<PAGE>   1

                       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, 1998

                                       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                                   61-1303983
    (State or other jurisdiction           I.R.S. Employer Identification No.)
  of incorporation or organization)


1231 Durrett Lane
Louisville, Kentucky                                   40285-0001
(Address of principal executive offices                (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:

                           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. YES |X| NO |_|

      Indicate by check 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. |X|

      The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 1999 was $29,415,190. The market value
calculation was determined using the closing sale price of the registrant's
common stock on March 23, 1999, as reported on the New York Stock Exchange.

The number of shares outstanding of the Registrant's Common Stock as of March
29, 1999 was 50,644,651.

<PAGE>   2

                                    TABLES OF CONTENTS

                                 Form 10-K Annual Report

Part I                                                                      PAGE
                                                                            ----

ITEM 1.     BUSINESS........................................................   3

ITEM 2.     PROPERTIES......................................................   6

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...........................................   7

ITEM 6.     SELECTED FINANCIAL DATA.........................................   8

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS...........................   9

ITEM 7A     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......  13

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................  13

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE........................... 13

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............  14

ITEM 11.    EXECUTIVE COMPENSATION..........................................  14

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT....................................................  14

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................  14

PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
              ON FORM 8-K...................................................  16

SIGNATURES  ................................................................  17


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<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

      National Processing, Inc. ("NPI", the "Company" or "Registrant"), through
its wholly owned operating subsidiary National Processing Company ("NPC"), is a
provider of low-cost high-volume transaction processing services and customized
processing solutions. Deploying technology and applications software, the
Company currently provides products and services which include (i) processing of
card transactions ("Merchant Card Services") and check transactions ("Merchant
Check Services") for merchants and other commercial businesses (collectively
known as "Merchant Services"), (ii) outsourcing of administrative and financial
functions for corporations seeking to reduce overhead costs ("Corporate
Services"), and (iii) ticket processing and settlement for providers of
travel-related services ("Travel Services").

      NPI is an Ohio corporation that was formerly a wholly owned subsidiary of
National City Corporation, an Ohio-headquartered bank holding company ("National
City" or "NCC"). Following the completion of NPI's initial public offering in
August 1996, National City continued to own 85% of NPI's outstanding common
stock, without par value ("Common Stock" or "NPI Common Stock"). NPI was formed
on June 5, 1996 to hold all of the Common Stock of National Processing Company.
To effect the transaction, NPI issued 43,100,000 shares of Common Stock (after
giving retroactive effect to the 57,465.67 to 1 stock split which was effective
on June 6, 1996) to National City and National City contributed the Common Stock
of NPC (then a wholly owned subsidiary of NCC) to NPI. On August 9, 1996, NPI
sold 7,475,000 shares of its Common stock in an initial public offering;
retaining the net proceeds from the transaction to fund internal business
development needs. In May 1997, National City purchased 1,265,400 shares of
NPI's common stock in the open market and currently owns 88% of NPI's
outstanding common stock. NPI maintains operations, employees and contracts
substantially independent of National City's other operating subsidiaries. NPI
and National City are parties to agreements pursuant to which National City and
its subsidiaries provide NPI, and NPI provides National City and its
subsidiaries, certain administrative support, operations, and processing
services. NPI is also a party to a tax sharing agreement and a registration
rights agreement with National City.

      Merchant Services represented approximately 60% of the Company's revenues
in 1998 and provided services to approximately 400,000 merchant locations.
Corporate Services functions include accounts payable processing, remittance
processing, freight bill audit and funds settlement services, outsourcing
services and electronic commerce products. Corporate Services represented
approximately 30% of the Company's revenues in 1998. Travel Services provides
settlement functions to the airline industry for all ticket purchases made
through travel agents in the United States. In addition to ticket payment
processing, the Company provides lift document processing services for many
airline companies. Travel Services includes electronic commission payment
solutions which are targeted primarily at travel related companies such as auto
rental agencies, hotels and cruise lines, which reduce costs and provide
management information. Travel Services accounted for approximately 10% of the
Company's revenues in 1998.

      An important component of the Company's profitability has been access to
low-cost international labor markets. The Company established its initial
presence internationally with the opening of a processing facility in Juarez,
Mexico in 1988. During 1997, the Company acquired Caribbean Data services, Ltd.,
a data processing company with operating facilities in Barbados and the
Dominican Republic, and MRS Jamaica, Inc., a healthcare form processing company
with operating facilities in Jamaica. At December 31, 1998, international
operations employed approximately 63.8% of the Company's employees.

      The Company announced in late 1998 and early 1999 that the Board of
Directors had authorized management to investigate potential strategic options
for various product and business lines, including the possible restructuring,
divestiture, or liquidation of certain lines. The Company's management closely
evaluated the profitability and future growth potential of the Company's various
businesses, particularly three business lines within the Corporate Services
segment and one business line within the Merchant Services segment. The
Corporate Services business lines under consideration engage in freight bill
audit and settlement services, the administration of payable functions on an
outsourcing basis for large corporations, and remittance processing. The
Merchant Services business line under consideration engages in check
authorization and guarantee activities. Since that effort began, the Company
entered into an agreement in February 1999 to sell the freight payment and
payables business lines. In addition, in March 1999, the Board of Directors
committed to the definite divestiture, either through sale or liquidation, of
the check authorization and remittance business lines. (See further discussion
of these events in the sections that follow entitled Merchant Services Segment
and the Corporate Services Segment and in Note O to the Consolidated Financial
Statements.) These actions will allow 


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the Company to focus more closely on its core businesses which include merchant
card processing, outsourcing services and travel services.

      The Company experiences seasonality in its businesses, particularly in its
Merchant Services and Travel Services business. The Company typically realizes
higher revenues in the third and fourth calendar quarters and lower revenues in
the first calendar quarter, reflecting increased transaction volumes and travel
in the summer and holiday months and a decrease in transaction volume during the
quarter immediately following the holiday season.

      The Company estimates that the average tenure of its relationships with
its 50 largest customers has been approximately ten years.

Industry Overview

      The transaction processing industry has experienced strong volume growth
in recent years, as acceptance and use of credit cards, debit cards and checks
have grown, and corporations have increasingly outsourced non-core
administrative and financial functions in order to reduce costs, capitalize upon
advances in technology, and enhance the quality and availability of management
information. This growth has created considerable competition in the marketplace
which has resulted in additional focus on economies of scale. In addition to
competition, the cost of advancing technology and customer demand for a broad
product line have caused rapid consolidation among transaction processing
providers. The industry is expected to continue to grow and consolidate and to
experience continued increases in competition.

      Merchant Services Segment

      The Company's merchant services business consists of activities related to
merchant card processing and merchant check processing. As previously mentioned,
in the first quarter of 1999, the Company committed to divest the merchant check
business so that the Company can focus more closely on its core merchant card
processing business. This business maintains significant scale in an industry
that is still experiencing 10% to 15% organic growth.

      Payment processing volume for commercial businesses has grown steadily in
recent years as a result of a proliferation in the uses and types of credit and
debit cards, wider acceptance of such cards among merchants and increased
consumer usage of such cards. Advances in payment processing and
telecommunications technology have been a key factor contributing to this
growth. The transition from paper-based to electronic processing, for example,
provides greater convenience to merchants and consumers, reduces fees charged to
merchants, and facilitates faster, more accurate settlement of payments.

      The merchant card processing market is generally characterized by three
tiers of merchants consisting of national, regional, and numerous local
merchants. Historically, the Company has focused on servicing national
merchants, while many smaller transaction processors, such as Independent Sales
Organizations (ISOs) and regional banks, have offered a more limited range of
services to regional and local businesses. In October 1997, the Company
strategically expanded its card processing business through the acquisition of
approximately 80%, and in January 1998, the remaining 20%, of the common stock
of FA Holdings, Inc., the sole owner of Financial Alliance Processing Services,
Inc., an independent sales organization that specializes in selling credit and
debit card processing services to smaller merchants.

      This acquisition allowed NPC to diversify its customer base (i.e., prior
to this acquisition, the Company had primarily focused on servicing national
merchants), enhance its risk management systems and, most importantly,
significantly expand its distribution capabilities. Through approximately 300
commission only sales representatives and third party distribution
relationships, the Company currently generates approximately 5,000 new merchant
applications each month.

      The Company's current customer base consists of approximately 140,000
customers with over 400,000 locations, all of which are based in the United
States. No one customer contributes more than 10% to merchant card revenue. In
1998 and 1997, card processing represented approximately 77.9% and 71.2%,
respectively, and 89.4% and 79.6%, respectively, of total merchant services
revenues and operating profit.

      The merchant services 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 costs to
meet merchant requirements for improved service, satisfy the demands for
additional technology-driven applications, and the scale driven nature of the
industry have made it difficult for small scale 


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<PAGE>   5

transaction processors to remain competitive. As a result, the transaction
processing industry will likely continue to undergo rapid consolidation over the
next few years.

      According to published industry sources, the three largest credit and
debit card transaction processors handled 51.8% of total credit and debit card
sales volume for calendar year 1997. (the Nilson Report - March, 1998). The
remaining market is highly fragmented among smaller merchant service providers.
The Company is well positioned to grow aggressively its national and regional
customer portfolios through continued expansion of direct and third party
distribution channels.

      Corporate Services Segment

      The Company's Corporate Services business provides outsourcing services,
remittance processing, accounts payable processing and freight bill audit and
settlement services to businesses. The corporate outsourcing marketplace is
competitive with a few relatively large providers and numerous smaller
providers. The cost advantages associated with large-scale processing, and the
ability to invest in new technology that delivers value-added services at lower
per unit costs have enabled large-scale providers to capture much of the
transaction processing and outsourcing requirements of large corporations.
Corporate Services' response to this competition has been to acquire additional
international labor infrastructure, initially in Mexico and, through 1997
acquisitions, in Dominican Republic, Barbados and Jamaica. Secondly, Corporate
Services is spending capital and management time to re-engineer processing
platforms to incorporate outsourcing services and internet technologies and to
maximize the benefit of the international labor infrastructure. These changes
are expected to position Corporate Services with a more competitive product
capability in the future.

      In 1999, management committed to a plan to divest the remittance
processing, accounts payable processing and freight bill audit and settlement
services business lines so that the Company can focus more closely on its core
outsourcing services business. Collectively, the three business lines that will
be divested made up 62.4% and 77.7% of total Corporate Services revenues for
1998 and 1997, respectively. These lines had an operating loss of $12.1 million
for 1998 out of a total operating loss of $6.9 million for Corporate Services.
These lines contributed $8.1 million, or 48.5% of the total corporate services
operating profit of $16.6 million for 1997.

      The remaining business within Corporate Services is outsourcing services
and represents a growing business that began in the early 1990's. Within this
business, the Company performs numerous administrative and clerical outsourcing
services for over 60 major companies. This includes operation of mailrooms,
image scanning, data entry, fulfillment and database creation services. Revenues
from outsourcing services increased $26.0 million, or 105.3%, from 1997 to 1998,
caused partly by the full year revenue recognition of two businesses acquired
during 1997. Operating profit from outsourcing services for 1998 amounted to
$5.2 million and represented 15.2% of total operating profit for the business
segments of the Company. 

      The market for outsourcing services continues to grow. Large companies are
outsourcing non-strategic functions within their organizations to companies such
as NPC. The Company's customers for outsourcing services include health
insurance companies, credit card issuers, airlines, transportation companies and
brokerage services. In 1998, several new customer relationships were developed
and the new sales outlook for 1999 remains attractive.

      In order to remain cost competitive, the Company and many of its
competitors have moved to international locations to reduce operating expenses.
The Company has four strategic international locations in the Caribbean and
Mexico.

      Travel Services Segment

      The Company's Travel Services business derived approximately 76% of its
revenues in 1998 from an exclusive long-term contract with the Airlines
Reporting Corporation ("ARC"). The Company is compensated on a "cost plus" basis
under its current contract with the ARC, which expires in December 2001. That
contract is currently being renegotiated, and, as a result, is expected to be
extended through December 2005. The Company believes that there are only a few
other providers that can compete in providing high volume processing for the
travel related industries.


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<PAGE>   6

Regulation

      As a result of National City's ownership in NPI and as long as National
City has a controlling interest, NPI is subject to banking laws, regulations and
orders (collectively, the "Banking Laws"). For example, NPI is subject to the
supervision and examination of 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 NPI, and the FRB's written approval is required in order for NPI to
consummate an acquisition. Pursuant to the Bank Holding Act, NPI 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 Act requires a bank holding company to receive prior
approval from the FRB without such approval having been obtained, or (ii) that
would cause NPI or any affiliate of NPI to violate any regulation,
administrative order, or court order made pursuant to the Bank Holding Act. If
at any time it is determined that any activity conducted by NPI or any
subsidiary does not comply with the requirements of the Bank Holding Act, NPI 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 NPI currently conducts, then NPI 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. NPI does not
believe, however, that either the Banking Laws or the Bank Holding Act will
impede significantly the manner in which NPI intends to conduct its business or
its product and service offerings, although there can be no assurance that the
Banking Laws or Bank Holding Act will not have such an effect.

      The Company is currently engaged in check guarantee and collection
services. As such, the Company is subject to certain consumer collection laws,
orders and regulations (collectively, "Consumer Laws") and the laws of the
various states in which such activities are conducted, which among other things:
(i) require the Company to obtain and maintain certain licenses and
qualifications; (ii) limit the fees and other charges the Company is allowed to
charge; and (iii) require specified disclosures. 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,
including the Consumer Laws.

      Through National City Bank of Kentucky, which serves as a member bank for
the Company, the Company is registered with VISA(R) and MasterCard(R) as a
certified processor and member service provider. As a result, the Company must
adhere to the standards of the VISA(R) and MasterCard(R) credit card
associations or else risk suspension or termination of its designation and/or
status. There can be no assurance that (i) VISA(R) and MasterCard(R) will
maintain the Company's registrations; (ii) the current VISA(R) and MasterCard(R)
rules allowing the Company and other nonbank transaction processors to market
and provide transaction processing services will remain in effect; or (iii)
VISA(R) and MasterCard(R) will continue to interpret their rules as they have
done in the past, which may have an impact on the Company's business operations.

Employees

            As of December 31, 1998, the Company and its subsidiaries had 10,478
full-time and 308 part-time employees.

ITEM 2. PROPERTIES

      The Company leases its processing facility in Louisville, Kentucky,
consisting of approximately 223,000 square feet, from National City Bank of
Kentucky, a wholly owned subsidiary of National City. (See Transactions with
Affiliates, Note E to Consolidated Financial Statements). The Company's lease
for the Louisville processing facility expires on February 28, 2019. The Company
also leases its operations center in Phoenix, Arizona. The Phoenix facility
consists of approximately 50,000 square feet for which the final lease term
expires on July 31, 1999. In an effort to improve both its operating
efficiencies and standardize its customer service levels, at the expiration of
this lease, the Company plans to consolidate significantly all of its remaining
operations in its Phoenix, AZ facility to its Louisville, KY facility. The
Company's Juarez operation owns and utilizes four properties totaling 225,000
square feet. The Company's other processing facilities have varying lease
expiration terms and range in size from 3,900 square feet to 41,300 square feet
and are located throughout the United States, Barbados, Dominican Republic,
Jamaica, and Mexico. The Company's 26 marketing and sales offices have varying
lease expiration


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<PAGE>   7

terms and range in size from 100 square feet to 9,000 square feet and are
located throughout the United States. 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 space requirements to
consolidate and dispose of or sublet facilities which are no longer required in
connection with its businesses and to acquire new space to meet the needs of its
businesses.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
        MATTERS

      The Company's common stock is traded on the New York Stock Exchange under
the symbol NAP. The common stock has been quoted on the New York Stock Exchange
since August 9, 1996, the date of the initial public offering of the Company's
common stock. The quarterly high and low closing price and the final day's
closing price of the Company's common stock for each of the quarterly periods in
1998 and 1997 were:

<TABLE>
<CAPTION>
Fiscal year ended December 31, 1998         High              Low        Close
                                            ----              ---        -----
<S>                                       <C>              <C>           <C>    
First Quarter                             $12.500          $ 9.750       $12.375
Second Quarter                             12.938            9.500        10.688
Third Quarter                              11.313            6.563         6.750
Fourth Quarter                              7.063            5.438         5.500

<CAPTION>
Fiscal year ended December 31, 1997
<S>                                       <C>              <C>           <C>    
First Quarter                             $16.125          $ 7.875       $ 8.000
Second Quarter                             11.250            6.750        10.250
Third Quarter                              11.625            9.125        11.125
Fourth Quarter                             11.688            9.375         9.875
</TABLE>

      The number of holders of record of the Company's common stock as of March
23, 1999 was 127. The Company believes that it has significantly more than 127
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, Department 5352,
P.O. Box 92301, Cleveland, Ohio, 44193-0900 (1-800-622-6757).

      Investors or analysts requiring further information should contact Thomas
A. Richlovsky, Investor Relations, Department 2101, P.O. Box 5756, Cleveland,
Ohio, 44101-0756 (1-216-575-2126).


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<PAGE>   8

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.

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                     ----------------------------------------------------
                                       1998       1997       1996       1995       1994
                                     --------   --------   --------   --------   --------
                                             (in millions, except per share data)
<S>                                  <C>        <C>        <C>        <C>        <C>     
Income Statement Data:(1)
Revenues                             $  483.2   $  405.7   $  373.7   $  339.3   $  319.5
Other Income                              4.0       --          3.9       --         --
Operating Expenses                      242.5      193.4      182.3      173.4      161.9
Wages and Other Personnel Expenses      126.9      101.6       83.2       69.9       73.6
General and Administrative
  Expenses                               66.8       50.8       49.0       41.8       40.2
Restructuring Charge                     --         13.3       --         --         --
Depreciation and
  Amortization                           26.8       17.8       12.8       10.4        9.6
                                     --------   --------   --------   --------   --------

Income from Operations                   24.2       28.8       50.3       43.8       34.2
Net Interest Income (Expense)              .9        4.0        2.8         .6        (.6)
                                     --------   --------   --------   --------   --------
Income Before Taxes                      25.1       32.8       53.1       44.4       33.6
Provision for Income Taxes                9.8       11.7       21.7       18.6       14.3
                                     --------   --------   --------   --------   --------

Net Income                           $   15.3   $   21.1   $   31.4   $   25.8   $   19.3
                                     ========   ========   ========   ========   ========
Basic and Diluted Net Income
   per Common Share (2)              $   0.30   $   0.42   $   0.68   $   0.60   $   0.45
                                     ========   ========   ========   ========   ========

Average Shares Outstanding
    - diluted (2)                        50.7       50.7       46.1       43.1       43.1

Balance Sheet Data:
Working Capital                      $   72.4   $   79.3   $  178.8   $   64.1   $   45.6
Goodwill                                171.4      170.3       70.6       72.6       73.5
Total Assets                            512.4      523.3      418.6      281.3      288.4
Total Liabilities                       159.8      186.4      102.9      107.3      140.2
Shareholders' Equity                 $  352.7   $  336.8   $  315.7   $  174.0   $  148.2
</TABLE>

(1)   The above information includes the impact of the following acquisitions
      during the period presented: in December 1995, the Company acquired the
      remittance processing business of First Data Resources, Inc.; on February
      4, 1997, the Company acquired NTA, Inc. a freight payment processing
      company; on June 18, 1997, the Company acquired the operating assets and
      liabilities of Intracon, Inc., a freight payment processing company; on
      June 20, 1997, the Company acquired the operating assets and liabilities
      of MRS Jamaica, Inc., a healthcare form processing company; on September
      30, 1997, the Company acquired Caribbean Data Services, Ltd., a data
      processing company; on October 24, 1997, the Company acquired 79.6% of the
      outstanding shares of FA Holdings, Inc., a debit and credit card processor
      (the Company acquired the remaining outstanding shares of FA Holdings,
      Inc. on January 2, 1998); on January 15, 1998, the Company acquired JBH
      Travel Audit Inc., a company which audits fees payable to travel agencies.
      These transactions were accounted for as purchases; accordingly, the
      results of operations are included in the statements of income from the
      respective acquisition dates.

(2)   Net income per share for 1994 and 1995 has been calculated based on
      43,100,000 shares outstanding which reflects the retroactive effect of the
      57,465.67 to one stock split effective June 6, 1996.


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<PAGE>   9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

General

      The Company is a provider of low-cost, high-volume transaction processing
services and customized processing solutions. The Company deploys technology and
applications software primarily to merchants and other commercial businesses,
corporations and providers of travel-related services.

Components of Revenue and Expenses

      Revenues. The Company's revenues are generated from a variety of sources.
The Company's Merchant Services revenues are primarily derived from fees paid by
merchants for the authorization and settlement of credit and debit card
transactions, exclusive of interchange fees, and for the acceptance of checks.
Merchant fees paid to the Company include assessment fees, which are amounts
charged by credit card associations for clearing services, advertising and other
expenses. Revenues from Corporate Services are derived from transaction fees for
the processing of remittances, accounts payable and freight bills, and for
outsourced services. Revenues from Travel Services are dependent on the volume
of ticket sales by travel agents on behalf of airlines. A small portion of
revenues is derived from earnings on cash balances, which are maintained by
customers pursuant to contract terms. Revenues derived from services provided to
affiliates are immaterial.

      Expenses. Operating expenses include all direct costs of providing
services to customers, excluding wages and other personnel expenses. The most
significant components of operating expenses are assessment fees, authorization
fees and data processing expenses. Wages and benefits include wages and benefits
for hourly employees. General and administrative expenses include management
salaries and benefits, facilities maintenance and software applications
programming.

Results of Operations

      The following table summarized the Company's operating results and sets
forth such results as a percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                                      -----------------------------
                                       1998       1997       1996
                                      -------    -------    -------
Operating Results:
(in millions)
<S>                                   <C>        <C>        <C>    
Revenues                              $ 483.2    $ 405.7    $ 373.7
Other Income                              4.0       --          3.9
Operating Expenses                      242.5      193.4      182.3
Wages and Other Personnel Expenses      126.9      101.6       83.2
General and Administrative Expenses      66.8       50.8       49.0
Restructuring Charge                     --         13.3       --
Depreciation and Amortization            26.8       17.8       12.8
                                      -------    -------    -------
Income from Operations                   24.2       28.8       50.3
Net Interest Income                        .9        4.0        2.8
                                      -------    -------    -------
Income Before Taxes                      25.1       32.8       53.1
Provision for Income Taxes                9.8       11.7       21.7
                                      -------    -------    -------
Net Income                            $  15.3    $  21.1    $  31.4
                                      =======    =======    =======

As a Percentage of Revenues:
Revenues                                100.0%     100.0%     100.0%
Other Income                               .8       --          1.0
Operating Expenses                       50.2       47.7       48.8
Wages and Other Personnel Expenses       26.3       25.0       22.2
General and Administrative Expenses      13.8       12.5       13.1
Restructuring Charge                     --          3.3       --
Depreciation and Amortization             5.5        4.4        3.5
                                      -------    -------    -------
Income from Operations                    5.0        7.1       13.4
Net Interest Income                        .2        1.0         .8
                                      -------    -------    -------
Income Before Taxes                       5.2        8.1       14.2
Provision for Income Taxes                2.0        2.9        5.8
                                      -------    -------    -------
Net Income                                3.2%       5.2%       8.4%
                                      =======    =======    =======
</TABLE>


                                       9
<PAGE>   10

Year Ended December 31, 1998 compared to Year Ended December 31, 1997

      Revenues: Consolidated revenues increased $77.5 million, or 19.1% to
$483.2 million for the year ended December 31, 1998 from $405.7 million for
1997. The increase was primarily due to revenues generated from the last five
acquisitions that contributed $70.5 million. The remaining increase resulted
primarily from increases in the merchant card operations partially offset by
decreases in the remittance and merchant check operations.

      The composition of the Company's revenues for these periods is as follows:

<TABLE>
<CAPTION>
                                                  For the Year Ended
                                                     December 31
                                                 1998           1997
                                                 ----           ----
<S>                                              <C>           <C>  
Merchant Services                                59.5%         57.6%
Corporate Services                               30.3%         31.1%
Travel Services                                  10.2%         11.3%
</TABLE>

      Other Income: Other income in 1998 reflects a settlement for the
cancellation of a third party merchant card processing contract.

      Costs and Expenses: Consolidated costs and expenses increased $86.2
million, or 22.9%, to $463.0 million for the year ended December 31, 1998 from
$376.8 million during 1997.

      Operating expenses increased $49.1 million, or 25.4%, to $242.5 million
for the year ended December 31, 1998 from $193.4 million in 1997. The increase
was primarily due to the last six acquisitions that contributed $23.0 million   
in operating expenses. The Company's core businesses reflected increases in
operating expense of $26.1 million, principally due to increased volumes and
expanded sales distribution channels, information technology and customer
services at the merchant card operations and increases at the remittance
operations due to $5.2 million for research adjustments and $2.4 million in
additional expenses due to delays in converting to its new imaging technology.
The Company's remittance operation accepts checks received on behalf of
customers and remits the funds to the customer. The research adjustments 
relate to the amounts charged back by the banks to the Company for errors in
deposits, NSF checks, etc. The Company maintains an in-process inventory of
these items that it normally settles without significant charges. As a result
of problems associated with the conversion of the remittance product to a new
image based system, the in-process inventory of bank charge backs increased
over normal operating levels.  Additional increases resulted from the write-off
of internally developed software and related costs following the cancellation
of a significant customer contract at the freight operations. These increases
were offset by decreases at the merchant check operations.

      Wages and other personnel expenses increased $25.4 million, or 25.0%, to
$127.0 million for the year ended December 31, 1998, from $101.6 million in
1998. This increase was due primarily to the last six acquisitions that added
$29.0 million in 1998. These increases were partially offset by wage decreases
at the remittance and travel operations resulting from decreases in processing
volumes.

      General and administrative expenses increased $16.0 million, or 31.7%, to
$66.8 million for the twelve months ended December 31, 1998, from $50.8 million
in 1997. This increase resulted principally from increases in information
technology expenses including $4.7 million incurred for Year 2000 compliance,
$1.2 million of the total $2.6 million freight software write-off discussed
above, and increases in sales and support services related to the company's last
three acquisitions.

      Depreciation and amortization increased $9.0 million, or 50.2%, to $26.8
million for the year ended December 31, 1998, from $17.8 million in 1997. The
increase was primarily due to the amortization of intangibles and the
depreciation of fixed assets acquired in the last six acquisitions, which
contributed $6.5 million, and additional fixed asset expenditures. 

      Net Interest Income: The Company earned net interest income of $0.9
million for the year ended December 31, 1998 compared to $4.0 million in 1997.
This decrease resulted from decreased investment balances reflecting the cash
used for the 1997 and 1998 acquisitions.

      Tax Provision: The provision for income taxes for 1998 was $9.8 million
compared to $11.7 million in 1997. The decrease resulted from the decrease in
taxable income of $7.7 million to $25.1 million. Additionally, the 1997
effective tax rate was lower than the 1998 rate due to a significant increase in
non-tax deductible goodwill amortization in 1998 resulting from 1997 and 1998
business acquisitions and due to non-taxable interest income from investments in
1997. The Company has approximately $51.0 million of state net operating loss
carryforwards for income tax purposes available to offset future taxable income
in the related states from 1999 to 2013. In 1998, the Company determined that it
was more likely than not that future taxable income would be generated in these
states sufficient to justify the deferred tax assets recorded, net of the
related valuation allowance of $2.4 million.


                                       10
<PAGE>   11

      Net Income: Excluding the 1997 restructuring charge, which totaled $8.1
million after-tax, net income for the year ended December 31, 1998 decreased
$13.9 million to $15.3 million from $29.2 million for the same period in 1997.
The decrease resulted primarily from the additional expenses for research
adjustments, the additional expenses due to delays in converting to new imaging
technology, the write-off of internally developed software and costs incurred in
conjunction with Year 2000 compliance.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

      Revenues. Consolidated revenues increased $32.0 million, or 8.6% to $405.7
million for the year ended December 31, 1997 from $373.7 million for 1996. The
increase was primarily due to revenue gains in Merchant Services and Corporate
Services which offset a revenue decline in Travel Services. Merchant Card
Services revenue increased 6.7% in 1997 compared to 1996 due to increased
transaction volume and an increase in revenue per transaction due to a shift in
mix toward smaller volume customers. This shift in mix was in part due to the
October 1997 acquisition of FA Holdings, Inc., a credit and debit card
processing company specializing in smaller merchants. Corporate Services revenue
grew 28.2% in 1997. 67% of this growth was due to 1997 acquisitions in the
Company's freight and electronic imaging operations. The Company processed 2.8
billion transactions during 1997, representing a 7.7% transaction volume
increase over the prior year.

      The composition of the Company's revenues for these periods is as follows:

<TABLE>
<CAPTION>
                                                  For the Year Ended
                                                     December 31
                                                 1997           1996
                                                 ----           ----
<S>                                              <C>           <C>  
Merchant Services                                57.6%         59.0%
Corporate Services                               31.1%         26.1%
Travel Services                                  11.3%         14.9%
</TABLE>

      Costs and Expenses: Consolidated costs and expenses increased $49.5
million, or 15.1%, to $376.8 million for the year ended December 31, 1997 from
$327.3 million during 1996. The increase was primarily due to higher wages and
other personnel expenses within the Corporate Services operations of electronic
imaging solutions and freight, principally due to 1997 acquisitions; and higher
levels of purchased services as a result of higher business volumes and
increases in software development costs in Merchant Services.

      Additional increases resulted from restructuring charges of $6.3 million
in the first quarter of 1997 related to severance pay and other costs resulting
from an organizational restructuring and $7.0 million in the fourth quarter of
1997 for the consolidation of operations and facilities following the
acquisition of FA Holdings, Inc.

      Depreciation and amortization for the year ended December 31, 1997 was
$17.8 million compared to $12.8 million during 1996. This increase was primarily
due to greater expenditures on fixed assets relating to technology improvements
and increased amortization of intangibles related to the Company's 1997
acquisitions.

      These increases were partially offset by lower operating costs at Travel
Services.

      Net Income. Net income for the year ended December 31, 1997 decreased
32.6% to $21.1 million from $31.4 million for the year ended December 31, 1996.
The decrease resulted principally from the $8.1 million of after-tax
restructuring charges in 1997 and a 1996 $2.5 million after-tax gain on the sale
of a portfolio of merchant contracts.

Business Segment Review

      Selected financial information for the Company's three business segments,
Merchant Services, Travel Services and Corporate Services, are discussed in Note
N, Segment Reporting. The following is an analysis of the Company's operations
by business segment.

Merchant Services


                                       11
<PAGE>   12

      Revenues for the year ended December 31, 1998 increased $53.8 million due
to merchant card revenue increases of $37.7 million from the FA Holdings
acquisition and additional increases at core operations, partially offset by
lower merchant check revenues from the elimination of certain unprofitable
customers and re-pricing of some continuing customers. Operating profit includes
other income of $4.0 million for a cancellation settlement of a merchant card
contract. This contract represented approximately 2% of the 1998 merchant card
revenues prior to cancellation.

Travel Services

      Revenues for the year ended December 31, 1998 increased $3.5 million
primarily due to the January 1998 acquisition of JBH Travel Audit, Inc.
Operating profit was $9.9 million for the year compared to $9.0 million for
1997. This increase was also due to the acquisition of JBH Travel Audit, Inc.
and additional increases recorded at the core travel operations due to cost
savings bonuses which exceeded decreases in volumes and income from the ARC
contract.

Corporate Services

      The year ended December 31, 1998 reflected an operating loss of $6.9
million compared to an operating profit of $16.6 million for 1997. The decrease
was primarily due to a $5.2 million reserve for research adjustments and
additional expenses related to the implementation of imaging technologies and
reduced revenues in remittance operations. Additional decreases resulted from a
$2.6 million write-off of internally developed software and related costs
following the cancellation in June of a significant freight customer contract.

Corporate

      In March, 1997, the Company recorded expenses of $6.3 million, including
$5.0 million for severance pay for approximately 79 employees, and $1.2 million
for other costs, related to organizational restructuring. In December, 1997, the
Company recorded expenses of $7.0 million following the acquisition of FA
Holdings, Inc. The expenses resulted principally from the write-off of certain
fixed assets (totaling $5.5 million) related to several of the Company's 
operating facilities which have been or are in the process of being closed and 
consolidated into the Company's current facilities.

Liquidity and Capital Resources

      The Company's primary uses of capital resources include acquisitions,
capital expenditures and working capital. 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 systems
hardware and software, scanning and other document processing equipment as
well as buildings and leasehold improvements to the Juarez, Mexico and
Louiseville operation facilities. During the year ended December 31, 1998 the
Company's capital expenditures totaled $42.5 million. Such expenditures were
principally financed from operating cash flow, which totaled approximately
$44.6 million. Operating cash flow during the year ended December 31, 1997
totaled $34.6 million. Capital expenditures for 1997 were $28.3 million. The
Company expects capital expenditures for 1999 to be approximately $16 million
principally to enhance processing capabilities in Merchant Services and
Corporate Services.

      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 its
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. The Company maintains
cash balances held on behalf of clients pending distribution to vendors that are
shown on the balance sheet as assets and equivalent, offsetting liabilities.
These cash 


                                       12
<PAGE>   13

balances totaled approximately $91.5 million and $83.2 million as of December
31, 1998 and 1997, respectively. From time to time, the Company also maintains
cash deposits from certain Merchant Card Services customers as collateral for
potential contingent liabilities that are the responsibility of such customers.
At December 31, 1998 and 1997, the amount of such cash deposits was immaterial.

Year 2000

      Management initiated the process of preparing its computer systems and
applications for the Year 2000 in February 1996. The process involves
identifying and remediating date recognition problems in computer systems and
software and other operating equipment that could be caused by the date change
from December 31, 1999 to January 1, 2000.

      Management has completed its assessment of all business processes that
could be affected by the Year 2000 issue. Each business process assessment
included a review of the information systems used in that process, including
related hardware and software, the involvement of any third parties, and any
affected operating equipment. To date, 95% of the work necessary to complete the
assessment, remediation and testing of those business processes determined to be
"mission critical" has been completed. Management expects to complete the
remediation and testing of all affected systems within the critical business
processes by the end of the second quarter of 1999.

      Management is also working with significant customers, vendors, and
business counter parties to monitor the progress of their Year 2000 efforts.

      Management believes it has an effective plan in place to resolve the Year
2000 issue in a timely manner, and, thus far, the Company's Year 2000
remediation activities have tracked in accordance with its plan. Management is
in the process of modifying its existing business continuity plans and is also
developing contingency plans to address potential risks in the event of Year
2000 failures, including non-compliance by third parties. Despite the Company's
efforts to date to remediate affected systems and develop contingency plans for
potential risks, management has not yet completed all activities associated with
resolving its Year 2000 issues. Under the unlikely scenario that the additional
phases are not completed, the Company could be materially adversely affected as
a result of not being able to process transactions related to its core business
activities. In addition, non-compliance by third parties and disruptions to the
economy in general resulting from Year 2000 issues could also have a material
negative impact of undeterminable magnitude on the Company.

      The total cost of the Year 2000 project is estimated at $8.5 million.
Approximately 20% of this estimate represents costs related to internal
personnel working on the project and certain capitalizable costs related to
replacing non-compliant hardware and software. To date $4.7 million of the total
project costs have been incurred, all of which were incurred in 1998.

Forward Looking Statement

      In Item 1, Business, the sections entitled Merchant Services Segment,
Corporate Services Segment and Travel Services Segment, and in Item 7, the
section entitled Year 2000 contain certain forward-looking statements (as
defined in the Private Securities Litigation Reform Act of 1995). These
forward-looking statements involve risks and uncertainties, including changes
in general economic conditions, the Company's ability to execute its business
plans, including its plan to address the Year 2000 issue, the ability of third
parties to effectively address their Year 2000 issues and the Company's ability
to carry out its plans to divest of the payables, freight, check and remittance
business lines. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, actual results may differ
materially.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      Market risk for purposes of this disclosure relates to losses due to
adverse changes in the fair value of a financial instrument caused by changes in
interest rates, foreign exchange rates or commodity prices. These exposures are
considered immaterial to the Company's financial position, results of
operations, and cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Index to Consolidated Financial Statements at Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
     
      None.


                                       13
<PAGE>   14

                                    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

Compensation of Directors

      Members of the board of directors of NPI who are not officers of National
City, NPI or any of their subsidiaries ("Outside Directors"), receive a yearly
retainer, payable in quarterly installments, and a fee for each meeting of the
board, and each committee thereof, which they attend. The yearly retainer is
$12,000. The fee for attendance at any board meeting or any committee meeting is
$1,000. The chairperson of each committee receives a fee of $500 for each
meeting of that committee attended by that chairperson. In addition, each
non-affiliated director is awarded options to purchase 2,500 shares of NPI
Common on the first Friday following each annual meeting of NPI's shareholders,
with an exercise price equal to the market value as of the date of such first
Friday.

      Pursuant to the NPI Nonemployee Directors Stock Option Plan, Messrs.
Cotsakos, Gonzalez-Baz, and Heller each received in 1998 non-qualified stock
options to purchase 2,500 shares of NPI Common at 100% of the fair market value
as of the date upon which those options were granted.

Directors

      NPI's board of directors is comprised of seven individuals, four of whom
are classified as Class I directors, and three of whom are classified as Class
II directors. Each class of directors has a two-year term of office.
Accordingly, the term of office of the Class I directors, which began upon the
due election and qualification of those directors at the 1997 Annual Meeting of
Shareholders, will expire upon the due election and qualification of their
respective successors at the 1999 Annual Meeting. The term of office of the
Class II directors, which began upon the due election and qualification of those
directors at the 1998 Annual Meeting of Shareholders, will expire upon the due
election and qualification of their respective successors at the 2000 Annual
Meeting of Shareholders.

      The following material contains biographical information concerning each
director, including recent employment, positions with NPI, other directorships,
age, and the number of shares of NPI Common beneficially owned, all as of
February 28, 1999. Unless otherwise indicated, the directors and nominees have
sole voting and investment power with respect to NPI's securities shown to be
owned by each.

CLASS I DIRECTORS WHOSE TERMS CONTINUE UNTIL THE 1999 ANNUAL MEETING OF
SHAREHOLDERS

                        JAMES R. BELL, III, Executive Vice President of National
                        City, since 1996. Executive Vice President of Retail
                        Sales and Distribution of National City, since 1998.
                        President and Chief Executive Officer of National City
                        Bank of Kentucky, a commercial bank, from 1996 to 1998.
                        Vice Chairman of National City Bank of Kentucky from
                        1995 to 1996 and Executive Vice President of National
                        City Bank of Kentucky from 1994 to 1995. Director of NPI
                        since 1996. Age: 42. Shares of NPI Common owned: 3,030.

                        AURELIANO GONZALEZ-BAZ, Partner in Bryan Gonzalez Vargas
                        y Gonzalez-Baz, a full service law firm, since 1974.
                        Director of NPI since 1996. Chairman of the Audit
                        Committee and member of the Compensation Committee. Age:
                        51. Shares of NPI Common owned: 0; options exercisable
                        within 60 days: 17,499.

                        PRESTON B. HELLER, Jr., Retired as Chairman, Chief
                        Executive Officer and President of Pioneer-Standard
                        Electronics, Inc., an industrial distributor of
                        electronics and computer products, during 1996. Prior to
                        that time he served as Chairman and Chief Executive
                        Officer from 1992 to 1995. Director of NPI since 1996.
                        Member of the Audit Committee and the Compensation
                        Committee. Age: 69. Shares of NPI Common owned: 4,500;
                        options exercisable within 60 days: 17,499.

                        ROBERT G. SIEFERS, Chairman of the Board of NPI since
                        May, 1997. Vice Chairman and Chief Financial Officer of
                        National City since August, 1997. Executive Vice
                        President and Chief Financial Officer of National City
                        from 1991 to August, 1997. Director of NPI since 1996.
                        Age: 53. Shares of NPI Common owned: 10,000.

CLASS II DIRECTORS WHOSE TERMS CONTINUE UNTIL THE 2000 ANNUAL MEETING
OF SHAREHOLDERS

                        CHRISTOS M. COTSAKOS, President and Chief Executive
                        Officer of E*TRADE Group, Inc., an electronic commerce
                        company, since 1996. President and Co-Chief Executive
                        Officer of A. C. Nielsen, Inc. from 1992 to 1995.
                        Director of NPI since 1996. Chairman of the Compensation
                        Committee and member of the Audit Committee. Age: 50.
                        Shares of NPI Common owned: 11,100; options exercisable
                        within 60 days: 17,499.

                        JEFFREY D. KELLY, Executive Vice President of National
                        City since 1994. Senior Vice President of National City
                        from 1990 to 1994. Age: 45. Shares of NPI owned: 1,000.

                        ROBERT E. SHOWALTER, President and Chief Executive
                        Officer of NPI since March 1997. President and Chief
                        Executive Officer of National City Bank, Northeast from
                        1995 to 1997 and President and Chief Executive Officer
                        of National City Bank, Northwest from 1991 to 1995.
                        Director of NPI since 1997. Age: 62. Shares of NPI
                        Common owned: 45,200; options exercisable within 60
                        days: 133,334.


                       REMUNERATION OF EXECUTIVE OFFICERS
                        AND TRANSACTIONS WITH MANAGEMENT

Executive Compensation

      (a) Compensation. The following table sets forth, together with certain
other information, the compensation earned during the fiscal year ended December
31, 1998 by (i) Robert E. Showalter, who served as President and Chief Executive
Officer of NPI during March, 1998 (ii) the four most highly compensated
executive officers (other than the President and Chief Executive Officer) of
National Processing and its subsidiaries, and (iii) John J. Leehy, III who, but
for the fact that he was not serving as an executive officer of National
Processing at the end of 1998 would have been among the four most highly
compensated executive officers (other than the President and Chief Executive
Officer) who were serving as executive officers of National Processing at the
end of 1998.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                 Annual Compensation                       Long-Term Compensation
                                                 -------------------                       ----------------------
                                                                                          Awards            Payouts
                                                                                          ------            -------
                                                                                                Securities
                                                                                 Restricted     Underlying                   All
                                                                          Other     Stock        Options/                   Other
     Name and Principal                                      Bonus        Annual   Award(s)         SARs      LTIP           Comp
          Position                  Year     Salary($)        ($)         Comp($)    ($)          (#)(6)    Payouts($)      ($)(7)
          --------                  ----     ---------        ---         -------    ---          ------    ----------      ------
<S>                                 <C>      <C>           <C>             <C>      <C>           <C>        <C>          <C>      
Robert E. Showalter(1)              1998     $ 320,833     $       0       $  0     $ 0           70,571     $140,923     $ 48,343 
President and                       1997     $ 284,792     $ 216,000       $  0     $ 0          226,481     $ 45,753     $ 31,706 
Chief Executive Officer             1996     $             $               $        $                        $            $       
                                                                                                                                   
Robert E. Johnson(2)                1998     $ 173,183     $  66,000       $  0     $ 0           25,000     $      0     $ 24,483 
Executive Vice President            1997     $ 168,683     $  24,350       $  0     $ 0           75,000     $      0     $ 21,636 
                                    1996     $ 165,667     $  71,638       $  0     $ 0          100,000     $      0     $ 21,551 
                                                                                                                                   
Donald J. Kenney(3)                 1998     $ 226,154     $       0       $  0     $ 0          125,000     $      0     $ 11,308 
Executive Vice President            1997     $             $               $        $                        $            $  
                                    1996     $             $               $        $                        $            $  
                                                                                                                                   
John J. Leehy, III(4)               1998     $ 200,000     $       0       $  0     $ 0                0     $      0     $ 10,000 
                                    1997     $  38,351     $       0       $  0     $ 0          100,000     $      0     $      0 
                                    1996     $             $               $                                 $            $  
                                                                                                                                   
Gregory W. Sahrmann(5)              1998     $ 191,667     $  42,000       $  0     $ 0           75,000     $      0     $  9,611 
                                    1997     $  36,215     $       0       $  0     $ 0           50,000     $      0     $      0 
                                    1996     $             $               $        $                        $            $
                                                                                                                                   
Thomas A. Wimsett                   1998     $ 183,333     $       0       $  0     $ 0           25,000     $      0     $ 21,117 
Executive Vice President            1997     $ 170,000     $  77,700       $  0     $ 0          100,000     $      0     $ 24,600 
                                    1996     $ 152,500     $  84,700       $  0     $ 0          100,000     $      0     $ 11,938 
</TABLE>
                                                                                

(1)   Robert E. Showalter was elected President and Chief Executive Officer of
      NPI during March, 1997.

(2)   Robert E. Johnson resigned as Executive Vice President of NPI effective as
      of March 31, 1999.

(3)   Donald J. Kenney was elected Executive Vice President of NPI on March 31,
      1998.

(4)   John J. Leehy, III joined NPI on October 24, 1997.

(5)   Gregory W. Sahrmann joined NPI on October 24, 1997. He resigned as
      Executive Vice President of NPI effective as of December 31, 1998.

(6)   The Securities Underlying Options/SARS pertain to options to purchase
      shares of NPI Common with the exception of Robert E. Showalter who
      received options to purchase 20,571 shares of National City Common Stock,
      par value $4.00 per share ("National City Common") and options to purchase
      50,000 shares of NPI Common.

(7)   All Other Compensation includes the Executive Savings Plan and the Savings
      and Investment Plan matching and profit-sharing components together with
      premiums paid by NPI in connection with split dollar insurance contracts,
      but does not include retirement accruals as these are not calculable. For
      the year 1998, each of the named executive officers were credited with the
      following matching and profit-sharing amount under the Savings and
      Investment Plan: Robert E. Showalter, $11,130; Robert E. Johnson, $11,002;
      Donald J. Kenney, $6,308; John J. Leehy, III, $$6,250; Gregory W.
      Sahrmann, $6,314; and Thomas A. Wimsett, $4,750. The named executive
      officers were credited with the following match and profit-sharing amount
      under the Executive Savings Plan during the year 1998; Robert E.
      Showalter, $19,151; Robert E. Johnson, $7,309; Donald J. Kenney, $5,000;
      John J. Leehy, III, $3,750; Gregory W. Sahrmann, $3,297; and Thomas A.
      Wimsett, $16,367. All other compensation also includes the following
      amounts equal to the full dollar value of the remainder of the premiums
      paid by NPI in connection with life insurance policies issued pursuant to
      the Split Dollar Life Insurance Agreements between National City and the
      following named executive officers during 1998, respectively, as
      applicable: Robert E. Showalter, $18,062; Robert E. Johnson, $6,172;
      Donald J. Kenney, $0; John J. Leehy, III, $0; Gregory W. Sahrmann, $0; and
      Thomas A. Wimsett, $0;. The premiums paid by NPI in connection with the
      life insurance policies issued pursuant to such Split Dollar Life
      Insurance Agreements, set forth in the preceding sentence, generally will
      be recovered in full by NPI upon the cancellation or purchase by a named
      executive officer of any such life insurance policy or the payment of any
      death benefits under any such life insurance policy.

      (b) Options. The following table provides information on options to
acquire National City Common and NPI Common granted during 1998 to the named
executive officers.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                              Individual Grants
                                                              -----------------
                                     Number of         % of Total
                                    Securities        Options/SARs         Exercise
                                    Underlying         Granted to             or                           Grant Date
                                   Options/SARs       Employees in        Base Price      Expiration         Present
        Name                        Granted(#)       Fiscal Year(1)         ($/sh)           Date           Value($)
        ----                        ----------       --------------         ------           ----           --------
<S>                                 <C>              <C>                  <C>             <C>              <C>
Robert E. Showalter                   50,000  (2)           6.22%            $11.813          5/21/08       $347,000(6)
                                       1,472  (3)           7.16%             67.875          7/28/08         16,531(7)
                                       8,528  (4)          41.46%             67.875          7/28/08         95,769(7)
                                       4,517  (5)          21.96%             69.002          7/22/06         51,584(7)
                                       6,054  (5)          29.43%             69.062          7/28/07         69,137(7)
Robert E. Johnson(8)                  25,000  (2)           3.11%             11.813          5/21/08        173,500(6)
Donald J. Kenney                     100,000  (2)          12.45%             12.375          3/31/08        727,000(6)
                                      25,000  (2)           3.11%             11.813          5/21/08        173,500(6)
John J. Leehy, III                         0                   0%
Gregory W. Sahrmann(9)                75,000                9.34%             11.813          5/21/08        520,500(6)
Thomas A. Wimsett                     25,000  (2)           3.11%             11.813          5/21/08        173,500(6)
</TABLE>

(1)   NPI granted options representing 803,300 shares to NPI employees during
      1998. National City granted options representing 20,571 shares to NPI
      employees during 1998.

(2)   Options are options to acquire NPI Common. All such options are
      non-qualified stock options. Subject to the named individual remaining in
      the continuous employment of NPI, the options become exercisable 33%
      annually beginning one year from the date of grant and expire not later
      than 10 years from the date of grant.

(3)   Options are incentive stock options to acquire National City Common. One
      half of each option grant becomes exercisable one year after the date of
      the grant and the remainder becomes exercisable on the second anniversary
      of the grant. For incentive stock options a further restriction is placed
      on the exercise of options such that the maximum number of shares of
      National City Common which become initially available for purchase under
      all post-1986 incentive stock option grants from National City in any
      calendar year shall be limited to that number of shares the aggregate
      exercise price of which does not exceed $100,000. Additional Option rights
      are attached to each option and Additional Options will be granted upon
      exercise, subject to certain provisions, if the exercise price or the
      related tax obligation is paid using shares of National City Common owned
      by the optionee.

(4)   Options are non-qualified stock options to acquire National City Common.
      One-half of each option grant becomes exercisable one year after the date
      of grant and the remainder becomes exercisable on the second anniversary
      of the grant. The options have a contractual term of 10 years. Additional
      Option rights are attached to each option and Additional Options will be
      granted upon exercise, subject to certain provisions, if the exercise
      price or the related tax obligation is paid using shares of National City
      Common owned by the optionee.

(5)   Options are Additional Options as defined in the Amended and Restated
      National City Corporation 1993 Stock Option Plan ("Additional Options") to
      acquire National City Common. Additional Options are granted at the market
      price of National City Common on the date of grant and become exercisable
      6 months after the date of grant. They have a contractual term equal to
      the remaining term of the original option.

(6)   In accordance with Securities and Exchange Commission rules, the
      Black-Scholes pricing model was used to estimate the Grant Date Present
      Value. The values indicated were calculated using the following
      assumptions: (i) an expected volatility of .492, (ii) an expected dividend
      yield of 0%, (iii) a risk-free interest rate at the date of grant of
      5.97%, (iv) an expected option life of 7 years, and (v) no discounts for
      non-transferability or risk of forfeiture. The estimated values have been
      included solely for purposes of disclosure in accordance with the rules of
      the Securities and Exchange Commission and represent theoretical values.
      The actual value, if any, an executive may realize will depend upon the
      increase in the market price of NPI Common through the date of exercise.
      Such an increase would benefit all shareholders of NPI.

(7)   In accordance with Securities and Exchange Commission rules, the
      Black-Scholes pricing model was used to estimate the Grant Date Present
      Value. The values indicated were calculated using the following
      assumptions: (i) an expected volatility of .208, (ii) an expected dividend
      yield of 3.00%, (iii) the risk-free interest rate at the date of grant
      based upon a term equal to the expected life of the option of 4.539%, (iv)
      an expected option life equal to the anticipated period of time from date
      of grant to exercise of 3.9 years, and (v) no discounts for
      non-transferability or risk of forfeiture. The estimated values have been
      included solely for purposes of disclosure in accordance with the rules of
      the Securities and Exchange Commission and represent theoretical values.
      The actual value, if any, an executive may realize will depend upon the
      increase in the market price of National City Common through the date of
      exercise. Such an increase would benefit all stockholders of National
      City.

(8)   Robert E. Johnson resigned as Executive Vice President of NPI effective as
      of March 31, 1999. Under the terms of Mr. Johnson's resignation, Mr.
      Johnson's NPI options will terminate on March 31, 2001.

(9)   Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
      as of December 31, 1998. Under the terms of the Stock Option Agreement
      pursuant to which Mr. Sahrmann's options were granted, Mr. Sahrmann's
      options terminated unexercised upon his resignation.

      The following table sets forth the stock options for National City Common
and NPI Common exercised by each of the named executive officers during the
calendar year 1998 and the December 31, 1998 value of all unexercised options
for National City Common and NPI Common held by the named executive officers.

             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                            FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                        Number of
                                                                       Securities                  Value of
                                                                       Underlying                 Unexercised
                                                                       Unexercised               In-The-Money
                                                                      Options/SARs               Options/SARs
                                   Shares                              at 12/31/98                at 12/31/98
                                 Acquired on         Value            Exercisable/               Exercisable/
        Name                     Exercise(#)    Realized($)(1)        Unexercisable              Unexercisable
        ----                     -----------    --------------        -------------              -------------
<S>                               <C>            <C>                  <C>                     <C>                         
Robert E. Showalter               19,991(2)      $403,508.31(2)       49,800/34,700(2)        $1,900,882.04/$299,772.94(4)
                                       0(3)                0(3)      66,667/183,333(3)                      $0.00/$0.00(5)

Robert E. Johnson(6)                   0(2)                0(2)          14,300/100(2)            $662,660.00/$4,312.50(4)
                                       0(3)                0(3)      91,667/108,333(3)                      $0.00/$0.00(5)

Donald J. Kenney                       0(2)                0(2)            64,260/0(2)              $3,546,657.90/$0.00(4)
                                       0(3)                0(3)           0/125,000(3)                      $0.00/$0.00(5)

John J. Leehy, III                     0(2)                0(2)                 0/0(2)                      $0.00/$0.00(4)
                                       0(3)                0(3)            33,333/0(3)                      $0.00/$0.00(5)

Gregory W. Sahrmann(7)                 0(2)                0(2)                 0/0(2)                      $0.00/$0.00(4)
                                       0(3)                0(3)                 0/0(3)                      $0.00/$0.00(5)

Thomas A. Wimsett                      0(2)                0(2)           6,400/100(2)            $282,587.50/$4,312.50(4)
                                       0(3)                0(3)     100,001/124,999(3)                      $0.00/$0.00(5)
</TABLE>

(1)   The "Value Realized" is equal to the difference of the fair market value
      on the date of exercise less the option exercise price.

(2)   Pertains to options to purchase shares of National City Common.

(3)   Pertains to options to purchase shares of NPI Common.

(4)   The "Value of Unexercised In-The-Money Options/SARs at 12/31/98" is equal
      to the difference (in no case less than zero) of the closing price of
      National City Common on December 31, 1998, which was $72.50, less the
      option/SAR exercise price.

(5)   The "Value of Unexercised In-the-Money-Options/SARs at 12/31/98" is equal
      to the difference (in no case less than zero) of the closing price of NPI
      Common on December 31, 1998, which was $5.50, less the option/SAR exercise
      price.

(6)   Robert E. Johnson resigned as Executive Vice President of NPI effective as
      of March 31, 1999.

(7)   Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
      as of December 31, 1998.

      The following table provides information on the awards of long-term
incentive plan participation during the year 1998.

             LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>                               
                                                                                  Estimated Future Payouts under    
                                                      Performance                            Non-Stock              
                                     Number of          or Other                       Price-Based Plans(3)         
                                  Shares, Units       Period Until              ----------------------------------
                                     or Other         Maturation or             Threshold     Target       Maximum
          Name                     Rights(#)(1)         Payout(2)                  ($)          ($)          ($)
          ----                     ------------         ---------                  ---          ---          ---
<S>                               <C>               <C>                         <C>           <C>          <C>
Robert E. Showalter                     N/A         December 31, 2001             64,547      107,579      215,158
Robert E. Johnson(4)                    N/A         December 31, 2000                  0            0            0
Donald J. Kenney                        N/A         December 31, 2000             37,830       63,050      126,100
John J. Leehy, III                      N/A         December 31, 2000                  0            0            0
Gregory W. Sahrmann(5)                  N/A         December 31, 2000                  0            0            0
Thomas A. Wimsett                       N/A         December 31, 2000             25,220       42,033       84,067
</TABLE>

(1)   Awards are cash awards based on a percentage of the individual's base pay.
      No shares or other rights are granted.

(2)   Mr. Showalter participates in the National City Corporation Long-Term
      Incentive Compensation Plan. His award is based on a three-year cycle
      starting 1/1/99 and ending 12/31/01. All other awards were made under the
      NPI Company Long-Term Incentive Compensation Plan, and are based on a
      three-year cycle commencing 1/1/98 and ending 12/31/00. Mr. Wimsett was
      awarded the opportunity to participate in the next three-year cycle of the
      NPI Company Long-Term Incentive Compensation Plan. Under either plan,
      payouts occur only at the end of the cycle.

(3)   In the case of Mr. Showalter, the payout is a percentage of his average
      annual salary for the three-year cycle, determined on the basis of
      National City's ranking, according to increase in total shareholder return
      over the three-year cycle, relative to a peer group comprised of
      high-performing banking companies. In all other cases, the payout is a
      percentage of the participant's average annual salary for the three-year
      cycle, determined on the basis of NPI's compound growth rate in earnings
      over the three-year cycle.

(4)   Robert E. Johnson resigned as Executive Vice President of NPI effective
      March 31, 1999. Under the terms of the National Processing Company
      Long-Term Incentive Compensation Plan, participants who resign prior to
      the end of a three-year cycle are not entitled to any award under the plan
      for that cycle. Accordingly, the estimated future payouts to Mr. Johnson
      for the three-year cycle commencing January 1, 1999 are zero.

(5)   Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
      as of December 31, 1998. Under the terms of the NPI Company Long-Term
      Incentive Compensation Plan, participants who resign prior to the end of a
      three-year cycle are not entitled to any award under the plan for that
      cycle. Accordingly, the estimated future payouts to Mr. Sahrmann for the
      three-year cycle commencing January 1, 1998 are zero.

      The value of benefits paid or furnished by NPI in 1998 to executive
officers, other than those included in the preceding table, are less than the
amounts required to be disclosed pursuant to the Exchange Act.

DESCRIPTION OF NPI'S COMPENSATION AND BENEFIT PLANS

      Savings Plan. NPI participates in the National City Savings and Investment
Plan (the "Savings Plan"). The Savings Plan is a qualified salary reduction
profit-sharing plan within the meaning of Section 401(k) of the Code. Under the
Savings Plan as amended, all eligible employees (generally, an eligible employee
is one who has completed one year of continuous service, is 21 years of age or
older and has completed 1,000 hours of service) of NPI and its adopting
subsidiaries may participate in the Savings Plan by directing their employers to
make Before-Tax Contributions (as defined in the Savings Plan) to the Savings
Plan Trust (the "Trust") for their accounts and to reduce their compensation by
an equal amount. Contributions may be directed in any whole percentage between
1% and 10% of the employee's base compensation. The employers also make
contributions to the Trust ("Matching Employer Contributions") in an amount
equal to the Matching Employer Contribution percentage then in effect (the
Matching Employer Contribution percentage is currently an amount equal to 100%
of the first 3% of the employee's pay contributed as a Before-Tax Contribution,
plus 50% of the next 4% of the employee's pay similarly contributed as a
Before-Tax Contribution, with no further Matching Employer Contribution for any
additional pay contributed as a Before-Tax Contribution). Amounts contributed
pursuant to the Savings Plan may be invested in certain investment choices.
Before-Tax Contributions and Matching Employer Contributions are fully vested at
all times.

      During 1997, the Savings Plan had a profit-sharing feature based upon
National City's profitability, as measured by the percentage return on common
equity ("ROE") from year to year. The profit-sharing contribution was in
addition to the regular Matching Employer Contributions described above. The
additional amount of this profit-sharing contribution in any year was dependent
upon National City's ROE for that year and ranged, in five-cent increments from
no additional contribution, if a minimum ROE of 12% was not attained, to a
maximum of 50 cents for each $1.00 of an individual's Before-Tax Contributions
for the year if National City's ROE was equal to or greater than 18.5%. In 1997,
National City's ROE was 18.53%, which resulted in National City contributing 50
cents for each $1.00 of an individual's Before-Tax Contribution as a
profit-sharing contribution for the year 1997. The profit-sharing contribution
for the year 1998 was made in February, 1999.

      Effective January 1, 1998, the profit-sharing contribution for any year,
commencing with 1998, will be determined on the basis of the reported growth in
National City's earnings per share ("EPS") since the end of the immediately
preceding year. Under the Savings Plan, the amount of the profit sharing
contribution for any year, commencing in 1998, will range, in five cent
increments, from zero, if growth in National City's reported EPS since the end
of the immediately preceding year is less than 8%, to a maximum of 50 cents for
each $1.00 of an individual's Before-Tax Contributions for that year if growth
in National City's reported EPS since the end of the immediately preceding year
is equal to or greater than 14.01%. The profit-sharing contribution for each
year will be made during the immediately succeeding year. Any profit-sharing
contribution will be in addition to any Regular Matching Employer Contributions.

      Executive Plan. NPI participates in the National City Executive Savings
Plan (the "Executive Plan"). The Executive Plan is a non-qualified salary
reduction profit-sharing plan, similar to the Savings Plan. The Executive Plan
is to supplement the Savings Plan with respect to employee Before-Tax
Contributions and the attendant Matching Employer Contributions which, by reason
of an individual's annual compensation, would not be otherwise allowed because
of the annual maximum limit of the Code or because of the application, under the
Code, of actual deferral percentage testing against prohibited excessive
deferrals by highly compensated employees. The Executive Plan is substantially
similar to the Savings Plan as to amounts of employee Before-Tax Contributions
and Matching Employer Contributions.

      Participants in the Executive Plan are limited to those key officers of
NPI or its subsidiaries who may be designated from time to time by the
Compensation Committee. The benefits of the Executive Plan are without regard to
any limitation imposed by the Code, or any other applicable law limiting the
amount payable under a qualified plan (such as the Savings Plan), and represent
unfunded general obligations of NPI. Portions of such benefits are subject to
certain provisions for forfeiture as set forth in the Executive Plan.

      Directors of NPI or its subsidiaries who are not also employees of NPI,
National City or any of their subsidiaries are not eligible to participate in
the Savings Plan or the Executive Plan.

      National Processing Company Long-Term Incentive Compensation Plan. The
National Processing Company Long-Term Incentive Compensation Plan (the
"Long-Term Plan") for Senior Officers focuses on maximizing returns to
shareholders and promotes the long-term profitability and success of NPI by
providing an incentive to those key executives who are primarily responsible
for such profitability and success.

      The Long-Term Plan is administered by the Compensation Committee. Awards
are based on the earnings of NPI over a three-year cycle commencing on January 1
of each fiscal year. Each new fiscal year begins a new three-year plan cycle.
Awards under the Long-Term Plan are based on the attainment of goals over a
three-year plan cycle. Participants for plan cycles commencing on or before
January 1, 1997 may receive either a target award or a maximum award expressed
in either case as a percentage of average annual salary for the plan cycle and
determined on the basis of NPI's compound growth rate in earnings over the plan
cycle. If NPI has attained a compound growth rate in earnings of 10% over the
plan cycle, then each participant for that plan cycle shall receive the target
award. If NPI has attained a compound growth rate in earnings of 15% or more
over the plan cycle, then each participant for that plan cycle shall receive the
maximum award. In the event that NPI's compound growth rate in earnings over the
plan cycle is greater than 10% but less than 15%, the award for the plan cycle
shall be pro-rated.

      Participants for plan cycles commencing on or after January 1, 1998 may
receive a threshold award, a target award or a maximum award expressed in each
case as a percentage of average annual salary for the plan cycle and determined
on the basis of NPI's ranking, according to increase in total shareholder return
over the plan cycle, relative to a peer group comprised of comparable
corporations. Prior to the beginning of each such plan cycle, the Compensation
Committee establishes threshold award, target award, and maximum award
performance levels for the plan cycle, against which NPI total stockholder
return for the plan cycle shall be compared to other members of a peer group
based on ranking of plan cycle results of NPI and members of the peer group. At
the same time, the Compensation Committee determines membership in the peer
group for the plan cycle, which is comprised of a group of comparable
corporations.

      Amounts awarded under the Long-Term Plan may be in cash, in unfunded
future benefits, or a combination thereof. With the exception of the cash award,
awards are not funded, but simply remain contractual liabilities of NPI and are
subject to payment upon the recipient's termination of employment with NPI or
its subsidiaries. Generally, these unfunded benefits, together with earnings
thereon, are payable to the former officer, his beneficiary, or his estate on an
installment basis over 10 years. Unfunded future benefits awards are considered
as invested in the funds described in the Savings Plan or as directed by the
recipient from time to time in the equivalent of a savings account and are
subject to the gains or losses on those investments.

      The Long-Term Plan provides that, if a change in control of NPI shall
occur, then the implementation date of that change in control shall be the last
day of all then current plan cycles, and no further plan cycles shall commence.
The award of each participant in the Long-Term Plan for any then current plan
cycle in which such participant participates shall be payable in cash to the
participant within five business days after the implementation date of the
change in control, and shall be in an amount equal to the participant's maximum
award for that plan cycle multiplied by a fraction the numerator of which is the
number of full months completed since the beginning of that plan cycle and the
denominator of which is thirty-six. In adopting this plan, it was felt this
change in control provision was appropriate in that those individuals previously
charged with providing superior total returns to the shareholders of NPI would
no longer be in the same position to guide the affairs of NPI as they were prior
to the event constituting a change in control. Furthermore, following change in
control of NPI, no further performance comparisons could be made.

      Directors of NPI or its subsidiaries who are not also employees of NPI or
its subsidiaries are not eligible to participate in the Long-Term Plan.

      National Processing Company Short-Term Incentive Compensation Plan. The
National Processing Company Short-Term Incentive Compensation Plan for Senior
Officers (the "Short-Term Plan") focuses on the short-term goals achieved by the
individual participant, NPI's results and in some cases, National City's
financial results. Under this plan, awards can be granted to any senior officer
of NPI, or to other officers of NPI or its subsidiaries as may be designated
from time to time by the Compensation Committee. Each participant in the
Short-Term Plan is evaluated annually with respect to performance on approved
objectives. Awards are based on individual results and can range from 0% to 70%
of the recipient's base salary in effect at the close of the year for which the
evaluation is made. Awards under this plan are paid or credited no later than
the end of first quarter of the following year.

      Amounts awarded under the Short-Term Plan may be in cash, in unfunded
future benefits, or a combination thereof. With the exception of the cash award,
awards are not funded, but simply remain contractual liabilities of NPI and are
subject to payment upon the recipient's termination of employment with NPI and
its subsidiaries. Generally, these unfunded benefits, together with earnings
thereon, are payable to the former officer, his beneficiary, or his estate on an
installment basis over 10 years. Unfunded future benefits awards are considered
as invested as directed by the recipient from time to time, in funds described
in the Savings Plan or in the equivalent of a savings account and are subject to
the gains or losses on those investments.

      In the event of a change in control, the Short-Term Plan provides that
each participant will be paid at the effective time of the change in control,
the maximum benefit the participant is entitled to receive under the Short-Term
Plan.

      Stock Option Plan. The NPI 1996 Stock Option Plan (the "Option Plan")
generally provides for the granting of options to purchase shares of NPI Common.
The options are non-qualified options which are not intended to qualify as
Incentive Stock Options under Section 422 of the Code.

      The Option Plan provides for an additional stock option grant (an
"Additional Option") when the employee has used previously owned NPI Common to
pay the exercise price of an original option grant (a swap transaction) or to
pay the amount to be withheld under applicable federal, state and local income
tax laws in connection with the exercise of an option. The additional option
feature typically encourages an employee to exercise the option grant earlier
than if the feature were not present, thereby increasing the employee's level of
equity ownership. Each Additional Option's termination date is the same as the
termination of the option that originally had the additional option feature. Its
option price is the market price at the time of the exercise of the original
option. An Additional Option is not provided upon exercise of an Additional
Option unless the board of directors directs otherwise. This feature supports
NPI's focus on increased equity ownership. The Option Plan also allows for the
granting of Appreciation Rights, but only in tandem with stock options
previously granted or contemporaneously being granted.

      Under the Option Plan, no options may be granted at less than 100% of the
market value of NPI Common on the date of the grant of the option. Stock option
awards are based on current individual performance. Previous awards are not
considered except for assuring the plan maximums are not exceeded.

      Agreements with Executives. Certain key executive officers of NPI have
employment agreements (the "Employment Agreements") with National Processing
Company ("NPC"), a subsidiary of NPI. Each of the Employment Agreements provides
for a minimum annual base salary that does not differ materially from the
amounts shown as salary in the Summary Compensation Table. The Employment
Agreements generally provide that if the executive officer subject thereto is
terminated for any reason other than the executive officer's violation of the
contract, an amount equal to the officer's base pay will be paid in monthly
installments, for either one or two years after termination, depending on the
position held. The Employment Agreements also generally provide for the
continuation of certain employee benefits.

      Each of the executive officers who has entered into an Employment
Agreement has thereby agreed not to compete with NPI in the United States and,
in some cases, Mexico by not engaging in any capacity in any business that is
competitive with, in the case of certain executives, any business of NPC and, in
the case of the other certain executives, the business of NPI for which such
officer bears primary managerial responsibility. These non-competitive
restrictions remain in effect for the period in which the executive officer is
entitled to receive payments under the Employment Agreement following
termination as generally described above.

      Severance Agreements. In order to assure itself of both present and future
continuity of management in the event of a change in control, NPI has entered
into severance agreements (the "Severance Agreements") with certain of its
senior executive officers and other key employees ("Executives"). The Severance
Agreements become immediately operative upon a change in control.

      The Severance Agreements provide that following a change in control, such
Executives will be entitled to severance compensation upon termination of
employment during the period commencing with the occurrence of the change in
control and continuing until the earliest of (i) the third anniversary of the
occurrence of the change in control, (ii) death, or (iii) attainment of age
sixty-five and upon the occurrence of one or more certain additional events. As
of the date of this proxy statement, there are Severance Agreements with 14 key
employees of NPI and its subsidiaries.

      The severance compensation will be a lump sum payment in an amount equal
to three times the sum (for Executives) and two times the sum (for other senior
officers) of (i) base pay at the highest rate in effect for any period prior to
the termination date plus (ii) incentive pay in an amount equal to not less than
the highest aggregate annual bonus, incentive, or other payments of cash
compensation made or to be made in regard to services rendered in any calendar
year during the three calendar years immediately preceding the year in which the
change in control occurs, less the sum of (iii) any and all payments received
from NPI, National City, or a successor or their affiliates following a change
in control plus (iv) any future payments to be made in accordance with any
Employment Agreements or other contracts between NPI and such other entities
(specifically excluding payments from any deferred compensation plan). For three
years (for Executives) and two years (for other senior officers) following
termination, NPI will arrange to provide the Executives with welfare benefits
substantially similar to those they were receiving or were entitled to receive
immediately prior to the termination date, with such three-year period
qualifying as service with NPI for the purpose of determining service credits
and benefits under NPI's various retirement benefit plans. Each Executive may
waive one year of severance pay in exchange for being released from the
non-competition restrictions contained in their respective Employment
Agreements.

      NPI has agreed to pay any and all legal fees incurred by the Executives in
connection with the interpretation, enforcement, or defense of their rights
under the Severance Agreements. The term of each Severance Agreement runs until
the later of (i) the close of business on the third anniversary of the date of
that Severance Agreement or (ii) the expiration of the three-year period of
severance benefit coverage. On January 1 of each year, the term of each
Severance Agreement is automatically extended for an additional year unless, not
later than September 30 of the immediately preceding year, NPI or the Executive
shall have given notice that the party giving such notice does not wish to have
the term extended. If, prior to a change in control, an Executive ceases for any
reason to be an employee of NPI or any subsidiary thereof, however, then the
term of that Executive's Severance Agreement will immediately terminate. For
purposes of an Executive's Severance Agreement, any termination of employment of
the Executive or the removal of the Executive from the office or position in NPI
following the commencement of any discussion with a third person that ultimately
results in a change in control shall be deemed to be a termination or removal of
the Executive after a change in control.

      Under the Severance Agreements, a change in control occurs upon either of
the following events: (i) NPI is merged, consolidated or reorganized into or
with another person other than National City, a successor of National City or an
affiliate of National City or (ii) NPI sells or otherwise transfers all or
substantially all of its assets to another corporation, or NPI causes or permits
the sale or transfer of all or substantially all of its assets or assets of any
subsidiary that has assets equal to or greater than 80% of the total assets of
NPI as reported on a consolidated basis, and as a result of such sale or
transfer less than 50% of the combined voting power of the then outstanding
securities of such corporation is held by National City.

      Mr. Showalter has a severance agreement with National City. The severance
agreement was entered into upon the recommendation of the Compensation and
Organization Committee of the board of directors of National City, and the form
of the agreement was approved by National City's board of directors at its
December 19, 1994 meeting. The agreement becomes immediately operative upon a
change in control.

      The severance agreement provides that upon termination of employment with
National City, a subsidiary, or a successor to National City within three years
following a change in control, unless the termination is because of death,
permanent disability, or cause, Mr. Showalter will be entitled to severance
compensation. The severance agreement also provides that following a change in
control, Mr. Showalter may terminate his own employment with National City or a
subsidiary with the right to severance compensation during the period commencing
with the occurrence of the change in control and continuing until the earliest
of (i) the third anniversary of the occurrence of the change in control, (ii)
death, or (iii) attainment of age sixty-five and upon the occurrence of one or
more certain additional events. His severance agreement also provides that in
the event of a change in control, he may terminate his employment with National
City or any subsidiary for any reason during the thirty-day period immediately
following the first anniversary of the first occurrence of a change in control
without cause with the right to severance compensation.

      The severance compensation will be a lump sum payment in an amount equal
to three times the sum of (i) base pay at the highest rate in effect for any
period prior to the termination date plus (ii) incentive pay in an amount equal
to not less than the highest aggregate annual bonus, incentive, or other
payments of cash compensation made or to be made in regard to services rendered
in any calendar year during the three calendar years immediately preceding the
year in which the change in control occurs. For thirty-six months following the
termination, National City will arrange to provide Mr. Showalter with employee
benefits that are welfare benefits substantially similar to those which he was
receiving or was entitled to receive immediately prior to the termination date
and such thirty-six month period will be considered service with National City
for the purpose of determining service credits and benefits due and payable
under National City's various retirement benefit plans.

      National City has agreed to bear the expense of any and all legal fees
incurred by Mr. Showalter associated with the interpretation, enforcement, or
defense of his rights under the severance agreement.

TRANSACTIONS WITH MANAGEMENT

      Aureliano Gonzalez-Baz, a director since 1996, provided various legal
services in excess of $60,000 to NPI and its subsidiaries in the ordinary course
of business in 1998. Such services pertained to legal advice related to NPI's
business operations in foreign countries. Without exception, all services
provided by the director were at market rates. Similar additional services may
be provided in the ordinary course of business in the future.

Beneficial Ownership

         As of February 28, 1999, NPI had one class of equity security
outstanding, NPI Common without par value.

         Beneficial ownership of NPI's outstanding equity security, for purposes
of the ownership disclosures, has been determined in accordance with Rule 13d-3
of the General Rules and Regulations under the Securities Exchange Act of 1934
("Exchange Act"), under which Rule a person is deemed to be the beneficial owner
of securities if he or she has or shares voting power or investment power in
respect of such securities or has the right to acquire beneficial ownership
within 60 days. Accordingly, the amounts shown in the following table do not
purport to represent beneficial ownership for any purpose other than as set
forth under such Rule. Further, beneficial ownership as determined in this
manner does not necessarily bear on the economic incidence of ownership of NPI's
equity securities.

         The following table sets forth the beneficial security ownership of all
shareholders known to NPI as of February 28, 1999, to be the owner of more than
five percent of NPI Common. For purposes of this disclosure, the amount of
outstanding NPI Common is the aggregate number of shares of NPI Common actually
outstanding on such date plus an amount equal to the aggregate amount of NPI
Common which could be issued upon the exercise of stock options by such person
or firm at that date. Beneficial ownership of NPI Common includes, as of such
date, those shares which could have been acquired by the exercise of stock
options.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Under federal securities law, NPI's directors, certain officers, and
persons holding more than 10% of any class of NPI's equity securities are
required to report, within specified monthly and annual due dates, their
initial ownership in any class of NPI's equity securities and all subsequent
acquisitions, dispositions or other transfers of interest in such securities,
if and to the extent reportable events occur that require reporting by such due
dates. NPI is required to describe in this proxy statement whether it has
knowledge that any person required to file such a report may have failed to do
so in a timely manner. In this regard, to NPI's knowledge, based soley on the 
review of copies of reports furnished to NPI by its directors and executive 
officers pursuant to Rule 16a-3 promulgated pursuant to the Exchange Act, and 
on written representations that no other reports were required during the 
period ending December 31, 1998, all of NPI's directors and officers satisfied 
such filing requirements in full.

 
                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

<TABLE>
<CAPTION>
                              Name                       Amount
                           and Address                and Nature of
     Title of             of Beneficial                Beneficial          Percent
       Class                  Owner                   Ownership(1)         of Class
       -----                  -----                   ------------         --------
<S>                  <C>                              <C>                  <C>  
Common Stock         National City Corporation
                     1900 East Ninth Street
                     Cleveland, OH 44114-3484           44,365,400            88%
</TABLE>

(1)   The listed beneficial owner is not known to have had, as of February 28,
      1999, the right to acquire beneficial ownership, as specified in Rule
      13d-3(d)(1) under the Exchange Act, of any shares of NPI Common.

                   BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT

      The following table sets forth, as of February 28, 1999, the beneficial
security ownership (including shares with respect to which the following persons
have the right to acquire beneficial ownership within 60 days after such date)
of (a) each director and nominee of NPI; (b) the chief executive officer and the
four other most highly compensated executive officers of NPI; (c) John J. Leehy,
III, who, but for the fact that he was not serving as an executive officer of
National Processing at the end of 1998, would have been among the four most
highly compensated executive officers (other than the chief executive officer)
who were serving as executive officers of National Processing at the end of
1998; and (c) all directors and executive officers of NPI as a Group:

                   BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT

<TABLE>
<CAPTION>
                                     Name                         Amount
                                 and Address                   and Nature of
 Title of                       of Beneficial                    Beneficial                 Percent
   Class                            Owner                        Ownership                  of Class
   -----                            -----                        ---------                  --------
<S>                           <C>                                <C>                        <C>
Common Stock                  James R. Bell, III                   3,030                        *
Common Stock                  Christos M. Cotsakos                28,599(4)                     *
Common Stock                  Aureliano Gonzalez-Baz              17,499(4)                     *
Common Stock                  Preston B. Heller, Jr.              21,999(4)                     *
Common Stock                  Robert E. Johnson(1)                96,667(5)                     *
Common Stock                  Jeffrey D. Kelly                     1,000                        *
Common Stock                  Donald J. Kenney(1)                 33,334(6)                     *
Common Stock                  John J. Leehy, III                  33,333(7)                     *
Common Stock                  Gregory W. Sahrmann(3)              25,000                        *
Common Stock                  Robert E. Showalter                178,534(8)                     *
Common Stock                  Robert G. Siefers                   10,000                        *
Common Stock                  Thomas A. Wimsett                  107,701(9)                     *
Common Stock                  Directors and Executive
                              Officers of National
                              Processing as a Group              667,037                    1.30%
</TABLE>

*     The percent of NPI Common beneficially owned is less than 1%.

(1)   Robert E. Johnson resigned as Executive Vice President of NPI effective as
      of March 31, 1999.

(2)   Donald J. Kenney was elected Executive Vice President of NPI on March 31,
      1998.

(3)   Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
      as of December 31, 1998.

(4)   Includes 17,499 shares of NPI Common of which the named beneficial owner
      has the right to acquire beneficial ownership, as specified in Rule
      13d-3(d)(1) under the Exchange Act.

(5)   Includes 91,667 shares of NPI Common of which Robert E. Johnson has the
      right to acquire beneficial ownership, as specified in Rule 13d-3(d)(1)
      under the Exchange Act.

(6)   Includes 33,334 shares of NPI Common of which Donald J. Kenney has the
      right to acquire beneficial ownership as specified in Rule 132-3(d)(1)
      under the Exchange Act.

(7)   Includes 33,333 shares of NPI Common of which John J. Leehy, III has the
      right to acquire beneficial ownership as specified in Rule 132-3(d)(1)
      under the Exchange Act.

(8)   Includes 178,534 shares of NPI Common of which Robert E. Showalter has the
      right to acquire beneficial ownership, as specified in Rule 13d-3(d)(1)
      under the Exchange Act.

(9)   Includes 100,001 shares of NPI Common of which Thomas A. Wimsett has the
      right to acquire beneficial ownership as specified in Rule 132-3(d)(1)
      under the Exchange Act.


                                       14
<PAGE>   15



                                       15
<PAGE>   16

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   1. Financial Statements

                                                                     Page Number
            Description                                               in Report
            -----------                                              -----------

            Report of Independent Auditors                               18     

            Consolidated Balance Sheets as of December 31, 1998          19 
            and 1997

            Consolidated Statements of Income for each of the            21
            three years in the period ended December 31, 1998             

            Consolidated Statements of Changes in Shareholders'          22
            Equity for each of the three years in the period
            ended December 31, 1998                                       

            Consolidated Statements of Cash Flows for each of            23
            the three years in the period ended December 31, 1998         

            Notes to Consolidated Financial Statements                   24 

  2.  Financial Statement Schedules

            Omitted due to inapplicability or because the required information
            is immaterial to the Company's financial statements.

  3.  Exhibits

            The index of exhibits has been filed as separate pages of the 1998
            Form 10-K and is available to shareholders on request from the
            Secretary of the Company at the principal executive offices. Copies
            of the exhibits may be obtained at a cost of 30 cents per page.

(b)   Reports on Form 8-K.

      October 14, 1998: On October 14, 1998, the Registrant issued a press
      release reporting earnings for the third quarter and first nine months of
      fiscal 1998. The press release also disclosed that due to the lower than
      expected third quarter results and an unsettled outlook, the Registrant
      indicated that full-year 1998 earnings could fall short of the September
      30, 1998 consensus earnings estimate of $.42 by as much as one-third.


                                       16
<PAGE>   17

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 1999.

                                          NATIONAL PROCESSING, INC.

                                          By:   /s/ Jim W. Cate
                                                Executive 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.

<TABLE>
<CAPTION>
    Signature                         Title                             Date
    ---------                         -----                             ----
<S>                         <C>                                     <C>
/s/ Robert E. Showalter                                           
-------------------------   President, Chief Executive Officer and
Robert E. Showalter         Director (Principal Executive Officer)  March 31, 1999*
                                                                  
                                                                  
/s/ Jim W. Cate                                                   
-------------------------   Executive Vice President and Chief    
Jim W. Cate                 Financial Officer(Principal           
                            Financial Officer)                      March 31, 1999
                                                                  
                                                                  
/s/ David E. Fountain                                             
-------------------------   Senior Vice President and Chief         March 31, 1999
David E. Fountain           Accounting Officer (Principal         
                            Accounting Officer)                   
                                                                  
/s/ James R. Bell, III                                            
-------------------------   Director                                March 31, 1999*
James R. Bell, III                                                 
                                                                  
                                                                  
/s/ Robert G. Siefers                                             
-------------------------   Director                                March 31, 1999*
Robert G. Siefers                                                 
                                                                  
                                                                  
/s/ Jeffrey D. Kelly                                              
-------------------------   Director                                March 31, 1999*
Jeffrey D. Kelly                                                  
                                                                  
                                                                  
-------------------------   Director                                March 31, 1999
Aureliano Gonzalez-Baz                                            
                                                                  
                                                                  
-------------------------   Director                                March 31, 1999
Christos M. Cotsakos                                            
                                                                

/s/ Preston B. Heller, Jr.                                          
--------------------------   Director                               March 31, 1999*
Preston B. Heller, Jr.
</TABLE>

*     The undersigned by signing his name hereto, does sign and execute the
      Annual Report on Form 10-K for fiscal year 1998 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


                                       17
<PAGE>   18

                              Report of Independent Auditors

The Shareholders
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, 1998 and 1997, 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, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.

Cleveland, Ohio
February 1, 1999

/s/ Ernst & Young LLP


                                       18
<PAGE>   19

                            NATIONAL PROCESSING, INC.

                           Consolidated Balance Sheets
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                               December 31,
                                                           1998           1997
                                                         --------       --------
<S>                                                      <C>            <C>     
Assets

Current assets:
  Cash and cash equivalents                              $  7,254       $ 40,075
  Accounts receivable-trade                               104,759        104,752
  Check inventory                                           2,901          7,395
  Restricted deposits--customer funds                      91,484         83,183
  Deferred tax assets                                       3,688         12,186
  Other current assets                                     13,434         10,064
                                                         --------       --------
Total current assets                                      223,520        257,655

Property and equipment:
  Furniture and equipment                                 116,420         94,976
  Building and leasehold improvements                      23,843         15,679
  Software                                                 23,537         16,219
  Property leased from affiliate                            4,173          4,173
  Land and improvements                                     2,828          1,591
                                                         --------       --------
                                                          170,801        132,638

  Accumulated depreciation and amortization                82,680         66,467
                                                         --------       --------
                                                           88,121         66,171
Other assets:
Goodwill, net of accumulated amortization
  of $14,202 in 1998, $10,616 in 1997                     171,489        170,327
Acquired merchant portfolios                               18,255         21,115
Deferred tax assets                                         2,764           --
Other assets                                                8,284          8,004
                                                         --------       --------
Total other assets                                        200,792        199,446
                                                         --------       --------
Total assets                                             $512,433       $523,272
                                                         ========       ========
</TABLE>

                     See notes to consolidated financial statements.


                                       19
<PAGE>   20

                            NATIONAL PROCESSING, INC.

                           Consolidated Balance Sheets
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                               December 31,
                                                           1998           1997
                                                         --------       --------
<S>                                                      <C>            <C>     
Liabilities and shareholders' equity

Current liabilities:
  Restricted deposits--customer funds                    $ 91,484       $ 83,183
  Accounts payable--trade                                   3,075          5,209
  Merchants payable--check services                         3,690          7,271
  Accrued bankcard assessments                             17,753         19,806
  Income tax payable to NCC                                 4,376          5,507
  Acquisition balance due                                    --           26,781
  Other accrued liabilities                                30,729         30,551
                                                         --------       --------
Total current liabilities                                 151,107        178,308

Obligation under property leased from affiliate             2,264          2,591
Other long-term liabilities                                   796          2,674
Deferred tax liabilities                                    5,607          2,874
                                                         --------       --------

Total liabilities                                         159,774        186,447

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;
    50,644,651 and 50,575,000 shares issued and
    outstanding in 1998 and 1997, respectively                  1              1
  Contributed capital                                     175,799        175,215
  Retained earnings                                       176,859        161,609
                                                         --------       --------

Total shareholders' equity                                352,659        336,825
                                                         --------       --------

Total liabilities and shareholders' equity               $512,433       $523,272
                                                         ========       ========
</TABLE>

                     See notes to consolidated financial statements.


                                       20
<PAGE>   21

                            NATIONAL PROCESSING, INC.

                        Consolidated Statements of Income
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                    1998         1997         1996
                                                  --------     --------     --------
<S>                                               <C>          <C>          <C>     
Revenues                                          $483,193     $405,661     $373,693
Other income                                         4,000         --          3,868
Operating expenses                                 242,478      193,352      182,291
Wages and other personnel expenses                 126,970      101,573       83,220
General and administrative expenses                 66,814       50,750       48,959
Restructuring charge                                  --         13,340         --
Depreciation and amortization                       26,767       17,826       12,847
                                                  --------     --------     --------
Operating profit                                    24,164       28,820       50,244
Net interest income                                    924        4,001        2,783
                                                  --------     --------     --------
Income before income taxes                          25,088       32,821       53,027
Provision for income taxes                           9,838       11,694       21,674
                                                  --------     --------     --------
Net income                                        $ 15,250     $ 21,127     $ 31,353
                                                  ========     ========     ========

Basic and diluted net income per common share     $   0.30     $   0.42     $   0.68
                                                  ========     ========     ========
</TABLE>

                 See notes to consolidated financial statements.


                                       21
<PAGE>   22

                                NATIONAL PROCESSING, INC.

                Consolidated Statements of Changes in Shareholders' Equity
                                  (Dollars in thousands)

<TABLE>
<CAPTION>
                                              Common  Contributed   Retained
                                               Stock    Capital     Earnings      Total
                                               -----    -------     --------      -----
<S>                                             <C>    <C>          <C>          <C>     
Balance at January 1, 1996                      $1     $ 64,825     $109,129     $173,955
Issuance of common stock (7,475,000 shares)      -      110,390         --        110,390
Net income                                       -         --         31,353       31,353
                                                --     --------     --------     --------
Balance at December 31, 1996                     1      175,215      140,482      315,698
Net Income                                       -         --         21,127       21,127
                                                --     --------     --------     --------
Balance at December 31, 1997                     1      175,215      161,609      336,825
Stock options exercised                          -          584         --            584
Net Income                                       -         --         15,250       15,250
                                                --     --------     --------     --------
Balance at December 31, 1998                    $1     $175,799     $176,859     $352,659
                                                ==     ========     ========     ========
</TABLE>

                 See notes to consolidated financial statements.


                                       22
<PAGE>   23

                                NATIONAL PROCESSING, INC.

                          Consolidated Statements of Cash Flows
                                  (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                         ---------------------------------------
                                                           1998           1997           1996
                                                         ---------      ---------      ---------
<S>                                                      <C>            <C>            <C>      
Operating activities

Net income                                               $  15,250      $  21,127      $  31,353

Items not requiring cash currently:
  Depreciation and amortization                             26,767         17,826         12,847
  Restructuring charge                                        --           10,552           --
  Deferred income tax                                        6,287         (3,803)           917
  Loss on disposition of assets                              2,430           --             --
Changes in current assets and liabilities:
  Accounts receivable                                          629         (4,590)        (8,830)
  Check inventory                                            4,494           (972)           (47)
  Accounts payable--trade                                   (2,245)        (4,694)        (1,536)
  Merchant payable--check services                          (3,581)           805           (841)
  Accrued bankcard assessments                              (2,053)         2,588            (79)
  Income taxes payable/receivable                           (1,131)         3,597            643
  Other current assets/liabilities                          (3,236)        (4,565)        (1,325)
  Other, net                                                   998         (3,252)         1,725
                                                         ---------      ---------      ---------

Net cash provided by operating activities                   44,609         34,619         34,827

Investing activities

Capital expenditures                                       (42,469)       (28,286)       (35,345)
Purchases of securities available for sale                    --         (444,422)      (405,886)
Proceeds from sales and maturities of securities
   Available for sale                                         --          566,859        283,484
Acquisitions, net of cash acquired                         (34,118)       (91,881)          --
Other                                                         --             --           (6,614)
                                                         ---------      ---------      ---------

Net cash (used for) provided by investing activities       (76,587)         2,270       (164,361)

Financing activities
Payment of note payable                                     (1,100)          --             --
Principal payments under property
  leased from affiliate                                       (327)          (144)          (144)
Net proceeds from issuance of common stock                    --             --          110,390
Exercise of stock options                                      584           --             --
                                                         ---------      ---------      ---------

Net cash (used for) provided by financing activities          (843)          (144)       110,246
                                                         ---------      ---------      ---------

Net (decrease) increase in cash and
  cash equivalents                                         (32,821)        36,745        (19,288)

Cash and cash equivalents, beginning of period              40,075          3,330         22,618
                                                         ---------      ---------      ---------

Cash and cash equivalents, end of period                 $   7,254      $  40,075      $   3,330
                                                         =========      =========      =========

Supplemental Cash Flow Information:
  Taxes paid to NCC                                      $   5,197      $  14,358      $  18,912
</TABLE>

See notes to consolidated financial statements.


                                       23
<PAGE>   24

                            NATIONAL PROCESSING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Organization and Business

Organization

      National Processing, Inc. and subsidiaries (the "Company") (a majority
owned subsidiary of National City Corporation ("NCC"), a bank holding company
headquartered in Cleveland, Ohio) became the owner of all of the outstanding
shares of National Processing Company ("NPC") on June 5, 1996. In connection
with its organization, the Company issued 43,100,000 shares of common stock
(after giving retroactive effect to the 57,465.67 to 1 stock split which was
effective June 6, 1996) to NCC, and NCC contributed the common stock of NPC
(then a wholly owned subsidiary of NCC) to the Company. Since both the Company
and NPC are subsidiaries of NCC, this transfer of assets was accounted for on
the basis of historical cost. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions are eliminated in consolidation.

      In August 1996, the Company sold 7,475,000 shares of its common stock in
an initial public offering at a price of $16.50 per share. Following the initial
public offering, NCC owned 85% of the Company's outstanding common stock. In May
1997, NCC purchased 1,265,000 shares of the Company's common stock in the open
market and currently owns approximately 88% of the Company's outstanding common
stock.

      The Company and NCC are parties to a Registration Rights Agreement whereby
NCC 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 NCC. NCC also has the right to participate, or
"piggy-back", in equity offerings initiated by the Company, subject to reduction
of the size of the offering on the advice of the managing underwriter.

Business

      The Company is a leading provider of transaction processing services and
customized processing solutions. The Company currently provides these services
in three principal areas: Merchant Services, Corporate Services and Travel
Services. Within Merchant Services, the Company focuses primarily on markets for
credit and debit card processing and for check acceptance and collection. The
Company's Corporate Services business provides integrated outsourcing solutions
for customers' remittance processing, freight bill processing, corporate
accounts payable, and imaging functions (see Note O). Customers of the Company's
Merchant Services and Corporate Services are diverse in terms of both industries
and size with no significant concentration in any particular industry or
customer type. Through an exclusive contract with the Airlines Reporting
Corporation ("ARC"), which expires in December 2001, Travel Services acts as a
processor and clearing house for all airline ticket payment transactions
generated by travel agents in the United States.

B. Summary of Significant Accounting Policies

Use of Estimates

      Financial statements prepared in accordance with generally accepted
accounting principles necessitate the use of estimates and assumptions by
management that affect the reported amounts of revenues and expenses, assets and
liabilities, and the disclosure requirement 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 as fee income the amounts charged by its various
businesses for the related processing activities. All revenues are recognized at
the time services are rendered.

Cash and Cash Equivalents

      Cash equivalents consist of highly liquid bank overnight repurchase
agreements, which are readily convertible to cash.


                                       24
<PAGE>   25

Financial Instruments

      The Company's financial instruments consist of cash equivalents, accounts
receivable, restricted deposits, accounts payable, merchants payable, and
payables to affiliates. The carrying values of these financial instruments
approximate their fair values.

Check Inventory

      The amount paid for checks submitted to the Company by merchants
participating in its various check guarantee programs are recorded at the amount
the Company deems ultimately collectible, subject to revision based on a
continual review of collection statistics. The check inventory is classified as
current in accordance with trade practice.

Restricted Deposits--Customer Funds

      The Company's travel and freight processing businesses regularly receive
funds, as part of the settlement process, in advance of the related
disbursement. Such monies are set aside in restricted accounts and a liability
is recorded for an equal and offsetting amount. As such, customer funds are not
eligible for use by the Company in its operations other than to pay related
liabilities. In all cases, customer funds are invested in highly liquid,
investment grade interest bearing securities. Investment of customer funds in
equity securities is prohibited by the Company's investment guidelines
established by the Board of Directors.

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 lease,
whichever is shorter. Maintenance and repairs are expensed as incurred, while
improvements that extend the useful life of the related asset are capitalized
and depreciated over the remaining life of the related asset. The ranges of
estimated useful lives are as follows:

<TABLE>
<S>                                                          <C>  
Furniture and equipment                                      3 to 10 years
Building and leasehold improvements                          5 to 40 years
Property leased from affiliates                                   35 years
Land improvements                                                 15 years
Software                                                      3 to 5 years
</TABLE>

      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 in income. Depreciation expense was $18.3 million, $14.2 million,
and $10.3 million in 1998, 1997, and 1996, respectively.

      The Company capitalizes certain costs incurred to develop or obtain
internal-use software. For purposes of amortization and impairment, capitalized
costs would be 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 reported at unamortized cost. Commencing the
month following project completion, these costs are amortized on a straight-line
basis over the estimated life of the software, not to exceed five years. For the
years ended December 31, 1998, 1997 and 1996, capitalized software amortization
totaled $.8 million, $1.3 million, and $1.3 million, respectively.

      In June 1998, the Company wrote-off $2,600,000 of internally developed
software and related costs, which is included in operating expenses in the
Consolidated Statements of Income, following the cancellation of a significant
customer contract.

Acquired Merchant Portfolios

      Acquired merchant portfolios represent costs allocated to customer
contracts acquired through acquisitions. These costs are amortized on a
straight-line basis over periods ranging from 7 to 15 years.

Deferred Contract Costs

      Other assets include $2.1 million and $3.2 million of deferred contract
costs in 1998 and 1997, respectively. Deferred contract costs primarily
represent costs incurred to acquire new customer contracts.


                                       25
<PAGE>   26

      These costs are amortized on a straight-line basis over the life of the
customer contract. Recoverability of these costs is assessed on an ongoing basis
and writedowns to net realizable values are recorded as necessary.

Acquisitions

      Operations of companies acquired in purchase transactions are included in
the consolidated statements of income from the respective acquisition dates. The
excess of the purchase price over the net assets acquired (goodwill) is
amortized on a straight-line basis over 40 years.

Asset Impairment

      The company records impairment losses on long-lived assets held for use
when events and circumstances indicate that the assets may be impaired and the
undiscounted net cash flows estimated to be generated by those assets are less
than their carrying amounts. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.

Merchant Payable--Check Services

      As part of its check services operations, the Company reimburses merchants
for checks that are dishonored. The liability to merchants for returned checks
guaranteed by the Company is established in part based upon an estimate of the
volume of checks accepted by the various merchants which are expected to be
dishonored. Differences between the estimated and actual merchant guaranteed
check liability are recorded at the time the checks are acquired from the
merchants.

Accrued Bankcard Assessments

      The liability to the VISA(R) and MasterCard(R) organizations originating
from the Company's agreements with these agencies, as an authorized processor,
is accrued and settled on a monthly and quarterly basis, respectively. The
Company recovers these assessment charges through various contractual
arrangements with its customers.

Income Taxes

      The Company is included in the consolidated federal income tax return of
NCC. NCC's policy is to allocate income taxes to its subsidiaries on a separate
return basis.

Reclassifications

      Certain prior year amounts in the financial statements and notes have been
reclassified to conform with the current year presentation.

C. Recent Accounting Pronouncements

Reporting Comprehensive Income

      In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The Company adopted the provisions
of this statement in 1998, however, any difference between net income and
comprehensive income are insignificant.

Disclosures about Segments of an Enterprise and Related Information

      In June 1997, the Financial Accounting Standards Board issued SFAS No.
131. Disclosures about Segments of an Enterprise and Related Information. The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
financial reports issued to shareholders. The statement defines an operating
segment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, whose operating results are regularly
reviewed by the chief operating decision maker in the determination of resource
allocation and assessment of performance, and for which discrete financial
information is available. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
adopted the 


                                       26
<PAGE>   27

provisions of this statement for 1998 annual reporting, and the related
disclosures are included in Note N to these financial statements.

Internal Use Software

      In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP), 98-1 Internal Use Software. This statement requires
the capitalization of costs to acquire or develop internal use software after
certain conditions are met. This statement is effective for fiscal years
beginning after December 15, 1998. Because the Company's current policy is not
significantly different from this statement, this statement will have no
significant impact on the financial position or results of operations of the
Company.

D. Acquisitions

      On January 15, 1998, the Company acquired all the outstanding shares of
JBH Travel Audit Inc. ("JBH"), a company which audits fees payable to travel
agencies, for $6.3 million in cash. The purchase price is subject to increase by
as much as $2.0 million based upon the earnings of the acquired company during
1999. The acquisition, which has been accounted for as a purchase, increased the
Company's goodwill by $5.1 million which is being amortized over 40 years. The
results of JBH's operations are included in the Company's results of operations
from the date of acquisition. The pro forma effect of the JBH transaction was
not material to previously reported periods.

      On February 4, 1997, the Company acquired all of the outstanding shares of
NTA, Inc., a freight payment processing company. On June 19, 1997, the Company
acquired the operating assets and liabilities of InTraCon, Inc., a freight
payment processing company. On June 20, 1997, the Company acquired the operating
assets and liabilities of MRS Jamaica, Inc., a healthcare form processing
company. On September 30, 1997, the Company acquired all of the outstanding
shares of Caribbean Data Services, Ltd., a data processing company. The combined
purchase price of these acquisitions was $30.3 million in cash and $4.3 million
in notes payable. $2.1 million of the notes were paid off in October 1997, $1.1
million were paid off in June 1998 and the $1.1 million balance, plus accrued
interest at 5.125% is due and payable in February 1999. The MRS Jamaica, Inc.
purchase price increased by $3.3 million in 1998 based upon the 1998 earnings of
the acquired company. The acquisitions, which have been accounted for as
purchases, increased the Company's goodwill by $32.3 million which is being
amortized over 40 years. The results of operations of these acquired companies
have been included in the consolidated financial statements since their
respective dates of acquisition.

      The combined pro forma effect of these transactions was not material to
previously reported periods.

      On October 24, 1997, the Company acquired 79.6% of the outstanding common
stock of FA Holdings, Inc., the sole owner of Financial Alliance Processing
Services, Inc. ("Financial Alliance"), for $67.2 million. Financial Alliance is
an independent sales organization specializing in selling credit and debit card
processing services to smaller merchants. The Company acquired the remaining
20.4% of the common stock for $26.8 million in January 1998. The acquisition,
which has been accounted for as a purchase, increased the Company's goodwill by
approximately $74 million which is being amortized over 40 years. The results of
operations of Financial Alliance have been included in the consolidated
financial statements since the date of its acquisition.

      The follow unaudited pro forma information gives effect to the Financial
Alliance acquisition as if it occurred January 1, 1996 (in thousands, except per
share amounts).

<TABLE>
<CAPTION>
                                                   Year Ended December 31
                                                   ----------------------
                                                      1997         1996
                                                   ---------    ---------
<S>                                                <C>          <C>      
   Revenues                                        $ 432,325    $ 411,948
   Income before income taxes                         32,733       48,759
   Net income                                         19,364       26,910
   Basic and diluted net income per common share   $    0.38    $    0.58
</TABLE>

      The pro forma results include the effect of all material adjustments
related to the acquisition and have been prepared using calculations based upon
assumptions deemed reasonable by the Company. The pro forma information is
presented for informational purposes only and is not necessarily indicative of
results that would have occurred had the acquisition taken place on January 1,
1996, nor are they necessarily indicative of future results.


                                       27
<PAGE>   28

      Supplemental cash flow information related to all 1997 acquisitions is as
follows (dollars in thousands):

<TABLE>
<S>                                                                   <C>       
      Net assets other than cash acquired                             $ (19,672)
      Purchase price in excess of net assets acquired                  (101,190)
      Notes and payables due                                             28,981
                                                                      --------- 
      Net cash used for acquisitions                                  $ (91,881)
                                                                      ========= 
</TABLE>

E. Transactions with Affiliates

      The Company leases certain facilities from National City Bank of Kentucky
("NCBK"), a wholly owned subsidiary of NCC, under long-term agreements
classified as "Property Leased From Affiliate" in the accompanying financial
statements. Future minimum payments under these leases, which expire between
1999 and 2019, are $4.2 million, including interest of $1.9 million.

      The Company uses the proof and transit department of NCBK to provide
processing for remittances. The charges for these services, which are included
in operating expenses, were $3.6 million in 1998, $5.5 million in 1997, and $4.1
million in 1996.

      The Company receives certain administrative services, such as internal
audit and legal, from NCC and its affiliates. Charges for these services are
included in general and administrative expenses and totaled $2.1 million, $3.3
million, and $3.4 million, in 1998, 1997, and 1996, respectively.

F. 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 $5.9 million
in 1999; $4.5 million in 2000; $2.8 million in 2001; $1.9 million in 2002, $1.6
million in 2003, and $8.9 million thereafter. Rent expense under operating
leases was $7.6 million, $7.0 million and $6.0 million, in 1998, 1997, and 1996,
respectively.


                                       28
<PAGE>   29

G. Income Taxes

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

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                               -----------------------
                                         1998             1997            1996
                                       --------         --------         -------
<S>                                    <C>              <C>              <C>    
Current:
  Federal                              $  1,485         $ 14,354         $16,457
  State                                     713            1,143           4,300
Deferred:
  Federal                                 6,781           (3,803)            917
  State                                    (494)            --              --
  Foreign                                 1,353             --              --
                                       --------         --------         -------
                                       $  9,838         $ 11,694         $21,674
                                       ========         ========         =======
</TABLE>

      The temporary differences that gave rise to deferred tax assets and
liabilities, which are included in the income tax receivable from or payable to
NCC, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        December 31
                                                        -----------
                                               1998         1997         1996
                                               ----         ----         ----
<S>                                        <C>          <C>          <C>     
Deferred tax assets:
Accrued expenses                           $  1,572     $  3,608     $    412
Pension, benefits and deferred
  compensation                                1,594        5,037          844
State operating losses                        4,681        1,245
Other                                         1,013        2,296           --
                                           --------     --------     --------
                                              8,860       12,186        1,256
Valuation allowance                          (2,408)          --           --
                                           --------     --------     --------
                                              6,452       12,186        1,256
Deferred tax liabilities:
Depreciation and amortization                (2,998)          41       (1,433)
Purchase accounting adjustments              (3,597)      (1,934)          --
Other                                           988         (981)        (518)
                                           --------     --------     --------
                                             (5,607)      (2,874)      (1,951)
                                           --------     --------     --------
Net deferred tax assets (liabilities)      $    845     $  9,312     $   (695)
                                           ========     ========     ========
</TABLE>

      The reconciliation of the U.S. statutory income tax rate to the Company's
effective tax rate is as follows:

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                             -----------------------
                                         1998          1997         1996
                                         ----          ----         ----
<S>                                      <C>           <C>          <C>  
U.S. statutory rate                       35.0%        35.0%        35.0%
Non-deductible amortization                5.5          2.6          1.2
State taxes, net of federal benefit         .6          1.9          5.4
Tax exempt income                          (.5)        (4.3)          --
Foreign tax benefit                       (2.5)          --           --
Other                                      1.1           .4          (.7)
                                          ----         ----         ---- 
                                          39.2%        35.6%        40.9%
                                          ====         ====         ==== 
</TABLE>

The Company has approximately $51.0 million of state net operating loss
carryforwards for income tax purposes available to offset future taxable income
in the related states from 1999 to 2013. In 1998, the Company determined that it
was more likely than not that future taxable income would be generated in these
states sufficient to justify the deferred tax assets recorded, net of the
related valuation allowance of $2.4 million.

Income before income taxes from foreign and United States operations was
approximately $4.3 million and $20.8 million, respectively in 1998. Income from
foreign operations was immaterial in 1997 and 1996.


                                       29
<PAGE>   30

H. Employee Benefit Plans

      An employee thrift plan offers all employees, who meet certain age and
eligibility requirements, a program of regular savings and investment funded by
their own contributions and discretionary matching contributions of the Company.
The Company recorded $2.6 million, $2.8 million, and $2.3 million, respectively,
in matching contributions during 1998, 1997, and 1996. 

I. Net Income Per Common Share

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

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                      1998      1997       1996
                                                      ----      ----       ----
<S>                                                  <C>       <C>       <C>    
Basic:
   Net income                                        $15,250   $21,127   $31,353
   Average common shares outstanding                  50,621    50,575    46,090
   Net income per common share - basic               $   .30   $   .42   $   .68

Diluted:
   Net income                                        $15,250   $21,127   $31,353
   Average common shares outstanding                  50,621    50,575    46,090
   Stock option adjustment                                92       139        59
   Average common shares outstanding - diluted        50,713    50,714    46,149
   Net income per common share - diluted             $   .30   $   .42   $   .68
</TABLE>

J. Stock Options

      The Company maintains two stock-based compensation plans that allow for
the granting of stock options to eligible employees and directors. The Company
has elected not to adopt the recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires a fair-value based method of
accounting for stock options and similar equity awards, and continues to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations to account for its stock-based
compensation plans.

      On June 5, 1996, the Company was authorized to grant up to 4,000,000
options under an employee stock option plan (the "Employee Plan") and up to
200,000 options under a non-employee directors stock option plan (the "Directors
Plan"). These options are for the purchase of shares of common stock at their
market price at the date of grant. The Employee Plan pertains to officers and
key employees and the Directors Plan pertains to certain directors. For both
plans, 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.

      A summary of stock option activity follows:

<TABLE>
<CAPTION>
                             Shares                      Weighted
                           Available       Shares      Average Price
                           for Grant     Outstanding     Per Share
                           ---------     -----------     ---------
<S>                        <C>            <C>              <C>   
            Authorized     4,200,000              0
               Granted    (2,312,500)     2,312,500        $16.68
              Canceled        81,667        (81,667)        16.50
                          ----------      ---------

     December 31, 1996     1,969,167      2,230,833         16.68
               Granted    (1,483,000)     1,483,000          9.33
              Canceled       872,000       (872,000)        16.16
                          ----------      ---------        ------

     December 31, 1997     1,358,167      2,841,833         13.00
               Granted      (818,300)       818,300         11.67
              Canceled       646,601       (646,601)        12.66
             Exercised        69,651        (69,651)        10.39
                          ----------      ---------        ------

     December 31, 1998     1,256,119      2,943,881        $12.72
                           =========      =========        ======
</TABLE>

      At December 31, 1998 and 1997, 1,158,060 and 474,444 options,
respectively, were exercisable under the Company's option plans. No options were
exercisable at December 31, 1996. The weighted average price per share of
exerciseable options was $14.40 at December 31, 1998. For options outstanding
at December 31, 1998, the option price per share ranged from $6.13 to $20.50,
the weighted average price per share of the options was $12.72, and the
weighted-average remaining contractual life of the options was 8.0 years.


                                       30
<PAGE>   31

      For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of stock options granted in 1996, 1997, and 1998 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 that the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
employee stock options.

      Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, net income and earnings per share
for 1998, 1997, and 1996 would have been $12,211,000 and $.24, $18,416,000 and
$.36, and $29,756,000 and $.65, respectively. As a result of a partial year's
vesting in 1998 and 1997 and possible changes in assumptions used in the fair
value calculation, the effects of applying SFAS No. 123 in 1998 and 1997 may not
be representative of the pro forma impact in future years.

      The following weighted-average assumptions were used in the option-pricing
model: a risk-free interest rate of 5.97% in 1998 and 1997 and 6.54% in 1996, an
expected life of the option of 7 years, an expected dividend yield of 0%, and a
volatility factor of .492 for 1998, .441 for 1997 and .412 for 1996. The
weighted-average grant date fair value of options granted was $6.83, $5.16, and
$9.04 in 1998, 1997, and 1996, respectively.

K. Commitments and Contingencies

      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.

      Under the rules of VISA U.S.A. Inc. and MasterCard International
Incorporated when the Company acquires card transactions, it has certain
contingent liabilities for the transactions it processes. This contingent
liability arises in the event of a billing dispute between the merchant and a
cardholder that is not ultimately resolved in favor of the merchant and the
amount is charged back to the merchant and the disputed amount is refunded to
the cardholder. If the Company is unable to collect this amount from the
merchant's account and if the merchant refuses or is unable due to bankruptcy or
other reasons to reimburse the Company for the chargebacks, the Company will
bear the loss for the amount of the refund to the cardholder. The Company
maintains merchant deposits from certain customers as an offset to potential
contingent liabilities that are the responsibility of such customers. The
Company evaluates its risk and estimates its potential loss for chargebacks
based on historical experience.

L. Quarterly Results of Operations: (Unaudited)

Selected quarterly data for the years ended December 31, 1998 and 1997 are as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                           1998
                                 --------------------------------------------------------
                                  First       Second       Third      Fourth
                                 Quarter      Quarter     Quarter     Quarter      Year
                                 --------    --------    --------    --------    --------
<S>                              <C>         <C>         <C>         <C>         <C>     
Revenues                         $113,649    $119,177    $121,430    $128,937    $483,193
Operating profit                    8,243       2,292       5,333       8,296      24,164
Net income                          4,908       1,570       3,381       5,391      15,250
Diluted net income
   per share                     $    .10    $    .03    $    .06    $    .11    $    .30
Weighted average shares            50,833      50,950      50,691      50,644      50,713

<CAPTION>
                                                           1997
                                 --------------------------------------------------------
                                  First       Second       Third      Fourth
                                 Quarter      Quarter     Quarter     Quarter      Year
                                 --------    --------    --------    --------    --------
<S>                              <C>         <C>         <C>         <C>         <C>     
Revenues                         $ 88,420    $ 94,969    $100,780    $121,492    $405,661
Operating (loss) profit              (905)      9,658      11,099       8,968      28,820
Net income                            370       7,157       7,637       5,963      21,127
Diluted net income
   per share                     $    .01    $    .14    $    .15    $    .12    $    .42
Weighted average shares            50,575      50,689      50,764      50,764      50,714
</TABLE>


                                       31
<PAGE>   32

The above information includes the impact of a $6.3 million restructuring charge
in the first quarter of 1997; a $7.0 million restructuring charge in the fourth
quarter of 1997; a $2.6 million write-off of internally developed software in
the second quarter of 1998; $4.0 million in other revenue related to the
settlement of a contract cancellation in the third quarter of 1998; and a $5.2
million charge for remittance research adjustments in the third quarter of 1998.


                                       32
<PAGE>   33

M. Restructuring Charge

      In March 1997 the Company recorded expenses of $6.3 million, including
$5.0 million for severance pay for approximately 79 employees, and $1.2 million
for other costs, related to organizational restructuring. In December 1997 the
Company recorded expenses of $7.0 million following the acquisition of FA
Holdings, Inc. The expenses resulted principally from the write-off of certain
fixed assets (totaling $5.5 million) related to several of the Company's
operating facilities which have been or are in the process of being closed and
consolidated into the Company's other current facilities. The charges decreased
1997 net income and earnings per share by approximately $8.1 million and $.16,
respectively. At December 31, 1998 and 1997, the remaining liability related to
the restructuring charge was $1.9 million and $4.0 million, respectively. The
remaining liability at December 31, 1998 is primarily related to severance and
lease liabilities that are expected to be paid in 1999.

N. Segment Reporting

      National Processing, Inc. operates three business segments - merchant
services, travel services and corporate services. Merchant services authorizes,
processes and settles credit and debit card transactions and authorizes and
collects checks for a variety of merchants. Historically, the Company has
derived a substantial portion of its merchant services revenues from larger
merchants. Travel services principally settles airline ticket purchases made
through travel agents on behalf of airlines and thus derives a substantial
portion of its revenues from an exclusive contract with the Airlines Reporting
Corporation ("ARC"). The Company is compensated on a "cost plus" basis under
this contract which expires in December 2001. Revenues from corporate services
are derived from transaction fees for the processing of remittances, accounts
payable and freight bills and for providing integrated document solutions
involving electronic imaging, archival, processing and payment settlement. The
business segments are identified by the services they offer. The accounting
policies of the reportable segments are the same as those described in Note A.

      The reported results reflect the underlying economics of the segments.
Indirect general and administrative expenses are allocated to the segments based
upon various methods determined by the nature of the expenses. There are no
intersegment revenues. The corporate entity reflects the restructuring charges
taken in the first quarter and fourth quarter of 1997 for severance pay and
other costs related to organizational restructuring.


                                       33
<PAGE>   34

<TABLE>
<CAPTION>
(Dollars in thousands)
                                               Merchant                        Corporate                        Consolidated
                                               Services     Travel Services     Services        Corporate          Total
                                              ------------------------------------------------------------------------------
<S>                                           <C>              <C>              <C>              <C>              <C>      
1998
Revenues from external customers              $ 287,394        $  49,237        $ 146,562               --        $ 483,193
Operating profit (loss)                          30,939            9,898           (6,933)              --           33,904
Depreciation and amortization                    12,688            3,124           10,955               --           26,767
Net interest income (expense)                     1,188             (278)              14               --              924

Net operating assets                            201,604           14,618          100,122        $  33,461          349,805
Expenditures for long-lived assets            $   9,848        $   1,861        $   8,172        $  22,588        $  42,469

1997
Revenues from external customers                233,550           45,734          126,377               --          405,661
Operating profit (loss)                          26,488            8,978           16,620        $ (13,340)          38,746
Depreciation and amortization                     8,698            2,292            6,836               --           17,826
Restructuring charge                                  0                0                0           13,340           13,340
Net interest income (expense)                    (2,049)            (694)          (1,258)              --           (4,001)

Net operating assets                            196,939           11,745           99,797          (15,536)         292,945

Expenditures for long-lived assets            $   4,823        $   1,532        $  14,585        $   7,346        $  28,286
</TABLE>

The following represent reconciliations of the Company's reportable segment
operating profit to the consolidated operating profit and the Company's
reportable segment net operating assets to consolidated net operating assets.

<TABLE>
<CAPTION>
                                                            1998         1997
                                                         ---------    ---------
<S>                                                      <C>          <C>      
Operating Profit
Total operating profit for reportable segments           $  33,904    $  38,746
General and administrative expenses - non-operating         (7,746)      (9,870)
Other                                                       (1,994)         (56)
                                                         ---------    ---------
     Consolidated operating profit                       $  24,164    $  28,820
                                                         =========    =========

Net Operating Assets
Total net operating assets for reportable segments       $ 349,805    $ 292,945
Cash                                                         7,254       40,075
Income taxes to parent                                      (5,245)      (4,262)
Deferred tax assets                                          6,452       10,941
Deferred tax liabilities                                    (5,607)      (2,874)
                                                         ---------    ---------
     Consolidated net operating assets                   $ 352,659    $ 336,825
                                                         =========    =========
</TABLE>

Depreciation expense for certain corporate fixed assets is allocated to the
three segments.

Corporate assets at December 31, 1997 were reduced by the restructuring related
liabilities recorded in the first and fourth quarters of 1997 as well as the
Acquisition Balance Due to Financial Alliance of approximately $26.8 million.

Revenues from foreign operations in 1998, primarily Barbados, were approximately
$50.7 million. Revenues from foreign operations were immaterial in 1997 and
1996. The net book value of foreign long-lived assets, primarily in Juarez,
Mexico, were approximately $12.1 million and $7.8 million at December 31, 1998
and 1997, respectively.

Segment information for 1996 has not been presented as it was impractical to do
so.

O. Subsequent Events (Unaudited)

      In November 1998, the Company formalized a plan to restructure its
Barbados facility. As of December 31, 1998, the Company has expensed
approximately $262,000 related to the restructuring. In the first quarter of
1999, the Company expects to record approximately $1.3 million in severance
charges related to the Barbados restructuring.

      In February 1999, the Company entered into an agreement with Investment
Services International Co., LLC to sell its payables and freight business lines
for approximately $37 million in cash. In addition, in March 1999, the Company
adopted a formal plan to either sell or discontinue the check and remittance
business lines. Under the provisions of FASB statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, the
Company expects to record an impairment loss of approximately $60-$70 million in
the first quarter of 1999 related to these business lines.
<PAGE>   35
                           NATIONAL PROCESSING, INC.
                         PART IV ITEM 14: EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT NUMBER                             DESCRIPTION
--------------      ------------------------------------------------------------
<S>                 <C>
3.1 (i)             Amended Articles of Incorporation of the Registrant. (A)

3.1 (ii)            Code of Regulations of the Registrant. (A)

4.1                 Specimen Certificate 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                Building Lease between First National Bank of Louisville and 
                    NPC of Arizona, dated September 1, 1984. (B)

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                Master Remittance Processing Services Agreement dated 
                    February 1, 1999 by and between National City Corporation 
                    and National Processing Company. (filed as Exhibit 10.6).

10.7                Administrative Services Agreement by and among NPC and 
                    Stored Value Systems, Inc., dated July 3, 1996. (B)

10.8                Form of Card Services Agreement by and among NPC and its 
                    affiliated corporations and certain bank subsidiaries of 
                    National City Corporation. (B)

10.9                Tax Sharing Agreement between the Company and National City 
                    Corporation, dated July 17, 1996. (B)

10.10               The Agreement between Airlines Reporting Corporation and 
                    First National Bank of Louisville and NPC for Area 
                    Settlement Plan Processing Services, dated October 16, 
                    1986. (B)

</TABLE>
<PAGE>   36

<TABLE>
<CAPTION>

EXHIBIT NUMBER                             DESCRIPTION
--------------      ------------------------------------------------------------
<S>                 <C>
10.11               First Amendment to Agreements between Airlines Reporting 
                    Corporation and First National Bank of Louisville and NPC, 
                    dated December 12, 1991. (A)

10.12               1994 Amendment to Agreements between Airlines Reporting 
                    Corporation and NPC, dated December 31, 1994. (A)

10.13               Supplemental Agreement by and between NPC and Airlines 
                    Reporting Corporation, dated February 24, 1995. (A)

10.14               Amendment to Agreement between Airlines Reporting 
                    Corporation and National City Bank of Kentucky and NPC, for 
                    Area Settlement Plan Processing Services, dated August 19, 
                    1995. (A)

10.15               (Intentionally Omitted).

10.16               (Intentionally Omitted).

10.17               (Intentionally Omitted).

10.18               (Intentionally Omitted).

10.19               (Intentionally Omitted).

10.20               Employment Agreement between the Registrant and Donald J.
                    Kenney dated March 19, 1998. (Incorporated herein by
                    reference to Exhibit 10.40 to the Registrant's Quarterly
                    Report on Form 10-Q for the three months ended
                    March 31, 1998).**

10.21               Employment Agreement and Undertaking of Confidentiality
                    between NPC and Thomas A. Wimsett dated May 23,1995.
                    (A)**

10.22               (Intentionally Omitted).

10.23               (Intentionally Omitted).

10.24               (Intentionally Omitted).


</TABLE>

<TABLE>
<CAPTION>

EXHIBIT NUMBER                             DESCRIPTION
--------------      ------------------------------------------------------------
<S>                 <C>

10.25               Severance Agreement between the Registrant and Robert E. 
                    Johnson, dated June 7, 1996. (B)**

10.26               (Intentionally Omitted).

10.27               Severance Agreement between the Registrant and Thomas A. 
                    Wimsett, dated June 7, 1996. (B)**

10.28               (Intentionally Omitted).

10.29               1996 Stock Option Plan and Form of Stock Option Agreement. 
                    (B)**

</TABLE>
<PAGE>   37
<TABLE>
<S>                 <C>
10.30               Nonemployee Directors Stock Option Plan and Form of Stock 
                    Option Agreement (B)**

10.31               NPC's Short-Term Incentive Compensation Plan for Senior 
                    Executives, dated January 1, 1995. (A)**

10.32               NPC's Long-Term Incentive Compensation Plan for Senior 
                    Officers, dated January 1, 1995. (A)**

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. (B)**

10.38               Check Processing Services Agreement between National City 
                    Bank of Kentucky and NPC. (B)

10.39               Employment Agreement and Undertaking of Confidentiality 
                    between the Registrant and Robert E. Showalter, dated March 
                    11, 1997. (Incorporated herein by reference to Exhibit 
                    10.39 to the Registrants Annual Report on Form 10-K for the 
                    year ended December 31, 1997).**

10.40               Asset Purchase Agreement between National Processing Company
                    and Investment Services International Co., LLC dated as of
                    February 20, 1999. (filed as Exhibit 10.40).
</TABLE>

<TABLE>
<CAPTION>

EXHIBIT NUMBER                             DESCRIPTION
--------------      ------------------------------------------------------------
<S>                 <C>
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                Powers of Attorney.

27.1                Financial Data Schedule.

--------------------------------------------------------------------------------

(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.

</TABLE>