##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-K

|                                                |  |                                                                                              |  | 
|----------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | 
|[X]                                             |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934     |  | 
|For the fiscal year ended December 31,
    2003
|OR                                             
|[  ]                                            |  | TRANSITION REPORT PURSUANT TO SECTION 13 or
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |  | 

For the transition period
from                               to

Commission file number 1-11905


NATIONAL PROCESSING, INC.

(Exact name of Registrant as specified in its
charter)


|                                                                                        |  |                                                        
|--------------------------------------------------------------------------------------- |  | -------------------------------------------------------
|Ohio
    (State or other jurisdiction
    of incorporation or organization)             |  | 61-1303983
    (I.R.S. Employer
    Identification No.)
|                                                                                       
|1900 East Ninth Street
    Cleveland, Ohio
    (Address of principal executive offices) |  | 44114-3484
    (Zip Code)                              

Registrants telephone number, including
area code: (216) 222-3368

SECURITIES REGISTERED PURSUANT TO SECTION
12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION
12(g) OF THE ACT:

National Processing, Inc. Common Stock, No Par
Value

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.
Yesü  No

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.ü

Indicate by check mark whether the registrant is
an accelerated filer (as defined by Rule 12b-2 of the Act).
Yesü  No.

The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of June 30,
2003 was $126,370,919. The market value calculation was
determined using the closing sale price of the Registrants
common stock on June 30, 2003, as reported on the New York
Stock Exchange.

The number of shares outstanding of the
Registrants Common Stock as of February 27, 2004 was
53,141,342.

Documents Incorporated by Reference:

Portions of the Registrants Proxy Statement
(to be dated approximately March 19, 2004) are incorporated
by reference into Item 10, Directors and Executive Officers
of the Registrant; Item 11, Executive Compensation;
Item 12, Security Ownership of Certain Beneficial Owners
and Management; Item 13, Certain Relationships and Related
Transactions, of Part III; and Item 14, Principal
Accountant Fees and Services.



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TABLE OF CONTENTS

|              |  |                                                                                                        |  |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|              |  |                                                                                                        |  | Page
|              |  |                                                                                                        |  |     
|PART I        |  |                                                                                                        |  |     
|             
|Item 1.       |  | Business                                                                                               |  |      | 3  | 
|             
|Item 2.       |  | Properties                                                                                             |  |      | 7  | 
|             
|Item 3.       |  | Legal Proceedings                                                                                      |  |      | 8  | 
|             
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 8  | 
|PART II       |  |                                                                                                        |  |     
|             
|Item 5.       |  | Market for Registrants
    Common Equity and Related Shareholder Matters                              |  |      | 8  | 
|             
|Item 6.       |  | Selected Financial Data                                                                                |  |      | 9  | 
|             
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 10 | 
|             
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |      | 21 | 
|             
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                        |  |      | 21 | 
|             
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 21 | 
|             
|Item 9A.      |  | Controls and Procedures                                                                                |  |      | 21 | 
|PART III      |  |                                                                                                        |  |     
|             
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 21 | 
|             
|Item 11.      |  | Executive Compensation                                                                                 |  |      | 22 | 
|             
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Shareholder
    Matters |  |      | 22 | 
|             
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                     |  |      | 22 | 
|             
|Item 14.      |  | Principal Accountant Fees
    and Services                                                             |  |      | 22 | 
|PART IV       |  |                                                                                                        |  |     
|             
|Item 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  |      | 23 | 
|              |  | Signatures                                                                                             |  |      | 26 | 
|Exhibit 10.13
|Exhibit 10.16
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 24.1 
|Exhibit 31.1 
|Exhibit 31.2 
|Exhibit 32.1 
|Exhibit 32.2 
|Exhibit 99.1 



2



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PART I




Item 1.     Business



| |             
| | ------------
| | Organization

National Processing, Inc. and its subsidiaries
(the Company) are providers of electronic payment
processing services. National Processing, Inc. was incorporated
in 1996 as an Ohio corporation and is 84% owned by National City
Corporation (National City), a financial holding
company headquartered in Cleveland, Ohio. The Companys
primary operating subsidiary, National Processing Company, LLC,
is located in Louisville, Kentucky. The Company and National
City are parties to agreements pursuant to which the Company
outsources a portion of certain functions to National City
including information technology services, tax services, human
resource services, internal audit and legal services. The
Company is also a party to a tax-sharing agreement and a
registration rights agreement with National City.



| |         
| | --------
| | Business

The Company currently operates two business
segments, Merchant Card Services and Payment Services. Merchant
Card Services authorizes, processes, and performs financial
settlement and reporting of card transactions, including credit
and debit card transactions. Merchant Card Services provides
services to merchant locations primarily in the United States
and represented 97%, 96%, and 85% of the Companys revenue
in 2003, 2002, and 2001, respectively.

Payment Services was formerly a component of the
Companys Corporate Outsourcing Solutions segment. This
segment was renamed Payment Services in 2001 after the sale of
the Business Process Outsourcing (BPO) unit, which
was also formerly a component of the Companys Corporate
Outsourcing Solutions segment. Payment Services provides
financial settlement and reporting solutions to large and
mid-size corporate customers in the travel and healthcare
industries. Payment Services settles 100% of domestic airline
tickets issued by travel agencies and settled through the
Airlines Reporting Corporation. Payment Services also settles
commission payments for car rental companies, cruise line
operators, and hotels. In the healthcare industry, Payment
Services provides financial settlement and reporting to
healthcare organizations such as insurance companies, managed
care organizations, and self-insured organizations. Payment
Services represented 3%, 4%, and 6% of the Companys
revenue in 2003, 2002, and 2001, respectively.

During 2001, the Company divested its BPO
business and exited its Denver collections business, which
collectively represented 9% of the Companys revenue in
2001.

Payment Services does not meet the materiality
thresholds for separate disclosures of segment information as
defined in Statement of Financial Accounting Standards
(SFAS) 131, Disclosures about Segments of an
Enterprise and Related Information. As a result, the Notes
to Consolidated Financial Statements do not include segment
disclosures.

Industry Overview



| |                       
| | ----------------------
| | Merchant Card Services

The merchant card processing industry provides
retailers and other merchants with card-based payment
authorization, capture, settlement and reporting, exception
processing, and other related services. The industry has enjoyed
significant growth over the last ten years due to wider merchant
acceptance of card-based payment products and increased consumer
usage of card-based payment services.

The Company provides a diversified product mix to
meet a wide range of customer needs, including:



| |   |                                        
| | - | ---------------------------------------
| |  | Processing of all credit card types    
|
| |  | Authorization and settlement accounting

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| |   |                                                 
| | - | ------------------------------------------------
| |  | Merchant reporting                              
|
| |  | Chargeback prevention and handling              
|
| |  | Point of Sale (POS) hardware and software       
|
| |  | On-line and off-line debit card acquiring       
|
| |  | Electronic Benefits Transfer processing (EBT)   
|
| |  | Customized reporting formats and data management
|
| |  | Call-center services                            
|
| |  | E-commerce solutions                            

The Company provides services to a wide array of
customers in virtually every industry, including retailers,
supermarkets, quick service and full service restaurants,
petroleum and convenience stores, hospitality, and e-commerce.
NPC is the second largest provider of merchant card processing
services in the United States. In 2003, NPC processed
4.3 billion transactions, including approximately one out
of every five Visa® and MasterCard ® transactions in
the United States.

The merchant card processing market can generally
be divided into two markets: 1) national merchants and
2) regional merchants, including small single-location
merchants. Since 1997, the Company has deployed a dual strategy
focused on growing both markets. On December 31, 1999, the
Company increased its market share of regional merchants by
acquiring a merchant contract portfolio from Heartland Payment
Systems LLC. The Company further expanded its market share of
regional merchants by acquiring the merchant services business
units from several National City banking subsidiaries on
January 8, 2001, a 70% ownership interest in ABN AMRO
Merchant Services, LLC (AAMS) on June 28, 2001,
and Bridgeview Payment Solutions, Inc. (BPS) on
June 9, 2003.

Merchant Card Services revenue was
$464.5 million in 2003, which represented 97% of the
Companys revenue. Total transaction volume increased by
11% to 4.3 billion in 2003. Total dollar settlement volume
increased by 5% to $177 billion in 2003.

Merchant Card Services uses various sales and
marketing channels for both its national and regional customers.
The Company employs approximately 150 commission only sales
representatives who focus on direct marketing channels. In
addition, the Company sells its services through approximately
1,100 third-party relationships such as independent sales
offices and community banks who, in most cases, represent
National Processing exclusively.

The merchant card processing market is extremely
competitive, which results in pricing pressure and creates the
need for continuous improvement in technology both to satisfy
customer demands and to reduce operating costs. The increased
costs to meet merchant requirements for regulatory compliance,
improved service and satisfy the demand for additional
technology-driven applications combined with the scale-driven
nature of the industry have made it difficult for small-scale
transaction processors to remain competitive and has led to
consolidation in the industry. National Processing competes in
this industry by focusing on lowering the merchants
total cost of card acceptance, which includes
minimizing interchange and processing fees assessed by third
parties.

According to published industry sources, the ten
largest card processors handle approximately 90% of the
transaction and dollar volume in the United States. The
remaining market is highly fragmented among smaller merchant
service providers. As a result, the transaction processing
industry will likely continue to undergo consolidation.



| |                 
| | ----------------
| | Payment Services

Payment Services was formerly an operating unit
within the Companys Corporate Outsourcing Solutions
segment. This segment was renamed Payment Services in 2001 after
the sale of the BPO unit. Payment Services provides financial
settlement and reporting solutions to large and mid-size
corporate customers in the

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travel and healthcare industries. Payment
Services revenue was $15.6 million in 2003, which
represented 3% of the Companys revenue. Payment Services
settled $64 billion of payments in 2003.


In the travel industry, Payment Services provides
financial settlement and reporting to airlines, hotels, travel
agents, cruise lines, and car rental companies. Through an
exclusive long-term cost-plus contract with the
Airlines Reporting Corporation (ARC), Payment
Services settles 100% of domestic airline tickets issued by
travel agencies and settled through the Airlines Reporting
Corporation. In addition, NPC provides an industry-wide global
payment system for consolidating and processing
business-to-business commission payments for virtually all
United States based car rental companies as well as for the
hotel and cruise line industries. During 2001, these services
were performed in both the Companys Mexican and United
States locations. In 2002 and 2003, these services were
performed solely in the Companys United States locations.

Competition for the Payment Services segment
varies based on the individual product lines. The Company
currently has an exclusive long-term contract with ARC to
provide payment settlement for all airline tickets sold by
travel agents in the United States. The other Payment Services
product lines experience competition in the marketplace. NPC
competes in this industry by focusing on price, quality, and
customer service.

Divested and Discontinued Business
Units

In 2001, the Company divested its BPO business
and exited its Denver collections business, which were
components of the former Corporate Outsourcing Solutions
segment. Revenue from these divested businesses was
$41.2 million, which represented 9% of the Companys
revenue in 2001. The sale of the BPO business unit to Affiliated
Computer Services (ACS) was completed on
August 29, 2001, for $43.0 million in cash
($41.3 million after transaction-related expenses). The
Company recorded charges of $3.9 million ($4.6 million
after-tax) related to the BPO divestiture. These charges
consisted of a loss of $3.3 million ($4.2 million
after-tax) on the sale of the business and a $0.6 million
charge ($0.4 million after-tax) for severance costs related
to organizational restructuring actions taken to reduce support
costs associated with the BPO unit.

Regulation

As a result of National Citys ownership in
the Company and as long as National City has a controlling
interest, the Company is subject to banking laws, regulations,
and orders (collectively, the Banking Laws). For
example, the Company is subject to the supervision and
examination by the Board of Governors of the Federal Reserve
System (FRB), one of the principal regulatory bodies
having jurisdiction over National City.

The FRB reviews acquisitions and new businesses
to be engaged in by the Company, and the FRBs written
approval is required for the Company to consummate an
acquisition. Pursuant to the Bank Holding Company Act, the
Company shall not engage in any activity, or own, control, or
have the power to vote more than 5% of any class of voting
security of any company engaged in any activity (i) for
which the Bank Holding Company Act requires a holding company to
receive prior approval from the FRB without such approval having
been obtained, or (ii) that would cause the Company or any
affiliate of the Company to violate any regulation,
administrative order, or court order made pursuant to the Bank
Holding Company Act. If at any time it is determined that any
activity conducted by the Company or any subsidiary does not
comply with the requirements of the Bank Holding Company Act,
the Company is required to take all reasonable steps to cease
such activity, or to divest any ownership or control position.
If National City is unable to obtain the necessary consent or
approval for any business activity substantially different from
those business activities the Company currently conducts, then
the Company may not engage in any of those new business
activities or proceed with the contemplated acquisition of a
business that would engage in such new activities. The Company
does not believe, however, that either the Banking Laws or the
Bank Holding Company Act will impede the manner in which the
Company conducts its business or its product and service
offerings, although there can be no assurance that the Banking
Laws or Bank Holding Company Act will not have such an effect.

Through National City Bank of Kentucky,
(NCBK), which serves as a member bank for the
Company, the Company is registered with Visa® and
MasterCard ® as a certified processor and member

5



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service provider. As a result, the Company must
adhere to the standards of the Visa®and MasterCard ®
credit card associations or risk suspension or termination of
its designation and/or status. There can be no assurance that
(i) Visa® and MasterCard ® will maintain the
Companys registrations; (ii) the current Visa®
and MasterCard ® rules allowing the Company and other
non-bank transaction processors to market and provide
transaction processing services will remain in effect; or (iii)
Visa® and MasterCard ® will continue to interpret
their rules as they have done in the past, which may have an
impact on the Companys business operations. NCBK is a
wholly-owned subsidiary of National City.


On July 30, 2002, the Senate and the House
of Representatives of the United States (Congress) enacted the
Sarbanes-Oxley Act of 2002, a statute that addresses, among
other issues, corporate governance, auditing and accounting,
executive compensation and enhanced and timely disclosure of
corporate information. The New York Stock Exchange also proposed
corporate governance rules that were approved by the Securities
and Exchange Commission. These changes are intended to allow
shareholders to more easily and efficiently monitor the
performance of companies and directors.

Effective August 29, 2002, as directed by
Section 302(a) of the Sarbanes-Oxley Act, the
Companys chief executive officer and chief financial
officer are each required to certify that the Companys
quarterly and annual reports do not contain any untrue statement
of a material fact. The rules have several requirements,
including having these officers certify that: they are
responsible for establishing, maintaining and regularly
evaluating the effectiveness of the Companys internal
controls; they have made certain disclosures to the
Companys auditors and the audit committee of the board of
directors about the Companys internal controls; and they
have included information in the Companys quarterly and
annual reports about their evaluation and whether there have
been significant changes in the Companys internal controls
or in other factors that could significantly affect internal
controls subsequent to the evaluation.

On November 14, 2002, the Board of Directors
of National Processing approved a series of actions to
strengthen and improve its corporate governance practices.
Included in those actions was the adoption of a new Code of
Ethics, a Code of Ethics for Senior Financial Officers,
Corporate Governance Guidelines and new charters for the Audit
and Compensation Committees. More information on National
Processings Corporate Governance is available on the
National Processing web site at www.npc.net.

The Company is also subject to various other
federal, state, local, and foreign laws, orders and regulations
applicable to the Companys operations in the jurisdictions
where it conducts business. Where applicable, regulators and
other persons are authorized to seek remedies against entities
such as the Company for violations of such laws.

Sponsorship Agreement

The Company and NCBK are parties to a sponsorship
agreement (the Sponsorship Agreement) whereby the
Company acts as NCBKs sole agent for the purposes of
providing electronic data authorization and capture, reporting,
settlement, and clearing services for merchants who participate
in Visa® and MasterCard ® programs. The Company, along
with other nonbank processors, must be sponsored by a financial
institution that is a member of the Visa® and MasterCard
® associations. NCBK is a member of such associations and
acts as the Companys primary sponsor.

The Company retains full responsibility for
performance of Merchant Card Services, except for certain
obligations or responsibilities of NCBK pursuant to the
Sponsorship Agreement. The Sponsorship Agreement provides that
the Company will comply with (1) all Visa® and
MasterCard ® bylaws, manuals and operating regulations and
other written materials as they from time to time are amended
which bind or apply to NCBK as a member of Visa® and
MasterCard ® with respect to Merchant Card Services or to
the Company as a third party processor, (2) all agreements
between merchants and NCBK with respect to Merchant Card
Services, and (3) all applicable federal or state laws and
regulations. Under the Sponsorship Agreement, the Company will
receive all fees, discounts and other amounts payable by
merchants for Merchant Card Services and will bear the expenses
of maintaining facilities necessary to provide such services.
Certain indemnification provisions are also contained in the
Sponsorship Agreement, under which the Company will indemnify
NCBK

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against losses, claims or other amounts in
accordance with the terms of the Sponsorship Agreement. See Note
13 to the Consolidated Financial Statements.


MasterCard ®Guarantee

On May 16, 2003, the Company provided a
financial guarantee relating to NCBKs obligations with
MasterCard ® . The agreement guarantees the payment of
NCBKs membership obligations pursuant to its license
agreement with MasterCard ® , the Bylaws and Rules of
MasterCard ® , and all regulations and policies of
MasterCard ® should NCBK default or fail to meet its
obligations of membership. The Companys primary risk under
this guarantee is related to potential chargebacks; however, the
Company believes its exposure to a material loss under the
guarantee is not probable at this time. The Company processes
all transactions received from MasterCard ® by NCBK under
the exclusive terms of the Sponsorship Agreement.

Visa® Guarantee

On August 6, 2002, the Company provided a
financial guarantee relating to NCBKs membership
obligations with Visa®. The agreement guarantees the
payment of NCBKs membership obligations pursuant to the
Visa® Certificate of Incorporation and Amendments, Bylaws,
rules, policies and operating rules should NCBK default or fail
to meet its obligations of membership including NCBKs
obligations to pay any Visa® member attendant to
NCBKs membership in Visa®, and Visas expenses
incurred in payment of such obligations on NCBKs behalf or
otherwise because of NCBKs failure to meet such
obligations. The Companys primary risk under this
guarantee is related to potential chargebacks; however, the
Company believes its exposure to material loss under the
guarantee is not probable at this time. National Processing
processes all transactions received from Visa® by NCBK
under the exclusive terms of the Sponsorship Agreement.

Employees

As of December 31, 2003, the Company had
approximately 1,700 full-time and part-time employees.

Seasonality

The Company experiences seasonality in certain
businesses and typically realizes higher revenue in the third
and fourth quarters and lower revenue in the first quarter,
reflecting increased transaction volume in the summer and
holiday months. Accounts receivable is generally highest in the
fourth quarter, as December is typically the highest volume
month due to holiday sales.

Web Site Access to United States Securities
and Exchange Commission Filings

All reports filed electronically by National
Processing, Inc. with the United States Securities and Exchange
Commission (SEC), including the annual report on Form 10-K,
quarterly reports on Form 10-Q and current event reports on
Form 8-K, as well as any amendments to those reports, are
accessible at no cost on the Companys web site at
www.npc.net. These filings are also available on the SECs
web site at www.sec.gov.




Item 2.     Properties

The Company leases its main processing facility
in Louisville, Kentucky, consisting of approximately
224,000 square feet, from NCBK. See Transactions with
Affiliates, Note 7 to the Consolidated Financial
Statements. The Companys lease for the Louisville
processing facility expires on February 28, 2019. The
Companys other U.S. facilities have varying lease
expiration terms and range in size from 5,000 square feet
to 16,000 square feet. The Company also has
20 marketing and sales offices, which have varying lease
expiration terms and range in size from 100 square feet to
4,600 square feet and are located throughout the United
States. As of December 31, 2003, the Company owned one idle
processing facility in Juarez, Mexico, consisting of
50,000 square feet, which was sold subsequent to year end.
All properties leased and owned by

7



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the Company are in good repair and suitable
condition for the purposes for which they are used. The Company
periodically reviews its overall facility needs in order to add
or delete capacity.





Item 3.     Legal
Proceedings

Various legal actions arising in the ordinary
course of business are pending against the Company. None of the
litigation pending against the Company, individually or
collectively, in the opinion of management, is expected to have
a material adverse effect on the Companys financial
condition, results of operations, or liquidity.




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

None.




PART II




Item 5.     Market
for the Registrants Common Equity and Related Shareholder
Matters

The Companys common stock is traded on the
New York Stock Exchange under the symbol NAP. The quarterly high
and low trade price and the final days closing price of
the Companys common stock for each of the quarterly
periods in 2003 and 2002 were as follows:

|                             |  |      |       |     |  |       |       |  |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | ----- | ----- |  |  | - | ----- | 
|                             |  | High |       | Low |  | Close
|                             |  |      |       |     |  |      
|Year Ended December 31, 2003 |  |      |       |     |  |       |       |  |  |   |       | 
|First Quarter                |  | $    | 16.25 |     |  | $     | 12.85 |  |  | $ | 13.92 | 
|Second Quarter               |  |      | 17.37 |     |  |       | 13.60 |  |  |   | 16.08 | 
|Third Quarter                |  |      | 21.80 |     |  |       | 15.29 |  |  |   | 19.32 | 
|Fourth Quarter               |  |      | 24.53 |     |  |       | 19.40 |  |  |   | 23.55 | 
|Year Ended December 31, 2002 |  |      |       |     |  |       |       |  |  |   |       | 
|First Quarter                |  | $    | 32.68 |     |  | $     | 22.78 |  |  | $ | 28.58 | 
|Second Quarter               |  |      | 30.28 |     |  |       | 24.80 |  |  |   | 25.80 | 
|Third Quarter                |  |      | 27.50 |     |  |       | 16.95 |  |  |   | 16.99 | 
|Fourth Quarter               |  |      | 16.60 |     |  |       | 11.50 |  |  |   | 16.05 | 

Securities authorized for issuance under equity
compensation plans are summarized in the following table. See
Note 12 to the Consolidated Financial Statements for a
description of the plans.

|                                  |  |                     |           |                |  |               |       |  |  |  |           | 
|--------------------------------- |  | ------------------- | --------- | -------------- |  | ------------- | ----- |  |  |  | --------- | 
|                                  |  |                     |           | Weighted-      |  | Shares       
|                                  |  | Shares to Be Issued |           | Average Option |  | Available for
|Plan Category                     |  | Upon Exercise       |           | Exercise Price |  | Future Grants
|                                  |  |                     |           |                |  |              
|Plans approved by shareholders    |  |                     | 3,105,208 |                |  | $             | 24.08 |  |  |  | 4,083,224 | 
|Plan not approved by shareholders |  |                     |          |                |  |               |      |  |  |  |          | 
|                                  |  |                     |           |                |  |               |       |  |  |  |           | 
|Total                             |  |                     | 3,105,208 |                |  | $             | 24.08 |  |  |  | 4,083,224 | 
|                                  |  |                     |           |                |  |               |       |  |  |  |           | 

The number of holders of record of the
Companys common stock as of February 27, 2004
was 111. The Company believes it has significantly more
than 111 beneficial holders of its common stock.

The Company has never declared or paid cash
dividends on its common stock. The declaration and payment of
cash dividends on the Companys common stock is at the
discretion of the Companys Board of Directors, and any
decision to declare a dividend will be based on a number of
factors, including, but not limited to, earnings, financial
condition, and other factors deemed relevant.

8



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The name and address of the Companys common
stock transfer agent and registrar is National City Bank,
Corporate Trust Operations, P.O. Box 92301,
Locator 5352, Cleveland, Ohio, 44193-0900, (800.622.6757).

Investors or analysts requiring a copy of this
annual report on Form 10-K or further information should
contact:

| |                          
| | -------------------------
| | David E. Fountain        
| | Chief Financial Officer  
| | 1231 Durrett Lane        
| | Louisville, KY 40213-2008
| | (502.315.3311)           






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following data should be read in conjunction
with the Consolidated Financial Statements and related notes
thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in
Item 7.

|                                     |  |                                      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       |  
|------------------------------------ |  | ------------------------------------ | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | -
|                                     |  |                                     
|                                     |  | Year Ended December 31,             
|                                     |  |                                     
|                                     |  | 2003                                 |       | 2002 |  | 2001 |       | 2000 |  | 1999
|                                     |  |                                      |       |      |  |      |       |      |  |     
|                                     |  |                                     
|                                     |  | (in millions, except per share data)
|Income Statement Data: (1)           |  |                                      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       |  
|Revenue                              |  | $                                    | 480.1 |      |  | $    | 455.4 |      |  | $    | 473.3 |  |  | $ | 427.3 |  |  | $ | 431.0 |  
|Net Income (Loss) (2)(3)             |  |                                      | 48.8  |      |  |      | 51.1  |      |  |      | 52.7  |  |  |   | 43.4  |  |  |   | (37.4 | )
|Basic Net Income (Loss) Per Share    |  |                                      | 0.93  |      |  |      | 0.98  |      |  |      | 1.03  |  |  |   | 0.85  |  |  |   | (0.74 | )
|Diluted Net Income (Loss) Per Share  |  |                                      | 0.93  |      |  |      | 0.97  |      |  |      | 1.01  |  |  |   | 0.85  |  |  |   | (0.74 | )
|Average Shares Outstanding  Basic   |  |                                      | 52.5  |      |  |      | 52.0  |      |  |      | 51.4  |  |  |   | 50.8  |  |  |   | 50.7  |  
|Average Shares Outstanding  Diluted |  |                                      | 52.6  |      |  |      | 52.5  |      |  |      | 52.0  |  |  |   | 51.0  |  |  |   | 50.7  |  
|                                    
|Balance Sheet Data: (1)              |  |                                      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       |  
|Working Capital                      |  | $                                    | 298.0 |      |  | $    | 257.1 |      |  | $    | 199.7 |  |  | $ | 184.2 |  |  | $ | 124.4 |  
|Goodwill                             |  |                                      | 115.3 |      |  |      | 91.2  |      |  |      | 91.2  |  |  |   | 79.4  |  |  |   | 88.4  |  
|Total Assets                         |  |                                      | 622.0 |      |  |      | 550.5 |      |  |      | 478.3 |  |  |   | 435.4 |  |  |   | 402.3 |  
|Long-Term Obligations                |  |                                      | 1.9   |      |  |      | 1.7   |      |  |      | 1.9   |  |  |   | 3.2   |  |  |   | 6.0   |  
|Total Liabilities                    |  |                                      | 100.2 |      |  |      | 94.1  |      |  |      | 78.3  |  |  |   | 73.9  |  |  |   | 85.9  |  
|Shareholders Equity                 |  |                                      | 521.8 |      |  |      | 456.4 |      |  |      | 400.0 |  |  |   | 361.6 |  |  |   | 316.4 |  



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | This financial data includes the impact of the
    following acquisitions during the periods presented: on
    December 31, 1999, the Company acquired a regional merchant
    processing portfolio from Heartland Payment Systems LLC; on
    June 28, 2001, the Company acquired a 70% ownership
    interest in ABN AMRO Merchant Services, LLC; on June 9,
    2003, the Company acquired Bridgeview Payment Solutions, Inc.
    from Bridgeview Bank and Trust Company. Each of these
    transactions were accounted for as purchases; accordingly, the
    results of operations are included in the consolidated
    statements of operations from the respective acquisition dates.
    On January 8, 2001, the Company purchased the merchant
    services business units from several of National Citys
    banking subsidiaries. This acquisition was accounted for as a
    transaction among entities under common control and was recorded
    at the historical cost bases of National City. The results of
    operations of the National City Merchant Services business units
    have been included in the consolidated financial statements
    since the date of acquisition.
|   
|    |  | Effective April 1, 1999, the Company sold
    its Freight and Payables business lines. Effective June 1,
    1999, the Company sold its Check Acceptance and Remittance
    business lines. Effective August 29, 2000, the Company sold
    its Springfield remittance operation. Effective March 30,
    2001, the Company discontinued its Denver collections business.
    Effective August 29, 2001, the Company sold its Business
    Process Outsourcing business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(2) |  | Included in net income (loss) are certain items
    summarized as follows: for 2003, $1.3 million
    ($0.8 million after-tax) of restructuring charges related
    to the consolidation of technology functions and a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

9



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | loss on the sale of 14 regional sales offices;
    for 2002, $1.7 million ($2.4 million after-tax) of
    site consolidation expenses and $3.2 million
    ($1.9 million after-tax) related to a separation agreement
    with the former CEO; for 2001, $3.9 million
    ($4.6 million after-tax) of restructuring and divestiture
    expenses; for 2000, $8.6 million ($5.6 million
    after-tax) of impairment and site consolidation expenses; for
    1999, $71.7 million (also $71.7 million after-tax) of
    impairment, restructuring, and related expenses.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) |  | The Company adopted the non-amortization
    provisions of Statement of Financial Accounting Standards
    (SFAS) 142, Goodwill and Other Intangible Assets, on
    January 1, 2002. If SFAS 142 had been adopted
    effective January 1, 1999, proforma net income (loss) would
    have been $55.0 million, $45.5 million, and
    $(34.7) million for the years ended December 31, 2001,
    2000, and 1999, respectively.




Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

National Processings revenue is primarily
derived from processing contracts with merchants for the
authorization, processing and settlement of credit and debit
card transactions. Business volumes tend to be influenced by
overall consumer spending trends as well as competitive
conditions within the marketplace. During 2003, U.S. consumers
continued to substitute card-based payments for cash and checks.
As a result, transactions and dollar volume processed increased
11% and 5%, respectively, over 2002 levels.

In 2003, the Company experienced strong growth
from regional and small business merchant accounts. Conversely,
the merchant processing industry has experienced a sustained
period of lower market pricing for large national merchants,
which decreased the Companys overall profit margins.
Negative pricing trends are expected to continue in the future
as these merchant contracts renew at lower market pricing levels.

The Company expects consumer preference for
card-based payments to continue to grow in 2004, which will lead
to higher processing volumes. Additionally, in 2004 the Company
will focus on continued expansion into higher margin regional
merchant accounts, while also focusing on new product
development and managing its cost structure to offset the
expected impact of lower margins on national merchant contracts.

Components of Revenue and Expenses



| |        
| | -------
| | Revenue

Approximately 95% of Merchant Card Services
revenue is derived from processing contracts with merchants for
authorization, processing, and settlement of credit and debit
card transactions. Processing fee revenue is earned either on a
per transaction basis or discount basis,
which is a percent of dollar volume processed. Merchant
contracts generally have terms ranging from three to five years.
Processing fee revenue is recorded in the period that the
related transaction is processed and is recorded net of
interchange fees charged by the credit card associations and
fees charged by debit networks. For the years ended
December 31, 2003, 2002, and 2001, interchange and debit
network fees were $2.5 billion, $2.4 billion, and
$2.2 billion, respectively. The increase in interchange and
debit network fees is attributed to increased processing
volumes. The remainder of Merchant Card Services revenue is
derived from sources other than processing fees, including
equipment and supply sales, equipment repair fees, application
and installation fees, and third-party commissions.

Approximately 40% of Payment Services revenue is
earned from an exclusive long-term contract with the Airlines
Reporting Corporation under which the Company is compensated on
a cost-plus basis. The remainder of Payment Services
revenue is derived from other non-card based electronic
settlement products. Revenue is recorded in the period services
are provided.

A portion of total consolidated revenue is
derived from earnings on customer cash balances, which are
maintained by NCBK pursuant to contractual terms. For the years
ended December 31, 2003, 2002, and 2001, earnings on
customer balances were $2.2 million, $4.3 million, and
$8.3 million, respectively.

10



---



##### Table of Contents





| |         
| | --------
| | Expenses

Bankcard assessments are liabilities to
MasterCard ® and Visa® that originate from the
Companys agreements with these agencies. Bankcard
assessments expense is the largest component of operating
expense and, for the years ended December 31, 2003, 2002,
and 2001, was $139.8 million, $134.9 million, and
$126.1 million, respectively. The increase in assessments
expense is attributed to increased processing volumes. Operating
expense also includes costs of providing services to customers
including wages and personnel costs, authorization fees,
commissions paid to independent sales organizations, and data
processing costs.

General and administrative expense includes
management and administrative expenses as well as fees for
certain administrative services provided by National City and
its affiliates.

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002

|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|------------------------------------------------------------------ |  | ---------------------- | ------- | ---- |  | ---------- | ------- |  |  |  | --- | -
|                                                                   |  |                        |         |      |  | % Change  
|                                                                   |  |                        |         |      |  | from Prior
|                                                                   |  | 2003                   |         | 2002 |  | Year      
|                                                                   |  |                        |         |      |  |           
|                                                                   |  |                       
|                                                                   |  | (Dollars in thousands)
|Revenue                                                            |  | $                      | 480,098 |      |  | $          | 455,376 |  |  |  | 5   |  
|Operating expenses                                                 |  |                        | 353,915 |      |  |            | 330,518 |  |  |  | 7   |  
|General and administrative expenses                                |  |                        | 22,845  |      |  |            | 23,142  |  |  |  | (1  | )
|Depreciation and amortization                                      |  |                        | 21,256  |      |  |            | 18,542  |  |  |  | 15  |  
|Impairment, restructuring and related expenses                     |  |                        | 1,273   |      |  |            | 1,650   |  |  |  | (23 | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Operating profit                                                   |  |                        | 80,809  |      |  |            | 81,524  |  |  |  | (1  | )
|Net interest income                                                |  |                        | 3,024   |      |  |            | 4,410   |  |  |  | (31 | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Income before provision for income taxes and
    minority interest |  |                        | 83,833  |      |  |            | 85,934  |  |  |  | (2  | )
|Provision for income taxes                                         |  |                        | 32,321  |      |  |            | 32,396  |  |  |  |    |  
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Net income before minority interest                                |  |                        | 51,512  |      |  |            | 53,538  |  |  |  | (4  | )
|Minority interest                                                  |  |                        | 2,751   |      |  |            | 2,461   |  |  |  | 12  |  
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Net income                                                         |  | $                      | 48,761  |      |  | $          | 51,077  |  |  |  | (5  | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  

Revenue for 2003 increased 5% to
$480.1 million from $455.4 million in 2002.

Merchant Card Services revenue was
$464.5 million for 2003, up 7% from 2002 revenue of
$434.9 million. Merchant Card Services transaction volume
processed for 2003 increased 11% to 4.3 billion
transactions from 3.9 billion transactions in 2002.
Merchant Card Services dollar volume processed for 2003
increased 5% to $177 billion from $169 billion in
2002. The increase in transaction volume is primarily due to
growth in existing national customers and the addition of new
regional merchants. The dollar volume processed has trailed
transaction growth primarily as a result of the Companys
initiative to exit merchant processing for airlines, which have
a large average ticket per transaction. Merchant Card Services
revenue for 2003 as compared to 2002 period was higher due
primarily to the increased transaction and dollar volumes,
additional revenue resulting from the acquisition of Bridgeview
Payment Solutions, and the favorable benefit of rate changes
implemented by Visa® and MasterCard ® . These
favorable factors were partially offset by the negative impacts
of price compression in the national merchant base and the
Companys decision to exit merchant processing for the
airline industry.

Revenue from Payment Services was
$15.6 million for 2003, down 24% from 2002 revenue of
$20.4 million. This decrease was due primarily to lower
revenue from the Companys Airlines Reporting Corporation
contract.

Operating expenses for 2003 increased 7% to
$353.9 million from $330.5 million in 2002 due
primarily to increased transaction volume in Merchant Card
Services.

11



---



##### Table of Contents



General and administrative expenses decreased by
1% to $22.8 million for 2003 from $23.1 million in
2002. The year 2002 included $3.2 million of expenses
related to a separation agreement with the Companys former
CEO, which did not occur in 2003. In 2003, however, the Company
incurred higher expenses associated primarily with equity based
compensation. See Note 12 to the Consolidated Financial
Statements.

Depreciation and amortization increased 15% to
$21.3 million for 2003 from $18.5 million in 2002 due
primarily to a web-based merchant accounting and reporting
system and a new data center that started depreciating in the
second and third quarters of 2002 and additional amortization
expense for the merchant portfolio acquired as part of the June
2003 acquisition of Bridgeview Payment Solutions, Inc.

In May 2003, the Company implemented various
initiatives focused on improving the long-term profitability of
the Company. In connection with these initiatives, the Company
consolidated certain technology functions which resulted in
severance for 30 employees. The Company also incurred a loss on
the sale of 14 regional sales offices. The Company recorded a
charge of $1.3 million in the second quarter of 2003
related to these initiatives. As of December 31, 2003, the
Company had $0.6 million remaining in accrued liabilities
related to these charges.

In May 2002, the Company announced plans to close
its remaining operations in Juarez, Mexico. The work performed
in Mexico has been relocated to existing facilities in the
United States. The Company recorded a restructuring charge of
$1.7 million in the second quarter of 2002 related to
severance costs for approximately 120 employees, building and
equipment write-downs, and related items. As of
December 31, 2003, the Company had $0.3 million
remaining in accrued liabilities for future obligations related
to this closure.

Operating profit margin as a percentage of
revenue decreased to 17% for 2003 from 18% in 2002 due to the
items discussed above.

Net interest income earned on the Companys
cash and cash equivalents for 2003 was $3.0 million, down
31% from $4.4 million in 2002 due to lower average interest
rates in 2003, offset partially by higher balances.

The overall effective tax rate for 2003 was
38.6%, compared to 37.7% in 2002. The increase in the effective
tax rate was due primarily to the realization of
$1.0 million of foreign tax credits in 2002 which had not
previously been recognized due to uncertainty.

For the year ended December 31, 2003,
minority interest was $2.8 million, up 12% from
$2.5 million in 2002. This increase is due to higher
earnings from AAMS, which is 70% owned by National Processing.

Net income decreased 5% to $48.8 million for
2003 from $51.1 million in 2002 due to the items discussed
above.

12



---



##### Table of Contents



Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001

|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|------------------------------------------------------------------ |  | ---------------------- | ------- | ---- |  | ---------- | ------- |  |  |  | --- | -
|                                                                   |  |                        |         |      |  | % Change  
|                                                                   |  |                        |         |      |  | From Prior
|                                                                   |  | 2002                   |         | 2001 |  | Year      
|                                                                   |  |                        |         |      |  |           
|                                                                   |  |                       
|                                                                   |  | (Dollars in thousands)
|Revenue                                                            |  | $                      | 455,376 |      |  | $          | 473,250 |  |  |  | (4  | )
|Operating expenses                                                 |  |                        | 330,518 |      |  |            | 343,819 |  |  |  | (4  | )
|General and administrative expenses                                |  |                        | 23,142  |      |  |            | 22,819  |  |  |  | 1   |  
|Depreciation and amortization                                      |  |                        | 18,542  |      |  |            | 20,346  |  |  |  | (9  | )
|Impairment, restructuring and related expenses                     |  |                        | 1,650   |      |  |            | 3,870   |  |  |  | (57 | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Operating profit                                                   |  |                        | 81,524  |      |  |            | 82,396  |  |  |  | (1  | )
|Net interest income                                                |  |                        | 4,410   |      |  |            | 6,866   |  |  |  | (36 | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Income before provision for income taxes and
    minority interest |  |                        | 85,934  |      |  |            | 89,262  |  |  |  | (4  | )
|Provision for income taxes                                         |  |                        | 32,396  |      |  |            | 35,775  |  |  |  | (9  | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Net income before minority interest                                |  |                        | 53,538  |      |  |            | 53,487  |  |  |  | 1   |  
|Minority interest                                                  |  |                        | 2,461   |      |  |            | 827     |  |  |  | 198 |  
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  
|Net income                                                         |  | $                      | 51,077  |      |  | $          | 52,660  |  |  |  | (3  | )
|                                                                   |  |                        |         |      |  |            |         |  |  |  |     |  

Revenue for 2002 decreased 4% to
$455.4 million from $473.3 million in 2001, primarily
as a result of the BPO divestiture, discussed below.

Merchant Card Services revenue was
$434.9 million, up 8% from $402.0 million in 2001.
Merchant Card Services transaction volume processed increased
11% to 3.9 billion transactions in 2002 from
3.5 billion transactions in 2001. Merchant Card Services
dollar volume increased 9% to $169 billion compared to
$156 billion in 2001. The increase in transaction volume
was primarily due to growth in existing national customers, the
addition of new regional merchants and continued expansion into
new markets. These favorable factors were partially offset by
the negative impacts of price compression in the national
merchant base.

Revenue from Payment Services was
$20.4 million in 2002, down 32% from 2001 revenue of
$30.1 million. This decrease was due to lower revenue from
the Companys Airlines Reporting Corporation contract and
lower earnings on customer balances due to lower average
interest rates in 2002. The revenue decrease was partially
offset by increased pricing in the Companys commission
settlement product.

Operating expenses for the year ended
December 31, 2002 decreased 4% to $330.5 million from
$343.8 million in 2001 due primarily to the divestiture of
the Companys Business Process Outsourcing business, which
was partially offset by increased operating expenses in Merchant
Card Services resulting from higher volumes.

General and administrative expenses increased by
1% to $23.1 million for the year ended December 31,
2002 from $22.8 million in 2001 due primarily to changes in
estimates for certain non-income related taxes offset by lower
expenses as a result of the BPO divestiture.

Depreciation and amortization decreased 9% to
$18.5 million for the year ended December 31, 2002
from $20.3 million in 2001. The year ended
December 31, 2001 included $2.7 million of goodwill
amortization expense that did not recur in 2002 due to the
adoption of new accounting standards. This decrease was
partially offset by additional depreciation in 2002 due to the
addition of a new web-based merchant accounting and reporting
system and the addition of a new data center.

In May 2002, the Company announced plans to close
its remaining operations in Juarez, Mexico. The work performed
in Mexico has been relocated to existing facilities in the
United States. The Company recorded a restructuring charge of
$1.7 million in the second quarter of 2002 related to
severance costs for approximately 120 employees, building and
equipment write-downs, and related items. As of December 31,

13



---



##### Table of Contents



2003, the Company had $0.3 million remaining
in accrued liabilities for future obligations related to this
closure.


In 2001, the Company divested its Business
Process Outsourcing (BPO) business and discontinued
its Denver collections business, which were components of the
former Corporate Outsourcing Solutions segment. The Denver
collections business was discontinued on March 30, 2001.
The sale of the BPO unit to Affiliated Computer Services
(ACS) was completed on August 29, 2001 for
$43.0 million in cash ($41.3 million after
transaction-related expenses). For the year ended
December 31, 2001, these business units had revenue of
$41.2 million. Operating profit (loss) for the divested and
discontinued business units, which includes a $3.9 million
loss on the sale of the BPO unit in 2001, was $(0.3) million for
the year ended December 31, 2001.

During 2001, the Company recorded a net pre-tax
charge of $3.9 million ($4.6 million after-tax)
related to the BPO divestiture. The after-tax charge exceeded
the pre-tax amount due to additional provisions required for
nondeductible losses, repatriation of previously untaxed
earnings in foreign countries, and dividends from foreign
subsidiaries. As of December 31, 2003, the Company had
$0.2 million remaining in accrued liabilities related to
final obligations associated with the BPO divestiture.

Operating profit margin as a percentage of
revenue increased to 18% for the year ended December 31,
2002 from 17% in 2001 due to the items discussed above.

Net interest income earned on the Companys
cash and cash equivalents for the year ended December 31,
2002 was $4.4 million, down 36% from $6.9 million for
2001 due to lower average interest rates in 2002.

The overall effective tax rate was 37.7% in 2002
compared to 40.1% in 2001. The decrease in the effective tax
rate was due to a $1.0 million foreign tax credit recorded
in 2002, which had not previously been recognized due to
uncertainty. The 2001 period also included the additional tax
provisions related to the BPO divestiture discussed above.

For the year ended December 31, 2002,
minority interest was $2.5 million compared to
$0.8 million for 2001. The increase is due to higher
earnings from AAMS. National Processing acquired a 70% ownership
interest in AAMS on June 28, 2001.

Net income decreased 3% to $51.1 million for
2002 from $52.7 million in 2001 due to the items discussed
above.

Chargeback and Market Uncertainties



| |         
| | --------
| | Airlines

The Company currently processes card transactions
for two of the largest airlines in the United States. In May
2002, the Company announced its decision to discontinue
processing debit and credit card transactions for the airline
industry. The Company will honor its existing contractual
obligations to the two airlines it currently serves but does not
intend to renew such contracts when their current terms expire.
The contracts currently in effect have expiration dates of April
2004 and November 2005. One of the two continuing airline
merchants, United Airlines, Inc., is currently operating under
Chapter 11 protection. In the event of liquidation of United
Airlines or the Companys other airline customer, the
Company could become financially responsible for refunding
tickets purchased through Visa® and MasterCard ® under
the chargeback rules of those associations. At December 31,
2003, the dollar value of tickets purchased, but as yet unflown,
under continuing merchant processing contracts, was
approximately $786 million, of which approximately
$464 million pertained to United Airlines. Based upon
available information, these amounts represent managements
best estimate of its maximum potential chargeback exposure
related to its continuing airline customers. As of
December 31, 2003, the Company held no significant
collateral under these contracts.

During the second quarter of 2003, the
Companys obligation to process card transactions for two
other airline merchants, including U.S. Airways Group, Inc.,
ceased with these merchants transitioning to new processors. At
December 31, 2003, the dollar value of tickets purchased,
but as yet unflown, under these

14



---



##### Table of Contents



concluding contracts was approximately
$5 million. This amount represents managements best
estimate of its maximum potential chargeback exposure under
these concluded contracts. As of December 31, 2003, the
Company held cash collateral of $1 million and third-party
indemnifications of $110 million against this remaining
chargeback exposure.


In November 2003, Congress passed the Federal
Aviation Administration Reauthorization Act. This legislation
included an extension of the airline ticket re-accommodation
provision, which requires airlines to honor tickets through
November 2004 for other airlines that may suspend, interrupt or
discontinue services due to insolvency or liquidation.

Based on current conditions in the airline
industry and other information currently available to the
Company, management believes the risk of a material loss under
the chargeback rules is unlikely.



| |                   
| | ------------------
| | Additional Factors

The Company is dependent on overall consumer
spending trends. The Company is also currently experiencing
increased pricing pressure in competing for new national
merchants and in retaining the existing national merchants.
These factors may affect the Companys future revenue and
operating profits.

Application of Critical Accounting
Policies



| |        
| | -------
| | General

The Companys consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in the United States. Application of these
principles requires management to make estimates, assumptions,
and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions,
and judgments are based on information available as of the date
of the financial statements; accordingly, as this information
changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies
inherently have greater reliance on the use of estimates,
assumptions, and judgments and as such have greater possibility
of producing results that could be materially different than
originally reported.



| |             
| | ------------
| | Income Taxes

The Company is included in the consolidated
federal income tax return of National City. National City
allocates income taxes to the Company as if it were a
stand-alone tax paying entity. Deferred tax assets and
liabilities are recognized as certain items are required to be
treated differently for financial statement purposes versus how
they are treated for tax purposes.

Management judgments and estimates are required
in determining the income tax provision as well as the balances
of deferred tax assets and liabilities. As of December 31,
2003, the Company had net deferred tax assets of $15.9 million.
The Company records a valuation allowance to reduce deferred tax
assets when it is more likely than not that certain amounts will
not be realized. The Company considers projected future taxable
income and tax planning strategies in assessing the need for a
valuation allowance. Should the Company determine in the future
that all or part of its net deferred tax asset is unrealizable,
an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. Management
provides reserves when it appears probable that a taxing
authority may take a sustainable position on a matter contrary
to the Companys position. Based on existing levels of
pre-tax earnings, management believes that the Company will
generate future taxable income above minimum amounts required to
realize its deferred tax assets.



| |                  
| | -----------------
| | Long-Lived Assets

Long-lived assets, consisting primarily of
property and equipment, goodwill and other intangible assets,
comprise a significant portion of the Companys total
assets.

15



---



##### Table of Contents



Property and equipment, net of accumulated
depreciation and amortization, totaled $50.7 million as of
December 31, 2003, which represented 8% of total assets.
Useful lives of property and equipment (which includes internal
use software) are estimated in order to determine the amount of
depreciation and amortization expense to be recorded during each
reporting period. The useful lives are estimated at the time the
assets are acquired based on historical experience with similar
assets and current business plans. Based on future events and
changes in business plans, the useful lives assigned to these
assets may need to be shortened, resulting in the recognition of
increased depreciation and amortization expense in future
periods. These changes could also result in the recognition of
an immediate impairment charge to reflect the write-down in
value of the assets. See Note 3 to the Consolidated Financial
Statements. Alternatively, assets may ultimately be used by the
Company for longer than their assigned depreciable lives.

Internal-use software is a component of property
and equipment. The Company capitalizes certain costs incurred to
develop or obtain internal-use software in accordance with
Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
The Company capitalizes costs once the preliminary project stage
has been completed, management has approved funding for the
project, and it is probable that the project will be completed
and that the software will be used for its intended use.
Capitalized software development and purchased software are
recorded at cost. Commencing the month following project
completion, these costs are amortized on a straight-line basis
over the estimated useful life of the software, ranging from
three to ten years. Software development costs may become
impaired due to technological obsolescence of the project or
where development efforts are abandoned due to changes in
business plans. For purposes of depreciation and impairment,
capitalized costs are treated in the same manner as other
property and equipment.

Goodwill and other intangible assets, net of
accumulated amortization, totaled $158.6 million as of
December 31, 2003, which represented 26% of total assets.
The Company analyzes goodwill and other intangible assets for
impairment on an annual basis or more frequently if events or
circumstances warrant. In assessing the recoverability of
goodwill and intangible assets, the Company must make estimates
regarding future cash flows and assumptions about other factors
to determine the fair value. Changes in estimates or the related
assumptions may cause the Company to record impairment charges
for the related assets. See Note 3 to the Consolidated Financial
Statements.



| |                                    
| | -----------------------------------
| | Chargebacks and Other Contingencies

The Company records reserves for chargebacks and
other contingent liabilities when such amounts are deemed to be
probable and estimable in accordance with SFAS 5, Accounting
for Contingencies. The required reserves may change in the
future due to new developments including but not limited to
changes in litigation or increased chargeback exposure as the
result of merchant insolvency, liquidation, or other reasons.
The required reserves are reviewed periodically to determine if
adjustments are required. See Note 13 to the Consolidated
Financial Statements.

Recent Accounting Pronouncements



| |                                     
| | ------------------------------------
| | Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards
Board issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets.SFAS 141
requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting
and broadens the criteria for recording intangible assets
separate from goodwill. Under the provisions of SFAS 142,
goodwill and certain other intangible assets, which do not
possess finite useful lives, are no longer to be amortized over
the estimated life but rather are tested at least annually for
impairment based on specific guidance provided in the new
standard. Intangible assets determined to have finite lives
continue to be amortized over their estimated useful lives and
also continue to be subject to impairment testing.

The provisions of SFAS 142 were adopted by the
Company as required effective January 1, 2002. As part of
adopting the provisions of SFAS 142, a transitional impairment
test was applied to all goodwill during the quarter ended
March 31, 2002. The Company also performed annual
impairment tests in 2002 and 2003. No

16



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##### Table of Contents



impairment was required to be recorded as a
result of these tests. The Company currently does not have any
other indefinite-lived intangible assets on its balance sheet.
There have not been any material categorical reclassifications
or adjustments to the useful lives of finite-lived intangible
assets as a result of adopting the new standard.


If the non-amortization provisions of SFAS 142
had been adopted effective January 1, 2000, goodwill
amortization expense, which is primarily nondeductible for
income tax purposes, would have been reduced by
$2.7 million for year ended December 31, 2001. For the
year ended December 31, 2001, proforma net income would
have been $55.0 million, or $1.06 per diluted share, versus
reported net income of $52.7 million, or $1.01 per diluted
share.

The Companys amortizable intangible assets
as of December 31, 2003 related almost exclusively to
acquired merchant portfolios. These costs are amortized on a
straight-line basis over periods ranging from 5 to
10 years. Amortization expense for years ended
December 31, 2003, 2002 and 2001 were $8.7 million,
$6.9 million and $5.6 million, respectively. The
estimated annual amortization expense for existing intangible
assets for each of the next five years is as follows:
2004  $9.7 million; 2005, 2006, and
2007  $7.8 million, and 2008 
$3.3 million.

In general, application of the new provisions may
result in more income statement volatility due to the potential
periodic recognition of impairment losses, which are likely to
vary in amount and regularity, for goodwill and other
indefinite-lived intangible assets, versus reducing those assets
through the recognition of recurring, consistent amortization
amounts.



| |                                 
| | --------------------------------
| | Accounting for Long-Lived Assets

SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,was issued in October 2001 and
addresses how and when to measure impairment on long-lived
assets and how to account for long-lived assets that an entity
plans to dispose of either through sale, abandonment, exchange,
or distribution to owners. The new provisions supersede SFAS
121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, which addressed
asset impairment, and certain provisions of Accounting
Principals Board (APB) Opinion 30, Reporting the
Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, related
to reporting the effects of the disposal of a business segment
and requires expected future operating losses from discontinued
operations to be recorded in the period in which the losses are
incurred rather than the measurement date. Under SFAS 144, more
dispositions may qualify for discontinued operations treatment
in the income statement. The provisions of SFAS 144 became
effective for the Company on January 1, 2002 and have not
had a material impact on the Companys financial position,
results of operations, or liquidity.



| |                                               
| | ----------------------------------------------
| | Accounting for Exit or Disposal
    Activities

SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, was issued in June 2002 and
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring). SFAS
146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost is
recognized at the date of the entitys commitment to an
exit plan. The provisions of SFAS 146 became effective for the
Company on January 1, 2003 and have not had a material
impact on the Companys financial position, results of
operations, or liquidity.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

In December 2002, the FASB issued SFAS 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, which provides guidance on how to
transition from the intrinsic value method of accounting for
stock-based employee compensation under APB 25, Accounting
for Stock Issued to Employees,

17



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##### Table of Contents



to SFAS 123s, Accounting for Stock-Based
Compensation, fair value method of accounting, if a company
so elects.


Effective January 1, 2003, the Company
adopted the fair value method of recording stock options under
SFAS 123. In accordance with the transitional guidance of SFAS
148, the fair value method of accounting for stock options was
applied prospectively to awards granted subsequent to
December 31, 2002. As permitted, options granted prior to
January 1, 2003, continue to be accounted for under APB
Opinion 25, and the proforma impact of accounting for these
options at fair value will continue to be disclosed in the
Consolidated Financial Statements until the last of those
options vest in 2005.

As the cost of anticipated future option awards
is phased in over a four-year period, the annual impact will
rise assuming options are granted in future years at a similar
level and under similar market conditions. The actual impact per
diluted share may vary in the event the fair value or the number
of options granted increase or decrease, or if the current
accounting guidance changes. The Company uses the Black-Scholes
model to estimate option values. The Black-Scholes option
pricing model was originally developed for use in estimating the
fair value of traded options, which have different
characteristics from the Companys employee stock options.
The model is also sensitive to changes in subjective
assumptions, which can materially affect the fair value estimate.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Accounting for Certain Financial Instruments
    with Characteristics of Both Liabilities and Equity

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.This
statement establishes standards for classifying and measuring
certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity.
The provisions of SFAS 150 became effective for the Company on
June 1, 2003 for any new qualifying financial instruments
that were subsequently entered into or modified. The provisions
of SFAS 150 for all other qualifying instruments within its
scope became effective as of July 1, 2003. The adoption of
this standard did not have a material impact on financial
position, results of operations, or liquidity. In December 2003,
the FASB deferred for an indefinite period the application of
the guidance in SFAS 150 to noncontrolling interests that
are classified as equity in the financial statements of a
subsidiary but would be classified as a liability in the
parents financial statements under SFAS 150. Management
continues to evaluate the applicability of SFAS 150 to such
entities and believes it would not have a material impact, if
any, to financial position, results of operations, or liquidity.



| |                          
| | -------------------------
| | Accounting for Guarantees

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires
additional recognition and disclosure by a guarantor in its
financial statements about its obligations under certain
guarantees.

The Companys contingent obligation to honor
chargebacks under merchant contracts is considered a performance
guarantee under FIN 45. Performance guarantees are contracts
that contingently require the guarantor to make payments to the
guaranteed party based on another entitys failure to
perform under an obligating agreement. Performance guarantees
are subject to both the recognition and disclosure requirements
of FIN 45. The disclosure requirements of FIN 45 were
effective for the Company as of December 31, 2002. The
required disclosures are included in Note 13 to the Consolidated
Financial Statements. The recognition requirements of
FIN 45 were adopted January 1, 2003 for new guarantees
entered into after such date and did not have a material impact
on the Companys financial position, results of operations,
or liquidity.



| |                                                
| | -----------------------------------------------
| | Consolidation of Variable Interest
    Entities

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46
provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a VIE are
to be included in an entitys consolidated financial
statements. A VIE exists when either the total equity investment

18



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##### Table of Contents



at risk is not sufficient to permit the entity to
finance its activities by itself, or the equity investors lack
one of three characteristics associated with owning a
controlling financial interest. Those characteristics include
the direct or indirect ability to make decisions about an
entitys activities through voting rights or similar
rights, the obligation to absorb the expected losses of an
entity if they occur, and the right to receive the expected
residual returns of the entity if they occur.


In December 2003, the FASB reissued FIN 46 with
certain modifications and clarifications. Application of this
guidance was effective for interests in certain VIEs
commonly referred to as special-purpose entities
(SPEs) as of December 31, 2003. Application for
all other types of entities is required for periods ending after
March 15, 2004, unless previously applied. The provisions
of FIN 46 are not anticipated to have a material impact on the
Companys financial position, results of operations, or
liquidity.

Liquidity and Capital Resources

The Companys primary uses of capital
resources include capital expenditures, working capital and
acquisitions. Future business acquisitions may be funded through
current liquidity, borrowed funds, and/or issuances of common
stock.

The Companys capital expenditures include
amounts for computer hardware, external and internally developed
software, and improvements to operating facilities. During 2003,
the Companys capital expenditures totaled
$9.3 million. Such expenditures were financed from
operating cash flow, which for 2003 totaled $92.2 million.
Capital expenditures and operating cash flow for 2002 were
$16.3 million and $100.8 million, respectively.
Operating cash flow decreased in 2003 due primarily to the
timing of certain working capital items. The Company expects
capital expenditures for 2004 to be comparable to 2003, which
will be principally used to enhance merchant card processing
capabilities.

On January 8, 2001, the Company acquired the
merchant services business units from several National City
banking subsidiaries for $44.0 million in cash. See
Note 4 to the Consolidated Financial Statements.

On June 28, 2001, the Company acquired a 70%
ownership interest in AAMS for $48.5 million in cash. See
Note 4 to the Consolidated Financial Statements.

On August 29, 2001, the Company completed
the sale of the BPO unit to Affiliated Computer Services, Inc.
for $43.0 million cash ($41.3 million after
transaction-related expenses). See Note 5 to the
Consolidated Financial Statements.

On July 3, 2002, the Company acquired
processing contracts from a key strategic partner for
$2.7 million cash. Pursuant to the terms of the agreement,
an additional $1.0 million was paid on August 5, 2003
related to these contracts. The terms of the agreement also
include future payments to the seller for a portion of the
revenue derived from these contracts for a specified period. See
Note 4 to the Consolidated Financial Statements.

In March 2003, the Company paid $2.4 million
to the minority shareholder of AAMS. This payment represents the
prorata share of earnings due to the minority shareholder for
the year ended December 31, 2002.

On June 9, 2003, the Company acquired
Bridgeview Payment Solutions, Inc. from Bridgeview Bank and
Trust Company for $32.4 million in cash.

As the Company does not carry significant amounts
of inventory and historically has experienced short collection
periods for its accounts receivable, it does not require
substantial working capital to support revenue growth. Working
capital requirements will vary depending upon future acquisition
activity. Increases in working capital needs are expected to be
financed through operating cash flow and current cash balances.

See also the sections entitled Chargeback and
Market Uncertainties and Contractual Obligations, Commitments
and Contingent Liabilities for other items that may impact the
Companys liquidity and capital resources.

19



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##### Table of Contents



Contractual Obligations, Commitments and
Contingent Liabilities

The following table presents, as of
December 31, 2003, the Companys significant fixed and
determinable contractual obligations by payment date. The
payment amounts represent those amounts contractually due to the
recipient. Further discussion of the nature of each obligation
is included in the referenced note to the consolidated financial
statements.

|                    |  |           |   |                 |  |             |      |            |  |            |      |       |  |   |     |  |  |   |     |  |  |   |      | 
|------------------- |  | --------- | - | --------------- |  | ----------- | ---- | ---------- |  | ---------- | ---- | ----- |  | - | --- |  |  | - | --- |  |  | - | ---- | 
|                    |  |           |   |                 |  |            
|                    |  |           |   | Payments Due In |  |            
|                    |  |           |   |                 |  |            
|                    |  | Note      |   | One Year        |  | One to      |      | Three to   |  | Over       |      |      
|                    |  | Reference |   | or Less         |  | Three Years |      | Five Years |  | Five Years |      | Total
|(In Millions)       |  |           |   |                 |  |             |      |            |  |            |      |      
|Operating Leases    |  |           | 8 |                 |  | $           | 1.3  |            |  | $          | 1.9  |       |  | $ | 1.5 |  |  | $ | 3.8 |  |  | $ | 8.5  | 
|Capital Lease       |  |           | 7 |                 |  |             | 0.3  |            |  |            | 0.5  |       |  |   | 0.3 |  |  |   | 1.4 |  |  |   | 2.5  | 
|Processing Minimums |  |           |  |                 |  |             | 11.4 |            |  |            | 23.2 |       |  |   | 6.8 |  |  |   |    |  |  |   | 41.4 | 
|Other               |  |           |  |                 |  |             | 0.3  |            |  |            |     |       |  |   |    |  |  |   |    |  |  |   | 0.3  | 

The Companys operating lease obligations
represent short and long-term lease and rental payments for
offices, facilities and equipment. Capital lease obligations
primarily represent a long-term lease for the Companys
main operating facility. Processing minimums represent minimum
obligations under agreements to purchase outsourced
authorization and settlement services.

The Company may also have liabilities under
certain contractual agreements contingent upon the occurrence of
certain events. A discussion of significant contractual
arrangements under which the Company may be held contingently
liable, including guarantee arrangements, is included in
Note 13 to the Consolidated Financial Statements.

Forward-Looking Statements

The annual report on Form 10-K contains
forward-looking statements. Forward-looking statements give
current expectations or forecasts of future events and are not
guarantees of future performance. Forward-looking statements may
be identified by the use of words such as may,
will, intend, expect,
believe, anticipate, plan,
estimate, project, target,
forecast, seek and other similar words
used in connection with any discussion of future operating or
financial performance. The forward-looking statements are based
on managements expectations that involve a number of risks
and uncertainties, and, although management believes the
expectations reflected in such forward-looking statements are
reasonable, actual results may differ materially from those
expressed or implied in such statements. Risks and uncertainties
that could cause actual results to differ materially include,
without limitation, the Companys ability to execute its
business plans; changes in general economic conditions in the
United States and other relevant economies; changes in consumer
spending habits; changes in the growth rate of the card
processing industry from recent years; ability to execute the
Companys acquisition strategy; successful integration of
acquisitions; consolidation in the banking, card processing or
electronic payment settlement industries; consolidation of major
customers or industries serviced; industry competition; renewal
of major customer relationships; changes in interest rates;
governmental and economic stability in foreign countries in
which the Company operates; litigation or changes in existing
litigation, chargebacks, customer bankruptcy, claims and
assessments; reliance on third party processing relationships;
changes in banking regulations; changes in credit card
association rules, regulations or operations; changes in other
laws or regulations that impact the Companys business;
changes in accounting policies and procedures as may be required
due to new accounting pronouncements of the Financial Accounting
Standards Board or other regulatory agencies; technological
changes; timely and successful implementation of future
processing systems projects; financial or other business impacts
due to systems infiltrations; and successful business continuity
plans. You are advised to consult any further disclosures the
Company makes on related subjects in the Companys Forms
10-Q, 8-K and 10-K reports filed with the Commission.

20



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##### Table of Contents






Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk



| |                       
| | ----------------------
| | Derivative Instruments

The Company does not use derivative instruments.



| |                                     
| | ------------------------------------
| | Market Risk of Financial Instruments

The Companys primary market risk exposure
with regard to financial instruments is to changes in interest
rates. As of December 31, 2003, the Company had
$247 million in cash and cash equivalents. For the year
ended December 31, 2003, NCBK also held an average of
approximately $245 million of customer cash balances. The
Company retains incremental interest earned on certain of these
funds above what is contractually due to the customers. Interest
earned on customer cash balances is included as a component of
revenue.

Because of the short-term nature of these
instruments, a sudden change in market interest rates would not
impact the fair value of these instruments. The Companys
earnings, however, are affected by changes in interest rates,
with respect to interest on the Companys cash and cash
equivalents as well as on customer funds maintained by NCBK. At
December 31, 2003, a hypothetical 100 basis point
increase in short-term interest rates would result in an
increase of approximately $4 million in annual pre-tax
income based on cash balances for 2003. A hypothetical 100 basis
point decrease in short-term interest rates would result in a
decrease of approximately $4 million in annual pre-tax
income.




Item 8.     Financial
Statements and Supplementary Data

See Index to Consolidated Financial Statements at
Item 15.




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.




Item 9A. Controls and
Procedures

As of December 31, 2003, an evaluation was
performed under the supervision and with the participation of
the Companys management, including the Chairman and Chief
Executive Officer (CEO) and the Chief Financial
Officer (CFO), of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures. Based on that evaluation, the Companys
management, including the CEO and CFO, concluded the
Companys disclosure controls and procedures as of
December 31, 2003 were effective in ensuring information
required to be disclosed in this Annual Report on Form 10-K
was recorded, processed, summarized and reported on a timely
basis. There have been no changes in the Companys internal
control over financial reporting that occurred during the year
ended December 31, 2003 that have materially affected, or
are reasonably likely to materially affect, the Companys
internal control over financial reporting.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The Executive Officers of the Company as of
February 27, 2004 were as follows:

|                  |  |     |    |          |  |                                                                     
|----------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Jon L. Gorney     |  |     | 53 |          |  | Chairman and Chief Executive Officer                                
|Mark D. Pyke      |  |     | 43 |          |  | Executive Vice President  Chief
    Operating Officer              
|Norman M. Martin  |  |     | 60 |          |  | Executive Vice President  Merchant
    Card Services               
|Robert C. Robins  |  |     | 62 |          |  | Executive Vice President  Business
    Development                 
|Steven C. Cory    |  |     | 54 |          |  | Executive Vice President  Information
    Technology and Operations
|David E. Fountain |  |     | 43 |          |  | Senior Vice President  Chief Financial
    Officer                 
|Kelly L. Lanham   |  |     | 34 |          |  | Senior Vice President  Chief
    Accounting Officer                

21



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##### Table of Contents



An executive officer will serve until his
successor is chosen and qualified. There is no family
relationship between any of the executive officers.

Mr. Gorney was appointed Chairman and Chief
Executive Officer in September 2002. Mr. Gorney has served
as an Executive Vice President of National City Corporation from
1993 to the present, with responsibility for National
Citys overall technology and operations functions.

Mr. Pyke was appointed Chief Operating
Officer in October 2001. Mr. Pyke previously served as
Executive Vice President  Merchant Card Services from
October 1999 to October 2001 and was a Senior Vice President of
the Merchant Card Services division from 1998 to 1999.

Mr. Martin was appointed as Executive Vice
President  Merchant Card Services in January 2000.
Mr. Martin previously served as President of Client
Merchant Services for First Data Corporation in 1998.

Mr. Robins was appointed Executive Vice
President  Business Development in November 2000.
Mr. Robins was employed by Visa U.S.A. from 1996 to
2000 serving as Executive Vice President of Market Development
and Acceptance.

Mr. Cory was appointed Executive Vice
President  Information Technology and Operations in
April 2003. Mr. Cory was employed by National City
Corporation serving as Executive Vice President 
Consumer Loan Services from 2001 to 2003 and Senior Vice
President  Card Services from 1999 to 2001.

Mr. Fountain was appointed Chief Financial
Officer in October 1999. Mr. Fountain was appointed interim
Chief Financial Officer in July 1999 and served as Senior Vice
President  Chief Accounting Officer from 1998 to 1999.

Mr. Lanham was appointed Chief Accounting
Officer in May 2000. Mr. Lanham joined the Company in
November 1999 as Vice President  Corporate
Controller. From 1996 to 1999, Mr. Lanham was employed by
Arthur Andersen, serving as a manager in the firms Audit
and Business Advisory division.

The other information required by Item 10 is
incorporated by reference from the Companys Definitive
Proxy Statement to be dated approximately March 19, 2004.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 19, 2004.






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 19, 2004.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 19, 2004.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 19, 2004.

22



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##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) 1.     Financial
Statements

|                                                                                                                                     |  |             |     | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | --- | 
|                                                                                                                                     |  | Page Number
|Description                                                                                                                          |  | in Report  
|                                                                                                                                     |  |            
|Report of Ernst & Young LLP, Independent
    Auditors                                                                                |  |             | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                     |  |             | F-2 | 
|Consolidated Statements of Income for each of the
    three years in the period ended December 31, 2003                              |  |             | F-3 | 
|Consolidated Statements of Changes in
    Shareholders Equity for each of the three years in the
    period ended December 31, 2003 |  |             | F-4 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2003                          |  |             | F-5 | 
|Notes to Consolidated Financial Statements                                                                                           |  |             | F-6 | 

2.     Financial
Statement Schedules

Omitted due to inapplicability or because
required information is shown in the Companys Consolidated
Financial Statements or notes thereto.

3.     Exhibits

The exhibits filed as part of the 2003
Form 10-K are accessible at no cost on the Companys
web site at www.npc.net or through the United States Securities
and Exchange Commissions web site at www.sec.gov. Copies
of the exhibits may be requested at a cost of $.30 per page from
National Processings investor relations department.

|        |      |             |  |                                                                                                                                                                                                                                                                                                                                               
|------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 3.1  | (i)         |  | Amended Articles of Incorporation of the Company.
    (A)                                                                                                                                                                                                                                                                                     
|        | 3.1  | (ii)        |  | Code of Regulations, Amended and Restated, as
    adopted and in effect on May 16, 2003, of the Company.
    (Incorporated herein by reference to Exhibit 3.1 (ii)
    to the Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2003)                                                                                
|        | 4.1  |             |  | Specimen Certification for the Common Stock,
    without par value, of the Company. (B)                                                                                                                                                                                                                                                       
|        | 4.2  |             |  | Registration Rights Agreement between the Company
    and National City Corporation, dated July 16, 1996. (B)                                                                                                                                                                                                                                 
|        | 4.3  |             |  | Amended Articles of Incorporation of the Company
    related to the capital stock of the Company and
    shareholders rights. (A)                                                                                                                                                                                                            
|        | 4.4  |             |  | Code of Regulations, Amended and Restated, as
    adopted and in effect on May 16, 2003, of the Company as
    related to the capital stock of the Company and
    shareholders rights. (Incorporated herein by reference to
    Exhibit 3.1 (ii) to the Companys Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2003)
|        | 10.1 |             |  | Absolute Net Ground Lease by and between Preston
    Manor, Inc. and Allied Stores Corporation, dated
    January 16, 1969. (A)                                                                                                                                                                                                               
|        | 10.2 |             |  | Second Amendment to Lease by and between William
    G. Earley, Plaza Centers, Inc. and First National Bank of
    Louisville, dated April 15, 1986. (A)                                                                                                                                                                                      
|        | 10.3 |             |  | Sponsorship Agreement between NPC and National
    City Bank of Kentucky, dated June 30, 1996. (B)                                                                                                                                                                                                                                            
|        | 10.4 |             |  | Administrative Services Agreement between NPC and
    National City Corporation, dated July 15, 1996. (B)                                                                                                                                                                                                                                     

23



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.5  |             |  | Tax Sharing Agreement between the Company and
    National City Corporation, dated July 17, 1996. (B)                                                                                                                                                                                                        
|        | 10.6  |             |  | Employment Agreement and Undertaking of
    Confidentiality between the Company and Mark Pyke dated
    March 4, 1996. (Incorporated herein by reference to
    Exhibit 10.19 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002) **                                       
|        | 10.7  |             |  | Employment Agreement and Undertaking of
    Confidentiality between National Processing Company and Thomas
    A. Wimsett dated December 12, 1997. (Incorporated herein by
    reference to Exhibit 10.21 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2002) **
|        | 10.8  |             |  | Separation Agreement, Release and Waiver between
    National Processing, Inc. and Thomas A. Wimsett dated
    September 29, 2002. (Incorporated herein by reference to
    Exhibit 10.22 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002) **                    
|        | 10.9  |             |  | Visa® U.S.A. Inc. Guaranty between National
    Processing, Inc. and Visa® U.S.A. Inc. dated August 6,
    2002. (Incorporated herein by reference to Exhibit 10.23 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002)                                         
|        | 10.10 |             |  | National Processing, Inc. 2000 Stock Option Plan.
    (Incorporated herein by reference to Exhibit 10.28 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2002) **                                                                                                        
|        | 10.11 |             |  | National Processing Company 1996 Stock Option
    Plan. (Incorporated herein by reference to Exhibit 10.29 to
    the Companys Annual Report on Form 10-K for the year
    ended December 31, 2002) **                                                                                                      
|        | 10.12 |             |  | Nonemployee Directors Stock Option Plan and Form
    of Stock Option Agreement. (B) **                                                                                                                                                                                                                       
|        | 10.13 |             |  | National Processing Company Short-Term Incentive
    Compensation Plan for Senior Executives, as amended and restated
    effective November 6, 2003. **                                                                                                                                                     
|        | 10.14 |             |  | National Processing Company Long-Term Incentive
    Compensation Plan for Senior Officers, as amended and restated
    effective February 1, 2003. (Incorporated herein by
    reference to Exhibit 10.32 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2002) **       
|        | 10.15 |             |  | Amendment to Building Lease between National City
    Bank of Kentucky and NPC, dated July 3, 1996. (B)                                                                                                                                                                                                      
|        | 10.16 |             |  | Form of Severance Agreement between the Company
    and David Fountain, Marsha Y. Lindholm, Michael McEvoy and
    Christopher C. McNulty.**                                                                                                                                                                 
|        | 10.17 |             |  | Form of Severance Agreement between the Company
    and Mark D. Pyke and Robert Robins. (Incorporated herein by
    reference to Exhibit 10.38 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2002) **                                                           
|        | 10.18 |             |  | Employment Agreement and Undertaking of
    Confidentiality between the Company and David Fountain dated
    October 27, 1998. (Incorporated herein by reference to
    Exhibit 10.39 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002) **                        
|        | 10.19 |             |  | National Processing, Inc. 2001 Restricted Stock
    Plan. (Incorporated herein by reference to Exhibit A to
    National Processing, Inc.s Proxy Statement on
    Form 14A #001-11905, dated March 31, 2001) **                                                                                             
|        | 10.20 |             |  | National Processing, Inc.s U.S. Asset
    Purchase Agreement, dated July 11, 2001. (Incorporated
    herein by reference to Exhibit 10.42 to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001)                                                                       
|        | 10.21 |             |  | National Processing, Inc.s Mexico Asset
    Purchase Agreement, dated July 11, 2001. (Incorporated
    herein by reference to Exhibit 10.43 to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001)                                                                     
|        | 10.22 |             |  | National Processing, Inc.s Stock Purchase
    Agreement, dated July 11, 2001. (Incorporated herein by
    reference to Exhibit 10.44 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2001)                                                                            

24



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                  
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.23 |             |  | Guarantee between National Processing, Inc. and
    MasterCard® International Incorporated dated May 16,
    2003. (Incorporated herein by reference to Exhibit 10.23 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2003)                                
|        | 10.24 |             |  | The National City Corporation Savings and
    Investment Plan, as amended and restated effective
    January 1, 2001. (Incorporated herein by reference to
    Exhibit 10.33 to National City Corporations Annual
    Report on Form 10-K for the year ended December 31,
    2002)             
|        | 10.25 |             |  | The National City Corporation Savings and
    Investment Plan No. 2, as amended and restated effective
    January 1, 2001. (Incorporated herein by reference to
    Exhibit 10.34 to National City Corporations Annual
    Report on Form 10-K for the year ended December 31,
    2002)       
|        | 10.26 |             |  | Amendment No. 1 to the National City Savings
    and Investment Plan, as amended and restated effective
    January 1, 2001. (Incorporated herein by reference to
    Exhibit 10.35 to National City Corporations Annual
    Report on Form 10-K for the year ended December 31,
    2002)      
|        | 10.27 |             |  | Amendment No. 1 to the National City Savings
    and Investment Plan No. 2, as amended and restated effective
    January 1, 2001. (Incorporated herein by reference to
    Exhibit 10.36 to National City Corporations Annual
    Report on Form 10-K for the year ended December 31,
    2002)
|        | 14.1  |             |  | Code of Ethics. (Incorporated herein by reference
    to Exhibit 14.1 to the Companys Current Report on
    Form 8-K filed August 11, 2003)                                                                                                                                                     
|        | 14.2  |             |  | Senior Financial Officers Code of Ethics.
    (Incorporated herein by reference to Exhibit 14.2 to the
    Companys Current Report on Form 8-K filed
    August 11, 2003)                                                                                                                       
|        | 21.1  |             |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                     
|        | 23.1  |             |  | Consent of Ernst & Young, LLP,
    Independent Auditors for National Processing, Inc.                                                                                                                                                                                                            
|        | 24.1  |             |  | Power of Attorney.                                                                                                                                                                                                                                                                               
|        | 31.1  |             |  | Chief Executive Officer 302 Certification dated
    March 11, 2004 for National Processing, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2003.                                                                                                                      
|        | 31.2  |             |  | Chief Financial Officer 302 Certification dated
    March 11, 2004 for National Processing, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2003.                                                                                                                      
|        | 32.1  |             |  | Chief Executive Officer 906 Certification dated
    March 11, 2004 for National Processing, Inc.s Annual
    Report on Form 10-K for year ended December 31, 2003.                                                                                                                              
|        | 32.2  |             |  | Chief Financial Officer 906 Certification dated
    March 11, 2004 for National Processing, Inc.s Annual
    Report on Form 10-K for year ended December 31, 2003.                                                                                                                              
|        | 99.1  |             |  | New York Stock Exchange Chief Executive Officer
    Certification dated March 11, 2004 for National Processing,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2003.                                                                                                  



---



|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Exhibit is incorporated herein by reference to
    the applicable exhibit in the Companys Registration
    Statement on Form S-1 (Registration No. 333-05507)
    filed on June 7, 1996.



|    |                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | Exhibit is incorporated herein by reference to
    the applicable exhibit in the Companys Amendment
    No. 1 to Form S-1 Registration Statement (Registration
    No. 333-05507) filed on July 18, 1996.



|   |                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------
|** | Represents a management contract or compensatory
    plan required to be filed pursuant to Item 14 of
    Form 10-K.

(b) Reports on Form 8-K

October 16, 2003: On October 16, 2003,
the Company issued a news release reporting earnings and
including a financial summary for the quarter and nine months
ended September 30, 2003.

January 15, 2004: On January 15, 2004,
the Company issued a news release reporting earnings and
including a financial summary for the fourth quarter and year
ended December 31, 2003.

25



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 11, 2004.



| |                          
| | -------------------------
| | NATIONAL PROCESSING, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ DAVID E. FOUNTAIN

| |                                                        
| | -------------------------------------------------------
| | Senior Vice President and Chief 
     Financial Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons in the capacities and on the dates indicated.

|                                             |  |                                                                                       |  |      |                |  
|-------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---- | -------------- | -
|Signature                                    |  | Title                                                                                 |  | Date
|                                             |  |                                                                                       |  |     
|/s/ JON L. GORNEYJon L. Gorney               |  | Chief Executive Officer and Director (Principal
    Executive Officer)                |  |      | March 11, 2004 |  
|                                            
|/s/ DAVID E. FOUNTAINDavid E. Fountain       |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)   |  |      | March 11, 2004 |  
|                                            
|/s/ KELLY L. LANHAMKelly L. Lanham           |  | Senior Vice President and Chief Accounting
    Officer (Principal Accounting Officer) |  |      | March 11, 2004 |  
|                                            
|/s/ PAUL G. CLARKPaul G. Clark               |  | Director                                                                              |  |      | March 11, 2004 | *
|                                            
|/s/ JEFFREY D. KELLYJeffrey D. Kelly         |  | Director                                                                              |  |      | March 11, 2004 | *
|                                            
|Aureliano Gonzalez-Baz                       |  | Director                                                                              |  |      | March 11, 2004 |  
|                                            
|/s/ JEFFREY P. GOTSCHALLJeffrey P. Gotschall |  | Director                                                                              |  |      | March 11, 2004 | *
|                                            
|Preston B. Heller, Jr.                       |  | Director                                                                              |  |      | March 11, 2004 | *
|                                            
|/s/ J. ARMANDO RAMIREZJ. Armando Ramirez     |  | Director                                                                              |  |      | March 11, 2004 | *



|  |                                                                                                                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The undersigned by signing his name hereto, does
    sign and execute the Annual Report on Form 10-K for fiscal
    year 2003 pursuant to the Power of Attorney executed by the
    above named Directors of the Company and which have been filed
    with the Securities Exchange Commission on behalf of such
    directors.



|    |                       | 
|--- | --------------------- | 
|By: | /s/ CARLTON E. LANGER | 

|                    | 
|------------------- | 
|Carlton E. Langer   | 
|As Attorney-in-Fact | 

26



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Shareholders and Board of Directors

National Processing, Inc.


We have audited the accompanying consolidated
balance sheets of National Processing, Inc. and subsidiaries (a
majority owned subsidiary of National City Corporation) as of
December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders equity, and
cash flows for each of the three years in the period ended
December 31, 2003. These financial statements are the
responsibility of National Processing, Inc.s management.
Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of National Processing, Inc. and
subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 3 to the financial
statements, in 2002 the Company changed its method of accounting
for goodwill.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Cleveland, Ohio

January 15, 2004


F-1



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##### Table of Contents



NATIONAL PROCESSING, INC.

Consolidated Balance Sheets

|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |         |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                           |                                                                                                                                                                   |                       
|                                           |                                                                                                                                                                   | December 31,          
|                                           |                                                                                                                                                                   |                       
|                                           |                                                                                                                                                                   | 2003                   |         | 2002   
|                                           |                                                                                                                                                                   |                        |         |        
|                                           |                                                                                                                                                                   |                       
|                                           |                                                                                                                                                                   | (Dollars in thousands)
|Assets                                     |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Current assets:                            |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           | Cash and cash equivalents                                                                                                                                         |                        | $       | 246,957 |   |   | $       | 185,513 |  
|                                           | Accounts receivable-trade                                                                                                                                         |                        |         | 136,346 |   |   |         | 152,132 |  
|                                           | Deferred tax assets                                                                                                                                               |                        |         | 2,775   |   |   |         | 2,113   |  
|                                           | Other current assets                                                                                                                                              |                        |         | 7,402   |   |   |         | 7,287   |  
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total current assets                       |                                                                                                                                                                   |                        | 393,480 |         |   |   | 347,045 |        
|Property and equipment:                    |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           | Furniture and equipment                                                                                                                                           |                        |         | 50,324  |   |   |         | 51,253  |  
|                                           | Building and leasehold improvements                                                                                                                               |                        |         | 12,490  |   |   |         | 11,835  |  
|                                           | Software                                                                                                                                                          |                        |         | 40,034  |   |   |         | 37,666  |  
|                                           | Property leased under capital leases                                                                                                                              |                        |         | 4,599   |   |   |         | 4,173   |  
|                                           | Land and improvements                                                                                                                                             |                        |         | 442     |   |   |         | 442     |  
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           |                                                                                                                                                                   |                        | 107,889 |         |   |   | 105,369 |        
|                                           | Accumulated depreciation and amortization                                                                                                                         |                        |         | (57,238 | ) |   |         | (51,662 | )
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           |                                                                                                                                                                   |                        | 50,651  |         |   |   | 53,707  |        
|Other assets:                              |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           | Goodwill                                                                                                                                                          |                        |         | 115,306 |   |   |         | 91,227  |  
|                                           | Other intangible assets, net of accumulated
    amortization of $30,187 in 2003 and $21,470 in 2002                                                               |                        |         | 43,312  |   |   |         | 41,990  |  
|                                           | Deferred tax assets                                                                                                                                               |                        |         | 13,117  |   |   |         | 12,231  |  
|                                           | Other assets                                                                                                                                                      |                        |         | 6,108   |   |   |         | 4,304   |  
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total other assets                         |                                                                                                                                                                   |                        | 177,843 |         |   |   | 149,752 |        
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total assets                               |                                                                                                                                                                   | $                      | 621,974 |         |   | $ | 550,504 |        
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Liabilities and shareholders
    equity   |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Current liabilities:                       |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           | Accounts payable-trade                                                                                                                                            |                        | $       | 26,426  |   |   | $       | 23,006  |  
|                                           | Accrued bankcard assessments                                                                                                                                      |                        |         | 33,335  |   |   |         | 27,645  |  
|                                           | Accrued compensation and benefits                                                                                                                                 |                        |         | 3,725   |   |   |         | 3,321   |  
|                                           | Income taxes payable                                                                                                                                              |                        |         | 11,693  |   |   |         | 17,211  |  
|                                           | Other accrued liabilities                                                                                                                                         |                        |         | 20,295  |   |   |         | 18,744  |  
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total current liabilities                  |                                                                                                                                                                   |                        | 95,474  |         |   |   | 89,927  |        
|Obligations under capital leases           |                                                                                                                                                                   |                        | 1,945   |         |   |   | 1,732   |        
|Minority interest                          |                                                                                                                                                                   |                        | 2,772   |         |   |   | 2,462   |        
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total liabilities                          |                                                                                                                                                                   |                        | 100,191 |         |   |   | 94,121  |        
|Shareholders equity:                      |                                                                                                                                                                   |                        |         |         |   |   |         |        
|                                           | Preferred stock, without par value,
    5,000,000 shares authorized; no shares issued or outstanding                                                              |                        |         |        |   |   |         |        |  
|                                           | Common stock, without par value,
    95,000,000 shares authorized; 53,113,009 and
    52,093,945 shares issued and outstanding in 2003 and 2002,
    respectively |                        |         | 1       |   |   |         | 1       |  
|                                           | Contributed capital                                                                                                                                               |                        |         | 214,944 |   |   |         | 198,728 |  
|                                           | Stock-based compensation plans                                                                                                                                    |                        |         | 112     |   |   |         | (311    | )
|                                           | Retained earnings                                                                                                                                                 |                        |         | 306,726 |   |   |         | 257,965 |  
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total shareholders equity                 |                                                                                                                                                                   |                        | 521,783 |         |   |   | 456,383 |        
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        
|Total liabilities and shareholders equity |                                                                                                                                                                   | $                      | 621,974 |         |   | $ | 550,504 |        
|                                           |                                                                                                                                                                   |                        |         |         |   |   |         |        

See notes to consolidated financial statements.

F-2



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##### Table of Contents



NATIONAL PROCESSING, INC.

Consolidated Statements of Income

|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |        | 
|------------------------------------------------------------------ | ------- | ---------------------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                   |         |                                         
|                                                                   |         | Year Ended December 31,                 
|                                                                   |         |                                         
|                                                                   |         | 2003                                     |         | 2002   |  | 2001
|                                                                   |         |                                          |         |        |  |     
|                                                                   |         |                                         
|                                                                   |         | (In thousands, except per share amounts)
|Revenue                                                            |         | $                                        | 480,098 |        |  | $    | 455,376 |        |  | $ | 473,250 |       
|Operating expenses                                                 |         |                                          | 353,915 |        |  |      | 330,518 |        |  |   | 343,819 |       
|General and administrative expenses                                |         |                                          | 22,845  |        |  |      | 23,142  |        |  |   | 22,819  |       
|Depreciation and amortization                                      |         |                                          | 21,256  |        |  |      | 18,542  |        |  |   | 20,346  |       
|Impairment, restructuring and related expenses                     |         |                                          | 1,273   |        |  |      | 1,650   |        |  |   | 3,870   |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Operating profit                                                   |         |                                          | 80,809  |        |  |      | 81,524  |        |  |   | 82,396  |       
|Net interest income                                                |         |                                          | 3,024   |        |  |      | 4,410   |        |  |   | 6,866   |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Income before provision for income taxes and
    minority interest |         |                                          | 83,833  |        |  |      | 85,934  |        |  |   | 89,262  |       
|Provision for income taxes                                         |         |                                          | 32,321  |        |  |      | 32,396  |        |  |   | 35,775  |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Income before minority interest                                    |         |                                          | 51,512  |        |  |      | 53,538  |        |  |   | 53,487  |       
|Minority interest                                                  |         |                                          | 2,751   |        |  |      | 2,461   |        |  |   | 827     |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Net income                                                         |         | $                                        | 48,761  |        |  | $    | 51,077  |        |  | $ | 52,660  |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Net income per common share                                        |         |                                          |         |        |  |      |         |        |  |   |         |       
|                                                                   | Basic   |                                          | $       | 0.93   |  |      | $       | 0.98   |  |   | $       | 1.03   | 
|                                                                   | Diluted |                                          | $       | 0.93   |  |      | $       | 0.97   |  |   | $       | 1.01   | 
|Average common shares outstanding                                  |         |                                          |         |        |  |      |         |        |  |   |         |       
|                                                                   | Basic   |                                          |         | 52,468 |  |      |         | 52,008 |  |   |         | 51,352 | 
|                                                                   | Diluted |                                          |         | 52,577 |  |      |         | 52,476 |  |   |         | 51,983 | 

See notes to consolidated financial statements.

F-3



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##### Table of Contents



NATIONAL PROCESSING, INC.

Consolidated Statements of Changes in
Shareholders Equity

|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ------ |  | ----------- | - | ------------ |  | -------- | ------- | ----- |  | - | ---- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                  |  |                        |            |        |  |             |   | Stock-Based  |  |          |         |      
|                                                                                                  |  | Common                 |            | Common |  | Contributed |   | Compensation |  | Retained |         |      
|                                                                                                  |  | Shares                 |            | Stock  |  | Capital     |   | Plans        |  | Earnings |         | Total
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |      
|                                                                                                  |  |                       
|                                                                                                  |  | (Dollars in Thousands)
|Balance at January 1, 2001                                                                        |  |                        | 50,935,460 |        |  | $           | 1 |              |  | $        | 178,729 |       |  | $ |     |   |  | $ | 182,828 |   |  | $ | 361,558 |  
|Net income                                                                                        |  |                        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 52,660  |   |  |   | 52,660  |  
|Common control business unit purchase, net of tax                                                 |  |                        |            |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | (28,600 | ) |  |   | (28,600 | )
|Issuance of common shares under stock-based
    compensation plans, including related tax effects |  |                        | 883,048    |        |  |             |  |              |  |          | 14,855  |       |  |   | (477 | ) |  |   |        |   |  |   | 14,378  |  
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                                                      |  |                        | 51,818,508 |        |  |             | 1 |              |  |          | 193,584 |       |  |   | (477 | ) |  |   | 206,888 |   |  |   | 399,996 |  
|Net Income                                                                                        |  |                        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 51,077  |   |  |   | 51,077  |  
|Issuance of common shares under stock-based
    compensation plans, including related tax effects |  |                        | 275,437    |        |  |             |  |              |  |          | 5,144   |       |  |   | 166  |   |  |   |        |   |  |   | 5,310   |  
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                                      |  |                        | 52,093,945 |        |  |             | 1 |              |  |          | 198,728 |       |  |   | (311 | ) |  |   | 257,965 |   |  |   | 456,383 |  
|Net income                                                                                        |  |                        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 48,761  |   |  |   | 48,761  |  
|Issuance of common shares under stock-based
    compensation plans, including related tax effects |  |                        | 1,019,064  |        |  |             |  |              |  |          | 16,216  |       |  |   | 423  |   |  |   |        |   |  |   | 16,639  |  
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                                                      |  |                        | 53,113,009 |        |  | $           | 1 |              |  | $        | 214,944 |       |  | $ | 112  |   |  | $ | 306,726 |   |  | $ | 521,783 |  
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  

See notes to consolidated financial statements.

F-4



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##### Table of Contents



NATIONAL PROCESSING, INC.

Consolidated Statements of Cash
Flows

|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |         |  
|----------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------- | -
|                                                                  |                                                |                        
|                                                                  |                                                | Year Ended December 31,
|                                                                  |                                                |                        
|                                                                  |                                                | 2003                    |         | 2002   |   | 2001
|                                                                  |                                                |                         |         |        |   |     
|                                                                  |                                                |                        
|                                                                  |                                                | (In thousands)         
|Operating Activities                                              |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Net income                                                        |                                                | $                       | 48,761  |        |   | $    | 51,077  |        |   | $ | 52,660  |        
|Non-cash items:                                                   |                                                |                         |         |        |   |      |         |        |   |   |         |        
|                                                                  | Depreciation of properties and equipment       |                         |         | 12,539 |   |      |         | 11,683 |   |   |         | 11,981  |  
|                                                                  | Amortization of intangible assets              |                         |         | 8,717  |   |      |         | 6,859  |   |   |         | 8,365   |  
|                                                                  | Impairment, restructuring and related expenses |                         |         | 1,273  |   |      |         | 1,650  |   |   |         | 3,250   |  
|                                                                  | Deferred income taxes                          |                         |         | (1,548 | ) |      |         | 2,265  |   |   |         | 4,042   |  
|                                                                  | Loss on disposition of fixed assets            |                         |         | 398    |   |      |         | 387    |   |   |         | 35      |  
|Changes in current assets and liabilities:                        |                                                |                         |         |        |   |      |         |        |   |   |         |        
|                                                                  | Accounts receivable-trade                      |                         |         | 19,030 |   |      |         | 11,512 |   |   |         | (44,513 | )
|                                                                  | Accounts payable-trade                         |                         |         | 1,213  |   |      |         | 3,926  |   |   |         | 4,599   |  
|                                                                  | Accrued bankcard assessments                   |                         |         | 5,585  |   |      |         | (468   | ) |   |         | 3,655   |  
|                                                                  | Income taxes payable                           |                         |         | (2,473 | ) |      |         | 10,541 |   |   |         | 4,848   |  
|                                                                  | Other current assets and liabilities           |                         |         | (1,239 | ) |      |         | (784   | ) |   |         | (203    | )
|                                                                  | Other, net                                     |                         |         | (404   | ) |      |         | 499    |   |   |         | 364     |  
|                                                                  | Minority interest, net of distributions        |                         |         | 310    |   |      |         | 1,635  |   |   |         | 827     |  
|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Net cash provided by operating activities                         |                                                |                         | 92,162  |        |   |      | 100,782 |        |   |   | 49,910  |        
|Investing activities                                              |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Capital expenditures                                              |                                                |                         | (9,343  | )      |   |      | (16,347 | )      |   |   | (20,089 | )      
|Proceeds from sales of fixed assets                               |                                                |                         |        |        |   |      |        |        |   |   | 34      |        
|Proceeds from maturities of Eurodollar deposits                   |                                                |                         |        |        |   |      |        |        |   |   | 56,000  |        
|Common control business unit purchase                             |                                                |                         |        |        |   |      |        |        |   |   | (44,000 | )      
|Acquisitions, net of cash received                                |                                                |                         | (33,356 | )      |   |      | (3,200  | )      |   |   | (48,500 | )      
|Net proceeds from sales of businesses                             |                                                |                         |        |        |   |      |        |        |   |   | 41,252  |        
|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Net cash used in investing activities                             |                                                |                         | (42,699 | )      |   |      | (19,547 | )      |   |   | (15,303 | )      
|Financing activities                                              |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Principal payments under property leased under
    capital leases |                                                |                         | (213    | )      |   |      | (130    | )      |   |   | (131    | )      
|Issuance of common stock under stock-based
    compensation plans |                                                |                         | 12,194  |        |   |      | 3,151   |        |   |   | 8,674   |        
|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Net cash provided by financing activities                         |                                                |                         | 11,981  |        |   |      | 3,021   |        |   |   | 8,543   |        
|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Net increase in cash and cash equivalents                         |                                                |                         | 61,444  |        |   |      | 84,256  |        |   |   | 43,150  |        
|Cash and cash equivalents, beginning of period                    |                                                |                         | 185,513 |        |   |      | 101,257 |        |   |   | 58,107  |        
|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Cash and cash equivalents, end of period                          |                                                | $                       | 246,957 |        |   | $    | 185,513 |        |   | $ | 101,257 |        
|                                                                  |                                                |                         |         |        |   |      |         |        |   |   |         |        
|Supplemental Cash Flow Information                                |                                                |                         |         |        |   |      |         |        |   |   |         |        
|                                                                  | Cash paid for income taxes                     |                         | $       | 36,569 |   |      | $       | 21,646 |   |   | $       | 26,396  |  

See notes to consolidated financial statements.

F-5



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##### Table of Contents



NATIONAL PROCESSING, INC.

Notes to Consolidated Financial
Statements

1. Organization and Business

Organization

National Processing, Inc. and subsidiaries (the
Company) are providers of electronic payment
processing services. The Company is 84% owned by National City
Corporation (National City), a financial holding
company headquartered in Cleveland, Ohio. The Companys
primary operating subsidiary, National Processing Company, LLC
is located in Louisville, Kentucky.

The Company and National City are parties to a
registration rights agreement whereby National City has the
right to require the Company to use its best efforts to register
under the Securities Act of 1933, as amended, all or a portion
of the issued and outstanding common stock held by National
City. National City also has the right to participate, or
piggy-back, in equity offerings initiated by the
Company, subject to a reduction of the size of the offering on
the advice of the managing underwriter.

Business

The Company operates two business segments,
Merchant Card Services and Payment Services. Merchant Card
Services authorizes, processes, and performs financial
settlement and reporting of card transactions, including credit
and debit card transactions. Merchant Card Services provides
services to merchant locations primarily in the United States
and represented 97% of the Companys revenue in 2003.

Payment Services was formerly an operating unit
within the Companys Corporate Outsourcing Solutions
segment. This segment was renamed Payment Services in 2001 after
the sale of the Business Process Outsourcing (BPO)
unit, which was also formerly a component of the Companys
Corporate Outsourcing Solutions segment. Payment Services
provides financial settlement and reporting solutions to large
and mid-size corporate customers in the travel and healthcare
industries. Payment Services settles 100% of domestic airline
tickets issued by travel agencies and settled through the
Airlines Reporting Corporation. Payment Services also settles
commission payments for car rental companies, cruise line
operators, and hotels. In the healthcare industry, Payment
Services provides financial settlement and reporting to
healthcare organizations such as insurance companies, managed
care organizations, and self-insured organizations. Payment
Services represented 3% of the Companys revenue in 2003.
Payment Services does not meet the materiality thresholds for
separate disclosures of segment information as defined in
Statement of Financial Accounting Standards (SFAS)
131, Disclosures about Segments of an Enterprise and Related
Information. As a result, these Notes to Consolidated
Financial Statements do not include segment disclosures.

Sponsorship
Agreement

The Company and National City Bank of Kentucky
(NCBK), a wholly owned subsidiary of National City,
are parties to a sponsorship agreement (the Sponsorship
Agreement) whereby the Company acts as NCBKs sole
agent for the purposes of providing electronic data
authorization and capture, reporting, settlement, and clearing
services for merchants who participate in Visa® and
MasterCard ® programs. The Company, along with other
nonbank processors, must be sponsored by a financial institution
that is a member of the Visa® and MasterCard ®
associations. NCBK is a member of such associations and acts as
the Companys primary sponsor.

The Company retains full responsibility for
performance of Merchant Card Services, except for certain
obligations or responsibilities of NCBK pursuant to the
Sponsorship Agreement. The Sponsorship Agreement provides that
the Company will comply with (1) all Visa® and
MasterCard ® bylaws, manuals and operating regulations and
other written materials as they from time to time are amended
which bind or apply to NCBK as a member of Visa® and
MasterCard ® with respect to Merchant Card Services or to
the Company as a third party processor, (2) all agreements
between merchants and NCBK with respect to Merchant Card
Services, and (3) all applicable federal or state laws and
regulations. Under the Sponsorship Agreement, the Company

F-6



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





will receive all fees, discounts and other
amounts payable by merchants for Merchant Card Services and will
bear the expenses of maintaining facilities necessary to provide
such services. Certain indemnification provisions are also
contained in the Sponsorship Agreement, under which the Company
will indemnify NCBK against losses, claims or other amounts in
accordance with the terms of the Sponsorship Agreement.


2. Summary of Significant Accounting
Policies

Principles of
Consolidation and Basis of Presentation

The Consolidated Financial Statements include the
accounts of National Processing, Inc. and its subsidiaries. On
June 28, 2001, the Company acquired a 70% ownership
interest in ABN AMRO Merchant Services, LLC (AAMS)
from ABN AMRO North America, Inc. and it subsidiaries
(AANA). See Note 4. Since the date of its
acquisition, the results of operations of AAMS have been
included in the Consolidated Financial Statements of the Company
and AANAs 30% ownership interest has been accounted for as
a minority interest. All significant intercompany transactions
and balances have been eliminated in consolidation. The
accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States.

Financial statements prepared in accordance with
accounting principles generally accepted in the United States
require the use of estimates and assumptions by management that
affect the reported amounts of revenue and expenses, assets and
liabilities, and the disclosure requirements for contingent
assets and liabilities during and at the date of the financial
statements. Consequently, actual results could differ from those
estimates.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue as services are
performed, recording revenue net of certain costs not controlled
by the Company, primarily interchange and debit network fees.
For the years ended December 31, 2003, 2002, and 2001,
interchange and debit network fees were $2.5 billion, $2.4
billion, and $2.2 billion, respectively.

A portion of total consolidated revenue is
derived from earnings on customer cash balances, which are
maintained by NCBK pursuant to contractual terms. For the years
ended December 31, 2003, 2002, and 2001, earnings on
customer balances were $2.2 million, $4.3 million, and
$8.3 million, respectively.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents consist of highly liquid bank
overnight repurchase agreements, which are readily convertible
to cash. The carrying amount of these balances approximates fair
value.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is stated at cost and
depreciated on a straight-line basis over the estimated useful
life or term of the related lease, whichever is shorter.
Maintenance and repairs are expensed as incurred, while
improvements that extend the useful life of the related asset
are capitalized and depreciated over the remaining life of the
related asset.

The Company capitalizes certain costs incurred to
develop or obtain internal-use software. For purposes of
amortization and impairment, capitalized costs are treated in
the same manner as other long-lived assets. To be considered as
internal-use software, the software is either acquired,
internally developed, or modified solely to meet the
Companys internal needs with no plans to market the
software externally. Project costs that are considered research
and development costs are expensed as incurred. Capitalized
software development

F-7



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





and purchased software costs are recorded at
cost. Commencing the month following project completion, these
costs are amortized on a straight-line basis over the estimated
useful life of the software.


The ranges of estimated useful lives are as
follows:

|                                     |  |  |               | 
|------------------------------------ |  |  | ------------- | 
|Furniture and equipment              |  |  | 3 to 10 years | 
|Building and leasehold improvements  |  |  | 5 to 30 years | 
|Software                             |  |  | 3 to 10 years | 
|Property leased under capital leases |  |  | 3 to 35 years | 
|Land improvements                    |  |  | 5 to 15 years | 

Upon the sale or disposal of property or
equipment, the cost and accumulated depreciation accounts are
adjusted accordingly and any gain or loss is recognized.



| |                        
| | -----------------------
| | Other Intangible Assets

Other intangible assets are composed primarily of
acquired merchant portfolios which represent costs allocated to
customer contracts acquired through acquisitions. These costs
are amortized on a straight-line basis over periods ranging from
5 to 10 years.



| |         
| | --------
| | Goodwill

Operating results of companies acquired in
purchase transactions are included in the consolidated
statements of operations from their respective acquisition
dates. The excess of the purchase price over the net assets
acquired (goodwill) is tested at least annually for impairment
based on specific guidance provided in SFAS 142, Goodwill and
Other Intangible Assets. The Company performed annual
impairment tests in 2002 and 2003. No impairment was required to
be recorded as a result of these tests.

Effective January 1, 2002, the Company
adopted SFAS 142. See Note 3 for further discussion of
the impact of this new accounting pronouncement on the
Companys Consolidated Financial Statements.



| |                 
| | ----------------
| | Asset Impairment

Effective January 1, 2002, the Company
adopted SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which changed the way asset
impairment is measured. Long-lived assets to be held and those
to be disposed of and certain intangibles are evaluated for
impairment using the guidance provided by SFAS 144. See
Note 3 for further discussion of the impact of this new
accounting pronouncement on the Companys Consolidated
Financial Statements.



| |                     
| | --------------------
| | Bankcard Assessments

Liabilities to MasterCard ® and Visa®
originating from the Companys agreements with these
agencies, as an authorized processor, are accrued and settled on
a monthly and quarterly basis, respectively.

The Company records assessments charged by credit
card associations as expense as the Company is the primary
obligor of these costs. For the years ended December 31,
2003, 2002, and 2001, assessments expense was $139.8 million,
$134.9 million, and $126.1 million, respectively.



| |             
| | ------------
| | Income Taxes

The Company is included in the consolidated
federal income tax return of National City. National City
allocates income taxes to its subsidiaries on a separate return
basis. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying

F-8



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized as income or expense in the period that includes the
enactment date.




| |                         
| | ------------------------
| | Stock-Based Compensation

The Company has various stock-based compensation
plans that allow for the granting of stock to eligible employees
and directors. See Note 12. Prior to January 1, 2003,
the Company accounted for those plans under the recognition and
measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Under
APB 25, compensation expense for employee stock options is
not recognized if the exercise price of the option equaled or
exceeded the market price of the stock on the date of grant.
Effective January 1, 2003, the Company adopted the fair
value method of recording stock options under the transitional
guidance of SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Compensation expense for employee stock options granted after
January 1, 2003, are recognized in the Consolidated
Financial Statements under the fair value method. Compensation
expense for restricted share awards is recognized ratably over
the period of service, generally the restricted period, based on
the fair value of the stock on the date of grant.

The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123,
Accounting for Stock-Based Compensation, to stock-based
employee awards for all periods. For purposes of providing the
pro forma disclosures required under SFAS 123, the fair
value of stock options granted were estimated at the date of
grant using a Black-Scholes option pricing model. The
Black-Scholes option pricing model was originally developed for
use in estimating the fair value of traded options, which have
different characteristics than the Companys employee stock
options. The model is also sensitive to changes in the
subjective assumptions, which can materially affect the fair
value estimate.

|                                                                                                                               |                       |                         |        |      |  |      |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------ | --------------------- | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                               |                       |                        
|                                                                                                                               |                       | Year Ended December 31,
|                                                                                                                               |                       |                        
|                                                                                                                               |                       | 2003                    |        | 2002 |  | 2001
|                                                                                                                               |                       |                         |        |      |  |     
|Net income, as reported                                                                                                        |                       | $                       | 48,761 |      |  | $    | 51,077 |      |  | $ | 52,660 |     
|Add: Stock-based compensation expense included in
    net income under fair value based method, net of related tax
    effects |                       |                         | 313    |      |  |      |       |      |  |   |       |     
|Deduct: Total stock-based compensation expense
    determined under fair value based method, net of related tax
    effects    |                       |                         | (6,501 | )    |  |      | (7,187 | )    |  |   | (4,481 | )   
|                                                                                                                               |                       |                         |        |      |  |      |        |      |  |   |        |     
|Pro forma net income                                                                                                           |                       | $                       | 42,573 |      |  | $    | 43,890 |      |  | $ | 48,179 |     
|                                                                                                                               |                       |                         |        |      |  |      |        |      |  |   |        |     
|Earnings per share:                                                                                                            |                       |                         |        |      |  |      |        |      |  |   |        |     
|                                                                                                                               | Basic  as reported   |                         | $      | 0.93 |  |      | $      | 0.98 |  |   | $      | 1.03 | 
|                                                                                                                               | Basic  pro forma     |                         | $      | 0.81 |  |      | $      | 0.84 |  |   | $      | 0.94 | 
|                                                                                                                               | Diluted  as reported |                         | $      | 0.93 |  |      | $      | 0.97 |  |   | $      | 1.01 | 
|                                                                                                                               | Diluted  pro forma   |                         | $      | 0.81 |  |      | $      | 0.84 |  |   | $      | 0.93 | 

F-9



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





The following weighted-average assumptions were
used in the option-pricing model:

|                                                  |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | 2003 |         | 2002 |  | 2001
|                                                  |  |      |         |      |  |     
|Risk free interest rate                           |  |      | 2.5     | %    |  |      | 3.6     | % |  |   | 5.5     | %
|Expected option life                              |  |      | 4 years |      |  |      | 4 years |   |  |   | 7 years |  
|Expected dividend yield                           |  |      | 0       | %    |  |      | 0       | % |  |   | 0       | %
|Volatility factor                                 |  |      | .473    |      |  |      | .485    |   |  |   | .495    |  
|Weighted average grant date fair value of options |  | $    | 7.89    |      |  | $    | 11.45   |   |  | $ | 15.14   |  



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform with the 2003 presentation. Reclassifications had no
effect on previously reported net income or equity.



|   |                                 
|-- | --------------------------------
|3. | Recent Accounting Pronouncements



| |                                     
| | ------------------------------------
| | Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS 141, Business
Combinations, and SFAS 142, Goodwill and Other
Intangible Assets. SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting and broadens the
criteria for recording intangible assets separate from goodwill.
Under the provisions of SFAS 142, goodwill and certain
other intangible assets, which do not possess finite useful
lives, are no longer to be amortized into net income over an
estimated life but rather are tested at least annually for
impairment based on specific guidance provided in the new
standard. Intangible assets determined to have finite lives
continue to be amortized over their estimated useful lives and
also continue to be subject to impairment testing.

The provisions of SFAS 142 were adopted by the
Company as required effective January 1, 2002. As part of
adopting the provisions of SFAS 142, a transitional
impairment test was applied to all goodwill during the quarter
ended March 31, 2002. The Company also performed annual
impairment tests in 2002 and 2003. No impairment was required to
be recorded as a result of these tests. The Company currently
does not have any other indefinite-lived intangible assets on
its balance sheet. There have not been any material categorical
reclassifications or adjustments to the useful lives of
finite-lived intangible assets as a result of adopting the new
standard.

If the non-amortization provisions of
SFAS 142 had been adopted effective January 1, 2001,
goodwill amortization expense, which is primarily nondeductible
for income tax purposes, would have been reduced by
$2.7 million for year ended December 31, 2001. For the
year ended December 31, 2001, proforma net income would
have been $55.0 million, or $1.06 per diluted share, versus
reported net income of $52.7 million, or $1.01 per diluted
share.

The Companys amortizable intangible assets
as of December 31, 2003 related almost exclusively to
acquired merchant portfolios. These costs are amortized on a
straight-line basis over periods ranging from 5 to
10 years. Amortization expense for the years ended
December 31, 2003, 2002, and 2001 was $8.7 million,
$6.9 million, and $5.6 million, respectively. The
estimated annual amortization expense for existing intangible
assets for each of the next five years is as follows:
2004  $9.7 million; 2005, 2006, and
2007  7.8, and 2008  $3.3 million.

In general, application of the new provisions may
result in more income statement volatility due to potential
periodic recognition of impairment losses, which are likely to
vary in amount and regularity, for goodwill and other
indefinite-lived intangible assets, versus reducing those assets
through the recognition of recurring, consistent amortization
amounts.

F-10



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)







| |                                 
| | --------------------------------
| | Accounting for Long-Lived Assets

SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, was issued in October 2001
and addresses how and when to measure impairment on long-lived
assets and how to account for long-lived assets that an entity
plans to dispose of either through sale, abandonment, exchange,
or distribution to owners. The statements provisions
supersede SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of, which addressed asset impairment, and certain provisions
of APB 30, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, related to
reporting the effects of the disposal of a business segment and
requires expected future operating losses from discontinued
operations to be recorded in the period in which the losses are
incurred rather than the measurement date. Under SFAS 144,
more dispositions may qualify for discontinued operations
treatment in the income statement. The provisions of
SFAS 144 became effective for the Company January 1,
2002 and have not had a material impact on the Companys
financial position, results of operations, or liquidity.



| |                                               
| | ----------------------------------------------
| | Accounting for Exit or Disposal
    Activities

SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, was issued in June 2002
and addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an
exit cost is recognized at the date of the entitys
commitment to an exit plan. The provisions of SFAS 146 become
effective for the Company January 1, 2003 and have not had
a material impact on the Companys financial position,
results of operations, or liquidity.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

In December 2002, the FASB issued SFAS 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, which provides guidance on how to
transition from the intrinsic value method of accounting for
stock-based employee compensation under APB 25,
Accounting for Stock Issued to Employees, to
SFAS 123s fair value method of accounting, if a
company so elects.

Effective January 1, 2003, the Company
adopted the fair value method of recording stock options under
SFAS 123. In accordance with the transitional guidance of
SFAS 148, the fair value method of accounting for stock
options was applied prospectively to awards granted subsequent
to December 31, 2002. As permitted, options granted prior
to January 1, 2003, continue to be accounted for under
APB Opinion 25, and the proforma impact of accounting
for these options at fair value will continue to be disclosed in
the Consolidated Financial Statements until the last of those
options vest in 2005.

As the cost of anticipated future option awards
is phased in over a four-year period, the annual impact will
rise assuming options are granted in future years at a similar
level and under similar market conditions. The actual impact per
diluted share may vary in the event the fair value or the number
of options granted increase or decrease, or if the current
accounting guidance changes. The Company uses the Black-Scholes
model to estimate option values. The Black-Scholes option
pricing model was originally developed for use in estimating the
fair value of traded options, which have different
characteristics from the Companys employee stock options.
The model is also sensitive to changes in subjective
assumptions, which can materially affect the fair value estimate.

F-11



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)







| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Accounting for Certain Financial Instruments
    with Characteristics of Both Liabilities and Equity

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
statement establishes standards for classifying and measuring
certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity.
The provisions of SFAS 150 became effective for the Company
on June 1, 2003 for any new qualifying financial
instruments that were subsequently entered into or modified. The
provisions of SFAS 150 for all other qualifying instruments
within its scope became effective as of July 1, 2003. The
adoption of this standard did not have a material impact on
financial position, results of operations, or liquidity. In
December 2003, the FASB deferred for an indefinite period the
application of the guidance in SFAS 150 to noncontrolling
interests that are classified as equity in the financial
statements of a subsidiary but would be classified as a
liability in the parents financial statements under SFAS
150. Management continues to evaluate the applicability of SFAS
150 to such entities and believes it would not have a material
impact, if any, to financial position, results of operations, or
liquidity.



| |                          
| | -------------------------
| | Accounting for Guarantees

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires additional recognition and disclosure by a guarantor in
its financial statements about its obligations under certain
guarantees.

The Companys contingent obligation to honor
chargebacks under merchant contracts is considered a performance
guarantee under FIN 45. Performance guarantees are
contracts that contingently require the guarantor to make
payments to the guaranteed party based on another entitys
failure to perform under an obligating agreement. Performance
guarantees are subject to both the recognition and disclosure
requirements of FIN 45. The disclosure requirements of
FIN 45 were effective for the Company as of
December 31, 2002. The required disclosures are included in
Note 13. The recognition requirements of FIN 45 were
adopted January 1, 2003 for new guarantees entered into
after such date and did not have a material impact on the
Companys financial position, results of operations, or
liquidity.



| |                                                
| | -----------------------------------------------
| | Consolidation of Variable Interest
    Entities

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46
provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a VIE are
to be included in an entitys consolidated financial
statements. A VIE exists when either the total equity investment
at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one of three
characteristics associated with owning a controlling financial
interest. Those characteristics include the direct or indirect
ability to make decisions about an entitys activities
through voting rights or similar rights, the obligation to
absorb the expected losses of an entity if they occur, and the
right to receive the expected residual returns of the entity if
they occur.

In December 2003, the FASB reissued FIN 46
with certain modifications and clarifications. Application of
this guidance was effective for interests in certain VIEs
commonly referred to as special-purpose entities
(SPEs) as of December 31, 2003. Application for
all other types of entities is required for periods ending after
March 31, 2004, unless previously applied. The provisions
of FIN 46 are not anticipated to have a material impact on
the Companys financial position, results of operations, or
liquidity.

F-12



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





4. Acquisitions

On June 9, 2003, the Company acquired
Bridgeview Payment Solutions, Inc. (BPS) from
Bridgeview Bank and Trust Company for $32.4 million in
cash. The allocation of the purchase price increased the
Companys goodwill by approximately $24 million. The
remainder of the purchase price was primarily allocated to
merchant contracts, which are included in other intangible
assets on the Consolidated Balance Sheets and are being
amortized on a straight-line basis over 5 years. The
results of operations for BPS have been included in the
Consolidated Financial Statements since the date of acquisition.
Incremental revenue as a result of this acquisition was
$12.2 million for year ended December 31, 2003.

On July 3, 2002, the Company acquired
processing contracts from a key strategic partner for
$2.7 million in cash, which was recorded, as an intangible
asset. Pursuant to the terms of the agreement, an additional
$1.0 million was paid on August 5, 2003 related to these
contracts, which also was recorded as an intangible asset. These
intangible assets are being amortized on a straight-line basis
over 10 years. The terms of the agreement also include
future payments to the seller for a portion of the revenue
derived from these contracts for a specified period. Under the
terms of the agreement, the Company obtained the right to
provide front-end authorization services for approximately
50,000 merchant locations. Prior to the acquisition, the Company
was already providing settlement services for these merchants.

On June 28, 2001, the Company acquired a 70%
ownership interest in AAMS from AANA for $48.5 million in
cash. Under the terms of the agreement, the Company provides
AAMS with all merchant processing services including both
authorization and settlement of all card-based transactions. The
acquisition, accounted for as a purchase, increased the
Companys goodwill by approximately $27 million. The
remainder of the purchase price was allocated to other
indentifiable intangibles, primarily acquired merchant
contracts, which are being amortized on a straight-line basis
over 10 years. Since the date of its acquisition, the
results of operations of AAMS have been included in the
Consolidated Financial Statements and AANAs 30% ownership
interest has been accounted for as a minority interest. AAMS is
an LLC that is treated as a partnership for federal income tax
purposes.

On January 8, 2001, the Company purchased
the merchant services business units from several of National
Citys banking subsidiaries for $44.0 million in cash.
This acquisition included merchant contracts and additional
sales personnel. The Company also assumed responsibility for all
merchant processing sales efforts throughout National
Citys 1,200 branch network via an exclusive
multi-year marketing agreement. The Company had previously
provided the authorization and settlement processing for these
merchants via a third party processing contract with National
Citys subsidiary banks. The acquisition was accounted for
as a transaction among entities under common control and was
recorded at National Citys historical cost bases. The
excess of the cash paid over the historical cost bases was
recorded as a reduction in shareholders equity, net of
income taxes of $15.4 million. The results of operations of
the National City merchant services business units have been
included in the consolidated financial statements since the date
of acquisition.

5. Divested and Discontinued Business
Units

In 2001, the Company divested its BPO
(Business Process Outsourcing) business and
discontinued its Denver collections business, which were
components of the former Corporate Outsourcing Solutions
segment. The Denver collections business was discontinued on
March 30, 2001. The sale of the BPO unit to Affiliated
Computer Services (ACS) was completed on
August 29, 2001 for $43.0 million in cash
($41.3 million after transaction-related expenses). For the
year ended December 31, 2001, the divested and discontinued
business units had revenue of $41.2 million. Operating
profit (loss) for the divested and discontinued business units,
which included $3.9 million of charges related to the
divestiture, was $(0.3) million for the year ended
December 31, 2001.

F-13



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





6. Impairment, Restructuring and Unusual
Items

In May 2003, the Company implemented various
initiatives focused on improving the long-term profitability of
the Company. In connection with these initiatives, the Company
consolidated certain technology functions, which resulted in
severance for 30 employees. The Company also incurred a
loss on the sale of 14 regional sales offices. The
remaining obligations for these initiatives are included in
other accrued liabilities on the Consolidated Balance Sheet. A
rollforward of the liability for severance and related charges
incurred in connection with these initiatives is presented in
the table below. The remaining obligations as of
December 31, 2003 represent future payments for severance
and lease commitments extending through August 15, 2005.

|                              |  |                   |       |  
|----------------------------- |  | ----------------- | ----- | -
|                              |  | Year Ended       
|                              |  | December 31, 2003
|(in thousands)                |  |                  
|Beginning balance             |  | $                 |      |  
|Severance and related charges |  |                   | 1,273 |  
|Payments and other            |  |                   | (713  | )
|                              |  |                   |       |  
|Ending balance                |  |                   | 560   |  
|                              |  |                   |       |  

In 2002, the Company recorded $3.2 million
($1.9 million after-tax) of expenses related to a
separation agreement with the former CEO. This amount was
included in general and administrative expense in the
accompanying financial statements. As of December 31, 2003,
the Company had $1.0 million remaining in accrued
liabilities for future obligations related to this agreement.

In May 2002, the Company announced plans to close
its remaining operations in Juarez, Mexico. The work performed
in Mexico has been relocated to existing facilities in the
United States. The Company recorded a pre-tax restructuring
charge of $1.7 million ($2.4 million after-tax) in the
second quarter of 2002 related to severance costs for
approximately 120 employees, building and equipment
write-downs, and related items. The after-tax charge exceeds the
pre-tax amount due to additional tax provisions required for
nondeductible losses and dividends from foreign subsidiaries. As
of December 31, 2003, the Company had $0.3 million
remaining in accrued liabilities for future obligations related
to this closure.

During 2001, the Company recorded net pre-tax
charges of $3.9 million ($4.6 million after-tax)
related to the BPO divestiture. The after-tax charges exceed the
pre-tax amounts due to additional provisions required for
nondeductible losses, repatriation of previously untaxed
earnings in foreign countries, and dividends from foreign
subsidiaries. These charges consisted of a loss of
$3.3 million ($4.3 million after-tax) on the sale of
the business and a $0.6 million charge ($0.4 million
after-tax) for severance costs related to organizational
restructuring actions taken to reduce support costs associated
with the BPO unit. As of December 31, 2003 the Company had
$0.2 million remaining in accrued liabilities related to
the final obligations associated with the BPO divestiture.

7. Transactions with Affiliates

The Company leases certain facilities from NCBK,
a wholly owned subsidiary of National City, under long-term
agreements classified as Obligations Under Capital
Leases in the accompanying balance sheets. Future minimum
payments under this lease, which expires in 2019, are
$2.6 million, including interest of $1.0 million.
Future minimum payments under these leases, including interest,
for the next five years are $0.2 million per year.

Substantially all of the Companys cash and
cash equivalents are held by NCBK and other National City
subsidiaries. The majority of interest income and earnings on
customer balances included in the Consolidated Statements of
Income are derived from accounts held at NCBK and other National
City subsidiaries.

F-14



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





The Company and National City are parties to
agreements pursuant to which the Company outsources a portion of
certain functions to National City including information
technology services, tax services, human resource services,
internal audit and legal services, from National City and its
affiliates. The Company also utilizes NCBK and other National
City subsidiaries for the majority of its banking services.
Charges for these services totaled $4.7 million,
$2.0 million, and $1.6 million in 2003, 2002, and
2001, respectively.

On January 8, 2001, the Company acquired the
merchant services business units from several National City
banking subsidiaries for $44.0 million, which was paid in
cash at closing. See Note 4.

8. Operating Leases

The Company leases various offices, facilities,
and equipment under noncancellable lease agreements with
expiration dates through 2019. During the normal course of
business, most of these leases will be renewed or replaced by
other leases. Future minimum rental payments under these leases
are $1.3 million in 2004, $1.0 million in 2005,
$0.9 million in 2006, $0.9 million in 2007,
$0.6 million in 2008 and $3.8 million thereafter. Rent
expense under operating leases was $2.5 million,
$2.5 million, and $2.9 million in 2003, 2002, and
2001, respectively.



|   |             
|-- | ------------
|9. | Income Taxes

The provision for income taxes consists of the
following (in thousands):

|          |         |                         |        |        |   |      |        |        |   |   |        |        |  
|--------- | ------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2003                    |        | 2002   |   | 2001
|          |         |                         |        |        |   |     
|Current:  |         |                         |        |        |   |      |        |        |   |   |        |       
|          | Federal |                         | $      | 30,480 |   |      | $      | 25,163 |   |   | $      | 31,074 |  
|          | State   |                         |        | 2,859  |   |      |        | 4,968  |   |   |        | 1,659  |  
|          | Other   |                         |        | 530    |   |      |        |       |   |   |        | (1,000 | )
|Deferred: |         |                         |        |        |   |      |        |        |   |   |        |       
|          | Federal |                         |        | (2,477 | ) |      |        | 2,887  |   |   |        | 1,660  |  
|          | State   |                         |        | 929    |   |      |        | (622   | ) |   |        | 2,382  |  
|          |         |                         |        |        |   |      |        |        |   |   |        |       
|          |         | $                       | 32,321 |        |   | $    | 32,396 |        |   | $ | 35,775 |       
|          |         |                         |        |        |   |      |        |        |   |   |        |       

The temporary differences that gave rise to
deferred tax assets and liabilities at December 31 are as
follows (in thousands):

|                          |                                   |      |        |        |   |   |        |        |  
|------------------------- | --------------------------------- | ---- | ------ | ------ | - | - | ------ | ------ | -
|                          |                                   | 2003 |        | 2002  
|                          |                                   |      |        |       
|Deferred tax assets:      |                                   |      |        |        |   |   |        |       
|                          | Accrued expenses                  |      | $      | 4,783  |   |   | $      | 4,622  |  
|                          | Accrued compensation and benefits |      |        | 241    |   |   |        | 602    |  
|                          | State net operating losses        |      |        |       |   |   |        | 530    |  
|                          | Intangible assets                 |      |        | 11,546 |   |   |        | 13,197 |  
|                          | Other                             |      |        | 5,618  |   |   |        | 1,423  |  
|                          |                                   |      |        |        |   |   |        |       
|                          |                                   |      | 22,188 |        |   |   | 20,374 |       
|Deferred tax liabilities: |                                   |      |        |        |   |   |        |       
|                          | Fixed assets                      |      |        | (6,296 | ) |   |        | (6,030 | )
|                          |                                   |      |        |        |   |   |        |       
|Net deferred tax assets   |                                   | $    | 15,892 |        |   | $ | 14,344 |       
|                          |                                   |      |        |        |   |   |        |       

F-15



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





The Company records a valuation allowance to
reduce deferred tax assets when it is more likely than not that
certain amounts will not be realized. The Company considers
projected future taxable income and tax planning strategies in
assessing the need for a valuation allowance. Should the Company
determine in the future that all or part of its net deferred tax
asset is unrealizable, an adjustment to the deferred tax asset
would be charged to income in the period such determination was
made. Management provides reserves when it appears probable that
a taxing authority may take a sustainable position on a matter
contrary to the Companys position. Based on existing
levels of pre-tax earnings, management believes that the Company
will generate future taxable income above minimum amounts
required to realize its deferred tax assets.

The reconciliation of the Companys income
tax provisions and the amounts computed by applying the U.S.
statutory income tax rate to income before taxes is as follows
(in thousands):

|                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|----------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                    |  |                        
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2003                    |        | 2002 |  | 2001
|                                    |  |                         |        |      |  |     
|U.S. statutory rate                 |  | $                       | 29,342 |      |  | $    | 30,077 |   |  | $ | 31,242 |  
|Nondeductible amortization          |  |                         |       |      |  |      |       |   |  |   | 630    |  
|State taxes, net of federal benefit |  |                         | 2,462  |      |  |      | 2,826  |   |  |   | 2,811  |  
|Change in valuation allowance       |  |                         |       |      |  |      |       |   |  |   | (185   | )
|Sale of BPO business                |  |                         |       |      |  |      |       |   |  |   | 1,305  |  
|Non-taxable LLC minority interest   |  |                         | (985   | )    |  |      | (861   | ) |  |   | (289   | )
|Other                               |  |                         | 1,502  |      |  |      | 354    |   |  |   | 261    |  
|                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|                                    |  | $                       | 32,321 |      |  | $    | 32,396 |   |  | $ | 35,775 |  
|                                    |  |                         |        |      |  |      |        |   |  |   |        |  

For 2003, 2002 and 2001, income tax benefits of
$3.0 million, $1.4 million and $4.6 million
respectively, were received related to the exercise of
nonqualified employee stock options. This benefit is recorded
directly to shareholders equity.

As of December 31, 2003, the Company had no
state net operating loss carryforwards for income tax purposes
available to offset future taxable income in the related states.
All net operating losses were utilized by December 31, 2003.



|    |                       
|--- | ----------------------
|10. | Employee Benefit Plans

The Company offers a 401(k) savings plan to all
employees who meet certain age and eligibility requirements. The
plan is funded by employee contributions and discretionary
matching contributions by the Company. The Company recognized
$2.2 million, $2.2 million, and $2.1 million in
matching contribution expense during 2003, 2002, and 2001,
respectively.

F-16



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)







|    |                            
|--- | ---------------------------
|11. | Net Income Per Common Share

The calculation of net income per common share
follows (in thousands, except per share amounts):

|         |                                           |                         |   |        |  |      |   |        |  |  |   |        | 
|-------- | ----------------------------------------- | ----------------------- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|         |                                           |                        
|         |                                           | Year Ended December 31,
|         |                                           |                        
|         |                                           | 2003                    |   | 2002   |  | 2001
|         |                                           |                         |   |        |  |     
|Basic:   |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income                                |                         | $ | 48,761 |  |      | $ | 51,077 |  |  | $ | 52,660 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Average common shares outstanding         |                         |   | 52,468 |  |      |   | 52,008 |  |  |   | 51,352 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income per common share-basic         |                         | $ | 0.93   |  |      | $ | 0.98   |  |  | $ | 1.03   | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|Diluted: |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income                                |                         | $ | 48,761 |  |      | $ | 51,077 |  |  | $ | 52,660 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Average common shares outstanding         |                         |   | 52,468 |  |      |   | 52,008 |  |  |   | 51,352 | 
|         | Dilutive effect of stock options          |                         |   | 109    |  |      |   | 468    |  |  |   | 631    | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Average common shares outstanding-diluted |                         |   | 52,577 |  |      |   | 52,476 |  |  |   | 51,983 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income per common share-diluted       |                         | $ | 0.93   |  |      | $ | 0.97   |  |  | $ | 1.01   | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       

Diluted net income per common share takes into
consideration the proforma dilution assuming certain unvested
restricted stock and unexercised stock option awards were
converted or exercised into common shares. For the years ended
December 31, 2003, 2002, and 2001, options to purchase
2,466,386, 2,467,768, and 1,428,352 shares of common stock,
respectively, were outstanding but not included in the
computation of diluted net income per share because their
inclusion would have had an anti-dilutive effect.



|    |                         
|--- | ------------------------
|12. | Stock-Based Compensation

The Company maintains various stock option and
restricted stock plans. These plans provide for the granting of
stock options and restricted shares to eligible employees and
directors. All of the Companys stock option and restricted
stock plans were approved by the stockholders.



| |              
| | -------------
| | Stock Options

The stock option plans under which options may
currently be granted authorize the issuance to officers,
directors and key employees of up to 9,200,000 options to
purchase shares of common stock at the fair value of the common
stock on the date of grant. These options generally become
exercisable 33% annually beginning one year from the date of
grant and expire not later than ten years from the date of grant.

Compensation expense was recognized in 2003,
2002, and 2001, related to the fair value of options for former
employees in situations where vesting continued upon a change in
employee status. The Company recognized $0.8 million,
$1.0 million, and $0.8 million of compensation expense
for these employees in 2003, 2002, and 2001, respectively.

F-17



---



##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





A summary of stock option activity follows:

|                  |           |                     |           |                     |   |                  |           |            |   |  |       |       | 
|----------------- | --------- | ------------------- | --------- | ------------------- | - | ---------------- | --------- | ---------- | - |  | ----- | ----- | 
|                  |           |                     |           |                    
|                  |           |                     |           | Options Outstanding
|                  |           |                     |           |                    
|                  |           | Option Shares       |           |                     |   | Weighted-Average
|                  |           | Available for Grant |           | Option Shares       |   | Price Per Share 
|                  |           |                     |           |                     |   |                 
|January 1, 2001   |           |                     | 6,032,575 |                     |   |                  | 2,806,965 |            |   |  | 11.54 |      
|                  | Granted   |                     |           | (1,464,725          | ) |                  |           | 1,511,583  |   |  |       | 25.91 | 
|                  | Forfeited |                     |           | 145,570             |   |                  |           | (145,570   | ) |  |       | 14.42 | 
|                  | Exercised |                     |           |                    |   |                  |           | (898,906   | ) |  |       | 11.36 | 
|                  |           |                     |           |                     |   |                  |           |            |   |  |       |      
|December 31, 2001 |           |                     | 4,713,420 |                     |   |                  | 3,274,072 |            |   |  | 18.09 |      
|                  | Granted   |                     |           | (1,290,550          | ) |                  |           | 1,368,324  |   |  |       | 27.42 | 
|                  | Forfeited |                     |           | 230,796             |   |                  |           | (230,796   | ) |  |       | 25.14 | 
|                  | Exercised |                     |           |                    |   |                  |           | (356,270   | ) |  |       | 12.97 | 
|                  |           |                     |           |                     |   |                  |           |            |   |  |       |      
|December 31, 2002 |           |                     | 3,653,666 |                     |   |                  | 4,055,330 |            |   |  | 21.29 |      
|                  | Granted   |                     |           | (102,500            | ) |                  |           | 141,776    |   |  |       | 20.01 | 
|                  | Forfeited |                     |           | 198,158             |   |                  |           | (198,158   | ) |  |       | 26.97 | 
|                  | Exercised |                     |           |                    |   |                  |           | (1,059,840 | ) |  |       | 12.30 | 
|                  |           |                     |           |                     |   |                  |           |            |   |  |       |      
|December 31, 2003 |           |                     | 3,749,324 |                     |   |                  | 2,939,108 |            |   |  | 24.08 |      
|                  |           |                     |           |                     |   |                  |           |            |   |  |       |      

Information about stock options outstanding at
December 31, 2003 follows:

|                |                |             |  |                |           |                  |  |             |       |                  |  |  |     |  |  |  |           |  |  |   |       | 
|--------------- | -------------- | ----------- |  | -------------- | --------- | ---------------- |  | ----------- | ----- | ---------------- |  |  | --- |  |  |  | --------- |  |  | - | ----- | 
|                |                |             |  |                |           | Weighted-Average |  |             |       |                 
|                |                |             |  | Weighted-      |           | Remaining        |  |             |       | Weighted-       
|Range of        |                |             |  | Average        |           | Contractual Life |  |             |       | Average Exercise
|Exercise Prices |                | Outstanding |  | Exercise Price |           | (in years)       |  | Exercisable |       | Price           
|                |                |             |  |                |           |                  |  |             |       |                 
|                | $5.50 - $10.99 |             |  |                | 184,569   |                  |  | $           | 10.19 |                  |  |  | 3.6 |  |  |  | 184,569   |  |  | $ | 10.19 | 
|                | 11.00 - 15.99  |             |  |                | 235,923   |                  |  |             | 11.63 |                  |  |  | 5.9 |  |  |  | 228,423   |  |  |   | 11.49 | 
|                | 16.00 - 20.99  |             |  |                | 217,161   |                  |  |             | 18.72 |                  |  |  | 5.9 |  |  |  | 115,000   |  |  |   | 17.85 | 
|                | 21.00 - 25.99  |             |  |                | 1,033,178 |                  |  |             | 25.40 |                  |  |  | 7.3 |  |  |  | 667,157   |  |  |   | 25.50 | 
|                | 26.00 - 32.95  |             |  |                | 1,268,277 |                  |  |             | 28.27 |                  |  |  | 8.1 |  |  |  | 488,198   |  |  |   | 28.67 | 
|                |                |             |  |                |           |                  |  |             |       |                  |  |  |     |  |  |  |           |  |  |   |       | 
|                | Total          |             |  |                | 2,939,108 |                  |  | $           | 24.08 |                  |  |  | 7.2 |  |  |  | 1,683,347 |  |  | $ | 22.32 | 
|                |                |             |  |                |           |                  |  |             |       |                  |  |  |     |  |  |  |           |  |  |   |       | 



| |                 
| | ----------------
| | Restricted Stock

The Companys restricted stock plan provides
for the issuance of up to 500,000 shares of common stock to
officers and key employees. In general, the restrictions on
shares granted expire within a four-year period. The Company
recognizes compensation expense over the restricted period. The
grant date fair value of the restricted share awards granted in
2003, 2002, and 2001 was $20.27, $27.92, and $24.18,
respectively. The Company recognized $0.3 million,
$0.1 million, and $0.2 million of compensation expense
in 2003, 2002, and 2001, respectively, related to these
restricted stock awards. As of December 31, 2003, 166,100
shares of restricted stock were outstanding.



|    |                                          
|--- | -----------------------------------------
|13. | Contingent Liabilities and
    Guarantees

Under the rules of Visa® and MasterCard
® , when a merchant processor acquires card transactions,
it has certain contingent liabilities for the transactions
processed. This contingent liability arises in the event of a
billing dispute between the merchant and a cardholder that is
ultimately resolved in the cardholders favor. In such a
case, the transaction is charged back to the
merchant and the disputed amount is credited or otherwise
refunded to the cardholder. If the Company is unable to collect
this amount from the merchants account, and if the
merchant refuses or is unable to reimburse the Company for the
chargeback due to

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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





liquidation or other reasons, the Company will
bear the loss for the amount of the refund paid to the
cardholder.


A cardholder, through its issuing bank, generally
has until the later of up to four months after the date a
transaction is processed or the delivery of the product or
service to present a chargeback to the Company as the merchant
processor. Management believes the maximum potential exposure
for chargebacks would not exceed the total amount of merchant
transactions processed through Visa® and MasterCard ®
for the last four months, plus any outstanding delayed-delivery
transactions and unresolved chargebacks in the process of
resolution. For the last four months of 2003, this amount
totaled approximately $56 billion. At December 31,
2003, the Company had $6 million of unresolved chargebacks
that were in process of resolution.

During 2003, 2002, and 2001, the Company
processed $151 million, $163 million, and
$168 million, respectively, in chargebacks presented by
issuing banks. Actual losses recorded for 2003, 2002, and 2001
were $3 million, $3 million, and $4 million,
respectively. The Company accrues for probable losses based on
historical experience and at December 31, 2003 and 2002,
had $1.3 million and $1.5 million, respectively,
recorded in other accrued liabilities for expected losses.

In most cases, a contingent liability for
chargebacks is unlikely to arise, as most products or services
are delivered when purchased, and credits are issued on returned
items. Where the product or service is not provided, however,
until some time after the purchase
(delayed-delivery), the potential for this
contingent liability increases. In 2003, the Company processed
approximately $13 billion of merchant transactions related
to delayed-delivery purchases.

The Company currently processes card transactions
for two of the largest airlines in the United States. In May
2002, the Company announced its decision to discontinue
processing debit and credit card transactions for the airline
industry. The Company will honor its existing contractual
obligations to the two airlines it currently serves but does not
intend to renew such contracts when their current terms expire.
The contracts currently in effect have expiration dates of April
2004 and November 2005. One of the two continuing airline
merchants, United Airlines, Inc., is currently operating under
Chapter 11 protection. In the event of liquidation of
United Airlines or the Companys other airline customer,
the Company could become financially responsible for refunding
tickets purchased through Visa® and MasterCard ® under
the chargeback rules of those associations. At December 31,
2003, the estimated dollar value of tickets purchased, but as
yet unflown, under continuing merchant processing contracts, was
approximately $786 million, of which approximately
$464 million pertained to United Airlines. Based upon
available information, these amounts represent managements
best estimate of its maximum potential chargeback exposure
related to its continuing airline customers. As of
December 31, 2003, the Company held no significant
collateral under these contracts.

During the second quarter of 2003, the
Companys obligation to process card transactions for two
other airline merchants, including U.S. Airways Group,
Inc., ceased with these merchants transitioning to new
processors. At December 31, 2003, the estimated dollar
value of tickets purchased, but as yet unflown, under these
concluding contracts was approximately $5 million. This
amount represents managements best estimate of its maximum
potential chargeback exposure under these concluded contracts.
As of December 31, 2003, the Company held cash collateral
of $1 million and third-party indemnifications of
$110 million against this remaining chargeback exposure.

In November 2003, Congress passed the Federal
Aviation Administration Reauthorization Act. This legislation
included an extension of the airline ticket re-accommodation
provision, which requires airlines to honor tickets through
November 2004 for other airlines that may suspend, interrupt or
discontinue services due to insolvency or liquidation.

Based on current conditions in the airline
industry and other information currently available to the
Company, management believes the risk of a material loss under
the chargeback rules is unlikely.

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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)







| |                        
| | -----------------------
| | MasterCard ®  Guarantee

On May 16, 2003, the Company provided a
financial guarantee relating to NCBKs obligations with
MasterCard ® . The agreement guarantees the payment of
NCBKs membership obligations pursuant to its license
agreement with MasterCard ® , the Bylaws and Rules of
MasterCard ® , and all regulations and policies of
MasterCard ® should NCBK default or fail to meet its
obligations of membership. The Companys primary risk under
this guarantee is related to potential chargebacks; however, the
Company believes its exposure to a material loss under the
guarantee is not probable at this time. The Company processes
all transactions received from MasterCard ® by NCBK under
the exclusive terms of the Sponsorship Agreement.



| |                
| | ---------------
| | Visa® Guarantee

On August 6, 2002, the Company provided a
financial guarantee relating to NCBKs membership
obligations with Visa®. The agreement guarantees the
payment of NCBKs membership obligations pursuant to the
Visa® Certificate of Incorporation and Amendments, Bylaws,
rules, policies and operating rules should NCBK default or fail
to meet its obligations of membership including NCBKs
obligations to pay any Visa® member attendant to
NCBKs membership in Visa®, and Visas expenses
incurred in payment of such obligations on NCBKs behalf or
otherwise because of NCBKs failure to meet such
obligations. The Companys primary risk under this
guarantee is related to potential chargebacks; however, the
Company believes its exposure to a material loss under the
guarantee is not probable at this time. The Company processes
all transactions received from Visa® by NCBK under the
exclusive terms of the Sponsorship Agreement.



| |           
| | ----------
| | Litigation

In the normal course of business, the Company is
involved in litigation from time to time. In the opinion of
management, the ultimate liability, if any, arising from this
litigation is not expected to have a material adverse effect on
the Companys financial condition, results of operations,
or liquidity.



|    |                                                 
|--- | ------------------------------------------------
|14. | Quarterly Results of Operations
    (Unaudited):

Selected quarterly data for 2003 and 2002 are as
follows (in thousands, except per share amounts):

|                                    |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                    |  | First   |         | Second  |  | Third   |         | Fourth  |  |     
|                                    |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Year
|                                    |  |         |         |         |  |         |         |         |  |     
|2003                                |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|Revenue                             |  | $       | 105,954 |         |  | $       | 113,614 |         |  | $    | 124,997 |  |  | $ | 135,533 |  |  | $ | 480,098 | 
|Operating profit                    |  |         | 13,929  |         |  |         | 18,377  |         |  |      | 24,232  |  |  |   | 24,271  |  |  |   | 80,809  | 
|Net income                          |  |         | 8,547   |         |  |         | 11,066  |         |  |      | 14,309  |  |  |   | 14,839  |  |  |   | 48,761  | 
|Basic net income per common share   |  | $       | 0.16    |         |  | $       | 0.21    |         |  | $    | 0.27    |  |  | $ | 0.28    |  |  | $ | 0.93    | 
|Diluted net income per common share |  | $       | 0.16    |         |  | $       | 0.21    |         |  | $    | 0.27    |  |  | $ | 0.28    |  |  | $ | 0.93    | 

|                                    |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                    |  | First   |         | Second  |  | Third   |         | Fourth  |  |     
|                                    |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Year
|                                    |  |         |         |         |  |         |         |         |  |     
|2002                                |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|Revenue                             |  | $       | 109,945 |         |  | $       | 112,664 |         |  | $    | 114,486 |  |  | $ | 118,281 |  |  | $ | 455,376 | 
|Operating profit                    |  |         | 19,016  |         |  |         | 21,617  |         |  |      | 18,125  |  |  |   | 22,766  |  |  |   | 81,524  | 
|Net income                          |  |         | 12,048  |         |  |         | 12,199  |         |  |      | 12,686  |  |  |   | 14,144  |  |  |   | 51,077  | 
|Basic net income per common share   |  | $       | 0.23    |         |  | $       | 0.24    |         |  | $    | 0.24    |  |  | $ | 0.27    |  |  | $ | 0.98    | 
|Diluted net income per common share |  | $       | 0.23    |         |  | $       | 0.23    |         |  | $    | 0.24    |  |  | $ | 0.27    |  |  | $ | 0.97    | 

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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





The above financial data for 2003 includes a
second quarter charge of $1.3 million ($0.8 million
after-tax) related to the consolidation of technology functions
and a loss on the sale of 14 regional sales offices.

The above financial data for 2002 includes
certain charges. The second quarter of 2002 includes a charge of
$1.7 million ($2.4 million after-tax) for severance
costs, building and equipment write-downs and other items
related to the closure of operations in Juarez, Mexico. The
third quarter of 2002 includes a charge of $3.4 million
($2.0 million after-tax) related to a separation agreement
with the former CEO.

F-21