<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q
                                        


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

     For the quarterly period ended   December 31, 1998
                                      -----------------

                                       OR

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


     Commission file number        1-14224
                                 ------------


                                Paymentech, Inc.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


            Delaware                                    75-2634185
--------------------------------------------------------------------------------
(State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                    Identification Number)


1601 Elm Street, 9th Floor, Dallas, Texas                       75201
--------------------------------------------------------------------------------
(address of principal executive offices)                      (Zip Code)


Registrant's Telephone Number, including area code   214-849-2149
                                                     ------------

                                      N/A
--------------------------------------------------------------------------------
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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes    X     No   
                                        -------     -------   


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

              Class                           Outstanding at January 31, 1999
---------------------------------------    -------------------------------------
    Common Stock, $.01 par value                     36,360,377 shares
<PAGE>
 
                                PAYMENTECH, INC.

                           FORM 10-Q QUARTERLY REPORT

                               Table of Contents
                               -----------------
 
 
 PART I.                         FINANCIAL INFORMATION                      Page
                                                                            ----

    Item 1.   Financial Statements.
 
              Condensed Consolidated Balance Sheets -
              December 31, 1998 (Unaudited) and June 30, 1998...............   3
 
              Condensed Consolidated Statements of Income (Unaudited) -
              Three and Six Months Ended December 31, 1998 and 1997.........   4
 
              Condensed Consolidated Statements of Cash Flows (Unaudited) -
              Six Months Ended December 31, 1998 and 1997...................   5
 
              Notes to Interim Condensed Consolidated Financial
              Statements (Unaudited)........................................   6
 

    Item 2.   Management's Discussion and Analysis of
              Financial Condition and Results of Operations.................  10

    Item 3.   Quantitative and Qualitative Disclosures About Market Risks...  14


PART II.                      OTHER INFORMATION

    Item 1.   Legal Proceedings.............................................  15
 
    Item 2.   Changes in Securities.........................................  15
 
    Item 4.   Submission of Matters to a Vote of Security Holders...........  15
 
    Item 6.   Exhibits and Reports on Form 8-K
 
              Reports on Form 8-K...........................................  16
              Index of Exhibits.............................................  16
 
    Signatures..............................................................  17
<PAGE>
 
                       PAYMENTECH, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                         December  31,        June 30,
                                                                                             1998               1998
                                                                                       --------------     --------------
<S>                                                                                      <C>                <C>
                                                                                         (Unaudited)
                                        ASSETS
Current assets:
  Cash and cash equivalents............................................................      $298,592           $158,307
  Receivables, net.....................................................................        43,334             23,770
  Credit card loans, net...............................................................        61,243             42,079
  Prepaid expenses and other current assets............................................         8,081             10,054
                                                                                       --------------     --------------
     Total current assets..............................................................       411,250            234,210
Investments, at cost (market value of $5,737 and $6,205 at December 31, 1998 and
 June 30, 1998, respectively)..........................................................         5,896              6,212
Notes receivable.......................................................................         9,556              9,997
Property and equipment, net............................................................        57,516             57,873
Goodwill, net..........................................................................       270,250            234,711
Purchased merchant portfolios and other intangibles, net...............................       124,890             98,817
Other assets...........................................................................        11,738              7,563
                                                                                       --------------     --------------
                                                                                             $891,096           $649,383
                                                                                       ==============     ==============
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.....................................................................      $260,823           $103,180
  Notes payable to banks...............................................................        84,019             55,049
  Interest-bearing deposits............................................................        50,547             34,790
  Merchant deposits....................................................................        23,605             22,844
  Accrued assessments..................................................................        10,367              8,881
  Other accrued expenses...............................................................        41,995             25,567
                                                                                       --------------     --------------
     Total current liabilities.........................................................       471,356            250,311
 
Stockholders' equity:
   Common stock, $0.01 par value, 200,000,000 shares authorized, 36,161,857 and
     36,025,944 issued and outstanding at December 31, 1998 and June 30, 1998,
     Respectively......................................................................           362                360
  Additional paid-in capital...........................................................       359,984            354,274
  Accumulated other comprehensive income...............................................         2,967                621
  Retained earnings....................................................................        56,427             43,817
                                                                                       --------------     --------------
     Total stockholders' equity........................................................       419,740            399,072
                                                                                       --------------     --------------
                                                                                             $891,096           $649,383
                                                                                       ==============     ==============
</TABLE>

                See notes to consolidated financial statements.

                                       3
<PAGE>
 
                       PAYMENTECH, INC. AND SUBSIDIARIES
                                        
            CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (Unaudited)
                     (In thousands, except per share data)
                                        

<TABLE>
<CAPTION>
                                                          Three Months Ended                   Six Months Ended
                                                             December 31,                        December 31,
                                                   -------------------------------    --------------------------------
                                                        1998              1997             1998               1997
                                                   -------------     -------------    -------------     --------------
 
<S>                                                <C>               <C>              <C>               <C>
Revenues:
         Revenue...................................      $64,794           $55,459         $121,259           $105,799
         Other income..............................          233             6,225              462              7,426
                                                   -------------     -------------    -------------     --------------
            Total revenues.........................       65,027            61,684          121,721            113,225
                                                   -------------     -------------    -------------     --------------
Expenses:
         Operating.................................       23,528            25,643           44,373             46,114
         Salaries and employee benefits............       18,124            15,821           36,391             31,272
         Depreciation and amortization.............        8,077             6,805           15,324             13,302
         Interest..................................        1,634             1,775            3,115              3,424
                                                   -------------     -------------    -------------     --------------
            Total expenses.........................       51,363            50,044           99,203             94,112
                                                   -------------     -------------    -------------     --------------
               Income before income taxes..........       13,664            11,640           22,518             19,113
Income tax provision...............................        6,008             4,975            9,908              8,276
                                                   -------------     -------------    -------------     --------------
               Net income..........................      $ 7,656           $ 6,665         $ 12,610           $ 10,837
                                                   =============     =============    =============     ==============
Basic and diluted earnings per share...............      $  0.21           $  0.19         $   0.35           $   0.31
                                                   =============     =============    =============     ==============
</TABLE>

                See notes to consolidated financial statements.

                                       4
<PAGE>
 
                       PAYMENTECH, INC. AND SUBSIDIARIES

          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                Six Months Ended
                                                                                                  December 31,
                                                                                      ---------------------------------
                                                                                            1998               1997
                                                                                      --------------     --------------
<S>                                                                                     <C>                <C>
Operating Activities
  Net income..........................................................................      $ 12,610           $ 10,837
  Adjustments to reconcile net income to net cash provided by (used for)
   operating activities:
    Noncash portion of asset write-off................................................            --              3,533
    Provision for depreciation and amortization.......................................        15,324             13,302
    Gain on sale of assets............................................................            --             (6,850)
    Other cash provided by (used for) operating activites.............................       121,929            (27,170)
                                                                                      --------------     --------------
     Net cash provided by (used for) operating activities.............................       149,863             (6,348)
Investing Activities
  Purchases of merchant portfolios, processing services and other acquisitions........       (51,187)            (1,180)
  Purchases of property and equipment, net............................................        (4,336)            (9,858)
  Proceeds from sale of assets........................................................            --             27,066
  Proceeds from maturities of investments.............................................           316              1,629
                                                                                      --------------     --------------
     Net cash provided by (used for) investing activities.............................       (55,207)            17,657
Financing Activities
 Net increase in notes payable to banks and other borrowings..........................        28,970                 --
 Net increase in interest-bearing deposits............................................        15,757              8,139
 Issuance of common stock, net........................................................           902              3,130
                                                                                      --------------     --------------
      Net cash provided by financing activities.......................................        45,629             11,269
                                                                                      --------------     --------------
       Increase in cash and cash equivalents..........................................       140,285             22,578
Cash and cash equivalents at beginning of period......................................       158,307            119,466
                                                                                      --------------     --------------
       Cash and cash equivalents at end of period.....................................      $298,592           $142,044
                                                                                      ==============     ==============
</TABLE>

                See notes to consolidated financial statements.

                                       5
<PAGE>
 
                       PAYMENTECH, INC. AND SUBSIDIARIES
          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                                        

Note A - Basis of Presentation

  Paymentech, Inc. ("Paymentech" or the "Company") is a Delaware corporation,
which engages in the credit card industry primarily as a payment processor of
credit and debit card transactions.  According to published industry sources,
the Company is the third largest payment processor of bankcard transactions in
the United States.  The Company also provides third-party credit and debit
authorization services to financial institutions, sales agents and the Company's
direct merchants.  In addition, the Company markets and issues commercial cards
to businesses and other entities.  Commercial cards facilitate centralized
business-to-business payment procedures and reporting, replacing traditional
direct payment methods.

  The Company has changed the presentation of its settlement inflows and
outflows effective for the quarter ended September 30, 1998.  For a portion of
the Company's business, receivables from credit card associations and the
related payables to merchants were previously presented as cash and cash
equivalents.  These payables to merchants are now presented as liabilities in
accounts payable.  The change was made to provide reporting consistency across
the Company's businesses.

  Effective for the quarter ended September 30, 1998, Paymentech adopted the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").  SOP 98-
1 requires companies to capitalize qualifying computer software costs incurred
during development.  Costs incurred in the designing of software configuration,
the coding of programs and the installation of hardware are examples of
qualifying capitalizable costs.  These costs will be amortized on a straight-
line basis over the period of benefit and will be periodically reviewed for
possible impairment.

  During the six months ended December 31, 1998, bankcard sales volume processed
increased approximately  18.3% to $29.4 billion compared with $24.8 billion for
the six months ended December 31, 1997.  The Company processed 1.2 billion total
transactions for the six months ended December 31, 1998, an increase of
approximately 30.9%, compared with 896.1 million total transactions for the same
period in fiscal 1998.  Bankcard sales volume processed included bankcard
transactions derived from the Company's merchant portfolio.  Total items
processed included bankcard and other credit and debit card transactions, and
credit and debit authorization transactions.

  The Company is a 55%-owned subsidiary of First USA Financial, Inc. ("First
USA"), which is a wholly owned subsidiary of BANK ONE CORPORATION, f/k/a BANC
ONE CORPORATION ("Bank One").

  The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the six months ended December 31, 1998 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1999.  For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K and 10-K/A for the fiscal year ended June 30, 1998.

                                       6
<PAGE>
 
Note B - Business Combinations, Divestitures and Merchant Portfolio Purchases

  During December 1998, Paymentech acquired the merchant processing business of
Mellon Bank Corporation ("Mellon") which directly services a broad range of
retailers and numerous government agencies, as well as processes for merchants
through independent sales organizations and agent banks for $51.2 million, of
which $9.2 million was retained by Paymentech to be paid to Mellon contingent
upon the full transfer by Mellon of certain of its merchant agreements to
Paymentech.  Mellon and the Company also agreed to an exclusive marketing and
referral agreement under which the parties will market Paymentech's processing
services to Mellon's merchant customers through Mellon's network of retail
offices and cash management and corporate banking groups.  In addition to
Mellon, during the quarter ended December 31, 1998, the Company purchased two
other merchant portfolios.  All of these acquisitions were accounted for as
purchases and accordingly, their results are included in Paymentech's result of
operations from the date of acquisition.

  During the quarter ended September 30, 1998, Paymentech purchased certain
assets of Prism Processing Services ("Prism") and acquired two merchant
portfolios for a total of $5.8 million.  Prism is a company that specializes in
developing merchant business with agent banks.  Additional cash payments may be
made if certain performance objectives are met annually by Prism for each of the
next eight years.  These acquisitions were accounted for as purchases and
accordingly, their results are included in the Company's result of operations
from the date of acquisition.

  The Company paid in common stock $1.2 million in August 1998, $2.5 million in
February 1998 and $1.5 million in August 1997 to the former sole stockholder of
Merchant-Link, Inc. ("Merchant-Link") as a result of the achievement of certain
performance criteria following the Company's acquisition of Merchant-Link in
January 1997.  The 125,765 shares of common stock originally issued in
connection with the acquisition in January 1997 are also subject to a price
guarantee by the Company.  In January 1999, Paymentech paid 163,675 shares of
common stock to the former sole stockholder of Merchant-Link as a result of this
price guarantee.

  In December 1997, the Company sold its share of PHH/Paymentech L.L.C.
("PHH/Paymentech"), a Delaware limited liability company, to PHH Vehicle
Management Services Corporation's ("PHH") new parent company, Cendant
Corporation ("Cendant") for $30.0 million. This sale generated a $6.0 million
pretax gain after deducting the Company's basis in its investment in
PHH/Paymentech and consideration for a preferred alliance agreement with
Cendant.  This gain is included in other income.  The Company and PHH had formed
the jointly-owned  PHH/Paymentech to offer a MasterCard-branded single card
payment system for fleet, purchasing, travel and entertainment needs.  The
Company will continue its relationship as the exclusive issuer of corporate
fleet cards for PHH.

  During the quarter ended September 30, 1997, the Company sold its terminal
leasing portfolio to Northern Leasing Systems Inc. ("Northern Leasing") for cash
and a note receivable.  This sale generated a pretax gain of $626,000, or $0.01
per diluted share, which is included in other income.  In addition, a deferred
gain up to approximately $450,000 will be recognized when certain performance
criteria are met with respect to lease payments made by the Company's merchants
to Northern Leasing.  The Company now leases terminals to merchants through a
contract with Northern Leasing which generates fee income.

  In September 1997, the Company sold the assets of its Ask! Technical Group
unit, a non-core business, to TASQ Technology, Inc. ("TASQ") for cash and a note
paid in December 1997.  In addition, TASQ has agreed to purchase certain
terminal inventories and supplies at book value.  The sale generated a gain of
$273,000 which is included in other income.  TASQ is an outsourcing provider of
information systems, inventory management services and logistics to the credit
card processing industry.  In connection with the sale, the Company also entered
into an ongoing servicing agreement with TASQ to provide deployment, repair and
inventory management services to the Company.

                                       7
<PAGE>
 
Note C - Notes Receivable

  As partial consideration for the sale of the Company's terminal leasing
portfolio during the quarter ended September 30, 1997, the Company accepted a
$1.3 million note receivable from Northern Leasing which earns a fixed market
rate which compounds quarterly.  Principal and interest are payable once certain
performance criteria are met with respect to lease payments made by the
Company's merchants to Northern Leasing.  Based on current information
available, the Company anticipates that the performance criteria will be met and
the first payment of principal and interest will be made during the quarter
ended June 1999 with the final payment expected during the fourth quarter of
fiscal 2000.

  The Company has a $2.1 million note receivable which was the result of the
sale of agent bank contracts in fiscal 1997.  The note matures in the fourth
quarter of fiscal 2000 and earns interest at a market rate with principal and
interest payments due quarterly.

  The Company has a $6.4 million note from LitleNet L.L.C. as part of a
litigation settlement.  This note is discounted to earn a market rate of
interest with principal and interest due in the third quarter of fiscal 2003.

Note D - Components of Comprehensive Income

  As of July 1, 1998, Paymentech adopted Statement No. 130, "Reporting
Comprehensive Income" (SFAS 130).  This Statement establishes standards for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or stockholders'
equity.  SFAS 130 requires that the unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in comprehensive income.  Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.

  The market value of the Company's investment in MessageMedia, Inc., f/k/a
First Virtual Holdings, Inc., was $8.8 million as of December 31, 1998,
resulting in a pretax unrealized holding gain of $3.8 million, or $2.3 million
on an after-tax basis.

  Components of comprehensive income are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                               
                                                       Three Months Ended                     Six Months Ended
                                                          December 31,                          December 31,
                                              ----------------------------------     ----------------------------------
                                                    1998               1997                1998               1997
                                              ---------------    ---------------     ---------------    ---------------
<S>                                             <C>                <C>                 <C>                <C>
Net income....................................        $ 7,656             $6,665             $12,610            $10,837
Unrealized holding gain on securities                                                          
 available for sale...........................          2,917                 --               2,346                 --
                                              ---------------    ---------------     ---------------    ---------------
 
Total comprehensive income....................        $10,573             $6,665             $14,956            $10,837
                                              ===============    ===============     ===============    ===============
</TABLE>

Note E - Income Taxes

  The Company's consolidated provision for income taxes includes state and
federal income tax components.  The Company's effective tax rate was 44.0% and
43.3% for the six months ended December 31, 1998 and 1997, respectively.  The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes primarily due to
the Company's high level of nondeductible amortization of goodwill, purchased
merchant portfolios and other intangibles.

                                       8
<PAGE>
 
Note F - Earnings per Share

  The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                Three Months Ended                            Six Months Ended
                                                   December 31,                                 December 31,
                                    -----------------------------------------    ----------------------------------------
                                            1998                   1997                  1998                  1997
                                    ------------------     ------------------    ------------------    ------------------
<S>                                   <C>                    <C>                   <C>                   <C>
Basic
-----
Net income..........................           $ 7,656                $ 6,665               $12,610               $10,837
                                    ------------------     ------------------    ------------------    ------------------
Weighted average shares outstanding.            36,184                 35,345                36,161                35,301
                                    ------------------     ------------------    ------------------    ------------------
Basic earnings per share............           $  0.21                $  0.19               $  0.35               $  0.31
                                    ==================     ==================    ==================    ==================
 
Diluted
-------
Net income..........................           $ 7,656                $ 6,665               $12,610               $10,837
                                    ------------------     ------------------    ------------------    ------------------
Weighted average shares outstanding.            36,184                 35,345                36,161                35,301
Dilutive effect of common stock                    
 equivalents........................               127                     --                   114                    60
Dilutive effect of contingently                    
 issuable shares....................               162                     --                   163                    --
                                    ------------------     ------------------    ------------------    ------------------
Adjusted weighted average shares                
 outstanding........................            36,473                 35,345                36,438                35,361
                                    ==================     ==================    ==================    ==================
 
Diluted earnings per share..........           $  0.21                $  0.19               $  0.35               $  0.31
                                    ==================     ==================    ==================    ==================
</TABLE>

Note G - Litigation

  The Company is a defendant in a putative class action suit commenced in
October 1997 against the Company, and a current and a former officer of the
Company alleging, among other things, that the defendants violated United States
securities laws by publicly issuing false and misleading statements and omitting
to disclose material adverse information regarding the Company's business.  The
Company has notified its insurance carriers of this action.  It is premature to
determine whether the Company will have any liability in the action or whether,
if so, that liability will be material.

                                       9
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


General

  Paymentech, Inc. ("Paymentech" or the "Company") is a Delaware corporation,
which engages in the credit card industry primarily as a payment processor of
credit and debit card transactions on behalf of merchants, financial
institutions and sales agents.  Paymentech also provides third-party credit and
debit authorization services to financial institutions, sales agents and the
Company's direct merchants.  According to published industry sources, the
Company is the third largest payment processor of bankcard transactions for
merchants in the United States.  In addition, Paymentech markets and issues
commercial cards to businesses and other entities.  Commercial cards facilitate
business-to-business payment procedures and reporting, replacing traditional
direct payment methods.

  During the six months ended December 31, 1998, bankcard sales volume processed
increased approximately 18.3% to $29.4 billion compared with $24.8 billion for
the six months ended December 31, 1997.  Paymentech processed 1.2 billion total
transactions for the six months ended December 31, 1998, an increase of
approximately 30.9%, compared with 896.1 million total transactions for the same
period in fiscal 1998.

  The Company is a 55%-owned subsidiary of First USA Financial, Inc. ("First
USA"), which is a wholly owned subsidiary of BANK ONE CORPORATION, f/k/a BANC
ONE CORPORATION ("Bank One").

Business Combinations, Divestitures and Merchant Portfolio Purchases

  During December 1998, Paymentech acquired the merchant processing business of
Mellon Bank Corporation ("Mellon") which directly services a broad range of
retailers and numerous government agencies, as well as processes for merchants
through independent sales organizations and agent banks for $51.2 million, of
which $9.2 million was retained by Paymentech to be paid to Mellon contingent
upon the full transfer by Mellon of certain of its merchant agreements to
Paymentech.  Mellon and the Company also agreed to an exclusive marketing and
referral agreement under which the parties will market Paymentech's processing
services to Mellon's merchant customers through Mellon's network of retail
offices and cash management and corporate banking groups.  In addition to
Mellon, during the quarter ended December 31, 1998, the Company purchased two
other merchant portfolios.  All of these acquisitions were accounted for as
purchases and accordingly, their results are included in Paymentech's result of
operations from the date of acquisition.

  During the quarter ended September 30, 1998, Paymentech purchased certain
assets of Prism Processing Services ("Prism") and acquired two merchant
portfolios for a total of $5.8 million.  Prism is a company that specializes in
developing merchant business with agent banks.  Additional cash payments may be
made if certain performance objectives are met annually by Prism for each of the
next eight years.  These acquisitions were accounted for as purchases and
accordingly, their results are included in the Company's result of operations
from the date of acquisition.

  The Company paid in common stock $1.2 million in August 1998, $2.5 million in
February 1998 and $1.5 million in August 1997 to the former sole stockholder of
Merchant-Link, Inc. ("Merchant-Link") as a result of the achievement of certain
performance criteria following the Company's acquisition of Merchant-Link in
January 1997.  The 125,765 shares of common stock originally issued in
connection with the acquisition in January 1997 are also subject to a price
guarantee by the Company.  In January 1999, Paymentech paid 163,675 shares of
common stock to the former sole stockholder of Merchant-Link as a result of this
price guarantee.

  In December 1997, the Company sold its share of PHH/Paymentech L.L.C.
("PHH/Paymentech"), a Delaware limited liability company, to PHH Vehicle
Management Services Corporation's ("PHH") new parent company, Cendant
Corporation ("Cendant") for $30.0 million. This sale generated a $6.0 million
pretax gain after deducting the Company's basis in its investment in
PHH/Paymentech and consideration for a preferred alliance agreement with
Cendant.  This gain is included in other income.  The Company and PHH had formed
the jointly-owned PHH/Paymentech to offer a MasterCard-branded single card
payment system for fleet, purchasing, travel and entertainment needs.  The
Company will continue its relationship as the exclusive issuer of corporate
fleet cards for PHH.

                                       10
<PAGE>
 
  During the quarter ended September 30, 1997, the Company sold its terminal
leasing portfolio to Northern Leasing Systems Inc. ("Northern Leasing") for cash
and a note receivable.  This sale generated a pretax gain of $626,000, or $0.01
per diluted share, which is included in other income.  In addition, a deferred
gain up to approximately $450,000 will be recognized when certain performance
criteria are met with respect to lease payments made by the Company's merchants
to Northern Leasing.  The Company now leases terminals to merchants through a
contract with Northern Leasing which generates fee income.

  In September 1997, the Company sold the assets of its Ask! Technical Group
unit, a non-core business, to TASQ Technology, Inc. ("TASQ") for cash and a note
paid in December 1997.  In addition, TASQ has agreed to purchase certain
terminal inventories and supplies at book value.  The sale generated a gain of
$273,000 which is included in other income.  TASQ is an outsourcing provider of
information systems, inventory management services and logistics to the credit
card processing industry.  In connection with the sale, the Company also entered
into an ongoing servicing agreement with TASQ to provide deployment, repair and
inventory management services to the Company.

Results of Operations

  For the Three Months Ended December 31, 1998 Compared With the Three Months
  ---------------------------------------------------------------------------
Ended December 31, 1997
-----------------------

  Paymentech recorded net income for the three months ended December 31, 1998 of
$7.7 million, or $0.21 per diluted share, compared with net income of $6.7
million, or $0.19 per diluted share, for the same period in the prior year.  For
the three months ended December 31, 1997, earnings excluding a $6.0 million
pretax gain related to the sale of the Company's interest in PHH/Paymentech and
a significant unusual pretax charge of $3.5 million, were $5.3 million or $0.15
per diluted share.

  Revenue increased 16.8% to $64.8 million for the three months ended December
31, 1998, compared with $55.5 million for the three months ended December 31,
1997.  The increase in revenue was the result of the increase in sales volume
processed partially offset by margin compression due to increased competition
within the industry.  Bankcard sales volume processed increased 19.8% to $16.3
billion for the three months ended December 31, 1998, compared with $13.6
billion for the same period in the prior year.  Total items processed for the
three months ended December 31, 1998 increased 30.9% to 623.5 million, compared
with 476.4 million for the three months ended December 31, 1997.  Bankcard sales
volume processed included bankcard transactions derived from the Company's
merchant portfolio.  Total items processed included bankcard and other credit
and debit card transactions, and credit and debit authorization transactions.
 
  Other income for the three months ended December 31, 1997 included a $6.0
million pretax gain related to the sale of the Company's interest in
PHH/Paymentech.  Other income for the three months ended December 31, 1998 and
December 31, 1997 also included interest income from investments.

  Total expenses for the three months ended December 31, 1998 increased slightly
to $51.4 million, compared with $50.0 million for the three months ended
December 31, 1997.  Total expenses, excluding amortization of goodwill,
purchased merchant portfolios and other intangibles, were $46.5 million for the
quarter ended December 31, 1998, compared with $45.9 million for the same period
in the prior year.

                                       11
<PAGE>
 
   Operating expenses for the three months ended December 31, 1998, decreased
8.2% to $23.5 million, compared with $25.6 million for the same period of fiscal
1998.  Excluding $3.5 million in charges related primarily to a reserve for loss
on terminal inventory and a reserve for loss on receivables recorded during the
quarter ended December 31, 1997, operating expenses increased slightly for the
three months ended December 31, 1998.  Paymentech's ability to maintain these
expenses while achieving a 19.8% increase in sales volumes processed is the
result of the realization of operational efficiencies.  Salaries and employee
benefits increased 14.6% to $18.1 million for the three months ended December
31, 1998, compared with $15.8 million for the same period in fiscal 1998.  This
increase is primarily due to increased incentive compensation as well as
increased number of employees.  The increase in salaries and employee benefits
is partially offset by the Company's adoption, during the first quarter of
fiscal 1999, of Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
allowed for the capitalization certain software development costs.  Interest
expense was $1.6 million for the three months ended December 31, 1998, a
decrease of 7.9% due to a lower quarterly average balance on the Company's
borrowings under its revolving credit facility with a bank syndicate ("Revolving
Credit Facility") for the quarter ended December 31, 1998.

  Depreciation and amortization increased 18.7% to $8.1 million for the three
months ended December 31, 1998, compared with $6.8 million for the three months
ended December 31, 1997.  The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $4.9 million for the quarter ended
December 31, 1998, compared with $4.2 million for the same period in fiscal
1998, primarily due to the Mellon acquisition.  Depreciation of property and
equipment increased to $3.2 million for the three months ended December 31,
1998, compared with $2.6 million for the three months ended December 31, 1997.
This increase in depreciation was primarily the result of the Company's capital
expenditures for technology.

 For the Six Months Ended December 31, 1998 Compared With the Six Months Ended
 -----------------------------------------------------------------------------
December 31, 1997
-----------------

  Paymentech recorded net income for the six months ended December 31, 1998 of
$12.6 million, or $0.35 per diluted share, compared with net income of $10.8
million, or $0.31 per diluted share, for the same period in the prior year.  For
the six months ended December 31, 1997, earnings excluding a $6.0 million pretax
gain related to the sale of the Company's interest in PHH/Paymentech, the
$626,000 pretax gain on the sale of the Company's terminal leasing portfolio,
and a significant unusual pretax charge of $3.5 million related to reserves,
were $9.1 million or $0.26 per diluted share.

  Revenue increased 14.6% to $121.3 million for the six months ended December
31, 1998, compared with $105.8 million for the six months ended December 31,
1997.  The increase in revenue was the result of the increase in sales volume
processed partially offset by margin compression due to increased competition
within the industry.  Bankcard sales volume processed increased 18.3% to $29.4
billion for the six months ended December 31, 1998, compared with $24.8 billion
for the same period in the prior year.  Total items processed for the six months
ended December 31, 1998 increased 30.9% to 1.2 billion, compared with 896.1
million for the six months ended December 31, 1997.
 
  Other income for the six months ended December 31, 1997 included a $6.0
million pretax gain related to the sale of the Company's interest in
PHH/Paymentech.  For the first quarter of fiscal 1998, other income included a
$626,000 pretax gain, or $0.01 per diluted share, related to the sale of the
Company's terminal leasing portfolio and a $273,000 pretax gain related to the
sale of assets of the Company's Ask! unit.  Other income also included interest
income from investments.

  Total expenses for the six months ended December 31, 1998 increased 5.4% to
$99.2 million, compared with $94.1 million for the six months ended December 31,
1997.  Total expenses, excluding amortization of goodwill, purchased merchant
portfolios and other intangibles, were $90.0 million for the quarter ended
December 31, 1998, compared with $85.8 million for the same period in the prior
year.

                                       12
<PAGE>
 
   Operating expenses for the six months ended December 31, 1998, were $44.4
million, compared with $46.1 million for the same period of fiscal 1998.
Excluding $3.5 million in charges related primarily to a reserve for loss on
terminal inventory and a reserve for loss on receivables recorded during the
quarter ended December 31, 1997, operating expenses increased slightly for the
six months ended December 31, 1998.  Paymentech's ability to maintain these
expenses while achieving a 18.3% increase in sales volumes processed is the
result of the realization of operational efficiencies.  Salaries and employee
benefits increased 16.4% to $36.4 million for the six months ended December 31,
1998, compared with $31.3 million for the same period in fiscal 1998.  This
increase is primarily due to increased incentive compensation as well as
increased number of employees.  The increase in salaries and employee benefits
is partially offset by the Paymentech's adoption of SOP 98-1.  Interest expense
was $3.1 million for the six months ended December 31, 1998, a decrease of 9.0%
due to a lower year to date average balance on the Company's borrowings under
its revolving credit facility with a bank syndicate ("Revolving Credit
Facility") for the six months ended December 31, 1998.

  Depreciation and amortization increased 15.2% to $15.3 million for the six
months ended December 31, 1998, compared with $13.3 million for the six months
ended December 31, 1997.  The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $9.2 million for the six months
ended December 31, 1998, compared with $8.3 million for the same period in
fiscal 1998, primarily due to the Company's  acquisitions.  Depreciation of
property and equipment increased to $6.1 million for the six months ended
December 31, 1998, compared with $5.0 million for the six months ended December
31, 1997.  This increase in depreciation was primarily the result of the
Company's capital expenditures for technology.

Seasonality

  The Company's revenue generally reflects the seasonal fluctuations that are
typically associated with traditional peaks in consumer spending.  Such peaks
fall in different quarters for different divisions of the Company due to the
varying nature of the Company's market niches and the varying nature of consumer
trends in such markets.

Liquidity and Capital Resources

  Net cash provided by operating activities was $149.9 million for the six
months ended December 31, 1998, compared with $6.3 million used for operating
activities in the same period of fiscal 1998.  This increase in cash provided by
operating activities for the six months ended December 31, 1998, is primarily
the result of the Company's change in its presentation of settlement inflows and
outflows.  For a portion of the Company's business, receivables from credit card
associations and the related payables to merchants were previously presented as
cash and cash equivalents.  These payables to merchants are now presented as
liabilities in accounts payable.  Effective for the quarter ended September 30,
1998, this change was made to provide reporting consistency across the Company's
businesses.

  The Company used $51.2 million for acquisitions and $4.3 million for capital
expenditures, primarily for technology, during the six months ended December 31,
1998, compared with $9.9 million for capital expenditures during the six months
ended December 31, 1997.
 
  The Company's Revolving Credit Facility provides a source of liquidity to
manage cash flow, provide capital to subsidiaries for expansion and for other
corporate uses.  At December 31, 1998, the Company had $84 million in borrowings
under the $150 million Revolving Credit Facility in the form of a $44 million
note and a $40 million note, each at a rate of LIBOR plus 35 basis points
(currently approximately 5.66% and 5.91%, respectively).  The proceeds from the
$44 million note were used to fund the acquisition of Mellon in December 1998,
while in September 1998, Paymentech paid a $15 million note it had outstanding
under the Revolving Credit Facility.  Certain financial conditions must be met
to utilize the full amount of the Revolving Credit Facility.

  The Company has no current plans to pay dividends on the common stock.  The
Company presently intends to retain earnings to support the growth of the
Company's business.

                                       13
<PAGE>
 
Parent Company Merger

  In June 1997, Paymentech's former indirect parent company, First USA, Inc.,
merged with and into Bank One resulting in Bank One becoming the indirect owner
of 55% of the Company's outstanding stock.  Bank One has informed Paymentech
that it completed an assessment of the strategic value of its ownership interest
in Paymentech and a review of the business prospects of Paymentech and has
concluded that its present intention is to not reduce its ownership interest in
Paymentech.  Bank One also owns a 50% interest in an alliance with First Data
Corporation, which alliance is a competitor of the Company.  Bank One currently
refers all prospective merchant customers from Bank One's branch network to such
alliance.

Year 2000

  As a result of computer programs written using two digits rather than four to
define the applicable year, certain systems may require modifications in order
to properly function beginning with the year 2000.  Based on an assessment of
its systems, the Company has developed a plan to ensure that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter.  Many of the Company's computer systems already comply with year
2000 requirements, primarily because of the Company's application of internal
resources and new year 2000 compliant software and equipment
 
  Paymentech's core data processing hardware has been tested and is believed to 
be year 2000 compliant. Additionally, the Company has completed the required
software renovations for the core data processing systems. Approximately 70% of
this software has been successfully tested for year 2000 compliance, with the
remainder targeted to be tested and installed by the end of April 1999.
Approximately two-thirds of the Company's desktop computer, telecommunication
and non-information technology hardware is currently believed to be year 2000
compliant with the remainder of the hardware targeted to be compliant by the end
of March 1999. For the Company's remaining noncompliant computer systems, the
Company believes that existing internal resources can be used to modify existing
software and hardware, and that the associated costs will not be significant.
However, if such modifications are not made, or are not completed on a timely
basis, year 2000 noncompliance could have a material impact on the operations of
the Company.

  Paymentech is actively monitoring the progress of its significant third-party
vendors and customers in their efforts to become year 2000 compliant, and is
planning actions deemed necessary in order to mitigate its exposure to year 2000
noncompliance.  There is no guarantee that the systems of other companies on
which the Company's systems rely will be corrected on a timely basis and will
not have a material adverse effect on the Company's systems.

  Paymentech is identifying the most reasonably likely scenarios involving year
2000 noncompliance and is currently developing contingency plans to support the
Company's core systems.

Cautionary Statements

  Information or statements provided by the Company herein and from time to time
may contain certain "forward-looking information," including information
relating to anticipated growth in earnings per share, anticipated returns on
equity, anticipated growth in revenue, year 2000 compliance costs and
implementation and the impact of third-party year 2000 non-compliance, account
origination and growth, customer base, anticipated growth via acquisitions,
anticipated actions by Bank One with respect to its ownership of shares of the
Company, potential customer reactions to the Bank One ownership, anticipated
operations costs and employment growth, anticipated marketing expense, or
anticipated credit and other losses.  Factors which could cause the Company's
actual financial and other results to differ materially from any results that
might be projected, forecast, estimated or budgeted by the Company in forward-
looking statements include, but are not limited to, the factors that are
described under "Business-Cautionary Statements" in the Company's Annual Report
on Form 10-K and Form 10-K/A for the fiscal year ended June 30, 1998.  These
cautionary statements are made pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995 (the "Act") and with the intention of
obtaining the benefits of the "safe harbor" provisions of the Act for any such
forward-looking information.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

  There have been no material changes from the fiscal year 1998 Annual Report on
Form 10-K and Form 10-K/A related to the Company's exposure to market risk from
interest rates.

                                       14
<PAGE>
 
PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

  As previously disclosed in the Company's Annual Report on Form 10-K for fiscal
year ended June 30, 1998 (as amended by Form 10-K/A), Quarterly Reports on Form
10-Q for the quarters ended September 30, 1998, March 31, 1998, December 31,
1997 and September 30, 1997 and in a Current Report on Form 8-K filed October
20, 1997, the Company is a defendant in a putative class action suit commenced
on October 10, 1997, by a stockholder of the Company in the United States
District Court, Northern District of Texas.  On September 2, 1998, plaintiffs
filed an amended complaint entitled Raffaele Branca, Carl C. Conrad, and Michael
                                    --------------------------------------------
P. Fuchs v. Paymentech, Inc., Pamela H. Patsley and David W. Truetzel.  The
---------------------------------------------------------------------      
defendants in the amended complaint are the Company and a current and a former
officer of the Company.  The amended complaint alleges, among other things, that
the defendants violated United States securities laws by publicly issuing false
and misleading statements and omitting material adverse information regarding
the Company's business.  The amended complaint seeks to represent all
stockholders who purchased stock during the period from January 22, 1997, the
date on which the Company issued a press release announcing its financial
results for the second quarter of fiscal year 1997, to September 24, 1997, the
date on which the Company announced that it was restating and revising its
previously announced results for the fourth quarter of fiscal year 1997.  The
defendants  have filed a motion to dismiss this amended complaint.  The Company
has notified its insurance carriers of this action.  It is premature to
determine whether the Company will have any liability in the action or, if so,
whether that liability will be material.

Item 2.    Changes in Securities

  In January 1999, the Company issued 163,675 shares of common stock to the
former sole stockholder of Merchant-Link as a result of the achievement of
certain performance criteria following the Company's acquisition of Merchant-
Link in January 1997.  No underwriter was used in connection with the sale or
issuance of the shares, and such issuance was an exempt transaction under
Section 4(2) of the Securities Act of 1933, as amended.  The Company intends to
register the resale of such shares on a shelf registration statement on Form S-
3.

Item 4.  Submission of Matters to a Vote of Security Holders

a.       The 1998 Annual Meeting of Stockholders was held on November 4, 1998.

b.       The following Directors were elected at such meeting:

<TABLE>
<CAPTION>
                                                                        Votes Cast to
                                                 Votes For           Withhold Authority
                                           -------------------    -----------------------
<S>                                          <C>                    <C>
John B. McCoy                                       33,117,764                  1,464,198
William P. Boardman                                 33,117,614                  1,464,348
</TABLE>

  The following Directors will also continue in their offices after such
meeting:

  Gene H. Bishop
  Pamela H. Patsley
  Rupinder S. Sidhu
  Ronald G. Steinhart
  John C. Tolleson

                                       15
<PAGE>
 
c.    The following other matters were approved at such meeting:

<TABLE> 
<CAPTION>
                                                                             Votes
                         Item                              Votes For        Against        Abstain
-----------------------------------------------------------------------------------------------------
<S>                                                     <C>              <C>            <C>
Adoption of an amendment to the Paymentech, Inc.             
 Employee Stock Purchase Plan to increase the number
 of shares of common stock that may be sold under
 such plan                                                 34,374,722        197,496          9,744

           No other matter was voted upon at such meeting.
</TABLE> 
 
Item 6.    Exhibits and Reports on Form 8-K

a.  Reports on Form 8-K filed during the second quarter of fiscal 1999:

          Report on Form 8-K filed October 29, 1998
                  Item 5.  Other Events
                  Exhibit 99.  Press Release
 
          Report on Form 8-K filed December 28, 1998
                  Item 5.  Other Events
                  Exhibit 99.  Press Release
 
b.  Reports on Form 8-K filed subsequent to the second quarter of fiscal 1999:

    None.
 
c.  Exhibits

    The following exhibits are incorporated by reference or filed herewith:

Exhibit Number  Description of Exhibit
--------------  ----------------------
      2.1*      Merchant Asset Purchase Agreement, dated as of October 28, 1998
                by and between Mellon Bank, N.A., as Seller, and Paymentech
                Management Resources, Inc., as Purchaser. (Confidential
                treatment has been requested for portions of this exhibit and,
                accordingly, such portions have been omitted from the exhibit.
                The entire document, including the portions omitted from the
                exhibit, have been provided separately to the Commission).

      27*       Financial Data Schedule.

------------------------ 
* Filed herewith.

                                       16
<PAGE>
 
                                   SIGNATURES
                                        

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


  Date:   February 16, 1999


                            Paymentech, Inc.



                            By: /s/ Pamela H. Patsley
                                -----------------------------------------
                                Pamela H. Patsley
                                President and Chief Executive Officer



                            By: /s/ Kathryn J. Kessler
                                -----------------------------------------
                                Kathryn J. Kessler
                                Chief Financial Officer


 

                                       17
<PAGE>
 
                               INDEX OF EXHIBITS
                               -----------------
                                        


                                                        Sequentially
Exhibit Number             Description of Exhibit      Numbered Page
--------------             ----------------------      -------------

      2.1          Merchant Asset Purchase Agreement, dated as of October 28,
                   1998 by and between Mellon Bank, N.A., as Seller, and
                   Paymentech Management Resources, Inc., as Purchaser.
                   (Confidential treatment has been requested for portions of
                   this exhibit and, accordingly, such portions have been
                   omitted from the exhibit. The entire document, including the
                   portions omitted from the exhibit, have been provided
                   separately to the Commission).

      27           Financial Data Schedule.

                                       18