of options granted under the LTI Plan is determined at the time of grant and may not exceed ten years from the date of the grant. At September 30, 2006, there were options outstanding under the LTI Plan to purchase 714,700 shares of the Company’s common stock, all of which were exercisable.

     There were no shares available for grant at September 30, 2006 under the LTI Plan.

Other Share-Based Issuances: TSYS has granted options to purchase 37,500 shares of the Company’s common stock to attract a key individual to the Company. At September 30, 2006, options to purchase 37,500 shares were outstanding and exercisable.

Share-Based Compensation

     TSYS’ share-based compensation costs are included as expenses and classified as salaries and other personnel expenses. TSYS does not include amounts associated with share-based compensation as costs capitalized as software development and contract acquisition costs. For the three months ended September 30, 2006, share-based compensation was $2.1 million, compared to $0.6 million for the same period in 2005. Included in the $2.1 million amount for 2006 is approximately $1.6 million related to expensing the fair value of stock options. For the nine months ended September 30, 2006, share-based compensation was $6.6 million, compared to $0.8 million for the same period in 2005. Included in the $6.6 million amount for 2006 is approximately $5.1 million related to expensing the fair value of stock options.

     Nonvested Awards: During the first nine months of 2006, the Company issued 150,775 shares of TSYS common stock with a market value of $3.0 million to certain key executive officers and non-management members of its board of directors under nonvested stock bonus awards for services to be provided by such officers and directors in the future. The market value of the common stock at the date of issuance is amortized as compensation expense over the vesting period of the awards.

     During the first nine months of 2005, the Company issued 95,815 shares of TSYS common stock with a market value of $2.2 million to certain key executive officers and non-management members of its board of directors under nonvested stock bonus awards for services to be provided by such officers and directors in the future.

     A summary of the status of TSYS’ nonvested shares as of September 30, 2006 and changes during the nine months ended September 30, 2006 is presented below:

(in thousands)						Weighted Average
Nonvested shares:		Shares				Grant-Date Fair Value
Outstanding at beginning of year			101			$	23.11
Granted			151				19.64
Vested			(13	)			23.08

(in thousands)						Weighted Average
Nonvested shares:		Shares				Grant-Date Fair Value
Forfeited/Canceled			—				—
Outstanding at end of period			239			$	20.92

     As of September 30, 2006, there was approximately $3.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.5 years.

     During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key executives with a performance-vesting schedule (performance-vesting shares). These performance-vesting shares have seven one-year performance periods (2005-2011) during which the Compensation Committee establishes an earnings per share goal. Each year’s award is 20% of the total authorized shares. Compensation expense for each year’s award is measured on the grant date based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for the year.

     A summary of the status of TSYS’ performance-based nonvested shares as of September 30, 2006 and changes during the nine months ended September 30, 2006 is presented below:

(in thousands)
Performance-based						Weighted Average
Nonvested shares:		Shares				Grant-Date Fair Value
Outstanding at beginning of year			25			$	24.93
Granted			25				20.00
Vested			(25	)			24.93
Forfeited/Canceled			—				—
Outstanding at end of period			25			$	20.00

     As of September 30, 2006, there was approximately $0.1 million of total unrecognized compensation cost related to nonvested performance-vesting share-based compensation arrangements. That cost is expected to be recognized over the remainder of 2006.

Stock Option Awards

     The Company did not grant any TSYS stock options during the nine months ended September 30, 2006 and 2005, respectively. A summary of the TSYS stock option activity as of September 30, 2006 and changes during the nine months ended on September 30, 2006 is presented below:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
(in thousands)						Exercise				Contractual Life				Intrinsic
Options:		Options				Price				(in years)				Value
Outstanding at beginning of year			1,382			$	15.19
Granted			—				—
Exercised			(280	)			13.29
Forfeited/Canceled			(11	)			19.61
Outstanding at end of period			1,091			$	15.63				2.6			$	10,903
Options exercisable at period-end			1,068			$	15.38				2.5			$	10,472
Weighted average fair value of options granted during the period						$	—

     During the nine months ended September 30, 2006, there were 280,150 TSYS stock options exercised that had an intrinsic value of approximately $2.6 million. The stock options exercised during 2006 were fully vested before January 1, 2006. During the nine months ended September 30, 2005, there were 199,100 TSYS stock options exercised that had an intrinsic value of approximately $1.9 million. For awards granted before January 1, 2006 that were not fully vested on January 1, 2006, the Company will record the tax benefits from the exercise of stock options as increases to the “Additional paid-in capital” line item of the Consolidated Balance Sheets. If the Company does recognize tax benefits, the Company will record these tax benefits from share-based compensation costs as cash inflows in the financing section in the Statement of Cash Flows. The Company has elected to use the short-cut method to calculate its historical pool of windfall tax benefits, and as a result, will not record any benefits received from previous stock option exercises in the operating section in the Statement of Cash Flows.

     As of September 30, 2006, there was approximately $66,100 of total unrecognized compensation expense cost related to TSYS stock options that is expected to be recognized over a weighted average period of 0.5 year.

Long-Term Incentive Plans – Synovus

     During the first nine months of 2006, Synovus granted stock options to key TSYS executive officers. The fair value of the option grant was $6.57 and was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions: risk-free interest rate of 4.48%; expected volatility of 25.1%; expected life of 6.0 years; and dividend yield of 2.80%. The expected life of 6.0 years was determined using the “simplified” method, as prescribed by SEC’s Staff Accounting Bulletin No. 107.

     A summary of the option activity related to option grants of Synovus common stock to TSYS employees as of September 30, 2006 and changes during the nine months ended on September 30, 2006 is presented below:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
(in thousands)						Exercise				Contractual Life				Intrinsic
Options:		Options				Price				(in years)				Value
Outstanding at beginning of year			6,451			$	25.79
Granted			305				27.67
Exercised			(503	)			20.53
Net Synovus/TSYS employee transfers between entities			(3	)			22.13
Forfeited/Canceled			(56	)			24.35
Outstanding at end of period			6,194			$	26.32				5.3			$	54,303
Options exercisable at period-end			2,739			$	23.59				4.0			$	21,424
Weighted average fair value of options granted during the period						$	6.57

     During the first nine months of 2005, Synovus granted 203,440 stock options to key TSYS executive officers. The fair value of the option grant was $7.56 and was estimated on the date of grant using the Black-

Scholes-Merton option-pricing model with the following weighted average assumptions: risk-free interest rate of 4.43%; expected volatility of 25.6%; expected life of 8.8 years; and dividend yield of 2.60%.

     The total intrinsic value of Synovus options exercised during the nine months ended September 30, 2006 was $2.8 million. As of September 30, 2006, there was $10.2 million of total unrecognized compensation expense cost related to Synovus stock options that is expected to be recognized over a weighted average period of 1.6 years.

     The total intrinsic value of Synovus options exercised during the nine months ended September 30, 2005 was $2.8 million.

Earnings Per Share

     The diluted earnings per share calculation excludes stock options and nonvested awards that are convertible into 26,500 common shares for the three and nine months ended September 30, 2006, and excludes 22,500 common shares for the three and nine months ended September 30, 2005, because their inclusion would have been anti-dilutive.

Note 6 – Long-Term Debt

     On June 30, 2003, TSYS obtained a $45.0 million long-term line of credit from a banking affiliate of Synovus. The line was an automatic draw down facility. The interest rate for the line of credit was the London Interbank Offered Rate (LIBOR) plus 150 basis points. In addition, there was a charge of 15 basis points on any funds unused. The line of credit was unsecured and included covenants requiring the Company to maintain certain minimum financial ratios. The line of credit expired on June 30, 2006.

Note 7 — Supplementary Cash Flow Information

Contract Acquisition Costs

     Cash used for contract acquisition costs for the nine months ended September 30, 2006 and 2005, respectively, are summarized as follows:

(in thousands)		September 30, 2006				September 30, 2005
Conversion costs		$	28,915				11,756
Payments for processing rights			10,663				—
Total		$	39,578				11,756

Nonvested Awards

     During the first quarter of 2006, the Company issued nonvested shares of common stock to certain key executive officers and non-management members of its board of directors under nonvested shares for services to be provided by such officers and directors in the future. Refer to Note 5 for more information.

Note 8 – Legal Proceedings

     The Company is subject to lawsuits, claims and other complaints arising out of the ordinary conduct of its business. In the opinion of management, based in part upon the advice of legal counsel, all matters are believed to be adequately covered by insurance, or if not covered, are believed to be without merit or are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably. The Company establishes reserves for expected future litigation exposures that TSYS determines to be both probable and reasonably estimable.

Note 9 – Guarantees and Indemnifications

     The Company has entered into processing and licensing agreements with clients that include intellectual property indemnification clauses. The Company generally agrees to indemnify its clients, subject to certain exceptions, against legal claims that TSYS’ services or systems infringes on certain third party patents, copyrights or other proprietary rights. In the event of such a claim, the Company is generally obligated to hold the client harmless and pay for related losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable attorney’s fees. The Company has not made any indemnification payments in relation to these indemnification clauses.

     The Company has not recorded a liability for guarantees or indemnities in the accompanying consolidated balance sheet since the maximum amount of potential future payments under such guarantees and indemnities is not determinable.

Note 10 – Business Combinations

TSYS Card Tech

     On July 11, 2006, TSYS acquired Card Tech, Ltd., a privately owned London-based payments firm, and related companies, increasing TSYS card issuing and merchant acquiring capabilities and extending its geographic reach to Asia Pacific, Europe, the Middle East and Africa. TSYS paid an aggregate consideration of approximately $59.3 million, including direct acquisition costs.

     Card Tech, Ltd. was established in 1989 and maintains service centers in London, England; Dubai, United Arab Emirates; Nicosia, Cyprus; and Kuala Lumpur, Malaysia. TSYS operates facilities in North America, Europe and the Asia-Pacific for a combined total of 12 countries worldwide.

     Card Tech has implemented its payments software for six of the 25 largest global banks and three of the largest global card issuers. Worldwide, the company has approximately 190 clients from 70 countries — primarily banks. Its applications are certified by all of the major global payment networks. TSYS formed and/or acquired five companies in connection with the Card Tech, Ltd. acquisition, which the Company collectively refers to as TSYS Card Tech.

     TSYS Card Tech’s software applications are utilized globally. TSYS Card Tech offers a server-based system with an established global footprint for comprehensive issuing and acquiring services. TSYS Card Tech offers products and services for installment loans, credit, debit, merchant acquiring and prepaid payment platforms in addition to fraud, risk management, authorizations, chargebacks, e-commerce and m-commerce solutions designed for the bankcard market. TSYS Card Tech’s applications are browser-based, multilingual, multicurrency and multi-country (including double-byte-enabled).

     TSYS consolidated TSYS Card Tech’s balance sheet and results of operations, as of July 11, 2006. The Company is in the process of finalizing the purchase price allocation and has preliminarily allocated approximately $36.3 million to goodwill, approximately $15.5 million to other identifiable intangible assets and the remaining amounts to other assets and liabilities acquired. The preliminary purchase price allocation is presented below:

(in thousands)
Cash and cash equivalents		$	4,341
Intangible assets			15,500
Goodwill			36,336
Other assets			12,803

(in thousands)
Total assets acquired			68,980
Other liabilities			9,689
Total liabilities assumed			9,689
Net assets acquired		$	59,291

     Revenues associated with TSYS Card Tech are included in electronic payment processing services and are included in international–based support services for segment reporting purposes.

China UnionPay Data Co., Ltd.

     Effective November 1, 2005, TSYS purchased an initial 34.04% equity interest in China UnionPay Data Co., Ltd., the payments-processing subsidiary of China UnionPay Co., Ltd. (CUP). Effective August 1, 2006, TSYS increased its ownership interest to 44.56% of CUP Data for $15.6 million. CUP is sanctioned by the People’s Bank of China, China’s central bank, to perform payments-processing. CUP Data currently provides transaction processing, disaster recovery and other services for banks and bankcard issuers in China.

     The Company is using the equity method of accounting to account for its investment in CUP Data. The difference between the cost of the investment and the amount of underlying equity in net assets of CUP Data is recognized as goodwill. The preliminary purchase price allocation related to the acquisition is presented below:

(in thousands)
Total assets acquired		$	12,830
Goodwill			39,772
Net assets acquired		$	52,602

     The goodwill associated with CUP Data is not reported as goodwill in the Company’s balance sheet, but is reported as a component of the equity investment.

TSYS Acquiring Solutions, L.L.C.

     Vital Processing Services, L.L.C. (Vital), a limited liability company, was established in May 1996 as a 50/50 joint venture between TSYS and Visa U.S.A. (Visa). Vital was rebranded as TSYS Acquiring in April 2006. TSYS Acquiring provides integrated end-to-end electronic transaction processing services to financial institutions and other merchant acquirers. TSYS Acquiring processes all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of retail market segments.

     On March 1, 2005, TSYS acquired the remaining 50% of Vital from Visa for $95.8 million in cash, including direct acquisition costs of $794,000. TSYS Acquiring is now a separate, wholly owned subsidiary of TSYS. As a result of the acquisition of control of TSYS Acquiring, TSYS changed from the equity method of accounting for the investment in TSYS Acquiring and began consolidating TSYS Acquiring’s balance sheet and results of operations in TSYS’ consolidated financial statements. In accordance with authoritative accounting guidelines, TSYS recorded the acquisition of the incremental 50% interest as a business combination, requiring that TSYS allocate the purchase price to the assets acquired and liabilities assumed based on their relative fair values. The Company finalized the purchase price allocation during the first quarter of 2006 and has allocated $30.2 million to goodwill, $30.5 million to other identifiable intangible assets and the remaining amount to the assets and liabilities acquired. Of the $30.5 million other identifiable intangible assets, the Company has allocated $18.5 million to computer software and the remaining amount to other intangible assets. The acquisition of TSYS Acquiring allows TSYS to be a provider of value-based

services at both ends of the payment chain and allows TSYS to expand the services offered to the Company’s largest customers. Revenues associated with TSYS Acquiring are included in merchant services and are classified in merchant acquiring services for segment reporting purposes.

     Since TSYS acquired less than 100% of the outstanding shares of the acquired enterprise, the valuation of assets acquired and liabilities assumed in the acquisition was based on a pro rata allocation of the fair values of the assets acquired and liabilities assumed and the historical financial statement carrying amounts of the assets and liabilities of the acquired enterprise. As a result, TSYS recorded the fair value of the 50% interest of TSYS Acquiring’s assets acquired and liabilities assumed as of March 1, 2005. The Company recorded the remaining 50% interest of TSYS Acquiring’s assets and liabilities at historical carrying values. The purchase price allocation is presented below:

(in thousands)
Cash and cash equivalents		$	19,399
Intangible assets			30,500
Goodwill			30,211
Other assets			47,563
Total assets acquired			127,673
Other liabilities			31,830
Total liabilities assumed			31,830
Minority interest			49
Net assets acquired		$	95,794

Pro forma

     Presented below are the pro forma consolidated results of operations for the nine months ended September 30, 2005, as though the acquisition of TSYS Acquiring had occurred on January 1, 2005. This pro forma information is based on the historical financial statements of TSYS Acquiring. Pro forma results do not include any actual or anticipated cost savings or expenses of the planned integration of TSYS and TSYS Acquiring, and are not necessarily indicative of the results which would have occurred if the business combinations had been in effect on the dates indicated, or which may result in the future.

		Nine months ended
(in thousands, except per share data)		September 30, 2005
Revenues		$	1,225,786
Net income			146,826
Basic earnings per share			0.74
Diluted earnings per share			0.74

     The pro forma impact of the TSYS Card Tech acquisition on revenues and net income for periods prior to the acquisition was not material.

TOTAL SYSTEM SERVICES, INC.

Financial Overview

     Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing electronic payment processing and related services to financial and nonfinancial institutions, generally under long-term processing contracts. TSYS’ services are provided primarily through the Company’s cardholder systems, TS2 and TS1, to financial institutions and other organizations throughout the United States and internationally. The Company currently offers merchant acquiring services to financial institutions and other organizations mainly through its majority owned subsidiary, GP Network Corporation (GP Net), and its wholly owned subsidiary, TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring).

     Due to the somewhat seasonal nature of the credit card industry, TSYS’ revenues and results of operations have generally increased in the fourth quarter of each year because of increased transaction and authorization volumes during the traditional holiday shopping season. Furthermore, growth or declines in card portfolios of existing clients, the conversion of cardholder accounts of new clients to the Company’s processing platforms, and the loss of cardholder accounts impact the results of operations from period to period. Another factor which may affect TSYS’ revenues and results of operations from time to time, is the sale by a client of its business, its card portfolio or a segment of its accounts to a party which processes cardholder accounts internally or uses another third-party processor. Consolidation in either the financial services or retail industries, a change in the economic environment in the retail sector, or a change in the mix of payments between cash and cards could favorably or unfavorably impact TSYS’ financial position, results of operations and cash flows in the future.

     A significant amount of the Company’s revenues is derived from long-term contracts with large clients, including certain major customers. Processing contracts with large clients, representing a significant portion of the Company’s total revenues, generally provide for discounts on certain services based on the size and activity of clients’ portfolios. Therefore, electronic payment processing revenues and the related margins are influenced by the client mix relative to the size of client card portfolios, as well as the number and activity of individual cardholder accounts processed for each client. Consolidation among financial institutions has resulted in an increasingly concentrated client base, which results in a change in client mix directed toward larger clients and increasing pressure on the Company’s operating profit margins.

     With the purchase of TSYS Card Tech, Ltd. on July 11, 2006, the Company began offering server-based software license arrangements, consulting and implementation services, maintenance agreements, as well as processing services, for comprehensive TSYS card issuing and merchant acquiring capabilities worldwide. New software license revenue is generally recognized together with the associated services based on contract accounting using either the percentage-of-completion or completed-contract method, provided that vendor specific objective evidence (VSOE) exists with respect to any undelivered element, which is generally the maintenance agreement. Maintenance and processing revenues are recognized ratably over the terms of their respective contracts. Revenue from third party software and hardware sales is recognized when all revenue recognition criteria have been met.

     The Company provides services to its clients including processing consumer, retail, commercial, government services, stored value and debit cards. Below is a general description of each type of account:

Account type		Description
Consumer		Visa and MasterCard credit cards; American Express cards
Retail		Private label
Commercial		Purchasing cards, corporate cards and fleet cards for employees
Government services		Student loan processing accounts
Stored value		Prepaid cards, including loyalty incentive cards, flexible spending cards and gift cards
Debit		On-line (PIN-based) and off-line (signature-based) accounts