TABLE OF CONTENTS




|                                                |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                              
|PART I                                         
|                                                | Item 1. Business                                                                             
|                                                | Item 2. Properties                                                                           
|                                                | Item 3. Legal Proceedings                                                                    
|                                                | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                        
|                                                | Item 5. Market for the Registrants Common Equity and Related Shareholder Matters            
|                                                | Item 6. Selected Financial Data                                                              
|                                                | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|                                                | Item 8. Financial Statements and Supplementary Data                                          
|                                                | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                       
|                                                | 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                                      
|                                                | Item 14. Controls and Procedures                                                             
|PART IV                                        
|                                                | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                     
|CERTIFICATIONS                                 
|CERTIFICATIONS                                 
|                                                | REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS                                            
|                                                | Consolidated Balance Sheets                                                                  
|                                                | Consolidated Statements of Income                                                            
|EX-10.19 Employment Agreement and Undertaking  
|EX-10.28 2000 Stock Option Plan                
|EX-10.29 1996 Stock Option Plan                
|EX-10.31 Short Term Incentive Compensation Plan
|EX-10.32 Long Term Incentive Compensation Plan 
|EX-21.1 Subsidiaries of the Company            
|EX-23.1 Consent of Independent Auditors        
|EX-24.1 Power of Attorney                      
|EX-99.1 CFO Code of Ethics                     
|EX-99.2 Section 906 Certification              
|EX-99.3 Section 906 Certification              



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##### 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,
    2002
|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.)
|                                                                                        
|1231 Durrett Lane
    Louisville, Kentucky
     (Address of principal executive offices) |  | 40213-2008
    (Zip Code)                              

Registrants telephone number, including
area code: (502) 315-2000

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.

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 28,
2002 was $227,737,709. The market value calculation was
determined using the closing sale price of the Registrants
common stock on June 28, 2002, as reported on the New York
Stock Exchange.

The number of shares outstanding of the
Registrants Common Stock as of January 31, 2003 was
52,152,277.

Documents Incorporated by Reference:

Portions of the Registrants Proxy Statement
(to be dated approximately March 28, 2003) 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; and Item 13, Certain Relationships and
Related Transactions, of Part III.



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##### Table of Contents






TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I   |  |                                                                                           |  |     
|        
|Item 1.  |  | Business                                                                                  |  |      | 3  | 
|        
|Item 2.  |  | Properties                                                                                |  |      | 7  | 
|        
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 7  | 
|        
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 7  | 
|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 Disclosure About
    Market Risk                             |  |      | 20 | 
|        
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 20 | 
|        
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 20 | 
|PART III |  |                                                                                           |  |     
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |      | 20 | 
|        
|Item 11. |  | Executive Compensation                                                                    |  |      | 21 | 
|        
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 21 | 
|        
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 21 | 
|        
|Item 14. |  | Controls and Procedures                                                                   |  |      | 21 | 
|PART IV  |  |                                                                                           |  |     
|        
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 22 | 
|         |  | Signatures                                                                                |  |      | 25 | 
|         |  | Certifications                                                                            |  |      | 26 | 

2



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##### Table of Contents






PART I




Item 1.  Business

Organization

National Processing, Inc. and its subsidiaries
(the Company) are providers of electronic payment
processing. The Company, headquartered in Louisville, Kentucky,
is an Ohio corporation that is 85% owned by National City
Corporation (National City), a financial holding
company headquartered in Cleveland, Ohio. The Company maintains
operations, employees, and contracts that are substantially
independent of National Citys other operating
subsidiaries. The Company and National City are parties to
agreements pursuant to which National City and its subsidiaries
provide the Company, and the Company provides National City and
its subsidiaries, certain administrative support, operations,
and processing 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 96% of the Companys revenue in 2002.

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. Payment Services represented 4% of the
Companys revenue in 2002.

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.

See Segment Reporting, Note 15 to the
Consolidated Financial Statements, for additional financial
disclosures of the Companys operating segments and foreign
operations.

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.

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



| |   |                                                 
| | - | ------------------------------------------------
| |  | Processing of all credit card types             
|
| |  | Authorization and settlement accounting         
|
| |  | Merchant reporting                              
|
| |  | Chargeback prevention and handling              
|
| |  | Point of Sale (POS) hardware and software       
|
| |  | On-line and off-line debit card acquiring       
|
| |  | Electronic Benefits Transfer (EBT)              
|
| |  | Customized reporting formats and data management

3



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| |   |                     
| | - | --------------------
| |  | Call-center services
|
| |  | E-commerce solutions

NPC 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 2002, NPC processed
3.9 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, NPC 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 31, 2001 and
a 70% ownership interest in ABN AMRO Merchant Services, LLC
(AAMS) on June 28, 2001. In 2002, approximately
60% of merchant card processing revenue was from regional
merchants.

Merchant Card Services revenue was
$434.9 million, which represented 96% of the Companys
revenue in 2002. Total transaction volume increased by 11% to
3.9 billion in 2002. Total dollar settlement volume
increased by 9% to $169 billion in 2002.

Merchant Card Services uses various sales and
marketing channels for both its national and regional customers.
The Company employs approximately 250 commission only sales
representatives who focus on direct marketing channels. In
addition, the Company sells its services through approximately
700 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 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. NPC
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 travel and healthcare industries.
Payment Services revenue was $20.4 million, which
represented 4% of the Companys revenue in 2002. Payment
Services settled $67 billion of payments in 2002.

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, these services were performed in the
Companys United States locations.

In the healthcare industry, Payment Services uses
AcceleratedPaySM, a healthcare settlement solution,
to provide financial settlement and reporting to healthcare
organizations such as insurance companies, managed

4



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care organizations, and self-insured
organizations. These services are performed 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, or $0.09 per
diluted share) related to the BPO divestiture. These charges
consisted of a loss of $3.3 million ($4.2 million
after-tax, or $0.08 per diluted share) on the sale of the
business and a $0.6 million charge ($0.4 million after-tax,
or $0.01 per diluted share) for severance costs related to
fourth quarter organizational restructuring actions taken to
reduce support costs associated with the BPO unit.

In 2000, the Company recorded charges of
$8.6 million ($5.6 million after-tax, or $0.11 per
diluted share) related to divested and discontinued business
units. These charges consisted of $7.1 million
($4.6 million after-tax, or $0.09 per diluted share) to
write-off goodwill and fixed assets for the Denver collections
business and $1.5 million ($1.0 million after-tax, or
$0.02 per diluted share) for site consolidation initiatives in
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 bank 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 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

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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 has also
proposed corporate governance rules that were presented to the
Securities and Exchange Commission for review and approval. The
proposed 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 already strong 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 against losses, claims or other amounts in accordance with
the terms of the Sponsorship Agreement. See Note 13 to the
Consolidated Financial Statements.

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®

6



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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 amount
guaranteed exceeds the amount of the Companys equity,
however, the Company believes its exposure to material loss
under the guarantee is unlikely. National Processing processes
all transactions received from Visa® by NCBK under the
exclusive terms of the Sponsorship Agreement.


Employees

As of December 31, 2002, the Company had
approximately 1,800 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 National City Bank of Kentucky. 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 29 marketing and
sales offices, which have varying lease expiration terms and
range in size from 100 square feet to 2,300 square feet and are
located throughout the United States. The Company owns one idle
processing facility in Juarez, Mexico, consisting of 50,000
square feet, which is currently held for sale. All properties
leased and owned by 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.

7



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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 2002 and 2001 were as follows:

|                             |  |      |        |     |  |       |        |  |  |   |        | 
|---------------------------- |  | ---- | ------ | --- |  | ----- | ------ |  |  | - | ------ | 
|                             |  | High |        | Low |  | Close
|                             |  |      |        |     |  |      
|Year Ended December 31, 2002 |  |      |        |     |  |       |        |  |  |   |        | 
|First Quarter                |  | $    | 32.680 |     |  | $     | 22.780 |  |  | $ | 28.580 | 
|Second Quarter               |  |      | 30.280 |     |  |       | 24.800 |  |  |   | 25.800 | 
|Third Quarter                |  |      | 27.500 |     |  |       | 16.950 |  |  |   | 16.990 | 
|Fourth Quarter               |  |      | 16.600 |     |  |       | 11.500 |  |  |   | 16.050 | 
|Year Ended December 31, 2001 |  |      |        |     |  |       |        |  |  |   |        | 
|First Quarter                |  | $    | 19.510 |     |  | $     | 15.625 |  |  | $ | 18.590 | 
|Second Quarter               |  |      | 28.310 |     |  |       | 17.350 |  |  |   | 28.000 | 
|Third Quarter                |  |      | 35.750 |     |  |       | 20.810 |  |  |   | 28.000 | 
|Fourth Quarter               |  |      | 34.330 |     |  |       | 24.500 |  |  |   | 32.500 | 

The number of holders of record of the
Companys common stock as of January 31, 2003 was 97.
The Company believes it has significantly more than
97 beneficial holders of its common stock.

The Company has never declared or paid cash
dividends on its common stock and has no plans to pay cash
dividends in the foreseeable future. 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, borrowing covenants, and other factors deemed
relevant.

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 further
information should contact:

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

8



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|        |                        
|------- | -----------------------
|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,             
|                                     |  |                                     
|                                     |  | 2002                                 |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                     |  |                                      |       |      |  |      |       |      |  |     
|                                     |  |                                     
|                                     |  | (in millions, except per share data)
|Income Statement Data: (1)           |  |                                      |       |      |  |      |       |      |  |      |       |  |  |   |       |   |  |   |       | 
|Revenue                              |  | $                                    | 455.4 |      |  | $    | 473.3 |      |  | $    | 427.3 |  |  | $ | 431.0 |   |  | $ | 483.2 | 
|Net Income (Loss) (2)(3)             |  |                                      | 51.1  |      |  |      | 52.7  |      |  |      | 43.4  |  |  |   | (37.4 | ) |  |   | 15.3  | 
|Basic Net Income (Loss) Per Share    |  |                                      | 0.98  |      |  |      | 1.03  |      |  |      | 0.85  |  |  |   | (0.74 | ) |  |   | 0.30  | 
|Diluted Net Income (Loss) Per Share  |  |                                      | 0.97  |      |  |      | 1.01  |      |  |      | 0.85  |  |  |   | (0.74 | ) |  |   | 0.30  | 
|Average Shares Outstanding  Basic   |  |                                      | 52.0  |      |  |      | 51.4  |      |  |      | 50.8  |  |  |   | 50.7  |   |  |   | 50.6  | 
|Average Shares Outstanding  Diluted |  |                                      | 52.5  |      |  |      | 52.0  |      |  |      | 51.0  |  |  |   | 50.7  |   |  |   | 50.7  | 
|                                    
|Balance Sheet Data: (1)              |  |                                      |       |      |  |      |       |      |  |      |       |  |  |   |       |   |  |   |       | 
|Working Capital                      |  | $                                    | 257.1 |      |  | $    | 199.7 |      |  | $    | 184.2 |  |  | $ | 124.4 |   |  | $ | 72.4  | 
|Goodwill                             |  |                                      | 91.2  |      |  |      | 91.2  |      |  |      | 79.4  |  |  |   | 88.4  |   |  |   | 171.5 | 
|Total Assets                         |  |                                      | 550.5 |      |  |      | 478.3 |      |  |      | 435.4 |  |  |   | 402.3 |   |  |   | 419.4 | 
|Long-Term Obligations                |  |                                      | 1.7   |      |  |      | 1.9   |      |  |      | 3.2   |  |  |   | 6.0   |   |  |   | 8.7   | 
|Total Liabilities                    |  |                                      | 94.1  |      |  |      | 78.3  |      |  |      | 73.9  |  |  |   | 85.9  |   |  |   | 66.7  | 
|Shareholders Equity                 |  |                                      | 456.4 |      |  |      | 400.0 |      |  |      | 361.6 |  |  |   | 316.4 |   |  |   | 352.7 | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | This financial data includes the impact of the
    following acquisitions during the periods presented: on
    January 15, 1998, the Company acquired JBH Travel
    Audit Inc., a commission audit and collections company; 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. 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 unusual
    items summarized as follows: 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; for 1998, $1.4 million ($0.8 million
    after-tax) of net gains related to contract terminations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(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, 1998, proforma net income
    (loss) would have been $55.0, $45.5, $(34.7) and $19.8 for
    the years ended December 31, 2001, 2000, 1999 and 1998,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

9



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##### Table of Contents






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

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,
2002, the Company had net deferred tax assets of $14.3 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 is likely that a taxing authority may
take a sustainable position on a matter contrary to the
Companys position.



| |                  
| | -----------------
| | 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.

Property and equipment, net of accumulated
depreciation, totaled $53.7 million as of December 31,
2002, which represented 10% of total assets. Useful lives of
property and equipment (which includes internal use software)
are estimated in order to determine the amount of depreciation
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 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.

10



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##### Table of Contents



Goodwill and other intangible assets, net of
accumulated amortization, totaled $133.2 million as of
December 31, 2002, which represented 24% of total assets.
The Company analyzes goodwill and other intangible assets for
impairment issues 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.

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, 2002, 2001 and 2000, interchange and debit
network fees were $2.4 billion, $2.2 billion, and $1.8
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 50% 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, 2002, 2001 and 2000, earnings on
customer balances were $4.3 million, $8.3 million and
$8.4 million, respectively.



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

Bankcard assessments are liabilities to
Visa® and MasterCard ® that originate from the
Companys agreements with these agencies. The Company
recovers these assessment charges through various contractual
arrangements with its customers. Bankcard assessment expense is
the largest component of operating expense and, for the years
ended December 31, 2002, 2001 and 2000, was $134.9 million,
$126.1 million and $103.2 million, respectively. The
increase in assessment 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
corporate management and administrative expense as well as fees
for certain administrative services, such as internal audit and
legal services from National City and its affiliates.

Results of Operations

The Companys operating results are
presented below in the manner in which they are viewed by
management. The Company divested certain business units during
2001 and 2000 in order to focus on its core

11



---



##### Table of Contents



business of electronic payment settlement.
Accordingly, the segment results presented below segregate the
operating performance for the core business lines from those
that were divested.


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

|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |       |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|---------------------------------------------------- |  | ---------------------- | ------- | ---------- |  | -------- | --- | ---------- |  | ------------ | ------ | ----------- |  | ----- | --- | - |  | - | - |  |  | - | ------ | - |  | - | ------- | 
|                                                     |  | Merchant               |         | % Change   |  |          |     | % Change   |  | Divested and |        | Unallocated |  |      
|                                                     |  | Card                   |         | Over Prior |  | Payment  |     | Over Prior |  | Discontinued |        | Corporate   |  |      
|2002                                                 |  | Services               |         | Year       |  | Services |     | Year       |  | Businesses   |        | Items       |  | Total
|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |      
|                                                     |  |                       
|                                                     |  | (Dollars in thousands)
|Revenue                                              |  | $                      | 434,943 |            |  |          | 8   |            |  | $            | 20,433 |             |  |       | (32 | ) |  | $ |  |  |  | $ |       |   |  | $ | 455,376 | 
|Operating expenses                                   |  |                        | 320,708 |            |  |          | 9   |            |  |              | 9,810  |             |  |       | (51 | ) |  |   |  |  |  |   |       |   |  |   | 330,518 | 
|General and administrative expenses                  |  |                        | 18,265  |            |  |          | 17  |            |  |              | 1,700  |             |  |       | (25 | ) |  |   |  |  |  |   | 3,177  |   |  |   | 23,142  | 
|Depreciation and amortization                        |  |                        | 16,739  |            |  |          | 6   |            |  |              | 1,803  |             |  |       | (20 | ) |  |   |  |  |  |   |       |   |  |   | 18,542  | 
|Impairment, restructuring and related expenses       |  |                        | 1,650   |            |  |          | NM  |            |  |              |       |             |  |       |    |   |  |   |  |  |  |   |       |   |  |   | 1,650   | 
|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |       |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Operating profit (loss)                              |  |                        | 77,581  |            |  |          | 1   |            |  |              | 7,120  |             |  |       | 24  |   |  |   |  |  |  |   | (3,177 | ) |  |   | 81,524  | 
|Net interest income                                  |  |                        | 4,022   |            |  |          | (33 | )          |  |              | 388    |             |  |       | (22 | ) |  |   |  |  |  |   |       |   |  |   | 4,410   | 
|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |       |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Income (loss) before taxes and minority
    interest |  |                        | 81,603  |            |  |          | (2  | )          |  |              | 7,508  |             |  |       | 20  |   |  |   |  |  |  |   | (3,177 | ) |  |   | 85,934  | 
|Provision for (benefit from) income taxes            |  |                        | 30,889  |            |  |          | (1  | )          |  |              | 2,778  |             |  |       | 36  |   |  |   |  |  |  |   | (1,271 | ) |  |   | 32,396  | 
|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |       |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Income (loss) before minority interest               |  |                        | 50,714  |            |  |          | (2  | )          |  |              | 4,730  |             |  |       | 12  |   |  |   |  |  |  |   | (1,906 | ) |  |   | 53,538  | 
|Minority interest                                    |  |                        | 2,461   |            |  |          | 198 |            |  |              |       |             |  |       |     |   |  |   |  |  |  |   |       |   |  |   | 2,461   | 
|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |       |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Net income (loss)                                    |  | $                      | 48,253  |            |  |          | (5  | )          |  | $            | 4,730  |             |  |       | 12  |   |  | $ |  |  |  | $ | (1,906 | ) |  | $ | 51,077  | 
|                                                     |  |                        |         |            |  |          |     |            |  |              |        |             |  |       |     |   |  |   |   |  |  |   |        |   |  |   |         | 

|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |       |  |  |  |   |        |   |  |   |   |  |  |   |         | 
|---------------------------------------------- |  | ---------------------- | ------- |  |  | -------- |  |  |  | ------------ | ------ | ----------- |  | ----- |  |  |  | - | ------ | - |  | - | - |  |  | - | ------- | 
|                                               |  | Merchant               |         |  |  |          |  |  |  | Divested and |        | Unallocated |  |      
|                                               |  | Card                   |         |  |  | Payment  |  |  |  | Discontinued |        | Corporate   |  |      
|2001                                           |  | Services               |         |  |  | Services |  |  |  | Businesses   |        | Items       |  | Total
|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |      
|                                               |  |                       
|                                               |  | (Dollars in thousands)
|Revenue                                        |  | $                      | 401,972 |  |  |          |  |  |  | $            | 30,113 |             |  |       |  |  |  | $ | 41,165 |   |  | $ |  |  |  | $ | 473,250 | 
|Operating expenses                             |  |                        | 293,731 |  |  |          |  |  |  |              | 19,844 |             |  |       |  |  |  |   | 30,244 |   |  |   |  |  |  |   | 343,819 | 
|General and administrative expenses            |  |                        | 15,552  |  |  |          |  |  |  |              | 2,266  |             |  |       |  |  |  |   | 5,001  |   |  |   |  |  |  |   | 22,819  | 
|Depreciation and amortization                  |  |                        | 15,766  |  |  |          |  |  |  |              | 2,243  |             |  |       |  |  |  |   | 2,337  |   |  |   |  |  |  |   | 20,346  | 
|Impairment, restructuring and related expenses |  |                        |        |  |  |          |  |  |  |              |       |             |  |       |  |  |  |   | 3,870  |   |  |   |  |  |  |   | 3,870   | 
|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |       |  |  |  |   |        |   |  |   |   |  |  |   |         | 
|Operating profit (loss)                        |  |                        | 76,923  |  |  |          |  |  |  |              | 5,760  |             |  |       |  |  |  |   | (287   | ) |  |   |  |  |  |   | 82,396  | 
|Net interest income                            |  |                        | 5,994   |  |  |          |  |  |  |              | 495    |             |  |       |  |  |  |   | 377    |   |  |   |  |  |  |   | 6,866   | 
|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |       |  |  |  |   |        |   |  |   |   |  |  |   |         | 
|Income before taxes and minority interest      |  |                        | 82,917  |  |  |          |  |  |  |              | 6,255  |             |  |       |  |  |  |   | 90     |   |  |   |  |  |  |   | 89,262  | 
|Provision for income taxes                     |  |                        | 31,307  |  |  |          |  |  |  |              | 2,045  |             |  |       |  |  |  |   | 2,423  |   |  |   |  |  |  |   | 35,775  | 
|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |       |  |  |  |   |        |   |  |   |   |  |  |   |         | 
|Income (loss) before minority interest         |  |                        | 51,610  |  |  |          |  |  |  |              | 4,210  |             |  |       |  |  |  |   | (2,333 | ) |  |   |  |  |  |   | 53,487  | 
|Minority interest                              |  |                        | 827     |  |  |          |  |  |  |              |       |             |  |       |  |  |  |   |       |   |  |   |  |  |  |   | 827     | 
|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |       |  |  |  |   |        |   |  |   |   |  |  |   |         | 
|Net income (loss)                              |  | $                      | 50,783  |  |  |          |  |  |  | $            | 4,210  |             |  |       |  |  |  | $ | (2,333 | ) |  | $ |  |  |  | $ | 52,660  | 
|                                               |  |                        |         |  |  |          |  |  |  |              |        |             |  |       |  |  |  |   |        |   |  |   |   |  |  |   |         | 

NM  Not Meaningful



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

Revenue for 2002 increased 8% to
$434.9 million from $402.0 million in 2001. The
acquisition of ABN AMRO Merchant Services, LLC (AAMS) on
June 28, 2001 contributed $18.9 million of incremental
revenue for the six months ended June 30, 2002.
Organic revenue growth, which excludes the impact of
acquisitions, was 2% in 2002.

Transaction volume processed increased by 11% to
3.9 billion in 2002 from 3.5 billion in 2001. Dollar
volume processed increased 9% to $169 billion in 2002 from
$156 billion in 2001. Organic transaction and dollar volume
processed, which excludes the impact of acquisitions, increased
by 10% and 6%, respectively, in

12



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##### Table of Contents



2002 over 2001. The volume increases were
primarily due to growth in existing national customers, addition
of new regional merchants, and continued expansion in new
markets.


Operating expenses for the year ended
December 31, 2002 increased 9% to $320.7 million from
$293.7 million in 2001 due to increased processing volume,
offset partially by expense reductions achieved in third-party
processing contracts.

General and administrative expenses increased 17%
to $18.3 million for the year ended December 31, 2002
from $15.6 million in 2001 due primarily to changes in
estimates for certain non-income related taxes.

Depreciation and amortization increased 6% to
$16.7 million for the year ended December 31, 2002
from $15.8 million in 2001 due to additional depreciation
from the capitalization of a new web-based accounting reporting
system and the addition of a new data center in Lansing,
Michigan. This increase was partially offset by the
non-amortization of goodwill. 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 the new
accounting standard. See Recent Accounting Pronouncements.

In May 2002, the Company announced its plans to
close its remaining operations in Juarez, Mexico by the end of
2002. 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, or $0.04 per diluted share) 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 provisions required for nondeductible
losses and dividends from foreign subsidiaries. As of
December 31, 2002, the Company had $0.5 million
remaining in accrued liabilities for future obligations related
to the closure.

Operating margins as a percentage of revenue
decreased to 18% in 2002 from 19% in 2001 due to the above items.

On June 28, 2001, the Company acquired a 70%
interest in AAMS. For the year ended December 31, 2002,
minority interest was $2.5 million compared to $0.8 million
for 2001.

Payment
Services

Revenue for 2002 decreased 32% to
$20.4 million from $30.1 million in 2001. Revenue
decreased primarily due to decreased paper-based transactions
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 51% to $9.8 million from
$19.8 million in 2001 due primarily to decreased
paper-based transactions and related staff reductions.

General and administrative expenses decreased 25%
to $1.7 million for 2002 from $2.3 million in 2001 due
to the decline in paper-based transactions and related staff
reductions.

Depreciation and amortization decreased 20% to
$1.8 million for 2002 from $2.2 million in 2001 due to
the consolidation of the Airlines Reporting Corporation contract
into a single operating facility. The work previously performed
in Juarez, Mexico was relocated to Louisville in the fourth
quarter of 2001.

Operating margins as a percentage of revenue
increased to 35% in 2002 from 19% in 2001 due to the above items.

Divested
and Discontinued Business Units

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.

13



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##### Table of Contents



During 2001, the Company recorded a net pre-tax
charge of $3.9 million ($4.6 million after-tax, or
$0.09 per diluted share) related to the BPO divestiture. The
after-tax charge exceeds 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, 2002, the
Company had $0.8 million remaining in accrued liabilities
related to final obligations associated with the BPO divestiture.

Unallocated
Corporate Items

In 2002, the Company recorded $3.2 million
($1.9 million after-tax, or $0.04 per diluted share) of net
expenses related to a separation agreement with the former CEO.

Net
Interest Income

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



| |                           
| | --------------------------
| | Provision for Income Taxes

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.

Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000

|                                               |  |                        |         |            |  |          |    |            |  |              |        |       |  |  |     |   |  |   |        |   |  |   |         | 
|---------------------------------------------- |  | ---------------------- | ------- | ---------- |  | -------- | -- | ---------- |  | ------------ | ------ | ----- |  |  | --- | - |  | - | ------ | - |  | - | ------- | 
|                                               |  | Merchant               |         | % Change   |  |          |    | % Change   |  | Divested and |        |      
|                                               |  | Card                   |         | Over Prior |  | Payment  |    | Over Prior |  | Discontinued |        |      
|2001                                           |  | Services               |         | Year       |  | Services |    | Year       |  | Businesses   |        | Total
|                                               |  |                        |         |            |  |          |    |            |  |              |        |      
|                                               |  |                       
|                                               |  | (Dollars in thousands)
|Revenue                                        |  | $                      | 401,972 |            |  |          | 26 |            |  | $            | 30,113 |       |  |  | (18 | ) |  | $ | 41,165 |   |  | $ | 473,250 | 
|Operating expenses                             |  |                        | 293,731 |            |  |          | 25 |            |  |              | 19,844 |       |  |  | (8  | ) |  |   | 30,244 |   |  |   | 343,819 | 
|General and administrative expenses            |  |                        | 15,552  |            |  |          | 9  |            |  |              | 2,266  |       |  |  | (34 | ) |  |   | 5,001  |   |  |   | 22,819  | 
|Depreciation and amortization                  |  |                        | 15,766  |            |  |          | 15 |            |  |              | 2,243  |       |  |  | (13 | ) |  |   | 2,337  |   |  |   | 20,346  | 
|Impairment, restructuring and related expenses |  |                        |        |            |  |          |   |            |  |              |       |       |  |  |    |   |  |   | 3,870  |   |  |   | 3,870   | 
|                                               |  |                        |         |            |  |          |    |            |  |              |        |       |  |  |     |   |  |   |        |   |  |   |         | 
|Operating profit (loss)                        |  |                        | 76,923  |            |  |          | 41 |            |  |              | 5,760  |       |  |  | (35 | ) |  |   | (287   | ) |  |   | 82,396  | 
|Net interest income                            |  |                        | 5,994   |            |  |          | (5 | )          |  |              | 495    |       |  |  | (52 | ) |  |   | 377    |   |  |   | 6,866   | 
|                                               |  |                        |         |            |  |          |    |            |  |              |        |       |  |  |     |   |  |   |        |   |  |   |         | 
|Income before taxes and minority interest      |  |                        | 82,917  |            |  |          | 37 |            |  |              | 6,255  |       |  |  | (37 | ) |  |   | 90     |   |  |   | 89,262  | 
|Provision for income taxes                     |  |                        | 31,307  |            |  |          | 34 |            |  |              | 2,045  |       |  |  | (39 | ) |  |   | 2,423  |   |  |   | 35,775  | 
|                                               |  |                        |         |            |  |          |    |            |  |              |        |       |  |  |     |   |  |   |        |   |  |   |         | 
|Income (loss) before minority interest         |  |                        | 51,610  |            |  |          | 38 |            |  |              | 4,210  |       |  |  | (35 | ) |  |   | (2,333 | ) |  |   | 53,487  | 
|Minority interest                              |  |                        | 827     |            |  |          | NM |            |  |              |       |       |  |  |    |   |  |   |       |   |  |   | 827     | 
|                                               |  |                        |         |            |  |          |    |            |  |              |        |       |  |  |     |   |  |   |        |   |  |   |         | 
|Net income (loss)                              |  | $                      | 50,783  |            |  |          | 36 |            |  | $            | 4,210  |       |  |  | (35 | ) |  | $ | (2,333 | ) |  | $ | 52,660  | 
|                                               |  |                        |         |            |  |          |    |            |  |              |        |       |  |  |     |   |  |   |        |   |  |   |         | 

14



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##### Table of Contents



|                                                     |  |          |         |  |  |          |  |  |  |              |        |       |  |  |  |  |  |   |        |   |  |   |         | 
|---------------------------------------------------- |  | -------- | ------- |  |  | -------- |  |  |  | ------------ | ------ | ----- |  |  |  |  |  | - | ------ | - |  | - | ------- | 
|                                                     |  | Merchant |         |  |  |          |  |  |  | Divested and |        |      
|                                                     |  | Card     |         |  |  | Payment  |  |  |  | Discontinued |        |      
|2000                                                 |  | Services |         |  |  | Services |  |  |  | Businesses   |        | Total
|                                                     |  |          |         |  |  |          |  |  |  |              |        |      
|Revenue                                              |  | $        | 317,853 |  |  |          |  |  |  | $            | 36,537 |       |  |  |  |  |  | $ | 72,871 |   |  | $ | 427,261 | 
|Operating expenses                                   |  |          | 235,499 |  |  |          |  |  |  |              | 21,686 |       |  |  |  |  |  |   | 51,165 |   |  |   | 308,350 | 
|General and administrative expenses                  |  |          | 14,281  |  |  |          |  |  |  |              | 3,455  |       |  |  |  |  |  |   | 8,929  |   |  |   | 26,665  | 
|Depreciation and amortization                        |  |          | 13,705  |  |  |          |  |  |  |              | 2,564  |       |  |  |  |  |  |   | 5,234  |   |  |   | 21,503  | 
|Impairment, restructuring and related expenses       |  |          |        |  |  |          |  |  |  |              |       |       |  |  |  |  |  |   | 8,572  |   |  |   | 8,572   | 
|                                                     |  |          |         |  |  |          |  |  |  |              |        |       |  |  |  |  |  |   |        |   |  |   |         | 
|Operating profit (loss)                              |  |          | 54,368  |  |  |          |  |  |  |              | 8,832  |       |  |  |  |  |  |   | (1,029 | ) |  |   | 62,171  | 
|Net interest income                                  |  |          | 6,329   |  |  |          |  |  |  |              | 1,029  |       |  |  |  |  |  |   | 924    |   |  |   | 8,282   | 
|                                                     |  |          |         |  |  |          |  |  |  |              |        |       |  |  |  |  |  |   |        |   |  |   |         | 
|Income (loss) before taxes and minority
    interest |  |          | 60,697  |  |  |          |  |  |  |              | 9,861  |       |  |  |  |  |  |   | (105   | ) |  |   | 70,453  | 
|Provision for income taxes                           |  |          | 23,339  |  |  |          |  |  |  |              | 3,360  |       |  |  |  |  |  |   | 367    |   |  |   | 27,066  | 
|                                                     |  |          |         |  |  |          |  |  |  |              |        |       |  |  |  |  |  |   |        |   |  |   |         | 
|Income (loss) before minority interest               |  |          | 37,358  |  |  |          |  |  |  |              | 6,501  |       |  |  |  |  |  |   | (472   | ) |  |   | 43,387  | 
|Minority interest                                    |  |          |        |  |  |          |  |  |  |              |       |       |  |  |  |  |  |   |       |   |  |   |        | 
|                                                     |  |          |         |  |  |          |  |  |  |              |        |       |  |  |  |  |  |   |        |   |  |   |         | 
|Net income (loss)                                    |  | $        | 37,358  |  |  |          |  |  |  | $            | 6,501  |       |  |  |  |  |  | $ | (472   | ) |  | $ | 43,387  | 
|                                                     |  |          |         |  |  |          |  |  |  |              |        |       |  |  |  |  |  |   |        |   |  |   |         | 

NM  Not Meaningful



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

Revenue for 2001 increased 26% to
$402.0 million from $317.9 million in 2000. The
Company acquired National Citys merchant business units on
January 8, 2001 and a 70% interest in ABN AMRO Merchant
Services, LLC on June 28, 2001, which contributed
$15.5 million and $17.7 million, respectively, of
incremental revenue in 2001. Organic revenue growth, which
excludes the impact of acquisitions, was 16% in 2001.

Transaction volume processed increased by 24% to
3.5 billion in 2001 from 2.8 billion in 2000. Dollar
volume processed increased 23% to $156 billion in 2001 from
$127 billion in 2000. Organic transaction and dollar volume
processed, which excludes the impact of acquisitions, increased
by 23% and 20%, respectively, in 2001. The addition of new
national customers, strong execution in regional sales channels,
and continued expansion in new markets led to the increase in
organic transaction and dollar volume.

Operating expenses increased 25% to
$293.7 million in 2001 from $235.5 million in 2000
primarily due to increased transaction volumes.

General and administrative expenses increased 9%
to $15.6 million in 2001 from $14.3 million in 2000
due to increased transaction volume in 2001.

Depreciation and amortization expense increased
15% to $15.8 million in 2001 from $13.7 million in
2002 due to the additional amortization related to the
acquisition of a 70% interest in AAMS on June 28, 2001.

Operating margins as a percentage of revenue
increased to 19% in 2001 from 17% in 2000 due to the above items.

Payment
Services

Revenue for 2001 decreased 18% to
$30.1 million from $36.5 million in 2000. Revenue
declined primarily due to decreased paper-based transactions
from the Companys Airlines Reporting Corporation contract.

Operating expenses decreased 8% to
$19.8 million in 2001 from $21.7 million in 2000 primarily
due to decreased paper-based transactions and related staff
reductions.

General and administrative expenses decreased 34%
to $2.3 million in 2001 from $3.5 million in 2000 due
to decreased paper-based transactions and related staff
reductions.

15



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##### Table of Contents



Depreciation and amortization decreased 13% to
$2.2 million in 2001 from $2.6 million in 2000 due to
site consolidation initiatives.

Operating margins as a percentage of revenue
decreased to 19% in 2001 from 24% in 2000 due to the above items.

Divested
and Discontinued Business Units

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.

In 2000, the Company recorded charges of
$8.6 million ($5.6 million after-tax, or $0.11 per
diluted share) related to these business units. These charges
consisted of $7.1 million ($4.6 million after-tax, or
$0.09 per diluted share) to write-off goodwill and fixed assets
for the Denver collections business and $1.5 million
($1.0 million after-tax, or $0.02 per diluted share) for
site consolidation initiatives in the BPO unit.

Net
Interest Income

Net interest income decreased 17% to
$6.9 million in 2001 from $8.3 million in 2000 due
primarily to lower average interest rates in 2001.

Provision
for Income Taxes

The overall effective tax rate was 40.1% in 2001
compared to 38.4% in 2000. The increase in the effective tax
rate was due to additional provisions related to the sale of the
BPO unit due to repatriation of previously untaxed earnings for
U.S. tax purposes. The increase in the effective tax rate was
partially offset by differences in state income tax rates
between legal entities with the Company due to acquisition and
divestiture activity and a $0.3 million reduction in the
valuation allowance for state net operating loss carry forwards.

Forward-Looking Results of
Operations



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

The Company currently processes card transactions
for several of the largest airlines in the United States.
Airline customers represented approximately 8% of the
Companys consolidated revenue (5% from Merchant Card
Services and 3% from Payment Services) for the year ended
December 31, 2002. In the event of liquidation of one or
more of the Companys airline customers, the Company could
become financially responsible for refunding tickets purchased
through Visa® or MasterCard ®  under the chargeback
rules of those associations. See Note 13 to the Consolidated
Financial Statements. At December 31, 2002, the dollar
value of tickets purchased, but as yet unflown, was
approximately $1.0 billion. Based upon available
information, this is managements best estimate of maximum
potential chargebacks related to its airline customers. As of
December 31, 2002, NCBK held $139.5 million in
merchant deposits and withheld settlement funds for certain
airline merchants. The merchant deposits collateralize only
individual airline merchants and some airline merchants have no
deposits. Of the total merchant deposits, $125.0 million
was related to a single airline merchant. In the near term,
management believes liquidations are unlikely for any of the
Companys airline customers.

US Airways Group, Inc. and United Air Lines,
Inc., both of which are merchant processing customers of the
Company, have filed for bankruptcy court protection under
Chapter 11. Based upon information currently available to
the Company and actions management has taken to mitigate risks,
management currently believes a material loss under the
chargeback rules is unlikely.

16



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##### Table of Contents



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 airlines it currently serves but
does not intend to renew such contracts when their current terms
expire. The contracts currently in effect have various
expiration dates extending through November 2005.



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

The Companys revenues are directly affected
by overall consumer spending trends. The Company is also
currently experiencing increased pricing pressure in competing
for new national merchants as well as in the renewal of existing
national merchant contracts. These factors may affect the
Companys future operating profits and margins.

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, will no longer be amortized over
the estimated life but rather will be tested at least annually
for impairment based on specific guidance provided in the new
standard. Intangible assets determined to have finite lives will
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. No impairment was required to be recorded
as a result of this test. 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 and $2.3 million for years ended
December 31, 2001 and 2000, respectively. 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. For the
year ended December 31, 2000, proforma net income would
have been $45.5 million or $0.89 per diluted share, versus
reported net income of $43.4 million, or $0.85 per diluted
share.

The Companys amortizable intangible assets
as of December 31, 2002 related almost exclusively to
acquired merchant portfolios. These costs are amortized on a
straight-line basis over periods ranging from 7 to
10 years. Amortization expense for years ended
December 31, 2002, 2001 and 2000 were $6.9 million,
$5.6 million and $7.3 million, respectively. The
estimated annual amortization expense for existing intangible
assets for each of the next five years is as follows:
2003  $7.1 million; 2004 
$6.7 million; 2005, 2006 and 2007 
$4.8 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, which addressed asset impairment, and certain
provisions of APB Opinion 30 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

17



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##### Table of Contents



operations treatment in the income statement. The
provisions of SFAS 144 became effective for the Company on
January 1, 2002 and did not have a material impact on the
Companys results of operations, financial position, or
liquidity.




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

SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, was issued in September 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 become effective for the Company on
January 1, 2003 and are not anticipated to have a material
impact on the Companys results of operations, financial
position, 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 to
SFAS 123s fair value method of accounting, if a
company so selects.

Effective January 1, 2003, the Company plans
to adopt 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
will be applied prospectively to awards granted subsequent to
December 31, 2002. As permitted, options granted prior to
January 1, 2003, will 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 to 2002. The actual
impact per diluted share may vary in the event the fair value or
the number of options granted increases or decreases from the
current estimate, 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 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 expands
the disclosures made by a guarantor in its financial statements
about its obligations under certain guarantees and requires the
guarantor to recognize a liability (with a corresponding
reduction in revenue) for the fair value of the obligation
assumed under certain guarantees.

The Companys contingent obligation to honor
chargebacks (see Note 13 to the Consolidated Financial
Statements) 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 are
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 will
require the Company to establish a liability at the inception of
a guarantee based on an estimate of the guarantees fair
value. The recognition requirements are to be applied
prospectively to new guarantees issued or modified after
December 31, 2002. The Company has not yet finalized the
impact of adopting the recognition requirements of FIN 45,
however the Company does not

18



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##### Table of Contents



believe that FIN 45 will have a material
impact on the Companys results of operations, financial
position 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 2002,
the Companys capital expenditures totaled
$16.3 million. Such expenditures were financed from
operating cash flow, which for 2002 totaled $101.6 million.
Capital expenditures and operating cash flow for 2001 were
$20.1 million and $49.9 million, respectively.
Operating cash flow increased in 2002 due to lower year end
accounts receivable balances and the timing of tax payments.
Operating cash flow for 2001 was negatively impacted by higher
year end accounts receivable balances. The Company expects
capital expenditures for 2003 to be comparable to 2002, 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. 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 plus an
additional one-time payment of up to $1.0 million. See
Note 4 to the Consolidated Financial Statements.

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.

Forward-Looking Statements and Risk
Factors

Item 1 (the sections entitled Industry
Overview, Merchant Card Services, Payment Services, Regulation,
and Visa® Guarantee), Item 2 (entitled Properties),
Item 3 (entitled Legal Proceedings), Item 5 (entitled
Market for the Registrants Common Equity and Related
Shareholder Matters), Item 7 (entitled Critical Accounting
Policies, Liquidity and Capital Resources, Forward-Looking
Results of Operations, and Recent Accounting Pronouncements),
and Item 7A (entitled Quantitative and Qualitative
Disclosure About Market Risk), contain certain forward-looking
statements (as defined in the Private Securities Litigation
Reform Act of 1995). Although management believes the
expectations reflected in such forward-looking statements are
reasonable, actual results may differ materially. Risks and
uncertainties that could cause actual results to differ
materially include, but are not limited to the following: 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; significant industry competition; renewal of major
customer relationships; changes in interest rates; governmental
and economic stability in foreign countries in which the Company
operates; unanticipated litigation or material changes in
existing litigation, chargebacks, customer bankruptcy, claims
and assessments; organizational changes or loss of key
management members; 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

19



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##### Table of Contents



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.





Item 7A.     Quantitative
and Qualitative Disclosure 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, 2002, the Company had
$186 million in cash and cash equivalents. For the year
ended December 31, 2002, NCBK also held an average of
approximately $244 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, 2002, a hypothetical 100 basis point increase
in short-term interest rates would result in an increase of
approximately $3 million in annual pre-tax income. A
hypothetical 100 basis point decrease in short-term interest
rates would result in a decrease of approximately
$3 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.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The Executive Officers of the Company as of
January 31, 2003 were as follows:

|     |                   |     |  |          |    |  |  |                                                       
|---- | ----------------- | --- |  | -------- | -- |  |  | ------------------------------------------------------
|Name |                   | Age |  | Position
|     |                   |     |  |         
|     | Jon L. Gorney     |     |  |          | 52 |  |  | Chairman and Chief Executive Officer                  
|     | Mark D. Pyke      |     |  |          | 42 |  |  | Executive Vice President  Chief
    Operating Officer
|     | Norman M. Martin  |     |  |          | 59 |  |  | Executive Vice President  Merchant
    Card Services 
|     | Robert C. Robins  |     |  |          | 61 |  |  | Executive Vice President  Business
    Development   
|     | David E. Fountain |     |  |          | 42 |  |  | Senior Vice President  Chief Financial
    Officer   
|     | Kelly L. Lanham   |     |  |          | 33 |  |  | Vice President  Chief Accounting
    Officer         

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
1998 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.

20



---



##### Table of Contents



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 1998 to 2000
serving as Executive Vice President of Market Development and
Acceptance.

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 1998 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 28, 2003.






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

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 28, 2003.






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

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 28, 2003.






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

Incorporated by reference from the Companys
Definitive Proxy Statement to be dated approximately
March 28, 2003.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

The management of the Company is responsible for
establishing and maintaining effective disclosure controls and
procedures, as defined under Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934. Within 90 days of this report,
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 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 that the Companys disclosure
controls and procedures were effective as of the evaluation date
for ensuring that information required to be disclosed in this
annual report on Form 10-K was recorded, processed,
summarized, and reported within the time period required by the
United States Securities and Exchange Commissions rules
and forms. There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect internal controls subsequent to the
evaluation date.

21



---



##### 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, 2002 and 2001                                                                     |  |             | F-2 | 
|Consolidated Statements of Income for each of the
    three years in the period ended December 31, 2002                              |  |             | F-3 | 
|Consolidated Statements of Changes in
    Shareholders Equity for each of the three years in the
    period ended December 31, 2002 |  |             | F-4 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002                          |  |             | 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 2002
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
    Registrant. (A)                                                                                            
|        | 3.1   | (ii)        |  | Code of Regulations of the Registrant. (A)                                                                                                              
|        | 4.1   |             |  | Specimen Certification for the Common Stock,
    without par value, of the Registrant. (B)                                                              
|        | 4.2   |             |  | Registration Rights Agreement between the
    Registrant and National City Corporation, dated July 16,
    1996. (B)                                    
|        | 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  |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.4  |             |  | Sponsorship Agreement between NPC and National
    City Bank of Kentucky, dated June 30, 1996. (B)                                                      
|        | 10.5  |             |  | Administrative Services Agreement between NPC and
    National City Corporation, dated July 15, 1996. (B)                                               
|        | 10.6  |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.7  |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.8  |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.9  |             |  | Tax Sharing Agreement between the Company and
    National City Corporation, dated July 17, 1996. (B)                                                   
|        | 10.10 |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.11 |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.12 |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.13 |             |  | (Intentionally Omitted)                                                                                                                                 
|        | 10.14 |             |  | (Intentionally Omitted)                                                                                                                                 

22



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.15 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.16 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.17 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.18 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.19 |             |  | Employment Agreement and Undertaking of
    Confidentiality between the Registrant and Mark Pyke dated
    March 4, 1996. (Filed as Exhibit 10.19)**                                                                                                                                                           
|        | 10.20 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.21 |             |  | 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 Registrants Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2002)**
|        | 10.22 |             |  | 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 Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002)**                    
|        | 10.23 |             |  | 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 Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002)                                        
|        | 10.24 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.25 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.26 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.27 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.28 |             |  | National Processing, Inc. 2000 Stock Option Plan.
    (Filed as Exhibit 10.28)**                                                                                                                                                                                                                               
|        | 10.29 |             |  | National Processing Company 1996 Stock Option
    Plan (Filed as Exhibit 10.29)**                                                                                                                                                                                                                              
|        | 10.30 |             |  | Nonemployee Directors Stock Option Plan and Form
    of Stock Option Agreement. (B)**                                                                                                                                                                                                                          
|        | 10.31 |             |  | National Processing Company Short-Term Incentive
    Compensation Plan for Senior Executives, effective
    February 1, 2003. (Filed as Exhibit 10.31)**                                                                                                                                                       
|        | 10.32 |             |  | National Processing Company Long-Term Incentive
    Compensation Plan for Senior Officers, as amended and restated
    effective February 1, 2003. (Filed as Exhibit 10.32)**                                                                                                                                  
|        | 10.33 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.34 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.35 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.36 |             |  | Amendment to Building Lease between National City
    Bank of Kentucky and NPC, dated July 3, 1996. (B)                                                                                                                                                                                                        
|        | 10.37 |             |  | Form of Severance Agreement between the
    Registrant and certain Senior Vice Presidents. (Incorporated
    herein by reference to Exhibit 10.37 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2002)**                                                        
|        | 10.38 |             |  | Form of Severance Agreement between the
    Registrant and certain Executive Vice Presidents. (Incorporated
    herein by reference to Exhibit 10.38 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002)**                                                     
|        | 10.39 |             |  | Employment Agreement and Undertaking of
    Confidentiality between the Registrant and David Fountain dated
    October 27, 1998. (Incorporated herein by reference to
    Exhibit 10.39 to the Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002)**                     
|        | 10.40 |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                        
|        | 10.41 |             |  | 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)**                                                                                                 
|        | 10.42 |             |  | National Processing, Inc.s U.S. Asset
    Purchase Agreement, dated July 11, 2001 (Incorporated
    herein by reference to Exhibit 10.42 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001)                                                                       

23



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                           
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.43 |             |  | National Processing, Inc.s Mexico Asset
    Purchase Agreement, dated July 11, 2001 (Incorporated
    herein by reference to Exhibit 10.43 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001)
|        | 10.44 |             |  | National Processing, Inc.s Stock Purchase
    Agreement, dated July 11, 2001 (Incorporated herein by
    reference to Exhibit 10.44 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001).      
|        | 21.1  |             |  | Subsidiaries of the Registrant (Filed as
    Exhibit 21.1)                                                                                                                                                                                
|        | 23.1  |             |  | Consent of Ernst & Young, LLP, Independent
    Auditors for National Processing, Inc. (Filed as
    Exhibit 23.1)                                                                                                                         
|        | 24.1  |             |  | Power of Attorney (Filed as Exhibit 24.1)                                                                                                                                                                                                 
|        | 99.1  |             |  | Senior Financial Officers Code of Ethics (Filed
    as Exhibit 99.1)                                                                                                                                                                      
|        | 99.2  |             |  | Chief Executive Officer 906 Certification dated
    February 19, 2003 for National Processing, Inc.s
    Annual Report on Form 10-K for year ended December 31,
    2002 (Filed as Exhibit 99.2)                                         
|        | 99.3  |             |  | Chief Financial Officer 906 Certification dated
    February 19, 2003 for National Processing, Inc.s
    Annual Report on Form 10-K for the year ended
    December 31, 2002 (Filed as Exhibit 99.3)                                     



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Exhibit is incorporated herein by reference to
    the applicable exhibit in the Registrant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 Registrant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 1, 2002: On September 30, 2002,
the Registrant issued a press release announcing that Thomas
A. Wimsett, formerly a director, Chief Executive Officer
and President, had resigned from National Processing, Inc. The
Registrant announced that Jon L. Gorney succeeded Paul
G. Clark as Chairman of National Processing, Inc. Clark
will remain a member of the Registrants Board of
Directors. Jon L. Gorney also assumed the Chief Executive
Officer position previously held by Thomas A. Wimsett.

October 16, 2002: On October 16, 2002,
the Registrant issued a news release reporting earnings for the
quarter and nine months ended September 30, 2002.

November 13, 2002: On November 13,
2002, the Registrant filed a Form 8-K containing the signed
certifications with respect to National Processing Inc.s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, filed on November 12, 2002.

January 15, 2003: On January 15, 2003,
the Registrant issued a news release reporting earnings for the
fourth quarter and year ended December 31, 2002.

24



---



##### 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 February 19,
2003.



| |                          
| | -------------------------
| | 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)              |  |      | February 19, 2003 |  
|                                                
|/s/ DAVID E. FOUNTAINDavid E. Fountain           |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer) |  |      | February 19, 2003 |  
|                                                
|/s/ PAUL G. CLARKPaul G. Clark                   |  | Director                                                                            |  |      | February 19, 2003 | *
|                                                
|/s/ ROBERT G. SIEFERSRobert G. Siefers           |  | Director                                                                            |  |      | February 19, 2003 | *
|                                                
|/s/ JEFFREY D. KELLYJeffrey D. Kelly             |  | Director                                                                            |  |      | February 19, 2003 | *
|                                                
|Aureliano Gonzalez-Baz                           |  | Director                                                                            |  |      | February 19, 2003 |  
|                                                
|/s/ JEFFREY P. GOTSCHALLJeffrey P. Gotschall     |  | Director                                                                            |  |      | February 19, 2003 | *
|                                                
|/s/ PRESTON B. HELLER, JR.Preston B. Heller, Jr. |  | Director                                                                            |  |      | February 19, 2003 | *
|                                                
|/s/ J. ARMANDO RAMIREZJ. Armando Ramirez         |  | Director                                                                            |  |      | February 19, 2003 | *



|  |                                                                                                                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The undersigned by signing his name hereto, does
    sign and execute the Annual Report on Form 10-K for fiscal
    year 2002 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 | 

25



---



##### Table of Contents






CERTIFICATIONS

I, Jon L. Gorney, certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of National Processing, Inc.;                                                                                                                                                                                                                                                           
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weakness in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this annual report whether or
    not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weakness.



| |                                     
| | ------------------------------------
| | /s/ JON L. GORNEY                   
| |                                     
| | Jon L. Gorney                       
| | Chairman and Chief Executive Officer

Date: February 19, 2003

26



---



##### Table of Contents






CERTIFICATIONS

I, David E. Fountain, certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of National Processing, Inc.;                                                                                                                                                                                                                                                           
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weakness in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this annual report whether or
    not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weakness.



| |                                                  
| | -------------------------------------------------
| | /s/ DAVID E. FOUNTAIN                            
| |                                                  
| | David E. Fountain                                
| | Senior Vice President and Chief Financial Officer

Date: February 19, 2003

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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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2002, 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 23, 2003


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##### Table of Contents



NATIONAL PROCESSING, INC.






Consolidated Balance Sheets


|                                                |                                                                                                                                                               |                        |         |         |   |   |         |         |  
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                |                                                                                                                                                               |                       
|                                                |                                                                                                                                                               | December 31,          
|                                                |                                                                                                                                                               |                       
|                                                |                                                                                                                                                               | 2002                   |         | 2001   
|                                                |                                                                                                                                                               |                        |         |        
|                                                |                                                                                                                                                               |                       
|                                                |                                                                                                                                                               | (Dollars in thousands)
|Assets                                          |                                                                                                                                                               |                        |         |         |   |   |         |        
|Current assets:                                 |                                                                                                                                                               |                        |         |         |   |   |         |        
|                                                | Cash and cash equivalents                                                                                                                                     |                        | $       | 185,513 |   |   | $       | 101,257 |  
|                                                | Accounts receivable-trade                                                                                                                                     |                        |         | 152,132 |   |   |         | 163,644 |  
|                                                | Deferred tax assets                                                                                                                                           |                        |         | 2,113   |   |   |         | 3,299   |  
|                                                | Other current assets                                                                                                                                          |                        |         | 7,287   |   |   |         | 7,138   |  
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total current assets                            |                                                                                                                                                               |                        | 347,045 |         |   |   | 275,338 |        
|Property and equipment:                         |                                                                                                                                                               |                        |         |         |   |   |         |        
|                                                | Furniture and equipment                                                                                                                                       |                        |         | 51,253  |   |   |         | 54,178  |  
|                                                | Building and leasehold improvements                                                                                                                           |                        |         | 11,835  |   |   |         | 10,770  |  
|                                                | Software                                                                                                                                                      |                        |         | 37,666  |   |   |         | 30,453  |  
|                                                | Property leased from affiliate                                                                                                                                |                        |         | 4,173   |   |   |         | 4,173   |  
|                                                | Land and improvements                                                                                                                                         |                        |         | 442     |   |   |         | 442     |  
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|                                                |                                                                                                                                                               |                        | 105,369 |         |   |   | 100,016 |        
|                                                | Accumulated depreciation and amortization                                                                                                                     |                        |         | (51,662 | ) |   |         | (50,244 | )
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|                                                |                                                                                                                                                               |                        | 53,707  |         |   |   | 49,772  |        
|Other assets:                                   |                                                                                                                                                               |                        |         |         |   |   |         |        
|                                                | Goodwill, net of accumulated amortization $8,283
    in 2002 and 2001                                                                                         |                        |         | 91,227  |   |   |         | 91,227  |  
|                                                | Other intangible assets, net of accumulated
    amortization of $21,470 in 2002 and $14,610 in 2001                                                           |                        |         | 41,990  |   |   |         | 44,950  |  
|                                                | Deferred tax assets                                                                                                                                           |                        |         | 12,231  |   |   |         | 13,310  |  
|                                                | Other assets                                                                                                                                                  |                        |         | 4,304   |   |   |         | 3,741   |  
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total other assets                              |                                                                                                                                                               |                        | 149,752 |         |   |   | 153,228 |        
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total assets                                    |                                                                                                                                                               | $                      | 550,504 |         |   | $ | 478,338 |        
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Liabilities and shareholders
    equity        |                                                                                                                                                               |                        |         |         |   |   |         |        
|Current liabilities:                            |                                                                                                                                                               |                        |         |         |   |   |         |        
|                                                | Accounts payable-trade                                                                                                                                        |                        | $       | 23,006  |   |   | $       | 19,080  |  
|                                                | Accrued bankcard assessments                                                                                                                                  |                        |         | 27,645  |   |   |         | 28,113  |  
|                                                | Accrued compensation and benefits                                                                                                                             |                        |         | 3,321   |   |   |         | 6,465   |  
|                                                | Income taxes payable                                                                                                                                          |                        |         | 17,211  |   |   |         | 8,089   |  
|                                                | Other accrued liabilities                                                                                                                                     |                        |         | 18,744  |   |   |         | 13,906  |  
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total current liabilities                       |                                                                                                                                                               |                        | 89,927  |         |   |   | 75,653  |        
|Obligation under property leased from affiliate |                                                                                                                                                               |                        | 1,732   |         |   |   | 1,862   |        
|Minority interest                               |                                                                                                                                                               |                        | 2,462   |         |   |   | 827     |        
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total liabilities                               |                                                                                                                                                               |                        | 94,121  |         |   |   | 78,342  |        
|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; 52,093,945 and 51,818,508 shares issued and
    outstanding in 2002 and 2001, respectively |                        |         | 1       |   |   |         | 1       |  
|                                                | Contributed capital                                                                                                                                           |                        |         | 198,728 |   |   |         | 193,584 |  
|                                                | Unearned compensation                                                                                                                                         |                        |         | (311    | ) |   |         | (477    | )
|                                                | Retained earnings                                                                                                                                             |                        |         | 257,965 |   |   |         | 206,888 |  
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total shareholders equity                      |                                                                                                                                                               |                        | 456,383 |         |   |   | 399,996 |        
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                               | $                      | 550,504 |         |   | $ | 478,338 |        
|                                                |                                                                                                                                                               |                        |         |         |   |   |         |        

See notes to consolidated financial statements.

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##### Table of Contents



NATIONAL PROCESSING, INC.






Consolidated Statements of Income


|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |        | 
|------------------------------------------------------------------ | ------- | ---------------------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                   |         |                                         
|                                                                   |         | Year Ended December 31,                 
|                                                                   |         |                                         
|                                                                   |         | 2002                                     |         | 2001   |  | 2000
|                                                                   |         |                                          |         |        |  |     
|                                                                   |         |                                         
|                                                                   |         | (In thousands, except per share amounts)
|Revenue                                                            |         | $                                        | 455,376 |        |  | $    | 473,250 |        |  | $ | 427,261 |       
|Operating expenses                                                 |         |                                          | 330,518 |        |  |      | 343,819 |        |  |   | 308,350 |       
|General and administrative expenses                                |         |                                          | 23,142  |        |  |      | 22,819  |        |  |   | 26,665  |       
|Depreciation and amortization                                      |         |                                          | 18,542  |        |  |      | 20,346  |        |  |   | 21,503  |       
|Impairment, restructuring and related expense                      |         |                                          | 1,650   |        |  |      | 3,870   |        |  |   | 8,572   |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Operating profit                                                   |         |                                          | 81,524  |        |  |      | 82,396  |        |  |   | 62,171  |       
|Net interest income                                                |         |                                          | 4,410   |        |  |      | 6,866   |        |  |   | 8,282   |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Income before provision for income taxes and
    minority interest |         |                                          | 85,934  |        |  |      | 89,262  |        |  |   | 70,453  |       
|Provision for income taxes                                         |         |                                          | 32,396  |        |  |      | 35,775  |        |  |   | 27,066  |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Income before minority interest                                    |         |                                          | 53,538  |        |  |      | 53,487  |        |  |   | 43,387  |       
|Minority interest                                                  |         |                                          | 2,461   |        |  |      | 827     |        |  |   |        |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Net income                                                         |         | $                                        | 51,077  |        |  | $    | 52,660  |        |  | $ | 43,387  |       
|                                                                   |         |                                          |         |        |  |      |         |        |  |   |         |       
|Net income per common share                                        |         |                                          |         |        |  |      |         |        |  |   |         |       
|                                                                   | Basic   |                                          | $       | 0.98   |  |      | $       | 1.03   |  |   | $       | 0.85   | 
|                                                                   | Diluted |                                          | $       | 0.97   |  |      | $       | 1.01   |  |   | $       | 0.85   | 
|Average common shares outstanding                                  |         |                                          |         |        |  |      |         |        |  |   |         |       
|                                                                   | Basic   |                                          |         | 52,008 |  |      |         | 51,352 |  |   |         | 50,821 | 
|                                                                   | Diluted |                                          |         | 52,476 |  |      |         | 51,983 |  |   |         | 51,049 | 

See notes to consolidated financial statements.

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NATIONAL PROCESSING, INC.

Consolidated Statements of Changes in
Shareholders Equity

|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ------ |  | ----------- | - | ------------ |  | -------- | ------- | ----- |  | - | ---- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                  |  | Common                 |            | Common |  | Contributed |   | Unearned     |  | Retained |         |      
|                                                                                                  |  | Shares                 |            | Stock  |  | Capital     |   | Compensation |  | Earnings |         | Total
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |      
|                                                                                                  |  |                       
|                                                                                                  |  | (Dollars in Thousands)
|Balance at January 1, 2000                                                                        |  |                        | 50,785,652 |        |  | $           | 1 |              |  | $        | 176,964 |       |  | $ |     |   |  | $ | 139,441 |   |  | $ | 316,406 |  
|Net income                                                                                        |  |                        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 43,387  |   |  |   | 43,387  |  
|Issuance of common shares under stock-based
    compensation plans, including related tax effects |  |                        | 149,808    |        |  |             |  |              |  |          | 1,765   |       |  |   |     |   |  |   |        |   |  |   | 1,765   |  
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                                                      |  |                        | 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 |  
|                                                                                                  |  |                        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |   |  |   |         |  

See notes to consolidated financial statements.

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NATIONAL PROCESSING, INC.

Consolidated Statements of Cash
Flows

|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |         |  
|----------------------------------------------------------- | --------------------------------------------- | ----------------------- | ------- | ------ | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                            |                                               |                        
|                                                            |                                               | Year Ended December 31,
|                                                            |                                               |                        
|                                                            |                                               | 2002                    |         | 2001   |   | 2000
|                                                            |                                               |                         |         |        |   |     
|                                                            |                                               |                        
|                                                            |                                               | (In thousands)         
|Operating Activities                                        |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Net income                                                  |                                               | $                       | 51,077  |        |   | $    | 52,660  |         |   | $ | 43,387  |        
|Non-cash items:                                             |                                               |                         |         |        |   |      |         |         |   |   |         |        
|                                                            | Depreciation and amortization                 |                         |         | 18,542 |   |      |         | 20,346  |   |   |         | 21,503  |  
|                                                            | Impairment, restructuring and related expense |                         |         | 1,650  |   |      |         | 3,250   |   |   |         | 8,521   |  
|                                                            | Deferred income taxes                         |                         |         | 2,265  |   |      |         | 4,042   |   |   |         | (3,788  | )
|                                                            | Loss on disposition of assets                 |                         |         | 387    |   |      |         | 35      |   |   |         | 715     |  
|                                                            | Minority interest                             |                         |         | 2,461  |   |      |         | 827     |   |   |         |        |  
|Changes in current assets and liabilities:                  |                                               |                         |         |        |   |      |         |         |   |   |         |        
|                                                            | Accounts receivable-trade                     |                         |         | 11,512 |   |      |         | (44,513 | ) |   |         | (20,304 | )
|                                                            | Accounts payable-trade                        |                         |         | 3,926  |   |      |         | 4,599   |   |   |         | 4,981   |  
|                                                            | Accrued bankcard assessments                  |                         |         | (468   | ) |      |         | 3,655   |   |   |         | 4,336   |  
|                                                            | Income taxes payable                          |                         |         | 10,541 |   |      |         | 4,848   |   |   |         | (8,453  | )
|                                                            | Other current assets and liabilities          |                         |         | (784   | ) |      |         | (203    | ) |   |         | (4,817  | )
|                                                            | Other, net                                    |                         |         | 499    |   |      |         | 364     |   |   |         | (1,015  | )
|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Net cash provided by operating activities                   |                                               |                         | 101,608 |        |   |      | 49,910  |         |   |   | 45,066  |        
|                                                           
|Investing activities                                        |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Capital expenditures                                        |                                               |                         | (16,347 | )      |   |      | (20,089 | )       |   |   | (14,406 | )      
|Proceeds from sales of fixed assets                         |                                               |                         |        |        |   |      | 34      |         |   |   | 314     |        
|Purchases of Eurodollar deposits                            |                                               |                         |        |        |   |      |        |         |   |   | (76,000 | )      
|Proceeds from maturities of Eurodollar deposits             |                                               |                         |        |        |   |      | 56,000  |         |   |   | 80,000  |        
|Common control business unit purchase                       |                                               |                         |        |        |   |      | (44,000 | )       |   |   |        |        
|Acquisitions, net of cash received                          |                                               |                         | (3,200  | )      |   |      | (48,500 | )       |   |   | (2,000  | )      
|Net proceeds from sales of business lines                   |                                               |                         |        |        |   |      | 41,252  |         |   |   |        |        
|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Net cash used in investing activities                       |                                               |                         | (19,547 | )      |   |      | (15,303 | )       |   |   | (12,092 | )      
|                                                           
|Financing activities                                        |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Principal payments under property leased from
    affiliate |                                               |                         | (130    | )      |   |      | (131    | )       |   |   | (130    | )      
|Distribution to minority shareholder                        |                                               |                         | (826    | )      |   |      |        |         |   |   |        |        
|Issuance of common stock                                    |                                               |                         | 3,151   |        |   |      | 8,674   |         |   |   | 1,765   |        
|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Net cash provided by financing activities                   |                                               |                         | 2,195   |        |   |      | 8,543   |         |   |   | 1,635   |        
|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Net increase in cash and cash equivalents                   |                                               |                         | 84,256  |        |   |      | 43,150  |         |   |   | 34,609  |        
|Cash and cash equivalents, beginning of period              |                                               |                         | 101,257 |        |   |      | 58,107  |         |   |   | 23,498  |        
|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Cash and cash equivalents, end of period                    |                                               | $                       | 185,513 |        |   | $    | 101,257 |         |   | $ | 58,107  |        
|                                                            |                                               |                         |         |        |   |      |         |         |   |   |         |        
|Supplemental Cash Flow Information                          |                                               |                         |         |        |   |      |         |         |   |   |         |        
|                                                            | Cash paid for income taxes                    |                         | $       | 21,646 |   |      | $       | 26,396  |   |   | $       | 37,342  |  

See notes to consolidated financial statements.

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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. The Company, headquartered in Louisville, Kentucky,
is 85% owned by National City Corporation (National
City), a financial holding company headquartered in
Cleveland, Ohio.

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 represented
96% of the Companys revenue in 2002.

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. Payment Services represented 4% of the
Companys revenue in 2002.

Sponsorship
Agreement

The Company and National City Bank of Kentucky
(NCBK) subsidiary banks are parties to a sponsorship
agreement (the Sponsorship Agreement) whereby the
Company acts as National City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, a wholly owned
subsidiary of National City, 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 against losses, claims or other amounts in accordance with
the terms of the Sponsorship Agreement.

F-6



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NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





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 amount guaranteed exceeds the amount of the
Companys equity, however, the Company believes its
exposure to loss under the guarantee is unlikely. National
Processing processes all transactions received from Visa®
by NCBK under the exclusive 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 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, 2002, 2001, and 2000,
interchange and debit network fees were $2.4 billion,
$2.2 billion, and $1.8 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, 2002, 2001, and 2000, earnings on
customer balances were $4.3 million, $8.3 million, and
$8.4 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.

F-7



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





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 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 40 years | 
|Software                            |  |  | 3 to 10 years | 
|Property leased from affiliates     |  |  | 35 years      | 
|Land improvements                   |  |  | 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.
Depreciation expense, including depreciation expense on property
leased from affiliates, was $11.7 million,
$12.0 million, and $14.2 million in 2002, 2001, and 2000,
respectively.



| |                        
| | -----------------------
| | 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
7 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 Statement of
Financial Accounting Standards (SFAS) 142,
Goodwill and Other Intangible Assets.

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 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 financial
statements.



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

Liabilities to Visa® and MasterCard ®
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
recovers these assessment charges through various contractual
arrangements with its customers.

F-8



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





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,
2002, 2001, and 2000 assessment expense was $134.9 million,
$126.1 million, and $103.2 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 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

At December 31, 2002, the Company has
various stock-based compensation plans that allow for the
granting of stock to eligible employees and directors. See Note
12. The Company accounts 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.
Compensation expense for employee stock options is generally not
recognized if the exercise price of the option equals or exceeds
the fair value of the stock on the date of grant. 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. Effective
January 1, 2003, the Company will adopt the fair value method of
recording stock options under the transitional guidance of SFAS
148, Accounting for Stock-Based Compensation 
Transition and Disclosure.

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
compensation. For purposes of providing the pro forma
disclosures required under SFAS 123, the fair value of stock
options granted in 2002, 2001, and 2000 was 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. As a result, management believes the
Black-Scholes model may not necessarily provide a reliable
single measure of the fair value of employee stock options.

|                                                                                                                                                    |                       |                         |        |      |  |      |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                       |                        
|                                                                                                                                                    |                       | Year Ended December 31,
|                                                                                                                                                    |                       |                        
|                                                                                                                                                    |                       | 2002                    |        | 2001 |  | 2000
|                                                                                                                                                    |                       |                         |        |      |  |     
|Net income, as reported                                                                                                                             |                       | $                       | 51,077 |      |  | $    | 52,660 |      |  | $ | 43,387 |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       | $                       | 7,187  |      |  | $    | 4,481  |      |  | $ | 1,669  |     
|                                                                                                                                                    |                       |                         |        |      |  |      |        |      |  |   |        |     
|Pro forma net income                                                                                                                                |                       | $                       | 43,890 |      |  | $    | 48,179 |      |  | $ | 41,718 |     
|                                                                                                                                                    |                       |                         |        |      |  |      |        |      |  |   |        |     
|Earnings per share:                                                                                                                                 |                       |                         |        |      |  |      |        |      |  |   |        |     
|                                                                                                                                                    | Basic  as reported   |                         | $      | 0.98 |  |      | $      | 1.03 |  |   | $      | 0.85 | 
|                                                                                                                                                    | Basic  pro forma     |                         | $      | 0.84 |  |      | $      | 0.94 |  |   | $      | 0.82 | 
|                                                                                                                                                    | Diluted  as reported |                         | $      | 0.97 |  |      | $      | 1.01 |  |   | $      | 0.85 | 
|                                                                                                                                                    | Diluted  pro forma   |                         | $      | 0.84 |  |      | $      | 0.93 |  |   | $      | 0.82 | 

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:

|                                                  |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | 2002 |         | 2001 |  | 2000
|                                                  |  |      |         |      |  |     
|Risk free interest rate                           |  |      | 3.6     | %    |  |      | 5.5     | % |  |   | 5.0     | %
|Expected option life                              |  |      | 4 years |      |  |      | 7 years |   |  |   | 7 years |  
|Expected dividend yield                           |  |      | 0       | %    |  |      | 0       | % |  |   | 0       | %
|Volatility factor                                 |  |      | .485    |      |  |      | .495    |   |  |   | .479    |  
|Weighted average grant date fair value of options |  | $    | 11.45   |      |  | $    | 15.14   |   |  | $ | 6.36    |  



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

Certain prior year amounts have been reclassified
to conform with the 2002 presentation.

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, will no longer be amortized
into net income over an estimated life but rather will be tested
at least annually for impairment based on specific guidance
provided in the new standard. Intangible assets determined to
have finite lives will 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. No impairment was required to be
recorded as a result of this test. 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 and $2.3 million for years ended
December 31, 2001 and 2000, respectively. 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. For the year ended December 31, 2000, proforma net
income would have been $45.5 million or $0.89 per diluted
share, versus reported net income of $43.4 million, or
$0.85 per diluted share.

The Companys amortizable intangible assets
as of December 31, 2002 related almost exclusively to
acquired merchant portfolios. These costs are amortized on a
straight-line basis over periods ranging from 7 to
10 years. Amortization expense for the years ended
December 31, 2002, 2001, and 2000 was $6.9 million,
$5.6 million, and $7.3 million, respectively. The
estimated annual amortization expense for existing intangible
assets for each of the next five years is as follows:
2003  $7.1 million; 2004 
$6.7 million; 2005, 2006, and 2007 
$4.8 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 Opinion 30 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 did not have a material
impact on the Companys results of operations, financial
position, 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 are not anticipated to have a material
impact on the Companys results of operations, financial
position, 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 to
SFAS 123s fair value method of accounting, if a
company so selects.

Effective January 1, 2003, the Company plans
to adopt 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 will be applied prospectively to awards granted
subsequent to December 31, 2002. As permitted, options
granted prior to January 1, 2003, will 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 to 2002. The actual
impact per diluted share may vary in the event the fair value or
the number of options granted increases or decreases from the
current estimate, 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 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 expands
the disclosures made by a guarantor in its financial statements
about its obligations under certain

F-11



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





guarantees and requires the guarantor to
recognize a liability (with a corresponding reduction in
revenue) for the fair value of the obligation assumed under
certain guarantees.


The Companys contingent obligation to honor
chargebacks (see Note 13) 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 are
effective for the Company as of December 31, 2002. The
required disclosures are included in Note 13, Commitments
and Contingencies.

The recognition requirements of FIN 45 will
require the Company to establish a liability at the inception of
a guarantee based on an estimate of the guarantees fair
value. The recognition requirements are to be applied
prospectively to new guarantees issued or modified after
December 31, 2002. The Company has not yet finalized the
impact of adopting the recognition requirements of FIN 45,
however the Company does not believe that FIN 45 will have
a material impact on the Companys results of operations,
financial position or liquidity.



|   |             
|-- | ------------
|4. | Acquisitions

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. 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 plus an additional one-time
payment of up to $1.0 million. 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
identifiable 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.
Incremental revenue and operating profit as a result of this
acquisition were $18.9 million and $3.0 million,
respectively, for the six months ended June 30, 2002.
Revenue and operating profit as a result of this acquisition
were $36.9 million and $6.4 million, respectively, for
the year ended December 31, 2002.

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.

F-12



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





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 includes a $3.9 million charge related to the
divestiture, was $(0.3) million for the year ended
December 31, 2001.

6. Impairment, Restructuring and Unusual
Items

In 2002, the Company recorded $3.2 million
($1.9 million after-tax, or $0.04 per diluted share) 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.

In May 2002, the Company announced plans to close
its remaining operations in Juarez, Mexico by the end of
2002. 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, or $0.04 per diluted share) 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, 2002, the Company had $0.5 million
remaining in accrued liabilities for future obligations related
to this closure.

During 2001, the Company recorded a net pre-tax
charge of $3.9 million ($4.6 million after-tax, or
$0.09 per diluted share) related to the BPO divestiture. The
after-tax charge exceeds 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. This charge consisted of a loss on
the sale of $3.3 million ($4.3 million after-tax or
$0.08 per diluted) which was partially offset by a
$0.6 million pre-tax ($0.4 million after-tax, or $0.01
per diluted share) severance charge related to organizational
restructuring actions taken to reduce support costs associated
with the BPO unit. As of December 31, 2002 the Company had
$0.8 million remaining in accrued liabilities related to
the final obligations associated with the BPO divestiture.

In 2000, the Company recorded charges of
$8.6 million ($5.6 million after-tax, or $0.11 per
diluted share) related to divested and discontinued business
units. These charges consisted of $7.1 million
($4.6 million after-tax, or $0.09 per diluted share) to
write-off goodwill and fixed assets for the Denver collections
business and $1.5 million ($1.0 million after-tax, or
$0.02 per diluted share) for site consolidation initiatives in
the BPO unit.

7. Transactions with Affiliates

The Company leases certain facilities from NCBK,
a wholly owned subsidiary of National City, under long-term
agreements classified as Property Leased From
Affiliate in the accompanying balance sheets. Future
minimum payments under this lease, which expires in 2019, are
$2.9 million, including interest of $1.1 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
Eurodollar deposits 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-13



---



##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





The Company obtains certain administrative
services, such as 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 are included in
general and administrative expenses and totaled
$2.0 million, $1.6 million, and $1.8 million in
2002, 2001, and 2000, respectively. As of December 31, 2002
and 2001, no amounts were due to or from National City.

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 $1.7 million in 2003, $1.5 million in 2004,
$1.3 million in 2005, $1.1 million in 2006,
$1.1 million in 2007 and $6.3 million thereafter. Rent
expense under operating leases was $2.5 million,
$2.9 million, and $3.7 million in 2002, 2001, and
2000, respectively.



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

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

|          |         |                         |        |        |   |      |        |        |   |   |        |        |  
|--------- | ------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2002                    |        | 2001   |   | 2000
|          |         |                         |        |        |   |     
|Current:  |         |                         |        |        |   |      |        |        |   |   |        |       
|          | Federal |                         | $      | 25,163 |   |      | $      | 31,074 |   |   | $      | 26,565 |  
|          | State   |                         |        | 4,968  |   |      |        | 1,659  |   |   |        | 3,638  |  
|          | Foreign |                         |        |       |   |      |        | (1,000 | ) |   |        | 651    |  
|Deferred: |         |                         |        |        |   |      |        |        |   |   |        |       
|          | Federal |                         |        | 2,887  |   |      |        | 1,660  |   |   |        | (2,961 | )
|          | State   |                         |        | (622   | ) |      |        | 2,382  |   |   |        | (827   | )
|          |         |                         |        |        |   |      |        |        |   |   |        |       
|          |         | $                       | 32,396 |        |   | $    | 35,775 |        |   | $ | 27,066 |       
|          |         |                         |        |        |   |      |        |        |   |   |        |       

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

|                          |                                   |      |        |        |   |   |        |        |  
|------------------------- | --------------------------------- | ---- | ------ | ------ | - | - | ------ | ------ | -
|                          |                                   | 2002 |        | 2001  
|                          |                                   |      |        |       
|Deferred tax assets:      |                                   |      |        |        |   |   |        |       
|                          | Accrued expenses                  |      | $      | 1,429  |   |   | $      | 792    |  
|                          | Accrued compensation and benefits |      |        | 602    |   |   |        | 1,232  |  
|                          | State net operating losses        |      |        | 530    |   |   |        | 1,622  |  
|                          | Amortization of intangibles       |      |        | 13,197 |   |   |        | 14,278 |  
|                          | Other                             |      |        | 4,616  |   |   |        | 4,507  |  
|                          |                                   |      |        |        |   |   |        |       
|                          |                                   |      | 20,374 |        |   |   | 22,431 |       
|Deferred tax liabilities: |                                   |      |        |        |   |   |        |       
|                          | Depreciation of fixed assets      |      |        | (6,030 | ) |   |        | (5,822 | )
|                          |                                   |      |        |        |   |   |        |       
|Net deferred tax assets   |                                   | $    | 14,344 |        |   | $ | 16,609 |       
|                          |                                   |      |        |        |   |   |        |       

F-14



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





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,
|                                    |  |                        
|                                    |  | 2002                    |        | 2001 |  | 2000
|                                    |  |                         |        |      |  |     
|U.S. statutory rate                 |  | $                       | 30,077 |      |  | $    | 31,242 |   |  | $ | 24,659 |  
|Nondeductible amortization          |  |                         |       |      |  |      | 630    |   |  |   | 630    |  
|State taxes, net of federal benefit |  |                         | 2,826  |      |  |      | 2,811  |   |  |   | 2,940  |  
|Change in valuation allowance       |  |                         |       |      |  |      | (185   | ) |  |   | (1,113 | )
|Foreign tax items                   |  |                         | 325    |      |  |      |       |   |  |   |       |  
|Sale of BPO business                |  |                         |       |      |  |      | 1,305  |   |  |   |       |  
|Non-taxable LLC minority interest   |  |                         | (861   | )    |  |      | (289   | ) |  |   |       |  
|Other                               |  |                         | 29     |      |  |      | 261    |   |  |   | (50    | )
|                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|                                    |  | $                       | 32,396 |      |  | $    | 35,775 |   |  | $ | 27,066 |  
|                                    |  |                         |        |      |  |      |        |   |  |   |        |  

For 2002, 2001 and 2000, income tax benefits of
$1.4 million, $4.6 million and $0.1 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, 2002, the Company has
approximately $7.6 million of state net operating loss
carryforwards for income tax purposes available to offset future
taxable income in the related states which expire through 2014.
The Company believes that it is more likely than not that future
taxable income will be generated in these states sufficient to
justify the deferred tax assets recorded. The valuation
allowance decreased in both 2001 and 2000 as the result of
changes in the estimated realizability of the related deferred
tax assets due to improved operating results.

Income (loss) before taxes from foreign
operations was ($1.0) million, $1.3 million, and
$2.6 million, respectively, in 2002, 2001, and 2000. Income
before income taxes from U.S. operations was $86.9 million,
$88.0 million, and $67.9 million, respectively, in
2002, 2001, and 2000.



|    |                       
|--- | ----------------------
|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, $2.1 million, and $1.4 million in
matching contribution expense during 2002, 2001, and 2000,
respectively.

F-15



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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,
|         |                                           |                        
|         |                                           | 2002                    |   | 2001   |  | 2000
|         |                                           |                         |   |        |  |     
|Basic:   |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income                                |                         | $ | 51,077 |  |      | $ | 52,660 |  |  | $ | 43,387 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Average common shares outstanding         |                         |   | 52,008 |  |      |   | 51,352 |  |  |   | 50,821 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income per common share-basic         |                         | $ | 0.98   |  |      | $ | 1.03   |  |  | $ | 0.85   | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|Diluted: |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income                                |                         | $ | 51,077 |  |      | $ | 52,660 |  |  | $ | 43,387 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Average common shares outstanding         |                         |   | 52,008 |  |      |   | 51,352 |  |  |   | 50,821 | 
|         | Dilutive effect of stock options          |                         |   | 468    |  |      |   | 631    |  |  |   | 228    | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Average common shares outstanding-diluted |                         |   | 52,476 |  |      |   | 51,983 |  |  |   | 51,049 | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       
|         | Net income per common share-diluted       |                         | $ | 0.97   |  |      | $ | 1.01   |  |  | $ | 0.85   | 
|         |                                           |                         |   |        |  |      |   |        |  |  |   |       



|    |                         
|--- | ------------------------
|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 2002 and
2001, related to the fair value of options for former employees
in situations where vesting continued upon a change in employee
status. In 2002, compensation expense of $1.0 million was
included in the $3.2 million of expenses related to the
separation agreement with the former CEO. In 2001, compensation
expense of $0.8 million was included in the
$3.9 million of expenses related to the BPO divestiture.

F-16



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##### 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, 2000   |            |                     | 1,647,407 |                     |   |                  | 2,341,941 |           |   |  | 11.82 |      
|                  | Authorized |                     |           | 5,000,000           |   |                  |           |          |   |  |       |      | 
|                  | Granted    |                     |           | (1,080,500          | ) |                  |           | 1,080,500 |   |  |       | 11.41 | 
|                  | Forfeited  |                     |           | 465,668             |   |                  |           | (465,668  | ) |  |       | 12.57 | 
|                  | Exercised  |                     |           |                    |   |                  |           | (149,808  | ) |  |       | 11.80 | 
|                  |            |                     |           |                     |   |                  |           |           |   |  |       |      
|December 31, 2000 |            |                     | 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 |      
|                  |            |                     |           |                     |   |                  |           |           |   |  |       |      

Information about stock options outstanding at
December 31, 2002 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 |             |  |                | 489,583   |                  |  | $           | 9.37  |                  |  |  | 5.8 |  |  |  | 463,752   |  |  | $ | 9.37  | 
|                | 11.00 - 15.99   |             |  |                | 725,039   |                  |  |             | 11.71 |                  |  |  | 7.1 |  |  |  | 464,731   |  |  |   | 11.69 | 
|                | 16.00 - 20.99   |             |  |                | 372,940   |                  |  |             | 17.49 |                  |  |  | 4.5 |  |  |  | 285,167   |  |  |   | 17.06 | 
|                | 21.00 - 25.99   |             |  |                | 1,090,166 |                  |  |             | 25.50 |                  |  |  | 8.4 |  |  |  | 361,861   |  |  |   | 25.50 | 
|                | 26.00 - 32.95   |             |  |                | 1,377,602 |                  |  |             | 28.26 |                  |  |  | 9.1 |  |  |  | 84,637    |  |  |   | 31.50 | 
|                |                 |             |  |                |           |                  |  |             |       |                  |  |  |     |  |  |  |           |  |  |   |       | 
|                | Total           |             |  |                | 4,055,330 |                  |  | $           | 21.29 |                  |  |  | 7.7 |  |  |  | 1,660,148 |  |  | $ | 15.99 | 
|                |                 |             |  |                |           |                  |  |             |       |                  |  |  |     |  |  |  |           |  |  |   |       | 



| |                 
| | ----------------
| | 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
generally recognizes compensation expense over the restricted
period. The grant date fair value of the restricted share awards
granted in 2001 was $24.18. The Company recognized
$0.1 million and $0.2 million of compensation expense
in 2002 and 2001, respectively, related to these restricted
stock awards. As of December 31, 2002, 22,500 shares of
restricted stock were outstanding.

13. Commitments and
Contingencies

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

F-17



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





account, and if the merchant refuses or is unable
to reimburse the Company for the chargeback due to 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 that 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 2002,
this amount totaled approximately $50 billion. At
December 31, 2002, the Company had $7.6 million of
unresolved chargebacks that were in process of resolution.

During 2002, 2001 and 2000, the Company processed
$163 million, $168 million and $131 million,
respectively, in chargebacks presented by issuing banks. Actual
losses recorded for 2002, 2001 and 2000 were $3 million,
$4 million, and $2 million, respectively. The Company
accrues for probable losses based on historical experience and
at December 31, 2002 and 2001 had $1.5 million and
$2.4 million, respectively, recorded in other accrued
liabilities for expected losses.

In most cases, this contingent liability is
unlikely to arise as most products or services are delivered
when purchased, and credits are issued on returned items.
However, where the product or service is not provided until some
time after the purchase (delayed-delivery), the
potential for this contingent liability increases. In 2002, the
Company processed approximately $22 billion of merchant
transactions related to delayed-delivery purchases.

The Company currently processes card transactions
for several of the largest airlines in the United States. In the
event of liquidation of one or more of the Companys
airline customers, the Company could become financially
responsible for refunding tickets purchased through Visa®
or MasterCard ® under the chargeback rules of those
associations. At December 31, 2002, the dollar value of
tickets purchased, but as yet unflown, was approximately
$1 billion. Based upon available information, this is
managements best estimate of maximum potential chargebacks
related to its airline customers. As of December 31, 2002,
NCBK held $139.5 million in merchant deposits and withheld
settlement funds for certain airline merchants. The merchant
deposits collateralize only individual airline merchants and
some airline merchants have no deposits. Of the total merchant
deposits, $125.0 million was related to a single airline
merchant. In the near term, management believes liquidations are
unlikely for any of the Companys airline customers.

US Airways Group, Inc. and United Air
Lines, Inc., both of which are merchant processing customers of
the Company, have filed for bankruptcy court protection under
Chapter 11. Based upon information currently available to
the Company and actions management has taken to mitigate risks,
management currently believes a material loss under the
chargeback rules is unlikely.

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 airlines it currently serves but
does not intend to renew such contracts when their current terms
expire. The contracts currently in effect have various
expiration dates extending through November 2005.



| |           
| | ----------
| | 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.

F-18



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)







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

Selected quarterly data for 2002 and 2001 are as
follows (in thousands, except per share amounts):

|                                    |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                    |  | 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    | 

|                                    |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                    |  | First   |         | Second  |  | Third   |         | Fourth  |  |     
|                                    |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Year
|                                    |  |         |         |         |  |         |         |         |  |     
|2001                                |  |         |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|Revenue                             |  | $       | 109,045 |         |  | $       | 117,876 |         |  | $    | 122,376 |  |  | $ | 123,953 |  |  | $ | 473,250 | 
|Operating profit                    |  |         | 16,432  |         |  |         | 14,753  |         |  |      | 23,421  |  |  |   | 27,790  |  |  |   | 82,396  | 
|Net income                          |  |         | 11,539  |         |  |         | 7,918   |         |  |      | 15,034  |  |  |   | 18,169  |  |  |   | 52,660  | 
|Basic net income per common share   |  | $       | 0.23    |         |  | $       | 0.15    |         |  | $    | 0.29    |  |  | $ | 0.35    |  |  | $ | 1.03    | 
|Diluted net income per common share |  | $       | 0.22    |         |  | $       | 0.15    |         |  | $    | 0.29    |  |  | $ | 0.35    |  |  | $ | 1.01    | 

The above financial data for 2002 includes
certain charges and unusual items. The second quarter of 2002
includes a charge of $1.7 million ($2.4 million after-tax,
or $0.04 per diluted share) for severance costs, building and
equipment write-downs and other items related to the closure of
the remaining operations in Juarez, Mexico. The third quarter of
2002 includes a charge of $3.4 million ($2.0 million
after-tax, or $0.04 per diluted share) related to a separation
agreement with the former CEO. The fourth quarter of 2002
includes a $0.2 million favorable adjustment related to the
same separation agreement.

The above financial data for 2001 includes a net
charge of $3.9 million ($4.6 million after-tax, or
$0.09 per diluted share). This net charge consists of a second
quarter charge of $6.3 million ($6.2 million
after-tax, or $0.12 per diluted share), which was partially
offset by a net positive adjustment of $2.4 million
($1.5 million after-tax, or $0.03 per diluted share) in the
fourth quarter. The second quarter charge related to the
Companys divestiture of its BPO unit. The net fourth
quarter gain represented a $3.0 million ($1.9 million
after-tax) favorable adjustment to the BPO divestiture charge,
partially offset by $0.6 million ($0.4 million
after-tax) charge for severance costs related to fourth quarter
organizational restructuring actions taken to reduce support
costs associated with the BPO unit.

The above financial data for 2001 also includes
goodwill amortization expense which is not included in 2002 due
to the adoption of the non-amortization provisions of SFAS 142.
If 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 the year ended December 31, 2001.
Proforma net income would have been $55.0 million, or $1.06
per diluted share, for the year ended December 31, 2001.



|    |                  
|--- | -----------------
|15. | Segment Reporting

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. Payment Services provides financial
settlement and reporting solutions to large and mid-size
corporate customers in the travel and healthcare industries.

F-19



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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)





Reportable segments are identified by the
services they offer. General and administrative expenses are
allocated to the segments based upon various methods determined
by the nature of the expenses. There is no intersegment revenue.
Depreciation expense for corporate fixed assets is allocated to
the reportable segments. Corporate assets are comprised
primarily of cash and cash equivalents, income tax balances, and
fixed assets used by these segments or by support service areas.
The accounting policies of the reportable segments are the same
as those of the Company.

|                                              |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|--------------------------------------------- |  | ---------------------- | ------- | ------------ |  | ------------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                                              |  | Merchant               |         |              |  |               |         |      
|                                              |  | Card                   |         | Payment      |  |               |         |      
|                                              |  | Services               |         | Services (1) |  | Corporate (2) |         | Total
|                                              |  |                        |         |              |  |               |         |      
|                                              |  |                       
|                                              |  | (Dollars in thousands)
|2002                                          |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|Revenue                                       |  | $                      | 434,943 |              |  | $             | 20,433  |       |  | $ |        |   |  | $ | 455,376 | 
|Impairment, restructuring and related expense |  |                        | 1,650   |              |  |               |        |       |  |   |        |   |  |   | 1,650   | 
|Operating profit                              |  |                        | 77,581  |              |  |               | 7,120   |       |  |   | (3,177  | ) |  |   | 81,524  | 
|Depreciation and amortization (3)             |  |                        | 16,739  |              |  |               | 1,803   |       |  |   |        |   |  |   | 18,542  | 
|Net interest income                           |  |                        | 4,022   |              |  |               | 388     |       |  |   |        |   |  |   | 4,410   | 
|Capital expenditures                          |  |                        | 11,048  |              |  |               | 532     |       |  |   | 4,767   |   |  |   | 16,347  | 
|                                             
|2001                                          |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|Revenue                                       |  | $                      | 401,972 |              |  | $             | 71,278  |       |  | $ |        |   |  | $ | 473,250 | 
|Impairment, restructuring and related expense |  |                        |        |              |  |               | 3,870   |       |  |   |        |   |  |   | 3,870   | 
|Operating profit                              |  |                        | 76,923  |              |  |               | 5,473   |       |  |   |        |   |  |   | 82,396  | 
|Depreciation and amortization                 |  |                        | 15,766  |              |  |               | 4,580   |       |  |   |        |   |  |   | 20,346  | 
|Net interest income                           |  |                        | 5,994   |              |  |               | 872     |       |  |   |        |   |  |   | 6,866   | 
|Capital expenditures                          |  |                        | 14,800  |              |  |               | 1,339   |       |  |   | 3,950   |   |  |   | 20,089  | 
|                                             
|2000                                          |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|Revenue                                       |  | $                      | 317,853 |              |  | $             | 109,408 |       |  | $ |        |   |  | $ | 427,261 | 
|Impairment, restructuring and related expense |  |                        |        |              |  |               | 8,572   |       |  |   |        |   |  |   | 8,572   | 
|Operating profit                              |  |                        | 54,368  |              |  |               | 7,803   |       |  |   |        |   |  |   | 62,171  | 
|Depreciation and amortization                 |  |                        | 13,705  |              |  |               | 7,798   |       |  |   |        |   |  |   | 21,503  | 
|Net interest income                           |  |                        | 6,328   |              |  |               | 1,954   |       |  |   |        |   |  |   | 8,282   | 
|Capital expenditures                          |  |                        | 9,669   |              |  |               | 3,143   |       |  |   | 1,594   |   |  |   | 14,406  | 
|                                             
|As of December 31, 2002                       |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|Goodwill                                      |  | $                      | 91,227  |              |  | $             |        |       |  | $ |        |   |  | $ | 91,227  | 
|Total assets                                  |  |                        | 320,990 |              |  |               | 4,229   |       |  |   | 225,285 |   |  |   | 550,504 | 
|                                             
|As of December 31, 2001                       |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|Goodwill                                      |  | $                      | 91,227  |              |  | $             |        |       |  | $ |        |   |  | $ | 91,227  | 
|Total assets                                  |  |                        | 326,409 |              |  |               | 6,383   |       |  |   | 145,546 |   |  |   | 478,338 | 
|                                             
|As of December 31, 2000                       |  |                        |         |              |  |               |         |       |  |   |         |   |  |   |         | 
|Goodwill                                      |  | $                      | 66,318  |              |  | $             | 13,081  |       |  | $ |        |   |  | $ | 79,399  | 
|Total assets                                  |  |                        | 223,919 |              |  |               | 56,311  |       |  |   | 155,215 |   |  |   | 435,445 | 



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Payment Services was formerly an operating unit
    within the Companys Corporate Outsourcing Solutions
    segment. This segment was renamed Payment Services after the
    sale of the BPO business unit in August 2001. The Payment
    Services segment disclosures for 2001 include the results of
    various divested business units formerly classified as part of
    the Corporate Outsourcing Solutions segment.
|   
|(2) | The year ended December 31, 2002 includes a
    $3.2 million of expenses charge related to a separation
    agreement with the former CEO. This expense was not allocated to
    the business segments.                                                                                                                                                                                                                     

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##### Table of Contents



NATIONAL PROCESSING, INC.


Notes to Consolidated Financial
Statements  (Continued)







|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | On January 1, 2002, the Company adopted the
    non-amortization provisions of SFAS 142; therefore, 2002 does
    not include goodwill amortization that is included in 2001 and
    2000.

Revenue from foreign operations in 2001 and 2000,
was $40.3 million, and $69.8 million, respectively.
The net book value of foreign long-lived assets, primarily in
Juarez, Mexico, was approximately $0.6 million,
$1.4 million, and $16.6 million at December 31,
2002, 2001, and 2000, respectively.

F-21