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: March 31, 2008

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

For the transition period from                     To

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.)

(Address of principal executive offices)		(Zip Code)

(706) 649-2310
(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

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: May 7, 2008
Common Stock, $0.10 par value		198,184,002 shares

 

 

TOTAL SYSTEM SERVICES, INC.
INDEX

		Page
		Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) — March 31, 2008 and December 31, 2007			3
Condensed Consolidated Statements of Income (unaudited) — Three months ended March 31, 2008 and 2007			4
Condensed Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2008 and 2007			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			29
Part II. Other Information
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6. Exhibits			31
Signatures			32
Exhibit Index			33
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32 SECTION 906 CERTIFICATION OF CEO AND CFO

TOTAL SYSTEM SERVICES, INC.
Part I — Financial Information

Condensed Consolidated Balance Sheets
(Unaudited)

(in thousands, except per share data)		March 31, 2008				December 31, 2007
Assets
Current assets:
Cash and cash equivalents (includes $136.4 million on deposit with a related party at 2007)		$	242,649				210,518
Restricted cash (includes $8.2 million on deposit with a related party at 2007)			25,706				29,688
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $7.8 million and $10.1 million at 2008 and 2007, respectively (includes $331 due from a related party at 2007)			261,935				256,970
Deferred income tax assets			19,787				17,152
Prepaid expenses and other current assets			75,492				72,250
Total current assets			625,569				586,578
Property and equipment, net of accumulated depreciation and amortization of $277.2 million and $266.4 million at 2008 and 2007, respectively			287,594				283,138
Computer software, net of accumulated amortization of $383.5 million and $365.6 million at 2008 and 2007, respectively			195,853				205,830
Contract acquisition costs, net			159,778				151,599
Goodwill, net			143,555				142,545
Equity investments			85,189				80,905
Other intangible assets, net of accumulated amortization of $13.7 million and $12.8 million at 2008 and 2007, respectively			13,209				13,462
Other assets			12,230				14,963
Total assets		$	1,522,977				1,479,020
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt		$	71,776				8,648
Current portion of obligations under capital leases			3,552				3,080
Accrued salaries and employee benefits			50,787				85,142
Accounts payable (includes $12 and $281 payable to related parties at 2008 and 2007, respectively)			43,638				41,817
Other current liabilities (includes $11.2 million payable to related parties for 2007)			163,905				135,108
Total current liabilities			333,658				273,795
Long-term debt, excluding current portion			186,292				252,659
Deferred income tax liabilities			67,232				67,428
Obligations under capital leases, excluding current portion			7,562				3,934
Other long-term liabilities			30,524				28,151
Total liabilities			625,268				625,967
Minority interests in consolidated subsidiaries			9,793				8,580
Shareholders’ equity:
Common stock — $0.10 par value. Authorized 600,000 shares; 200,375 and 199,660 issued at 2008 and 2007, respectively; 198,182 and 197,965 outstanding at 2008 and 2007, respectively			20,038				19,966
Additional paid-in capital			112,402				104,762
Accumulated other comprehensive income, net			32,687				28,322
Treasury stock, at cost (shares of 2,193 and 1,695 at 2008 and 2007, respectively)			(45,475	)			(34,138	)
Retained earnings			768,264				725,561
Total shareholders’ equity			887,916				844,473
Total liabilities and shareholders’ equity		$	1,522,977				1,479,020

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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

		Three months ended March 31,
(in thousands, except per share data)		2008				2007
Revenues:
Electronic payment processing services (includes $1.3 million from related parties for 2007)		$	241,279				230,060
Merchant acquiring services			61,667				60,680
Other services (includes $2.1 million from related parties for 2007)			57,095				52,871
Revenues before reimbursable items			360,041				343,611
Reimbursable items (includes $0.5 million from related parties for 2007)			101,682				85,992
Total revenues			461,723				429,603
Expenses:
Salaries and other personnel expense			148,317				140,445
Net occupancy and equipment expense			72,886				67,348
Spin related expenses			6,895				—
Other operating expenses (includes $2.4 million to related parties for 2007)			45,168				50,139
Expenses before reimbursable items			273,266				257,932
Reimbursable items			101,682				85,992
Total expenses			374,948				343,924
Operating income			86,775				85,679
Nonoperating income (expense):
Interest income (includes $3.3 million from related parties for 2007)			2,563				5,488
Interest expense			(3,340	)			(210	)
Gain on foreign currency translation, net			1,943				683
Other income			134				15
Total nonoperating income			1,300				5,976
Income before income taxes, minority interests and equity in income of equity investments			88,075				91,655
Income taxes			33,035				34,892
Income before minority interests and equity in income of equity investments			55,040				56,763
Minority interests in consolidated subsidiaries’ net income, net of tax			(250	)			(350	)
Equity in income of equity investments, net of tax			1,824				860
Net income		$	56,614				57,273
Basic earnings per share		$	0.29				0.29
Diluted earnings per share		$	0.29				0.29
Weighted average common shares outstanding			196,745				196,487
Increase due to assumed issuance of shares related to common equivalent shares			561				451
Weighted average common and common equivalent shares outstanding			197,306				196,938

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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

		Three months ended March 31,
(in thousands)		2008				2007
Cash flows from operating activities:
Net income		$	56,614				57,273
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests in consolidated subsidiaries’ net income, net of tax			250				350
Gain on foreign currency, net			(1,943	)			(683	)
Equity in income of equity investments, net of tax			(1,824	)			(860	)
Depreciation and amortization			39,229				38,597
Share-based compensation			7,895				3,036
Asset impairments			—				620
Provisions for (recoveries of) bad debt expenses and billing adjustments			2,101				(1,239	)
Charges for transaction processing provisions			265				(792	)
Deferred income tax benefit			(6,875	)			(1,006	)
Loss on disposal of equipment, net			161				20
(Increase) decrease in:
Accounts receivable			(6,140	)			9,089
Prepaid expenses, other current assets and other long-term assets			2,530				(3,518	)
Increase (decrease) in:
Accounts payable			3,426				735
Accrued salaries and employee benefits			(34,401	)			(39,211	)
Excess tax benefit from share-based payment arrangements			(67	)			(2,503	)
Other current liabilities and other long-term liabilities			38,778				6,542
Net cash provided by operating activities			99,999				66,450
Cash flows from investing activities:
Purchases of property and equipment, net			(14,350	)			(17,232	)
Additions to licensed computer software from vendors			(2,351	)			(3,884	)
Additions to internally developed computer software			(2,413	)			(3,039	)
Cash used in acquisitions			—				(472	)
Additions to contract acquisition costs			(17,168	)			(7,145	)
Net cash used in investing activities			(36,282	)			(31,772	)
Cash flows from financing activities:
Dividends paid on common stock (includes $11.2 million paid to related parties during 2007)		$	(13,858	)			(13,783	)
Repurchase of common stock			(11,369	)			—
Excess tax benefit from share-based payment arrangements			67				2,503
Principal payments on long-term debt borrowings and capital lease obligations			(4,976	)			(562	)
Proceeds from borrowings of long-term debt			—				6,805
Proceeds from exercise of stock options			59				3,518
Net cash used in financing activities			(30,077	)			(1,519	)
Effect of exchange rate changes on cash and cash equivalents			(1,509	)			(571	)
Net increase in cash and cash equivalents			32,131				32,588
Cash and cash equivalents at beginning of year			210,518				389,123
Cash and cash equivalents at end of period		$	242,649				421,711
Cash paid for interest		$	3,340				210
Cash paid for income taxes, net of refunds		$	1,095				26,464

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements

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 subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

     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 2007 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 2007 financial statements to conform to the presentation adopted in 2008.

Note 2 — Supplementary Balance Sheet Information

Cash and Cash Equivalents

     Cash and cash equivalent balances are summarized as follows:

(in thousands)		March 31, 2008				December 31, 2007
Cash and cash equivalents in domestic accounts		$	205,992				171,715
Cash and cash equivalents in foreign accounts			36,657				38,803
Total		$	242,649				210,518

     The Company maintains accounts outside the United States denominated in currencies other than the U.S. dollar. 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)		March 31, 2008				December 31, 2007
Prepaid expenses		$	11,367				12,766
Income taxes receivable			—				10,838
Supplies inventory			8,326				8,725
Other			55,799				39,921
Total		$	75,492				72,250

Contract Acquisition Costs, net

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

(in thousands)		March 31, 2008				December 31, 2007
Payments for processing rights, net		$	97,442				96,449
Conversion costs, net			62,336				55,150
Total		$	159,778				151,599

     Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $6.3 million and $5.9 million for the three months ended March 31, 2008 and 2007, respectively.

     Amortization expense related to conversion costs was $3.5 million and $3.9 million for the three months ended March 31, 2008 and 2007, respectively.

Other Current Liabilities

     Significant components of other current liabilities are summarized as follows:

(in thousands)		March 31, 2008				December 31, 2007
Client liabilities		$	33,993				32,199
Accrued expenses			33,489				32,520
Accrued income taxes			28,123				2,657
Deferred revenues			24,267				25,733
Dividends payable			13,912				13,859
Transaction processing provisions			6,256				8,525
Client postage deposits			4,389				4,244
Other			19,476				15,371
Total		$	163,905				135,108

Note 3 — Comprehensive Income

     For the three months ended March 31, comprehensive income is summarized below:

		Three months ended March 31,
(in thousands)		2008				2007
Net income		$	56,614				57,273
Other comprehensive income, net of tax:
Foreign currency translation adjustments			4,353				(108	)
Change in accumulated OCI related to postretirement healthcare plans			12				—
Total		$	60,979				57,165

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

		Beginning Balance				Pretax												Ending Balance
(in thousands)		December 31, 2007				Amount				Tax Effect				Net-of-Tax Amount				March 31, 2008
Foreign currency translation adjustments		$	29,202			$	5,441				(1,088	)		$	4,353			$	33,555
Change in accumulated OCI related to postretirement healthcare plans			(880	)			19				(7	)			12				(868	)
Total		$	28,322			$	5,460				(1,095	)		$	4,365			$	32,687

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 and merchant acquiring 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.

     Effective January 1, 2008, TSYS merged the operations of TSYS Prepaid, Inc. into TSYS. Effective February 1, 2008, TSYS merged the operations of Golden Retriever, L.L.C. (Golden Retriever) with TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring). As a result, previous segment results were reclassified to move Golden Retriever from domestic-based support services to merchant acquiring services to reflect the change related to the merger.

     In April 2007, TSYS’ wholly-owned subsidiary, Enhancement Services Corporation, changed its name to TSYS Loyalty, Inc. (TSYS Loyalty).

     Domestic-based support services include electronic payment processing services and other services provided from within the United States. The 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, Columbus Productions, Inc., TSYS Canada, Inc., TSYS Total Debt Management, Inc., ProCard, Inc., TSYS Technology Center, Inc., Merlin Solutions, L.L.C. and TSYS Loyalty.

     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, TSYS Japan Co., Ltd., TSYS Servicos de Transacoes Eletronicas Ltda., 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, and its wholly owned subsidiary TSYS POS Systems and Services, L.L.C.

		Domestic-				International-				Merchant
(in thousands)		Based Support				Based Support				Acquiring				Spin-Related
Operating Segments		Services				Services				Services				Costs				Consolidated
At March 31, 2008
Identifiable assets		$	1,296,349				353,655				188,360				—			$	1,838,364
Intersegment eliminations			(312,664	)			(1,514	)			(1,209	)			—				(315,387	)
Total assets		$	983,685				352,141				187,151				—			$	1,522,977
At December 31, 2007
Identifiable assets		$	1,278,403				319,279				189,956				—			$	1,787,638
Intersegment eliminations			(305,847	)			(1,526	)			(1,245	)			—				(308,618	)
Total assets		$	972,556				317,753				188,711				—			$	1,479,020
Three months ended March 31, 2008
Revenues before reimbursables		$	242,771				67,957				55,129				—			$	365,857
Intersegment revenues			(5,231	)			(403	)			(182	)			—				(5,816	)
Revenues before reimbursables from external customers		$	237,540				67,554				54,947				—			$	360,041
Segment total revenues		$	328,909				69,824				70,937				—			$	469,670
Intersegment revenues			(7,362	)			(403	)			(182	)			—				(7,947	)
Revenues from external customers		$	321,547				69,421				70,755				—			$	461,723
Depreciation and amortization		$	24,980				7,695				6,554				—			$	39,229

		Domestic-				International-				Merchant
(in thousands)		Based Support				Based Support				Acquiring				Spin-Related
Operating Segments		Services				Services				Services				Costs				Consolidated
Intersegment expenses		$	2,774				(3,541	)			(7,180	)			—			$	(7,947	)
Segment operating income		$	71,150				7,446				15,074				(6,895	)		$	86,775
Income before income taxes, minority interest and equity in income of equity investments		$	70,836				8,750				15,384				(6,895	)		$	88,075
Income taxes		$	26,637				2,914				5,408				(1,924	)		$	33,035
Equity in income of equity investments		$	(338	)			2,162				—				—			$	1,824
Net income		$	45,917				5,693				9,976				(4,972	)		$	56,614
Three months ended March 31, 2007
Revenues before reimbursables		$	240,106				52,963				55,681				—			$	348,750
Intersegment revenues			(4,776	)			(223	)			(140	)			—				(5,139	)
Revenues before reimbursables from external customers		$	235,330				52,740				55,541				—			$	343,611
Segment total revenues		$	313,595				55,400				67,747				—			$	436,742
Intersegment revenues			(6,776	)			(223	)			(140	)			—				(7,139	)
Revenues from external customers		$	306,819				55,177				67,607				—			$	429,603
Depreciation and amortization		$	25,951				5,800				6,846				—			$	38,597
Intersegment expenses		$	3,476				(3,239	)			(7,371	)			—			$	(7,134	)
Segment operating income		$	62,481				11,112				12,086				—			$	85,679
Income before income taxes, minority interest and equity in income of equity investments		$	67,613				11,379				12,663				—			$	91,655
Income taxes		$	26,186				4,172				4,534				—			$	34,892
Equity in income of equity investments		$	—				860				—				—			$	860
Net income		$	41,547				7,597				8,129				—			$	57,273

     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 months ended March 31, 2008 and 2007, respectively, based on the domicile of the Company’s customers.

		Three months ended March 31,
(in millions)		2008				2007
United States		$	354.1				337.7
Europe			58.9				45.9
Canada			31.7				30.0
Japan			7.4				5.3
Mexico			3.7				3.3
Other			5.9				7.4
Total		$	461.7				429.6

     The following table reconciles geographic revenues to revenues by reportable segment for the three months ended March 31, 2008 and 2007, respectively, based on the domicile of the Company’s customers.

		Domestic-Based								International-Based								Merchant Acquiring
		Support Services								Support Services								Services
(in millions)		2008				2007				2008				2007				2008				2007
United States		$	283.6				270.3				0.1				—				70.4				67.4
Europe			0.3				0.4				58.6				45.5				—				—
Canada			31.5				29.9				—				—				0.2				0.1
Japan			—				—				7.4				5.3				—				—
Mexico			3.7				3.3				—				—				—				—
Other			2.4				2.9				3.3				4.4				0.2				0.1
Total		$	321.5				306.8				69.4				55.2				70.8				67.6

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

(in millions)		At March 31, 2008				At December 31, 2007
United States		$	207.8				208.3
Europe			74.8				70.3
Japan			2.3				1.9
Other			2.7				2.6
Total		$	287.6				283.1

Major Customers

     For the three months ended March 31, 2008, the Company had three major customers which accounted for approximately 30.8%, or $142.0 million, of total revenues. For the three months ended March 31, 2007, these three major customers accounted for approximately 33.7%, or $144.6 million, of total revenues. Revenues from major customers for the periods reported are primarily attributable to the domestic-based support services and merchant acquiring services segments.

		Three months ended March 31,
		2008								2007
						% of								% of
Revenue						Total								Total
(in millions)		Dollars				Revenues				Dollars				Revenues
Client 1		$	69.1				15.0			$	52.5				12.2
Client 2			54.8				11.9				48.8				11.4
Client 3			18.1				3.9				43.3				10.1
Totals		$	142.0				30.8			$	144.6				33.7

Note 5 — Share-Based Compensation

     The Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC, contains a discussion of the Company’s share-based compensation plans and policy.

Share-Based Compensation

     TSYS’ share-based compensation costs are included as expenses and classified as salaries and other personnel expenses and spin-related 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 March 31, 2008, share-based compensation was $7.9 million, compared to $3.0 million for the same period in 2007. Included in the $7.9 million amount for 2008 and $3.0 million amount for 2007 is approximately $5.7 million and $1.7 million, respectively, related to expensing the fair value of stock options.

Non-vested Share Awards

     During the first three months of 2008, the Company issued 695,411 shares of TSYS common stock with a market value of $15.2 million to certain key employees and non-management members of its board of directors under nonvested stock bonus awards for services to be provided by such officers, directors and employees 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 three months of 2007, the Company issued 241,260 shares of TSYS common stock with a market value of $7.6 million to certain key employees and non-management members of its board of directors under nonvested stock bonus awards for services to be provided by such officers, directors and employees 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.

     As of March 31, 2008, there was approximately $23.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted average period of 2.9 years.

     During the first three months of 2008, TSYS authorized a total grant of 182,816 shares of nonvested stock to two key executives with a performance-vesting schedule (2008 performance-vesting shares). These 2008 performance-vesting shares have seven one-year

performance periods (2008-2014) 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.

     During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key executives with a performance-vesting schedule (2005 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.

     As of March 31, 2008, there was approximately $1.3 million of total unrecognized compensation cost related to both the 2008 grant and 2005 grant of nonvested performance-vesting share-based compensation arrangements. That cost is expected to be recognized over the remainder of 2008.

     On March 31, 2008, TSYS authorized performance based awards that have a market condition calculated on a combination of 2008 earnings per share growth and TSYS’ performance compared to the S&P 500 Technology Index during 2009 and 2010. Vesting of this award will occur on the last day of the three-year market condition valuation period if the participant is still employed on that date. Retirement for purposes of this award is defined as age 62 with 15 years of service, or age 65 regardless of service. The fair value of the award is based on a Monte Carlo simulation as prescribed by Statement of Financial Accounting Standards No. 123 (Revised) (SFAS No. 123R) “Share-Based Payment (Revised).” The Company has engaged a third-party valuation specialist to ascertain the fair value of this award. The third-party specialist is expected to complete the evaluation during the second quarter of 2008.

Stock Option Awards

     During the first three months of March 2008, the Company granted 768,855 stock options to key TSYS executive officers. The average fair value of the option grant was $9.73 per option 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 3.42%; expected volatility of 36.57%; expected term of 8.7 years; and dividend yield of 1.21%.

     As of March 31, 2008, there was approximately $10.0 million of total unrecognized compensation expense cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 2.4 years.

Earnings Per Share

     The diluted earnings per share calculation excludes stock options and nonvested awards that are convertible into 6.3 million common shares for the three months ended March 31, 2008, and excludes 11,000 common shares for the three months ended March 31, 2007 because their inclusion would have been anti-dilutive.

Note 6 — Long-Term Debt

     Refer to Note 11 of the Company’s audited financial statements for the year ended December 31, 2007 which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC, for a discussion regarding long-term debt.

     The Company did not enter into any new long-term borrowing arrangements during the first quarter of 2008.

Note 7 — Supplementary Cash Flow Information

Contract Acquisition Costs

     Cash used for contract acquisition costs for the three months ended March 31, 2008 and 2007, respectively, are summarized as follows:

(in thousands)		March 31, 2008				March 31, 2007
Payments for processing rights		$	6,984				1,852
Conversion costs			10,184				5,293
Total		$	17,168				7,145

Nonvested Awards

     During the first quarter of 2008 and 2007, the Company issued shares of common stock to certain key employees and non-management members of its board of directors under nonvested stock bonus awards for services to be provided by such key employees and directors in the future. Refer to Note 5 for more information.

Equipment and Software Acquired Under Capital Lease Obligations

     The Company acquired equipment and software under capital lease obligations in the amount of $5.4 million for the three months ended March 31, 2008 related to a software enterprise license agreement and storage and other peripheral hardware.

Note 8 — Legal Proceedings

     The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations 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 litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with Statement of Financial Accounting Standards No. 5 (SFAS No. 5), “Accounting for Contingencies”.

Note 9 — Guarantees and Indemnifications

     The Company has entered into processing and licensing agreements with its 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 infringe 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 pursuant 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 — Income Taxes

     TSYS is a member of an affiliated group that files a consolidated U.S. Federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. Federal income tax examinations for years before 2004 and with a few exceptions, the Company is no longer subject to income tax examinations from state and local authorities for years before 2001 and from foreign authorities before 2003. There are currently no Federal or foreign tax examinations in progress. However, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

     TSYS adopted the provisions of FASB Interpretation No. 48, “Accounting for Income Taxes — an Interpretation of FASB Statement 109” (FIN 48) on January 1, 2007. This interpretation prescribed a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return.

     TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the consolidated statements of income. Gross accrued interest and penalties on unrecognized tax benefits totaled $1.2 million and $1.4 million as of December 31, 2007 and March 31, 2008, respectively. The total amounts of unrecognized income tax benefits as of December 31, 2007 and March 31, 2008 that, if recognized, would affect the effective tax rates are $5.5 million and $5.7 million (net of the Federal benefit on state tax issues), respectively, which include interest and penalties of $0.9 million and $1.0 million.

TOTAL SYSTEM SERVICES, INC.
Item 2 — Management’s Discussion and Analysis of Financial
Condition and Results of Operations

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.

     For a detailed discussion regarding the Company’s Operations, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

     A summary of the financial highlights for 2008, as compared to 2007, is provided below:

		Three months ended March 31,
(in millions, except per share data and employees)		2008				2007				Percent Change
Revenues before reimbursables		$	360.0				343.6				4.8	%
Total revenues			461.7				429.6				7.5
Operating income			86.8				85.7				1.3
Net income			56.6				57.3				(1.2	)
Basic earnings per share (EPS)			0.29				0.29				(1.3	)
Diluted EPS			0.29				0.29				(1.3	)
Cash flows from operating activities			100.0				66.5				50.4
Other:
Accounts on file (AOF)			364.9				422.7				(13.7	)
Average full-time equivalent employees (FTE)			7,245				6,740				7.5

     Significant highlights for 2008 include:

Corporate

	•		Announced the launch of ingenuity in action: n>genSM, a new business paradigm that makes it easy for TSYS clients to efficiently and thoroughly manage all their complex payments-related business needs with point-and-click ease. n>gen is not a new platform and use of n>gen will not require conversion to a new platform — it adds a new level of business intelligence made available through analytical-based services, giving institutions a “total” view of their portfolios to make actionable, well-informed decisions on growth opportunities and overall risk.
	•		Recently named Rod Boyer, a 21-year veteran of the payments and technology industries, president of TSYS Loyalty.

Domestic

	•		Announced the renewal of a long-term agreement with Target Corporation, the operator of Target and SuperTarget stores, to service its REDcard portfolio. The multi-year agreement will include systems processing for Target® Visa® Credit Card, Target Credit CardSM, Target Check CardSM and the Target Business Card®. Target began working with TSYS in 2000 for the launch of its Visa product. TSYS began supporting the Target Credit CardSM portfolio in 2005. Target recently announced that it had entered into a $3.6 billion credit facility with Chase Bank USA, N.A. secured by an undivided interest in approximately 47% of its credit card receivables. Based upon information currently available to it, TSYS believes that, even after the creation of this credit facility, Target retains control of its credit card portfolio and the creation of this credit facility does not impact its recently extended processing relationship with Target.
	•		Announced the development by TSYS Loyalty of an innovative product that calculates points and rewards for customers who subscribe to multiple products with a single financial institution, including direct deposit, credit, mortgage, insurance and Certificate of Deposit accounts. TSYS Enterprise RewardsSM (patent pending) also supports a Web interface, which allows the subscriber to manage their total relationship with a single access point.

•

Announced the successful market launch of what we believe is the industry’s most advanced benefits payments system. Fringe Benefits Management Company, the first third-party administrator to use this innovative solution, offers its subscribers the ability to pay from multiple healthcare tax-advantaged accounts, credit accounts and cash accounts through a single card.

International

•

Completed a contract to provide Standard Bank of South Africa card issuing, merchant acquiring and related payment services for the multiple countries across Africa in which Standard Bank operates. The South African-based financial services company has a global presence, operating in 18 countries in Africa and 20 on other continents, including the key financial centers of Europe, the Americas and Asia.

Financial Review

     This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, liquidity and capital resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings.

Critical Accounting Policies and Estimates

     The Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to gain a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting policies employed.

     Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations are set forth in the Company’s forward-looking statements. Negative developments in these or other risk factors could have a material adverse effect on the Company’s financial position, results of operations and cash flows. For a detailed discussion regarding the Company’s risk factors, see “Item 1A: Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

     For a detailed discussion regarding the Company’s critical accounting policies and estimates, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to the Company’s critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions in 2008.

Related Party Transactions

     The Company believes the terms and conditions of transactions between the Company and 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 comparable to those which could have been obtained in transactions with unaffiliated parties. The Company’s margins with respect to related party transactions are comparable to margins recognized in transactions with unrelated third parties.

Off-Balance Sheet Arrangements

Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating leases for computer equipment, software and facilities. These leases allow the Company to provide the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the balance sheet.

Contractual Obligations: The total liability (with state amounts tax effected) for uncertain tax positions under FIN 48 at March 31, 2008 is $5.7 million. Refer to Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information regarding income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect a significant payment related to these obligations within the next year.

     As indicated in the Company’s 2007 Annual Report on Form 10-K, total contractual cash obligations at December 31, 2007 were estimated at $591.3 million. These contractual cash obligations include lease payments and software arrangements.

Results of Operations

     The following table sets forth certain income statement captions as a percentage of total revenues and the percentage increases or decreases in those items for the three months ended March 31, 2008 and 2007, respectively:

		Percentage of								Percentage Change
		Total Revenues								in Dollar Amounts
		2008				2007				2008 vs. 2007
Revenues:
Electronic payment processing services			52.2	%			53.6	%			4.9	%
Merchant acquiring services			13.4				14.1				1.6
Other services			12.4				12.3				8.0
Revenues before reimbursable items			78.0				80.0				4.8
Reimbursable items			22.0				20.0				18.2
Total revenues			100.0				100.0				7.5
Expenses:
Salaries and other personnel expense			32.1				32.7				5.6
Net occupancy and equipment expense			15.8				15.7				8.2
Spin related expenses			1.5				—			nm
Other operating expenses			9.8				11.7				(9.9	)
Expenses before reimbursable items			59.2				60.1				5.9
Reimbursable items			22.0				20.0				18.2
Total expenses			81.2				80.1				9.0
Operating income			18.8				19.9				1.3
Nonoperating income			0.3				1.4				(78.2	)
Income before income taxes, minority interest and equity in income of equity investments			19.1				21.3				(3.9	)
Income taxes			7.2				8.1				(5.3	)
Income before minority interest and equity in income of equity investments			11.9				13.2				(3.0	)
Minority interests in consolidated subsidiaries’ net income			(0.0	)			(0.1	)		nm
Equity in income of equity investments			0.4				0.2				112.1
Net income			12.3	%			13.3	%			(1.2	)%

Revenues

     Total revenues increased $32.1 million, or 7.5%, during the three months ended March 31, 2008, compared to the same period in 2007. The increase in revenues for the three months ended March 31, 2008 includes an increase of $1.6 million related to the effects of currency translation of its foreign-based subsidiaries and branches. Excluding reimbursable items, revenues increased $16.4 million, or 4.8%, during the three months ended March 31, 2008, compared to the same period in 2007.

International Revenues

     TSYS provides services to its clients worldwide and plans to continue to expand its service offerings internationally in the future.

     Total revenues from clients domiciled outside the United States for the three months ended March 31, 2008 and 2007, respectively, are summarized below:

		Three months ended March 31,
(in millions)		2008				2007				% Change
Europe		$	58.9				45.9				28.2
Canada			31.7				30.0				5.4
Japan			7.4				5.3				40.0
Mexico			3.7				3.3				14.4
Other			5.9				7.4				(19.6	)
Totals		$	107.6				91.9				17.1

Note: The Company has two equity investments located in Mexico and China that are accounted for under the equity method of accounting, and therefore, TSYS does not include the revenues of its equity investments in consolidated revenues.

     The increase in revenues in 2008 from clients domiciled outside the United States was a result of acquisitions, internal growth of existing clients, the increased use of value added products and services, and the effects of currency translation.

     TSYS expects to continue to grow its international revenues in the future through acquisitions, business expansion, new client signings and internal growth. TSYS may also grow as European financial institutions phase-in the Single Euro Payments Area (SEPA) requirements.

     The purpose of SEPA is to treat all Euro payments in the Euro area as domestic payments and move the Euro area towards a more integrated payments market. The European Payments Council’s plan for implementation of SEPA is structured in three phases: a design phase, an implementation phase and a migration phase. SEPA went live on January 28, 2008. The migration phase, which is scheduled to be complete by the end of 2010, is a period in which the European national payment schemes will coexist with the new SEPA schemes in order to allow a gradual market-driven migration to SEPA. As the deadline approaches, more European financial institutions may look to outsource their payment processing functions to third-party providers, such as TSYS.

     The Company has also seen some growth in international revenues as a result of providing products and services to implement the EMV standard for secure payments. EMV is a standard for interoperation of IC cards (chip cards) and IC capable POS terminals, for authenticating credit and debit card payments. The name EMV is derived from the initial letters of Europay, MasterCard and VISA, the three companies which originally cooperated to develop the standard. JCB (formerly Japan Credit Bureau) joined the organization in December 2004. IC card systems based on EMV are being phased in across the world, under names such as “IC Credit” and “Chip and PIN”.

     The purpose and goal of the EMV standard is to specify interoperation between EMV compliant IC cards and EMV compliant credit card payment terminals throughout the world. There are two major benefits to moving to smart card based credit card payment systems: improved security (with associated fraud reduction), and the possibility for finer control of “offline” credit card transaction approvals. EMV financial transactions are more secure against fraud than traditional credit card payments which use the data encoded in a magnetic stripe on the back of the card. Although not the only possible method, the majority of implementations of EMV cards and terminals confirm the identity of the cardholder by requiring the entry of a PIN (Personal Identification Number) rather than signing a paper receipt.

Value Added Products and Services

     The Company’s revenues are impacted by the use of optional value added products and services of TSYS’ processing systems. Value added products and services are optional features to which each client can choose to subscribe in order to potentially increase the financial performance of its portfolio. Value added products and services include: risk management tools and techniques, such as credit evaluation, fraud detection and prevention, and behavior analysis tools; and revenue enhancement tools and customer retention programs, such as loyalty programs and bonus rewards. These revenues can increase or decrease from period to period as clients subscribe to or cancel these services. Value added products and services are included primarily in electronic payment processing services revenue. For the three months ended March 31, 2008 and 2007, value added products and services represented 12.0% and 12.8%, respectively, of total revenues.

Major Customers

     A significant amount of the Company’s revenues is derived from long-term contracts with large clients, including its major customers. TSYS derives revenues from providing various processing, merchant acquiring and other services to these clients, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. Refer to Note 4 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information regarding major customers. The loss of these clients, or any significant client, could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

     In August 2005, TSYS finalized a five year definitive agreement with Capital One Financial Corporation (Capital One) to provide processing services for its North American portfolio of consumer and small business credit card accounts. TSYS completed the conversion of Capital One’s portfolio from its in house processing system to TSYS’ processing system in March 2007. TSYS expects to maintain the card processing functions of Capital One for at least five years. After a minimum of three years of processing with TSYS, the agreement provides Capital One the opportunity to license TS2 under a long-term payment structure.

     In October 2006, TSYS deconverted the Bank of America consumer card portfolio. TSYS continues to provide commercial and small business card processing for Bank of America and MBNA, as well as merchant processing for Bank of America, according to the terms of the existing agreements for those services. In 2007, TSYS provided debit card embossing services to Bank of America.

     In October 2004, TSYS finalized a definitive agreement with Chase to service the combined card portfolios of Chase Card Services and to upgrade its card-processing technology. Pursuant to the agreement, TSYS converted the consumer accounts of Chase to a modified version of TS2 in July 2005. In July 2007, Chase had the option to either extend the processing agreement for up to five additional two-year periods or migrate the portfolio in-house, under a perpetual license of a modified version of TSYS’ processing system with a six-year payment term. Chase discontinued its processing agreement at the end of July 2007 according to the original schedule and began processing in-house.

     Although the revenues associated with the Chase licensing arrangement are expected to be much lower than the revenues associated with the Chase consumer processing arrangement, management believes the impact should not have a material adverse effect on TSYS’ financial position, results of operations or cash flows, as TSYS has planned and implemented a paring down of the resources dedicated to the consumer portfolio through employee attrition and/or redeployment, as well as through equipment lease expirations. TSYS expects to continue to support Chase in processing its commercial portfolio.

     With the migration to a licensing arrangement and the resulting reduction in revenues, TSYS believes that the revenues from Chase for periods following the migration will represent less than 10% of TSYS’ total consolidated revenues.

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

AOF Data (in millions)

		2008				2007				% Change
At March 31,			364.9				422.7				(13.7	)
YTD Average			370.2				418.3				(11.5	)

AOF by Portfolio Type (in millions)

		2008								2007
At March 31,		AOF				%				AOF				%				% Change
Consumer			211.4				57.9				268.9				63.6				(21.4	)
Retail			57.9				15.9				52.5				12.4				10.4
Stored value			26.0				7.1				42.2				10.0				(38.4	)
Commercial			40.1				11.0				32.8				7.8				22.1
Government services			24.1				6.6				21.5				5.1				11.8
Debit			5.4				1.5				4.8				1.1				12.1
Total			364.9				100.0				422.7				100.0				(13.7	)

AOF by Geographic Area (in millions)

		2008								2007
At March 31,		AOF				%				AOF				%				% Change
Domestic			283.4				77.7				353.5				83.6				(19.8	)
International			81.5				22.3				69.2				16.4				17.9
Total			364.9				100.0				422.7				100.0				(13.7	)

Note: The accounts on file distinction between domestic and international is based on the geographic domicile of the Company’s processing clients.

Activity in AOF (in millions)

		March 2007 to				March 2006 to
		March 2008				March 2007
Beginning balance			422.7				440.4
Internal growth of existing clients			53.9				36.2

		March 2007 to				March 2006 to
		March 2008				March 2007
New clients			18.2				96.1
Purges/Sales			(25.3	)			(19.2	)
Deconversions			(104.6	)			(130.8	)
Ending balance			364.9				422.7

Electronic Payment Processing Services

     Electronic payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements mailed, cards embossed and mailed, and other processing services for cardholder accounts on file. Cardholder accounts on file include active and inactive consumer credit, retail, debit, stored value, government services and commercial card accounts. Due to the strong organic growth of TSYS’ clients and the expanding use of cards, as well as increases in the scope of services offered to clients, revenues relating to electronic payment processing services have continued to grow. Revenues from electronic payment processing services increased $11.2 million, or 4.9%, for the three months ended March 31, 2008 compared to the same period in 2007.

Merchant Acquiring Services

     Merchant acquiring services revenues are derived from providing acquiring solutions, related systems and integrated support services to financial institutions and other merchant acquirers. Revenues from merchant acquiring services include processing 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. Merchant acquiring services’ products and services include: authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale equipment sales and service.

     Revenues from merchant acquiring services are mainly generated by TSYS’ wholly owned subsidiary TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring) and majority owned subsidiary GP Network Corporation. Merchant acquiring services revenues for the three months ended March 31, 2008 was $61.7 million compared to $60.7 million for the same period last year. The increase is attributable to internal growth of transactions of existing clients offset by client deconversions in the terminal distribution business and price compression.

     TSYS Acquiring’s results are driven by the authorization and capture transactions processed at the point-of-sale and clearing and settlement transactions. TSYS Acquiring’s authorization and capture transactions are primarily through dial-up or Internet connectivity.

Other Services

     Revenues from other services consist primarily of revenues generated by TSYS’ wholly owned subsidiaries not included in electronic payment processing services or merchant acquiring services, as well as TSYS’ business process management services. Revenues from other services increased $4.2 million, or 8.0%, for the three months ended March 31, 2008, compared to the same period in 2007.

Reimbursable Items

     As a result of the FASB’s Emerging Issues Task Force No. 01-14 (EITF No. 01-14), “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” the Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. Reimbursable items increased $15.7 million, or 18.2% for the three months ended March 31, 2008 as compared to the same period last year. TSYS recognized approximately $34.8 million of attorney fees and court costs as additional reimbursable items for the three months ended March 31, 2008.

     The majority of reimbursable items relates to the Company’s domestic-based clients and is primarily costs associated with postage. The Company’s reimbursable items are impacted with changes in postal rates and changes in the volumes of all mailing activities by its clients. Effective May 14, 2007, the United States Postal Service increased the rate of first class mail. Effective May 12, 2008, the United States Postal Service is expected to increase the rate of first class mail by $0.01.

Operating Expenses

     Total expenses increased 9.0% for the three months ended March 31, 2008, respectively, compared to the same period in 2007. The fluctuation in expense includes an increase of $1.4 million for the three months ended March 31, 2008 related to the effects of currency translation of its foreign-based subsidiaries, branches and divisions. Excluding reimbursable items, total expenses increased 5.9% for the three months ended March 31, 2008 compared to the same period in 2007. The fluctuation in operating expenses is attributable to changes in each of the expense categories as described below.

Salaries and Other Personnel Expense

     Summarized below are the major components of salaries and other personnel expense for the three months ended March 31:

		Three months ended March 31,
(in thousands)		2008				2007				% Change
Salaries		$	106,606				101,491				5.0	%
Employee benefits			29,518				26,835				10.0
Nonemployee wages			13,810				9,917				39.3
Share-based compensation			3,745				3,048				22.9
Other			3,586				2,801				28.0
Less capitalized expenses			(8,948	)			(3,647	)			145.3
Total		$	148,317				140,445				5.6	%

     Salaries and other personnel expense increased $7.9 million, or 5.6%, for the three months ended March 31, 2008 compared to the same period in 2007. The change in salaries and other personnel expense is associated with the normal salary increases and related benefits, offset by the higher level of employment costs capitalized as software development and contract acquisition costs. Salaries and other personnel expense include the accrual for performance-based incentive benefits, which includes bonuses, profit sharing and employer 401(k) expenses. For the three months ended March 31, 2008 and 2007, the Company accrued $4.4 million and $7.5 million, respectively, for performance-based incentives.

     Prior to the spin-off by Synovus Financial Corp. (Synovus) to its shareholders of all the shares of TSYS held by Synvous, Synovus provided certain administrative services, such as human resources, legal, security and tax preparation and compliance, to TSYS in exchange for a management fee, which is included in other operating expenses, to cover TSYS’ pro rata share of services. With the spin-off, TSYS will begin recruiting employees and assuming these functions during 2008. During this transition period, TSYS will continue to utilize Synovus’ administrative services until these functions are operational within TSYS in exchange for an adjusted management fee based on utilization. As it assumes these functions, the Company expects salaries and other personnel expenses to increase, while other operating expenses decrease. TSYS’ headcount will also increase by approximately 60 people as these administrative services transition.

     Capitalized salaries and personnel expenses increased $5.3 million for the three months ended March 31, 2008 as compared to the same period in 2007, as a result of increased client conversion and implementation activity in the international segment.

     The Company’s salaries and other personnel expense is greatly influenced by the number of employees. Below is a summary of the Company’s employee data:

Employee Data:

(FTE)		2008				2007				% Change
At March 31,			7,548				6,804				10.9
YTD Average			7,245				6,740				7.5

     The majority of the increase in the number of employees in 2008 as compared to 2007 is a result of the expansion of TSYS’ international business.

     Share-based compensation expenses include the impact of expensing the fair value of stock options in 2008, as well as expenses associated with nonvested shares. For the three months ended March 31, 2008, share-based compensation was $3.7 million, compared to $3.0 million for the same period in 2007.

Net Occupancy and Equipment Expense

     Summarized below are the major components of net occupancy and equipment expense for the three months ended March 31, 2008 and 2007:

		Three months ended March 31,
(in thousands)		2008				2007				% Change
Depreciation and amortization		$	28,683				28,003				2.4	%
Equipment and software rentals			20,511				20,836				(1.6	)
Repairs and maintenance			12,948				10,274				26.0
Other			10,744				8,235				30.5
Totals		$	72,886				67,348				8.2	%

     Net occupancy and equipment expense increased $5.5 million, or 8.2%, for the three months ended March 31, 2008 over the same period in 2007.

     Repairs and maintenance increased for the three months ended March 31, 2008, as compared to the same period in 2007, as a result of support for additional software licenses and equipment.

Spin Related Expenses

     In July 2007, Synovus’ Board of Directors appointed a special committee of independent directors to make a recommendation with respect to whether to distribute Synovus’ ownership interest in TSYS to Synovus’ shareholders. As a result, the TSYS Board of Directors formed a special committee of independent TSYS directors to consider the terms of any proposed spin-off by Synovus of its ownership interest in TSYS, including the size of the pre-spin cash dividend. TSYS incurred expenses associated with advisory and legal services in connection with the spin assessment. As the spin-off was finalized and completed, TSYS also incurred expenses for the incremental fair value associated with converting Synovus stock options held by TSYS employees to TSYS options. During the three months ended March 31, 2008, the Company incurred approximately $6.9 million of spin related expenses. TSYS expects to incur additional spin related costs in 2008 associated with legal and advisory services, incremental fair value associated with the Synovus stock option conversion and other costs associated with unwinding the different commingled processes that Synovus and TSYS previously shared. TSYS estimates that it will incur approximately $16.0 million of spin related costs in operating expenses in 2008.

Other Operating Expenses

     Summarized below are the major components of other operating expenses for the three months ended March 31, 2008 and 2007:

		Three months ended March 31,
(in thousands)		2008				2007				% Change
Third-party data processing services		$	9,934				9,364				6.1
Travel and business development			6,985				6,349				10.0
Supplies and stationery			5,368				4,700				14.2
Professional advisory services			3,628				5,563				(34.8	)
Amortization of conversion costs			3,458				3,855				(10.3	)
Court costs associated with debt collection services			2,080				4,270				(51.3	)
Amortization of acquisition intangibles			659				834				(21.0	)
Transaction processing provisions			265				(792	)			(133.4	)
Terminal deployment costs			227				—			nm
Management fees			36				2,272				(98.4	)
Bad debt (recoveries) expense			(1,562	)			67			nm
Other			14,090				13,657				3.2
Totals		$	45,168				50,139				(9.9	)