<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934
    [No Fee Required]
                  For the fiscal year ended December 31, 1997
                                      or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    [No Fee Required]
 
                        COMMISSION FILE NUMBER: 1-12365.
 
                          BA MERCHANT SERVICES, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                           ONE SOUTH VAN NESS AVENUE
        DELAWARE        SAN FRANCISCO, CALIFORNIA 94103      94-3252840
     (STATE OR OTHER             415-241-3390             (I.R.S. EMPLOYER
     JURISDICTION OF     (ADDRESS AND TELEPHONE NUMBER   IDENTIFICATION NO)
    INCORPORATION OR    OF PRINCIPAL EXECUTIVE OFFICES)
      ORGANIZATION)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
   New York Stock Exchange: Class A Common Stock, Par Value $0.01 per share
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                     None
 
  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 mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to thisForm 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price on the consolidated
transaction reporting system on March 10, 1998, was $314.9 million.
 
  Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 10, 1998.
 
 Class A Common Stock, $0.01 par value--16,253,276 shares outstanding on 
                                March 10, 1998.
 Class B Common Stock, $0.01 par value--32,400,000 shares outstanding on 
                                March 10, 1998.
 
     DOCUMENTS INCORPORATED BY REFERENCE AND PARTS OF FORM 10-K INTO WHICH
                                 INCORPORATED:
 
  Portions of the Proxy Statement for the May 7, 1998 Annual Meeting of
Stockholders:    Part III.
 
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<PAGE>
 
                                   FORM 10-K
 
                                     PART I
 
<TABLE>
 <C>      <S>                                                               <C>
 Item 1.  Business
          General........................................................     2
          Products.......................................................     3
          New Product Initiatives........................................     4
          Merchant Customer Base.........................................     5
          Technology.....................................................     6
          Relationship with BankAmerica and the Bank.....................     7
          Asian Markets Outside of Thailand, the Philippines and Taiwan..     8
          Competition....................................................     8
          Supervision and Regulation.....................................     8
          Certain State Tax Issues.......................................     9
          Seasonality....................................................     9
          Employees......................................................     9
 Item 2.  Properties.....................................................    10
 Item 3.  Legal Proceedings..............................................    10
 Item 4.  Submission of Matters to a Vote of Security Holders............    10
 
                                    PART II
 
 Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters.......................................................    11
          Dividend Policy................................................    11
          Description of Capital Stock...................................    11
 Item 6.  Selected Financial Data........................................    13
 Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations.........................................    14
          Overview.......................................................    14
          Results of Operations..........................................    14
          Balance Sheet Review...........................................    16
          Liquidity and Capital Resources................................    16
          Operating Strategy.............................................    17
          Forward-Looking Statements.....................................    17
 Item 8.  Financial Statements and Supplementary Data....................    19
 Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure..........................................    36
 
                                    PART III
 
 Item 10. Directors and Executive Officers of the Registrant.............    36
 Item 11. Executive Compensation.........................................    36
 Item 12. Security Ownership of Certain Beneficial Ownership and
           Management....................................................    36
 Item 13. Certain Relationships and Related Transactions.................    36
 
                                    PART IV
 
 Item 14. Exhibits, Financial Statement Schedules, and Reports on 
           Form 8-K.......................................................   36
 Signatures...............................................................   38
</TABLE>
 
                                       1
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Organization and Use of Proceeds from Initial Public Offerings - BA Merchant
Services, Inc. (the Company) was incorporated in October 1996. At the close of
business on December 3, 1996, the merchant processing business of Bank of
America NT&SA (the Bank), a multi-state operation based in California, and the
merchant processing business of Bank of America NW, National Association
(formerly Seattle-First National Bank) (BANW), located principally in the
state of Washington, were transferred to the Company. At December 31, 1996,
both the Bank and BANW were subsidiaries of BankAmerica Corporation (BAC). On
January 1, 1997, BANW was merged into the Bank. References in this report to
BankAmerica shall be deemed to be references to BAC and its subsidiaries and
affiliates, including the Bank and BANW, unless the context otherwise
requires.
 
  On December 19, 1996, the Company commenced initial public offerings (the
Offerings) of 16.1 million shares of Class A Common Stock, $0.01 par value, at
$15.50 per share. Of these shares, 12.9 million shares were offered in the
United States and 3.2 million shares were offered in a concurrent
international offering outside the United States. The Company completed the
Offerings on December 31, 1996. Net proceeds from the Offerings were $232.9
million. In late December 1996, $126.3 million of the proceeds from the
Offerings were used to pay down the outstanding balance on a revolving line of
credit with an affiliate which had been used to finance operations pending
receipt of the proceeds of the Offerings.
 
  During the second and third quarters of 1997, the Company acquired
BankAmerica's merchant processing businesses in Thailand, the Philippines and
Taiwan and its merchant processing administrative office in Hong Kong in
consideration for a total of 2.2 million shares of Class B Common Stock. The
acquisition of these entities will be collectively referred to as the "Asia
Acquisitions". The Company provided approximately $33.0 million of the
proceeds from the Offerings to fund the regulatory and working capital
requirements of the Asia Acquisitions.
 
  As a result of the completion of the Offerings and subsequent Asia
Acquisitions, BAC, which indirectly owns 100 percent of the outstanding Class
B Common Stock of the Company, owns 66.6 percent of the outstanding common
stock of the Company. BAC's economic ownership represents 95.2 percent of the
combined voting power of the Company's outstanding common stock.
 
  During the third quarter of 1997, the Company acquired a portfolio of
approximately 4,200 merchant processing contracts utilizing $17.7 million of
the proceeds from the Offerings. The portfolio currently produces more than
$850 million in credit card sales volume on an annualized basis.
 
  Description of Business - The Company provides an array of payment
processing and related information products and services to merchants
throughout the United States and certain Asian countries who accept credit and
charge cards (collectively "credit cards") and debit cards as payment for
goods and services. According to published industry sources, the Company is
the fourth largest processor of merchant credit card transactions and one of
the largest processors of debit card transactions in the United States.
 
  The Company provides its products and services to a client base of merchants
in a wide variety of industries, including general retailers, restaurants, and
supermarkets. The Company's clients are comprised of large multi-regional
chains, middle-market merchants, and small merchants that collectively operate
from approximately 202,000 locations as of year-end 1997. The Company markets
its products and services to merchants directly and also indirectly through
BankAmerica's branch network and product distribution system. In addition, the
Company has increased its client base as well as its transaction volume
through the use of agent banks and independent sales organizations (ISOs) that
enlist merchant clients on its behalf. The Company continually invests in
technology, research, and product development and emphasizes excellent client
service in the delivery of its products and services. In 1997, the Company's
annual client retention rate exceeded 95 percent.
 
                                       2
<PAGE>
 
  In order to process credit and debit card transactions, the Company, along
with all other nonbank merchant processors, must be controlled or sponsored by
a financial institution that is a principal member of the credit card
associations and debit card networks. Through sponsorship by BankAmerica, the
Company is a member of Visa(R) and MasterCard(R), and participates in various
debit networks including Interlink(R), Explore(R), Accel(R), Pulse(R), and
Cash Station(R) for processing transactions through those associations or
networks.
 
  The Company experienced substantial growth in its transaction volume, net
revenue, and net income during the three years ended December 31, 1997,
principally through internally generated growth. The number of card
transactions processed by the Company increased from 322.2 million for the
year ended December 31, 1995 to 531.2 million for the year ended December 31,
1997. During the same periods, the Company's net revenue increased from $119.9
million to $161.0 million and net income increased from $22.3 million to $37.4
million.
 
  Management believes that the Company's growth in recent years has been
attributable in part to, and will continue to benefit from, its close
affiliation with BankAmerica. As a result of its contractual arrangements with
BankAmerica, the Company is able to utilize the Bank of America name and
family of brands and also access BankAmerica's product distribution channels
and client base to conduct its operations and generate new business. The Bank
of America name and brands are widely recognized by clients and businesses and
provide the Company with substantial credibility in the merchant processing
market. The Company's relationship with BankAmerica also affords the Company
access to the marketing and sales capabilities of BankAmerica's approximately
1,800 retail banking branches in 9 states. That relationship enables the
Company to reach more than one million small-business and middle-market
clients of BankAmerica, approximately 11 million BankAmerica ATM cardholders,
approximately 10 million BankAmerica credit cardholders, and approximately 14
million consumers holding BankAmerica checking and savings accounts at
December 31, 1997. For information regarding the Company's relationship with
BankAmerica, see "Relationship with BankAmerica and the Bank" .
 
PRODUCTS
 
  The Company offers a broad selection of products and services related to
payment processing. Through proprietary and third-party licensed software
applications and equipment, the Company provides electronic authorization and
settlement services for all major credit, charge and debit card brand
transactions. Additionally, the Company provides an array of value-added
services in connection with its processing systems including, data capture and
reporting, billing dispute resolution, merchant marketing programs and a
variety of specialty industry applications.
 
  Electronic Authorization Services - The Company provides electronic
transaction authorization services for all major credit and debit cards.
Authorization generally involves approving a cardholder's purchase at the
point of sale after verifying that the card is not lost or stolen and the
transaction amount is within the cardholder's credit or account limit. The
Company utilizes third-party national authorization networks available on a
subscription basis to confirm such information. In the case of certain "On-Us"
transactions (those transactions originated in California involving debit
cards issued by BankAmerica), the Company obtains the necessary authorization
directly from BankAmerica, thus avoiding third-party authorization networks
and the related fees. In the event that a merchant is not able to connect with
the electronic network, the Company provides access to voice authorization and
automated voice response that is available 24 hours a day, seven days a week.
 
  Data Capture and Reporting Services - The Company records data relating to
card transactions at the time of the transaction authorization and aggregates
this data for each merchant client using a software application programmed by
the Company into the merchant's terminal. The Company compiles this aggregated
data and uses it to provide merchants with information services, such as
specialized management reports. For certain national merchant customers, the
Company captures data via a "host-to-host" linkage with the merchant's own
mainframe computer which, in turn, allows the merchant enhanced access to the
reporting capabilities of the Company's proprietary systems.
 
  Settlement, Clearing, and Accounting Services - The Company processes
transactions for settlement, forwards transaction data to credit card
associations for payment, and provides daily payments to merchants. The
settlement process involves managing a record of each merchant's transactions
and transferring funds for
 
                                       3
<PAGE>
 
payment from the card issuer to the merchant. Transaction information is
transmitted by the Company, or a third-party merchant accounting provider, to
the card-issuing bank through the card association, such as Visa(R) or
MasterCard(R). The Company then arranges for funds to be transferred to the
merchant's bank account via Automated Clearing House (ACH) or Fedwire
transfer, or via BankAmerica's internal deposit system in the event the
merchant has a BankAmerica deposit account.
 
  Billing Dispute Resolution Services - The Company assists merchants in
investigating and resolving billing disputes with their clients.
 
  Terminal Services - The Company rents and sells POS terminals to its
merchant clients. The Company customizes and regularly updates the software
that drives the terminals and provides terminal maintenance services.
 
  Client Service and Support - The Company maintains a telephone call-in
service staffed by client service representatives which is available 24 hours
a day, seven days a week. Representatives provide technical support for
merchants for all of the Company's products and services.
 
  Merchant Marketing Programs - The Company and BankAmerica jointly offer a
number of services designed to allow merchant clients to target and reward
retail BankAmerica clients who are frequent customers of a merchant. Through
joint marketing programs of BankAmerica and the Company, merchants are able to
communicate directly with BankAmerica retail clients through advertising,
statement messages and inserts, transaction receipts, newsletters, and direct
mail.
 
  Specialty Applications - The Company also provides products and services
tailored to the needs of individual merchants or a particular industry. In the
retail industry, a variety of products are offered to support different types
of equipment at the point of sale, including POS terminals, electronic cash
registers, and personal computers. For restaurants, the Company offers
products that assist merchants in managing the entry and distribution of tips
to servers. For lodging establishments, the Company offers products which
assist such establishments in managing the unique circumstances that result
from numerous types of transaction activity occurring over a period of days.
The Company offers additional products to support supermarkets and large-
volume/low-dollar-amount merchants who find it economically beneficial to
process transactions in batches rather than individually. For very small
merchants, the Company offers voice authorization and the deposit of paper
drafts at BankAmerica or agent bank branches. These products are supported
through a variety of arrangements that involve the use of the Company's
internal authorization and capture system or third-party authorization and
capture systems.
 
  Quasi-Cash Access - In 1997, the Company introduced a new product which
enables customers of gaming establishments to use their credit cards and debit
cards at automated terminals to obtain authorization for negotiable drafts
which are redeemable for cash at the gaming establishment. The Company expects
to add to its quasi-cash access product line during the second quarter of 1998
by offering Casino Cash Plus(R) through Bank of America's automated teller
machines (ATM) in gaming locations. Casino Cash Plus(R) provides ATM cash
access and credit and debit card quasi-cash capabilities from one source and
is anticipated to increase overall quasi-cash transactions at such locations.
The Company is marketing this product to major gaming industry companies that
have lending and cash management relationships with BankAmerica.
 
NEW PRODUCT INITIATIVES
 
  The Company continues to devote substantial time and resources to the
development of new products and services as described below:
 
  Electronic Commerce - The Company has pursued several initiatives in the
developing arena of electronic commerce. The Company designed and developed
credit card payment solutions for on-line retail sales, and activated several
merchant pilot programs during 1997. In addition, the Company works with
BankAmerica's
 
                                       4
<PAGE>
 
Interactive Banking Group which offers bill payment by telephone, a home-
banking service and a financial institution site on America Online(R). The
Company and BankAmerica have also assisted in the development of data
encryption standards for the secure transport of cardholder data across the
Internet. The Company and BankAmerica participated in Visa(R)'s pilot program
on the Internet during the third quarter of 1997. It is the Company's
objective to deliver a complete, secure on-line payment solution to Internet
merchants by the time Visa(R) implements its anticipated system-wide launch of
Internet card payment transactions in mid-1998.
 
  Stored Value Cards - The Company works with BankAmerica's Interactive
Banking Group to bring consumers and merchants together in pilot programs to
test and evaluate emerging stored value card payment technologies. The Company
is the processor for reload transactions whereby cardholders may use their
credit or debit cards to load value onto their stored value cards. During the
fourth quarter of 1997, the Company piloted a program with BankAmerica's
Interactive Banking Group offering stored value cards over the Internet.
 
  Electronic Benefit Transfer and Payment - During the first quarter of 1998,
the Company began a pilot program with the County of San Bernardino
(California) providing food stamp benefits to eligible participants through a
benefit card that operates much like a commercial debit card. The Company
anticipates working on another pilot program for the County of San Diego
during the second quarter of 1998. The Company expects that there will be
increasing demand among government agencies for the ability to accept credit,
debit, and smart cards for payments that have traditionally been paper-based.
The Company continues to evaluate ways of enhancing its product offerings to
support the unique requirements of these government-related payment
transactions.
 
  Corporate Purchasing Cards - During 1997, both Visa(R) and MasterCard(R)
introduced corporate purchasing cards designed to enable large companies to
conduct their relatively low-dollar-value (under $25,000) procurement
transactions through the use of credit cards. These card products are designed
to alleviate the paper-intensive purchase order and check remittance processes
that many larger companies experience when acquiring goods or services. The
Company's specialized processing services for corporate purchasing cards
enables vendors of goods or services to accept the cards as payment and
generates the necessary transaction support data (e.g., invoice number and tax
amount) for the corporate purchaser paying for the goods or services. The
Company works closely with BankAmerica to enroll merchants in this new
program.
 
MERCHANT CUSTOMER BASE
 
  The Company provides merchant processing services to a diverse client base,
ranging from large multi-regional chains to small merchants. At December 31,
1997, the Company provided merchant processing services to over 167,000
merchant locations directly, to over 18,000 merchant locations through 151
agent banks not affiliated with the Company, and to over 16,500 merchant
locations through ISOs.
 
  The Company's merchant accounts were distributed by type of merchant at
December 31, 1997 (as measured by annualized credit card sales volume for the
year ended December 31, 1997) as follows:
 
<TABLE>
<CAPTION>
      MERCHANT TYPE                                                   PERCENTAGE
      -------------                                                   ----------
      <S>                                                             <C>
      General retail.................................................     27%
      Supermarkets...................................................     13
      Restaurants....................................................      8
      Lodging establishments.........................................      7
      Automobile sales and repair....................................      7
      Mail order companies...........................................      6
      Other..........................................................     32
                                                                         ---
        Total........................................................    100%
                                                                         ===
</TABLE>
 
  As indicated by the above table, the composition of the Company's merchant
client base emphasizes general retail merchants, supermarkets, restaurants,
lodging establishments, and other similar merchants. In the "Other" category,
no single merchant type accounted for more than 4 percent of annualized credit
card sales volume.
 
                                       5
<PAGE>
 
  The Company's clients were distributed by size at December 31, 1997 (as
measured by credit card sales volume for the year ended December 31, 1997) as
follows:
 
<TABLE>
<CAPTION>
      SALES VOLUME                                                    PERCENTAGE
      ------------                                                    ----------
      <S>                                                             <C>
      Less than $250,000.............................................     15%
      $250,000 to $50,000,000........................................     50
      More than $50,000,000..........................................     35
                                                                         ---
        Total........................................................    100%
                                                                         ===
</TABLE>
 
  As shown by the above data, a significant percentage of the Company's
business is with merchants with less than $50 million in annual sales volume.
In the Company's experience, its smaller retail merchant clients have been
less price sensitive than large corporate businesses. Fees per transaction
paid by high sales volume merchants are generally lower compared to the
Company's overall merchant base. In addition, no single merchant accounted for
more than 5 percent of the net revenue of the Company in 1997.
 
  At December 31, 1997, more than half of the merchant locations served by the
Company were located in California. In addition, the Company estimates that
approximately 44 percent of its sales volume processed for the year ended
December 31, 1997 was derived from merchant locations in California.
 
TECHNOLOGY
 
  To remain competitive in the merchant processing industry, the Company has
dedicated significant resources to developing proprietary technologies that
lower costs and enhance service. The Company believes its continuing
investment in technology will allow it to remain competitive in the industry.
The principal systems that the Company has developed are described below:
 
  Transaction Processing System - The Company's new transaction processing
system, called HostLINK(TM), is an advanced system which the Company began
installing in the second quarter of 1997. Management believes that the client-
server open architecture technology of the new system will enhance the
Company's position among the technological leaders of the payment processing
business. The Company expects to add the ability to process restaurant and
lodging merchant transactions through HostLINK(TM) by the third quarter of
1998. These transactions are currently processed through third-party
processors. Additional systems enhancements will enable the Company to meet
the processing requirements of diverse media, including the Internet. These
enhancements also will enable the Company to expand the types and delivery
methods of information reported to merchants. Management believes that the
flexibility resulting from the open architecture design of HostLINK(TM) will
result in reduced maintenance costs compared with those normally associated
with mainframe systems, improved product differentiation, and reduced product
development time.
 
  On-Us Debit Card Transactions - In early 1997, the Company developed the
capability to process On-Us transactions. On-Us transactions are those
processed directly with the Bank thereby bypassing the third-party
authorization networks and the related network charges. This capability is
presently operational for on-line (ATM card) debit card transactions initiated
in California, which as of December 31, 1997, represented approximately 61
percent of total debit card transactions processed by the Company. The Company
expects to offer On-Us capabilities for debit card transactions in the eight
other states in the BankAmerica retail market area by mid-1998. The Company is
also presently developing the capability to process off-line (check card) On-
Us debit transactions directly with the Bank.
 
  On-Us Credit Card Transactions - BankAmerica began the migration of its
settlement, accounting, and statement functions for most of its credit card
accounts to a third-party card processing system in 1997. The migration of the
rest of its accounts should be completed by mid-1998. When completed, the
Company will be able to offer direct processing of On-Us credit card
transactions.
 
                                       6
<PAGE>
 
  Automated Chargeback System - The Company's Automated Chargeback System
automates the processing of billing disputes between the Company's merchants
and their customers. Resolution of disputed transactions involves the receipt,
processing, and tracking of retrieval requests and chargebacks. Retrieval
requests are requests from card-issuing banks for copies of sales drafts.
Chargebacks are transactions returned by card-issuing banks to merchant
processors when customers dispute the receipt of goods or services from
merchants. According to card association rules, if the merchant processor is
unable to collect the amount of the transaction from the merchant within a
specified time period, the merchant processor is liable for such amount. The
system automates many of the time-consuming, labor-intensive processes
normally associated with the handling of retrieval requests and chargebacks.
The system incorporates nearly all aspects of the transaction dispute process,
including the receipt of chargebacks from issuing banks, the distribution of
chargeback notices to merchants, the receipt of merchant rebuttals, and the
collection of transaction dollar amounts. The system improves the timeliness
of the dispute resolution process and reduces operating costs and losses
associated with the processing of retrieval requests and chargebacks.
 
RELATIONSHIP WITH BANKAMERICA AND THE BANK
 
  For information regarding BankAmerica and the Bank, see Item 13, "Certain
Relationships and Related Transactions".
 
  The Bank owns 100 percent of the outstanding Class B Common Stock of the
Company, which represents 66.6 percent of the Company's outstanding common
stock. Such ownership represents 95.2 percent of the combined voting power of
the Company's outstanding common stock. The Bank has the ability to elect all
of the members of the Board of Directors of the Company and to exercise a
controlling influence over the business and affairs of the Company. As of the
date of this report, the size of the Board of Directors of the Company is
fixed at seven. Two of the present members of the Board of Directors are
independent of BankAmerica.
 
  The Company and BankAmerica engage in various intercompany transactions and
arrangements, including the provision by BankAmerica of various services to
the Company. Such services are rendered pursuant to certain intercompany
agreements (Intercompany Agreements) which provide, among other things, for
the grant to the Company of a license to use the Bank of America name and
certain trademarks and servicemarks, including Bank of America(R),
BankAmericard(R), VERSATEL(R) and VERSATELLER(R), in connection with the
Company's business. Under the Intercompany Agreements, BankAmerica performs
for the Company certain product distribution, processing, system support,
telecommunications, marketing, regulatory compliance, legal, tax and treasury,
accounting and audit, and other miscellaneous support and administrative
services. Additionally, BankAmerica provides association and network
sponsorship and representation in the Visa(R) and MasterCard(R) associations.
The Company and BankAmerica have also entered into agreements concerning
registration rights, the allocation of tax liabilities, and the leasing of
certain facilities by the Company from BankAmerica.
 
  In December 1996, BAC and the Company entered into a Non-Competition and
Corporate Opportunities Allocation Agreement (Non-Competition Agreement)
pursuant to which BAC will not compete with the Company for a period of five
years with respect to payment processing for merchants that arise in the use
of credit, charge, or debit cards that are authorized through an electronic
medium originating at the point of sale in the United States and certain Asian
countries in which the Company has operations.
 
  BankAmerica is not required to maintain control of the Company, and any
disposition by BankAmerica of its interest in the Company could, depending
upon the circumstances, have an adverse effect on the Company or the price of
its stock. Any divestiture by BankAmerica which results in it owning less than
a majority of the voting power of the Company will permit BankAmerica to
terminate its contractual arrangements with the Company under which the
Company has access to the Bank's client base, the Bank of America name and
trademarks, the implementation of On-Us transaction processing and marketing,
the Bank's product distribution channels, and credit and debit card
association and network sponsorships. Any such termination could have a
material adverse effect on the Company's business. The Company expects that
the Intercompany Agreements and the Corporate Opportunities Agreement will
govern the relationship between the Company and BankAmerica, the provision of
services and the payments therefrom, for the foreseeable future.
 
                                       7
<PAGE>
 
ASIAN MARKETS OUTSIDE OF THAILAND, THE PHILIPPINES AND TAIWAN
 
  The Company and BankAmerica have agreed to work cooperatively to allow the
Company to acquire the Bank's Asian merchant processing businesses not already
owned by the Company, if the Company chooses to enter these markets. At this
time, the Company does not plan to acquire these businesses from the Bank. In
addition, local regulatory requirements may make it difficult or preclude the
Company from operating such businesses. In December 1997, the Bank exited its
merchant processing business in Korea. The Bank's remaining merchant
processing businesses are in The People's Republic of China, India and
Pakistan.
 
COMPETITION
 
  The United States domestic market in which the Company competes for credit,
charge, and debit card payment processing for merchants is intensely
competitive. According to publicly available industry sources, the 10 largest
merchant processors in the United States processed approximately 83 percent of
the credit card sales volume during the calendar year 1997. Other competitors
include smaller vertically integrated processors, community and regional
banks, and ISOs. The Company competes on the basis of price, the availability
of products and services, the quality of customer service and support, and
transaction processing speed, quality, and reliability. The Company also
competes by building alliances with other banks to gain access to their
distribution systems, acquiring merchant portfolios, and enlisting ISOs. The
majority of the Company's contracts with its merchant clients are cancelable
at will or on short notice or provide for renewal at frequent periodic
intervals, and, accordingly, the Company and its competitors regularly rebid
such contracts. This competition may influence the prices the Company can
charge, which consequently requires the Company to aggressively control costs
to maintain acceptable profit margins.
 
  Since 1991, price competition has caused the Company's net revenue in
relation to sales volume to decline, particularly with respect to high-volume
retail clients. No assurance can be given that the Company will be able to
maintain profit margins at or near present levels, whether with respect to its
high-volume retail clients or its small and middle-market clients.
 
  The merchant processing industry in general requires the use of advanced
computer hardware and software technology, and has been characterized by the
development of new products and services to meet increasingly complex and
rapidly changing client and regulatory requirements. The success of any
competitor in this industry, including the Company, depends in part on the
ability to continue to adapt its technology in a timely and cost-effective
basis to meet these requirements.
 
  In recent years, there has been a trend toward consolidation in the merchant
processing industry. Further tightening of margins may result in banks and
other payment processors abandoning the transaction processing business, thus
accelerating the trend toward consolidation. Due to market demands requiring
processors to provide advanced and efficient technology, certain processors
have recently left the business or merged with other providers. This
consolidation has enabled certain of the Company's competitors to gain access
to significant capital, management, marketing, and technological resources
that are equal to or greater than those of the Company.
 
  Due to language differences and variances in association regulations and
interchange fees, each country in Asia represents a unique market. Competition
is highly localized within country borders where local banks have priced
merchant processing services aggressively in order to preserve market share
against various large multi-national banks that compete for business in the
region. The MasterCard(R) interchange structure in some countries is designed
to discourage banks from operating only as processors, and not as issuers, by
charging non-issuer processors higher fees which may affect the profitability
of the Company's operations in Asia.
 
SUPERVISION AND REGULATION
 
  As long as BankAmerica has a controlling interest in the Company, the
Company is subject to all provisions of federal banking laws and regulations
that are applicable to the Bank unless specifically provided otherwise
 
                                       8
<PAGE>
 
(collectively, the Banking Laws). As a result, the Company's activities are
generally limited to those that are permissible for a national bank, e.g.,
those activities which are a part of or incidental to the business of banking.
All of the current activities of the Company are permissible for national
banks.
 
  The Company is subject to the supervision and examination of the Office of
the Comptroller of the Currency (OCC), one of the principal regulatory bodies
having jurisdiction over the Bank, as well as the Board of Governors of the
Federal Reserve System (Federal Reserve Board) with respect to foreign
activities and investments. The Company may not engage in any new activities
until it first obtains the written approval of the OCC and/or the Federal
Reserve Board. The OCC will only approve those activities legally permissible
for a national bank that are consistent with prudent banking principles and
OCC policy. The Federal Reserve Board applies similar requirements to the
Company's foreign activities and/or investments. Future acquisitions by the
Company may also require the prior written approval of the OCC and/or the
Federal Reserve Board.
 
  To facilitate BankAmerica's compliance with applicable Banking Laws and to
allow BankAmerica to obtain any required consents or approvals, the Company
and the Bank have entered into an agreement which prohibits the Company from
entering into any business activities prior to the receipt of any consents and
approvals required pursuant to the Banking Laws and, if such consents are not
received, prohibits the Company from engaging in such business activities.
 
  The Company must adhere to the standards of the credit card associations and
debit card networks or risk suspension or termination of its membership or
participation status. There can be no assurance that: (i) the credit card
associations or debit card networks will maintain the Company's membership or
participation status; (ii) the rules of the credit card associations or debit
card networks allowing the Company and other nonbank transaction processors to
market and provide transaction processing services will remain in effect; or
(iii) the credit card associations or debit card networks will continue to
interpret their rules as they have done in the past, which may have an impact
on the Company's business operations.
 
CERTAIN STATE TAX ISSUES
 
  Merchant processing companies like the Company may be subject to state
taxation on certain portions of their service fees charged to merchants.
Application of this tax is an emerging issue in the industry and the states
have not yet adopted uniform guidelines regarding the taxation of merchant
services. In the event the Company is required to bear all or a portion of
these costs, and is unable to pass such costs through to its merchant clients,
the Company's business, financial condition, or results of operations could be
adversely affected.
 
SEASONALITY
 
  The merchant processing industry in general is prone to seasonal
fluctuations in transaction activity. Although the Company generally
experiences seasonality in its business, fluctuations are less pronounced than
in the industry, due in part to its diverse merchant client base. Those
segments of merchants that are particularly sensitive to seasonal
fluctuations, such as airlines, travel agencies, lodging, and mail order
merchants, each represent relatively small percentages of the Company's
processing business, as compared to those segments of the Company's client
base that are generally not subject to significant seasonality, such as
general retail merchants, restaurants, supermarkets, and gas stations. The
Company's net revenue is typically higher in the third and fourth calendar
quarters and lower in the first calendar quarter. Increased tourism in
California and other western states during the summer months and retail
activity prior to the beginning of the school year contribute to higher third
quarter net revenue, and holiday activity contributes to higher fourth quarter
net revenue. The decline in retail activity following the holiday season
results in lower first quarter net revenue.
 
EMPLOYEES
 
  At December 31, 1997, the actual number of persons employed by the Company
was 806. On a full-time equivalent basis, the Company's staff level was 785.
 
 
                                       9
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company leases its principal executive offices and processing facility
in San Francisco from BankAmerica. The Company also leases other facilities in
California (Los Angeles, Azusa, and Foster City), Washington (Bellevue,
Seattle and Spokane) and Hong Kong from BankAmerica. The Company also leases
other facilities in various locations in the United States and certain Asian
countries from other unrelated third parties.
 
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, 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.
 
                                      10
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Class A Common Stock of the Company is listed for trading on the New
York Stock Exchange under the symbol BPI. The following table sets forth the
high and low sales prices of the Company's Class A Common Stock for the
periods indicated since commencement of trading on December 19, 1996:
 
<TABLE>
<CAPTION>
                                                                HIGH    LOW
                                                                ----    ----
      <S>                                                       <C>     <C>
      December 19, 1996 to December 31, 1996................... $18 1/4 $16 3/8
      Year ended December 31, 1997 -
       First Quarter........................................... $17 3/4 $12 3/4
       Second Quarter.......................................... $19 1/2 $12
       Third Quarter........................................... $22 1/4 $17 1/8
       Fourth Quarter.......................................... $19 1/2 $14 1/8
</TABLE>
 
DIVIDEND POLICY
 
  The Company has not declared any dividends since its incorporation. It
currently intends to retain all future earnings for use in the operations of
its business and does not anticipate paying any cash dividends in the
foreseeable future. The Company's future dividend policy will be determined by
its Board of Directors on the basis of various factors, including the
Company's results of operations, financial condition, liquidity needs, capital
requirements and investment opportunities. The historical financial statements
included in this report for periods prior to the Offerings reflect the
remittance to BankAmerica of all cash generated by the Company in excess of
the amount required for the Company's operating and investing activities.
 
DESCRIPTION OF CAPITAL STOCK
 
AUTHORIZED CAPITAL STOCK
 
  The authorized capital stock of the Company consists of 200 million shares
of Class A Common Stock, par value $0.01 per share, 50 million shares of Class
B Common Stock, par value $0.01 per share, and 10 million shares of Preferred
Stock, par value $0.01 per share. None of the Preferred Stock was issued or
outstanding as of December 31, 1997. Of the 200 million shares of Class A
Common Stock authorized, 16.3 million shares were outstanding as of January
31, 1998 and held by approximately 2,350 beneficial stockholders, 32.4 million
shares have been reserved for issuance upon conversion of Class B Common Stock
into Class A Common Stock and 7.0 million shares have been reserved for
issuance pursuant to certain employee and nonemployee director benefit and
option plans. Of the 50 million shares of Class B Common Stock authorized,
32.4 million shares, or 100 percent of the outstanding shares, are held by
BankAmerica. The following summary description of the capital stock of the
Company is qualified in its entirety by reference to the Certificate of
Incorporation of the Company and the Bylaws of the Company.
 
COMMON STOCK
 
  Voting Rights - The holders of Class A Common Stock and Class B Common Stock
generally have identical rights except that holders of Class A Common Stock
are entitled to one vote per share while holders of Class B Common Stock are
entitled to ten votes per share on all matters to be voted on by stockholders.
The holders of Common Stock are not entitled to cumulative voting rights.
Generally, all matters to be voted on by stockholders must be approved by a
majority (or, in the case of election of directors, by a plurality) of the
votes entitled to be cast by all shares of Class A Common Stock and Class B
Common Stock present in person or represented by proxy, voting together as a
single class, subject to any voting rights granted to holders of any Preferred
Stock. In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock would be
entitled to share ratably in all assets remaining after payment of liabilities
subject to prior distribution rights and payment of any distributions owing to
holders of shares of
 
                                      11
<PAGE>
 
Preferred Stock then outstanding, if any. Holders of the shares of Common
Stock have no preemptive rights, and the shares of Common Stock are not
subject to further calls or assessment by the Company. There are no redemption
or sinking fund provisions applicable to the shares of Common Stock.
 
  Dividends - Holders of Class A Common Stock and Class B Common Stock will
share in an equal amount per share in any dividend declared by the Board of
Directors, subject to any preferential rights of any outstanding Preferred
Stock. Dividends consisting of shares of Class A Common Stock and Class B
Common Stock may be paid only as follows: (i) shares of Class A Common Stock
may be paid only to holders of Class A Common Stock and shares of Class B
Common Stock may be paid only to holders of Class B Common Stock and (ii)
shares shall be paid proportionally with respect to each outstanding share of
Class A Common Stock and Class B Common Stock.
 
  Conversion - Generally, one share of Class B Common Stock is convertible
into one share of Class A Common Stock prior to a tax-free spin-off (as
defined in the Internal Revenue Code of 1986, as amended): (a) at any time, at
the holder's option; (b) automatically, with respect to any shares retained by
BankAmerica or its subsidiaries after transfer of Class B Common Stock
representing more than a 50 percent economic interest in the then outstanding
shares of common stock in a single transaction to a person who is not an
affiliate of BankAmerica (Class B Transferee); (c) automatically, upon
transfer of a share to a person other than BankAmerica or a Class B Transferee
or its subsidiaries; (d) automatically, if shares owned by BankAmerica or a
Class B Transferee or its subsidiaries in the aggregate constitute less than
30 percent of the economic ownership of the shares of Class A and Class B
Common Stock combined. Shares transferred to BankAmerica stockholders or to
stockholders of a Class B Transferee in a tax-free spin-off do not
automatically convert upon the spin-off. However, after a tax-free spin-off,
Class B shares automatically convert into Class A shares on the fifth
anniversary of a tax-free spin-off unless counsel opines that the conversion
could adversely affect the ability to secure a tax-free ruling from the
Internal Revenue Service, or the Service has adopted a no-ruling policy and
the conversion could adversely affect the tax-free status of the distribution,
in which case stockholders must approve the conversion (unless counsel opines
that approval could adversely affect the tax-free status of the distribution).
In the event that counsel opines that stockholder approval of the conversion
could affect the tax-free status of the distribution, the Class B shares will
not convert to Class A shares.
 
PREFERRED STOCK
 
  The Board of Directors has the authority, without further action by
stockholders, to issue preferred stock in one or more series and to fix the
rights, designation, preferences, privileges, limitations and restrictions
thereof, including dividend rights, conversion rights, terms and rights of
redemption, liquidation preferences, and sinking fund terms (any or all of
which may be greater than the rights of the common stock). The Board of
Directors, without stockholder approval, can issue shares of preferred stock
with conversion, voting, and other rights which could adversely affect the
rights of the holders of shares of common stock.
 
                                      12
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,(1)
                                     -----------------------------------------
                                      1997    1996     1995     1994    1993
                                     ------- -------  -------  ------- -------
                                      (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                  <C>     <C>      <C>      <C>     <C>
OPERATING DATA:
Net revenue......................... $ 161.0 $ 138.8  $ 119.9  $ 106.2 $  88.9
                                     ------- -------  -------  ------- -------
Operating expense:
  Salaries and employee benefits....    34.7    27.9     24.1     21.6    19.0
  Data processing and
   communications...................    34.4    29.5     28.4     25.0    27.9
  General and administrative........    21.8    18.4     18.4     15.8    15.0
  Depreciation......................    10.6     9.1      6.6      4.6     3.7
  Employee stock exchange(2)........     --      2.4      --       --      --
  Occupancy.........................     3.0     2.3      2.4      2.7     2.3
  Amortization of intangibles.......      .8     1.1      1.2      1.3     1.5
                                     ------- -------  -------  ------- -------
   Total operating expense..........   105.3    90.7     81.1     71.0    69.4
                                     ------- -------  -------  ------- -------
Income from operations..............    55.7    48.1     38.8     35.2    19.5
Net interest income (expense).......     7.7    (1.5)    (0.8)     --      --
                                     ------- -------  -------  ------- -------
  Income before income taxes........    63.4    46.6     38.0     35.2    19.5
Provision for income taxes..........    26.0    19.2     15.7     14.5     8.0
                                     ------- -------  -------  ------- -------
    Net income...................... $  37.4 $  27.4  $  22.3  $  20.7 $  11.5
                                     ======= =======  =======  ======= =======
Diluted earnings per common share
 (3)................................ $   .77      NA       NA       NA      NA
                                     ======= =======  =======  ======= =======
Pro forma diluted earnings per
 common share (3)(4)................ $    NA $   .56  $   .46  $   .43 $   .25
                                     ======= =======  =======  ======= =======
Pro forma diluted earnings per
 common share, as adjusted(3)(5).... $    NA $   .69  $   .57  $   .51      NA
                                     ======= =======  =======  ======= =======
BALANCE SHEET DATA AT DECEMBER 31:
Total assets........................ $ 332.1 $ 318.3  $ 150.1  $ 125.9 $  90.1
Total liabilities...................    40.8    38.3     27.3     27.4    19.1
BAC's equity interest(6)............     N/A    27.9    122.8     98.5    71.0
Stockholders' equity................   291.3   252.1       NA       NA      NA
OTHER DATA:
Total transactions processed........   531.2   386.2    322.2    251.6   201.8
Total sales volume processed........ $33,900 $26,430  $21,241  $16,979 $14,503
</TABLE>
--------
(1) All data presented for the years ended December 31, 1997, 1996, 1995 and
    1994 include the historical results of the Asia Acquisitions. The
    acquisition of these entities has been accounted for as a reorganization
    of entities under common control. Prior to January 1, 1994, the Asian
    operations were fully integrated with the operations of BankAmerica in
    each of the respective countries. Certain amounts have been reclassified
    to conform with the current year presentation.
(2) On December 31, 1996 certain employees of the Company elected to exchange
    their employee stock options and restricted stock from BAC for options and
    restricted stock of the Company. This employee stock exchange resulted in
    a one-time expense of $2.4 million (see Note 9 of the Notes to the
    Consolidated Financial Statements).
(3) The earnings per common share amount has not been presented because it is
    the same as the diluted earnings per common share amount.
(4) Pro forma diluted earnings per common share for all periods presented has
    been calculated as if the Offerings of Class A Common Stock had been
    completed on January 1, 1993, and 48.5 million shares (32.4 million shares
    of Class B Common Stock and 16.1 million shares of Class A Common Stock)
    had been outstanding for all periods presented.
(5) Pro forma earnings per share, as adjusted, assumes that the proceeds from
    the Offerings were available from January 1, 1994 and were invested in
    short-term investments, and excludes the one-time expense related to the
    employee stock exchange ($2.4 million) and interest expense of $492,000
    from the 1996 results.
(6) BAC's equity interest represents cumulative historical net income of the
    Company adjusted for net cash transfers to and from BAC. On December 3,
    1996, BankAmerica exchanged its equity interest in the domestic operations
    of the Company for 30.2 million shares of Class B Common Stock. During the
    second and third quarters of 1997, BankAmerica exchanged its equity
    interest in certain Asian operations of the Company for 2.2 million shares
    of Class B Common Stock.
 
                                      13
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
OVERVIEW
 
  BA Merchant Services, Inc. (the Company) was organized in October 1996 with
the transfer of the domestic merchant card processing businesses of
BankAmerica Corporation (BAC). In December 1996, the Company successfully
completed initial public offerings of Class A Common Stock which netted the
Company approximately $233 million, about half of which was used to
immediately repay short-term borrowings. The Company acquired BAC's Thailand,
the Philippines and Taiwan merchant processing businesses and its merchant
processing administrative office in Hong Kong (the Asia Acquisitions) during
the second and third quarters of 1997 in consideration for a total of 2.2
million shares of Class B Common Stock. The Company provided approximately
$33.0 million to fund the regulatory and working capital requirements of the
Asia Acquisitions.
 
  The above mentioned transfer of entities to the Company was accounted for as
a reorganization of entities under common control and, accordingly, the net
assets acquired were accounted for at historical cost in a manner similar to a
pooling of interests. The accompanying Consolidated Financial Statements have
been prepared as if the Company had operated as a separate entity and include
the combined historical results of operations, assets and liabilities of all
such entities for all periods presented.
 
  The year ended December 31, 1997 represents the Company's first full year as
a publicly held company. Although new to the public equities market, the
Company's experience in the merchant card processing business dates back
nearly forty years to the time when BankAmerica first introduced the
BankAmericard(R). According to published industry sources, the Company is the
fourth largest processor of merchant credit card transactions and one of the
largest processors of debit card transactions in the United States.
 
  During 1997, the Company reported net income of $37.4 million compared to
$27.4 million in 1996. Earnings per share for 1997 were $0.77, an increase of
12 percent over pro forma earnings per share, as adjusted, of $0.69 for 1996.
Financial results for 1997 were boosted by a 28 percent increase in sales
volume processed, reflecting the success of the Company's direct sales
efforts. The Company opened eight new sales offices and increased its sales
staff by 51 percent during 1997. Most of this expansion was on the East Coast
and in the Midwest where the Company previously had a small presence. During
the third quarter, the Company acquired a portfolio of approximately 4,200
merchant processing contracts from First Data Merchant Services, Inc. The
portfolio currently produces more than $850 million in credit card sales
volume on an annualized basis. Additionally, during the third quarter of 1997,
the Company successfully completed the conversion of certain merchants from
its old transaction processing system to the new HostLINK(TM) transaction
processing system. Currently, HostLINK(TM) processes approximately 200,000
transactions per day. During 1997, the Company also converted and integrated
all the merchants (approximately 20,000) on its Northwest merchant accounting
platform to its standard merchant accounting systems.
 
RESULTS OF OPERATIONS
 
 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
  Net Revenue - Net revenue of $161.0 million for 1997 increased 16 percent or
$22.2 million over 1996. This increase was primarily related to 1997 sales
volume processed of $33.9 billion, an increase of 28 percent or $7.5 billion
over 1996, and the result of the sales force expansion previously described.
The growth in credit card and debit card sales volume processed in 1997 over
1996 was 27 percent and 41 percent, respectively. The growth rate in net
revenue was lower than that for sales volume processed primarily as a result
of greater sales volume growth in lower spread business (debit card and high
sales volume merchants) and to a lesser degree, declining spreads in existing
business consistent with historical competitive trends in the merchant
processing industry.
 
                                      14
<PAGE>
 
  Operating Expense - Total operating expense for 1997 increased $14.6 million
or 16 percent over 1996. Excluding the cost of the non-recurring employee
stock exchange of $2.4 million in 1996, total operating expense for 1997
increased 19 percent over 1996. The increase was primarily attributable to
higher salaries and employee benefits, data processing and communications,
general and administrative and depreciation expense. Salaries and employee
benefits expense for 1997 increased $6.8 million or 24 percent over 1996
primarily as a result of a 32 percent increase in average employee headcount
over 1996. Approximately 47 percent of the total headcount increase was
attributable to the growth in sales and portfolio management personnel. Data
processing and communications expense in 1997 increased $5.0 million or 17
percent over 1996 principally due to increased third-party data processing
services related to growth in transaction volume. General and administrative
expense was $21.8 million in 1997, a $3.5 million or 19 percent increase over
1996. This increase was due to higher merchant supplies expense related to
increased transactions processed and increased administrative expense
associated with being an independent company. Depreciation expense in 1997
increased $1.4 million over 1996 as a result of the purchase of approximately
$19.5 million in equipment including $5.5 million for HostLINK(TM).
 
  During 1997, operating expense declined to $0.20 from $0.23 per debit and
credit card transaction. This decrease was attributable to: (1) greater
economies of scale; (2) lower processing costs for merchants converted from
the Company's previous transaction processing system to HostLINK(TM) as well
as the conversion of the Northwest merchant accounting platform; (3) the full
year cost savings impact of the favorable renegotiation of a third party
vendor arrangement and (4) the expansion of processing of On-Us debit card
transactions begun in 1996.
 
  Net Interest Income (Expense) - Net interest income for 1997 represented
interest income from short-term investments and interest received for merchant
account float from BAC ($9.0 million), net of interest expense paid to BAC on
amounts borrowed to fund the daily operating activities of Thailand, the
Philippines and Taiwan merchant processing businesses prior to the
acquisitions ($0.8 million) and costs associated with the revolving line of
credit ($0.4 million). Net interest expense for 1996 represented interest
expense paid to BAC on amounts borrowed to fund operating activities.
 
  Year 2000 Expenses - During 1997, the Company incurred approximately $0.3
million of operating expense (primarily temporary help) in connection with
making its merchant terminal software year 2000 compliant. The Company
estimates that the total cost over the three year period 1998-2000 to bring
other computer systems and software year 2000 compliant will not be material
to its results of operations in any one reporting period. The Company believes
that its plans for dealing with the year 2000 issue will result in timely and
adequate modifications of its systems and technology.
 
  Ultimately, the potential impact of the year 2000 issue will depend not only
on the corrective measures the Company undertakes, but also on the way in
which the year 2000 issue is addressed by businesses and other entities who
provide data to, or receive data from the Company, or whose financial
condition or operational capability is important to the Company as suppliers
or customers. Therefore, the Company is communicating with these parties to
ensure they are aware of the year 2000 issue, to learn how they are addressing
it, and to evaluate any likely impact on the Company. It is possible that if
all aspects of the year 2000 issues are not adequately resolved by these
parties, the Company's future business operations and, in turn, its financial
position and results of operations could be negatively impacted. However, at
this time, it is not possible to quantify the potential impact of such
situations.
 
 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
  Net Revenue - For the year ended December 31, 1996, net revenue was $138.8
million, up $18.8 million, or 16 percent, over 1995. This increase was
primarily attributable to a $5.2 billion increase in sales volume processed
during the same period. The increase in sales volume resulted primarily from
growth in the Company's merchant base reflecting its continued emphasis on
direct marketing and sales. Growth in credit card sales volume processed was
partially offset by a small decline in debit card sales volume, reflecting the
loss by the Interlink(R) debit card network of a major debit card issuer.
Furthermore, to offset interchange rate increases in
 
                                      15
<PAGE>
 
April 1996 and April 1995, the Company implemented a price increase in April
1996 which added approximately $1.5 million to net revenue during the year
ended December 31, 1996. This price increase was accomplished without any
material client attrition.
 
  Sales volume increased at a higher rate than net revenue as a result of a
continuing change in the composition of the Company's merchant base. Fees per
transaction paid to the Company by high-volume retailers in relation to sales
volume generally are lower than in the case of the Company's overall merchant
base.
 
  Operating Expense - Total operating expense was $90.7 million in 1996, an
increase of $9.6 million, or 12 percent, over 1995. Excluding the cost of the
non-recurring employee stock exchange of $2.4 million, total operating expense
increased $7.1 million, or 9 percent, over 1995. This increase was primarily
due to higher salaries and employee benefits, depreciation, and data
processing and communications expense. Salaries and employee benefits expense
increased $3.8 million over 1995, resulting primarily from the opening of the
Company's New York and Chicago sales and marketing offices. In addition, the
cost of employee benefits increased during 1996, reflecting changes in the
benefit formulas resulting from benefit plan amendments. Depreciation expense
increased $2.6 million over 1995, primarily related to terminals acquired to
support new merchant locations. Data processing and communications costs
increased $1.0 million, primarily as a result of higher authorization and
telecommunications expense, reflecting increased transaction volume.
 
  During 1996, operating expense declined to $0.23 from $0.25 per debit and
credit card transaction. This decline reflected greater economies of scale,
expense reduction resulting from the Company's in-house performance of certain
processing functions previously performed by third parties, and the favorable
renegotiation of a third-party vendor arrangement. In addition, the Company
began to realize cost savings as a result of the expansion of its processing
of On-Us debit card transactions.
 
  Net Interest Income (Expense) - Net interest expense for both 1996 and 1995
represented interest expense paid to BAC on amounts borrowed to fund operating
activities.
 
BALANCE SHEET REVIEW
 
  The Company's assets totaled $332.1 million as of December 31, 1997, up
$13.8 million from December 31, 1996. The balances in cash and cash
equivalents, short-term investments, drafts in transit and merchants payable
can fluctuate greatly depending on the day of the week in which the reporting
period ends. The timing of payments received from credit card associations and
debit card networks, remittances to merchants and weekend processing influence
these balances. While the individual balances in these accounts at December
31, 1997 were significantly different from the balances at December 31, 1996,
the net total of these combined accounts was $195.8 million at December 31,
1997, versus $238.6 million at December 31, 1996.
 
  The $28.2 million increase in accounts receivable since December 31, 1996
was primarily due to higher year over year sales volume processed and the
integration of the Company's Northwest operations into its standard merchant
accounting system, shifting the collection of the Northwest operations's
discount fees from the last day of the month to the first few days of the next
month. Other assets increased $21.5 million over the December 31, 1996 amount
primarily related to the previously discussed acquisition of the portfolio of
merchant processing contracts. BAC's equity interest of $27.9 million at the
beginning of 1997 represented its interest in the net assets of the Asian
merchant processing businesses. During the second and third quarters of 1997,
the Company provided approximately $33.0 million to fund the regulatory and
working capital requirements of the Asia Acquisitions.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash flow generated from operations provides the Company with a significant
source of liquidity to meet its needs. During 1997, working capital decreased
by $18.9 million to $238.9 million at December 31, 1997. Average cash and cash
equivalent and short-term investment balances were $157.4 million during 1997.
The Company anticipates utilizing these balances for funding the daily cash
needs of the business as well as for acquisitions, strategic technology
investments and the funding of research and product development. Additionally,
the Company has a $100 million revolving line of credit with BankAmerica.
 
 
                                      16
<PAGE>
 
OPERATING STRATEGY
 
  While past performance does not guarantee future results, the Company is
committed to continue to sustain quality earnings growth. The Company's
strategy is to increase net revenue by expanding its direct sales force,
enhancing its product offerings and pursuing business acquisitions that would
have an accretive impact to earnings. The Company also expects to leverage its
technology and infrastructure to increase its operating efficiency.
 
  Net Revenue Growth - The Company has invested in its sales infrastructure
over the past two years, opening 12 new sales offices and increasing the
number of sales professionals by approximately 114%. Most of this growth, and
the corresponding growth in sales volume processed and net revenue, has come
from outside of BankAmerica's retail markets. The Company plans to continue
this expansion into additional geographic markets. The Company also expects to
grow its direct sales force in existing markets.
 
  The Company believes it can further enhance net revenue growth through
increased relationship building with its merchants by providing customized
product solutions, cross selling additional products and identifying multi-
product offerings through BankAmerica such as business checking, loans and
other banking products.
 
  Leverage Technology - The merchant processing industry in general requires
the use of advanced computer hardware and software technology and has been
characterized by the development of new products and services to meet
increasingly complex and rapidly-changing merchant and regulatory
requirements. As a result, the payment processing industry has consolidated
significantly in the past few years and the Company believes this trend will
continue as technological demands on processors increase.
 
  The Company's investment in client-server open architecture technology has
allowed it to provide more flexible and efficient business solutions for its
merchants. This technology entails lower equipment costs and will provide the
Company with greater ability to reduce and control costs. The Company
installed HostLINK(TM), its new transaction processing system, in the second
quarter of 1997. HostLINK(TM) will allow the Company to reduce its dependence
on third party processors. This will also contribute to the Company's efforts
to reduce operating expense per debit and credit card transaction. The Company
expects to further leverage its investment in HostLINK(TM) by adding the
ability to process restaurant and hotel merchant transactions by the third
quarter of 1998.
 
  Acquisitions - The Company completed one acquisition during 1997 and
continues to consider acquisition opportunities as a supplement to its
internal growth plans. The Company will target acquisitions that enhance
product or technology or add to its customer base.
 
FORWARD-LOOKING STATEMENTS
 
  From time to time, the Company makes forward-looking statements. Forward-
looking statements include financial projections, statements of plans and
objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
 
  The Company may include forward-looking statements in its periodic reports
to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, annual
report and letter to stockholders, in its proxy statement, in other written
materials, and in statements made by senior management to analysts,
institutional investors, representatives of the media, and others.
 
  By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections, and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors.
Among the uncertainties to which the Company's forward-looking statements are
subject are credit risk, liquidity risk, and capital risk. In addition,
various events can create uncertainties to which the Company's forward-looking
statements are subject. These events include, but are not limited to, new
product initiatives; technological changes; the effects of competition or of
legislative
 
                                      17
<PAGE>
 
or regulatory developments; expansion into new markets; changes in fiscal
monetary and tax policies of the United States and other countries in which
the Company does business; political or social developments, including war,
civil unrest or terrorist activity; and natural disasters (including
earthquakes). When relying on forward-looking statements to make decisions
with respect to the Company, investors and others should carefully consider
these and other uncertainties and events, whether or not the statements are
described as forward-looking.
 
  Forward-looking statements made by the Company are intended to apply only at
the time they are made, unless explicitly stated to the contrary. Moreover,
whether or not stated in connection with a forward-looking statement, the
Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were to update or correct a forward-looking
statement, investors and others should not conclude that the Company will make
additional updates or corrections thereafter.
 
                                      18
<PAGE>
 
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
BA Merchant Services, Inc.
 
  We have audited the accompanying consolidated balance sheets of BA Merchant
Services, Inc. (as successor to the merchant processing businesses of
BankAmerica Corporation as described in Note 1) as of December 31, 1997 and
1996 and the related consolidated statements of operations, changes in equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of BA Merchant
Services, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
  We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of BA Merchant Services, Inc. at December 31, 1997 and 1996 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
                                             /s/ Ernst & Young LLP

 
San Francisco, California
February 3, 1998
 
                                      19
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                           CONSOLIDATED BALANCE SHEET
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                               -----------------
                                                                 1997     1996
                                                               -------- --------
<S>                                                            <C>      <C>
ASSETS
Current assets:
  Cash and cash equivalents..................................  $ 29,426 $138,413
  Short-term investments.....................................    64,018      --
  Drafts in transit..........................................   110,445  116,992
  Accounts receivable........................................    63,461   35,282
  Other current assets.......................................    11,533    5,038
                                                               -------- --------
    Total current assets.....................................   278,883  295,725
Property and equipment, net..................................    27,762   18,567
Other assets.................................................    25,422    3,969
                                                               -------- --------
    Total assets.............................................  $332,067 $318,261
                                                               ======== ========
LIABILITIES AND EQUITY
Current liabilities:
  Accounts payable...........................................  $     32 $    415
  Merchants payable..........................................     8,058   16,823
  Accrued liabilities........................................     6,050    4,477
  Accrued credit card association and interchange fees.......     9,192    6,367
  Income taxes payable.......................................     3,459    3,306
  Other current liabilities..................................    13,207    6,596
                                                               -------- --------
    Total current liabilities................................    39,998   37,984
Other liabilities............................................       816      269
                                                               -------- --------
    Total liabilities........................................    40,814   38,253
                                                               -------- --------
BAC's equity interest in Asia merchant processing
 operations..................................................       --    27,883
                                                               -------- --------
Stockholders' equity:
Class A Common Stock, par value $0.01; authorized 200,000,000
 shares; issued and outstanding 16,253,126 shares at December
 31, 1997 and 16,236,092 shares at December 31, 1996.........       162      162
Class B Common Stock, par value $0.01; authorized 50,000,000
 shares; issued and outstanding 32,400,000 shares at December
 31, 1997 and 30,200,000 shares at December 31, 1996.........       324      302
Additional paid-in capital...................................   252,479  249,622
Retained earnings............................................    38,280    2,039
Accumulated foreign currency translation adjustments.........         8      --
                                                               -------- --------
    Total stockholders' equity...............................   291,253  252,125
                                                               -------- --------
    Total liabilities and equity.............................  $332,067 $318,261
                                                               ======== ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       20
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    ---------------------------
                                                      1997     1996      1995
                                                    -------- --------  --------
<S>                                                 <C>      <C>       <C>
Net revenue........................................ $160,975 $138,776  $119,958
                                                    -------- --------  --------
Operating expense:
  Salaries and employee benefits...................   34,657   27,875    24,112
  Data processing and communications...............   34,438   29,447    28,412
  General and administrative.......................   21,817   18,351    18,416
  Depreciation.....................................   10,592    9,147     6,593
  Employee stock exchange..........................       --    2,431        --
  Occupancy........................................    2,984    2,332     2,388
  Amortization of intangibles......................      801    1,118     1,201
                                                    -------- --------  --------
    Total operating expense........................  105,289   90,701    81,122
                                                    -------- --------  --------
Income from operations.............................   55,686   48,075    38,836
Net interest income (expense)......................    7,762   (1,458)     (811)
                                                    -------- --------  --------
    Income before income taxes.....................   63,448   46,617    38,025
Provision for income taxes.........................   26,020   19,252    15,731
                                                    -------- --------  --------
    Net income..................................... $ 37,428 $ 27,365  $ 22,294
                                                    ======== ========  ========
Earnings per common share..........................     $.77      N/A       N/A
Diluted earnings per common share..................     $.77      N/A       N/A
</TABLE>
 
 
                See Notes to Consolidated Financial Statements.
 
                                       21
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                               -------------------------------
                                                 1997       1996       1995
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................  $  37,428  $  27,365  $  22,294
Adjustments to net income to arrive at cash
 provided by operating activities:
  Depreciation...............................     10,592      9,147      6,593
  Amortization of intangibles................        801      1,118      1,201
  Benefit from deferred income taxes.........     (2,169)    (1,297)      (268)
  Amortization of restricted stock...........        589         38        --
  Amortization of loan fees..................        310        --         --
  Employee stock exchange....................        --       2,431        --
Changes in operating assets and liabilities
 excluding the effects of the transfer of net
 assets from BAC:
   Decrease (increase) in drafts in transit..      6,547    (12,124)   (21,087)
   Increase in accounts receivable...........    (28,179)   (10,717)    (3,972)
   Increase in other current assets..........     (6,495)    (1,387)       --
   (Decrease) increase in accounts payable...       (383)    (1,468)     2,018
   Increase in current income taxes payable..      1,741      3,306        --
   (Decrease) increase in merchants payable..     (8,765)     2,853      1,420
   Increase (decrease) in accrued
    liabilities..............................      1,573        458       (570)
   Increase in accrued credit card
    association and interchange fees.........      2,825      2,483        160
   Other, net................................      2,631      1,256       (858)
                                               ---------  ---------  ---------
     Net cash provided by operating
      activities.............................     19,046     23,462      6,931
                                               ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...........    (19,537)   (12,807)    (9,539)
Purchase of short-term investments...........   (110,620)       --         --
Maturities of short-term investments.........     46,602        --         --
Acquisition of portfolio of merchant
 processing contracts........................    (17,706)       --         --
                                               ---------  ---------  ---------
     Net cash used for investing activities..   (101,261)   (12,807)    (9,539)
                                               ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit.......        --     174,500        --
Repayments on revolving line of credit.......        --    (174,500)       --
BAC's change in funding......................    (26,586)  (105,529)     2,038
Increase in underwriting expense.............       (194)       --         --
Net proceeds from initial public offering....        --     232,882        --
                                               ---------  ---------  ---------
     Net cash provided by (used for)
      financing activities...................    (26,780)   127,353      2,038
                                               ---------  ---------  ---------
EXCHANGE RATE EFFECT ON CASH:                          8        --         --
                                               ---------  ---------  ---------
(Decrease) increase in cash and cash
 equivalents.................................   (108,987)   138,008       (570)
Cash and cash equivalents at beginning of
 year........................................    138,413        405        975
                                               ---------  ---------  ---------
Cash and cash equivalents at end of year.....  $  29,426  $ 138,413  $     405
                                               =========  =========  =========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       22
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                             CUMULATIVE
                                                               FOREIGN
                           COMMON STOCK  ADDITIONAL           CURRENCY     BAC'S
                          --------------  PAID-IN   RETAINED TRANSLATION  EQUITY
                          SHARES AMOUNTS  CAPITAL   EARNINGS ADJUSTMENTS INTEREST
                          ------ ------- ---------- -------- ----------- ---------
<S>                       <C>    <C>     <C>        <C>      <C>         <C>
BALANCE AT DECEMBER 31,
 1994...................     --   $ --    $    --   $   --      $ --     $  98,489
Net income..............     --     --         --       --        --        22,294
BAC's change in fund-
 ing....................     --     --         --       --        --         2,038
                          ------  -----   --------  -------     -----    ---------
BALANCE AT DECEMBER 31,
 1995...................     --     --         --       --        --       122,821

CHANGES IN EQUITY FOR
 THE PERIOD ENDED
 DECEMBER 3, 1996:
Net income..............     --     --         --       --        --        25,326
BAC's change in fund-
 ing....................     --     --         --       --        --      (105,529)

EFFECT OF REORGANIZA-
 TION:
Transfer of net assets
 from BAC in exchange
 for Class B Common
 Stock..................  30,200    302     14,433      --        --       (14,735)
Employee stock exchange
 for Class A Common
 Stock..................       2    --       2,431      --        --           --

CHANGES IN EQUITY FOR
 THE PERIOD DECEMBER 4,
 1996 THROUGH DECEMBER
 31, 1996:
Net income..............     --     --         --     2,039       --           --
Restricted stock issu-
 ances of Class A Common
 Stock..................     134      1      2,075      --        --           --
Unvested portion of
 restricted stock, net
 of amortization of
 $37....................     --     --      (2,038)     --        --           --
Net proceeds from the
 initial public offering
 of Class A Common
 Stock..................  16,100    161    232,721      --        --           --
                          ------  -----   --------  -------     -----    ---------
BALANCE AT DECEMBER 31,
 1996...................  46,436    464    249,622    2,039       --        27,883

Net income..............     --     --         --    36,241       --         1,187
BAC's change in funding
 related to Asia mer-
 chant processing opera-
 tions..................     --     --         --       --        --       (26,586)
Restricted stock issu-
 ances of Class A Common
 Stock..................      17    --         307      --        --           --
Unvested portion of
 restricted stock, net
 of amortization of
 $589...................     --     --         282      --        --           --
Foreign currency trans-
 lation adjustment......     --     --         --       --          8          --
Transfer of net assets
 from BAC in exchange
 for Class B Common
 Stock..................   2,200     22      2,462      --        --        (2,484)
Increase in underwriting
 expense................     --     --        (194)     --        --           --
                          ------  -----   --------  -------     -----    ---------
BALANCE AT DECEMBER 31,
 1997...................  48,653  $ 486   $252,479  $38,280     $   8    $     --
                          ======  =====   ========  =======     =====    =========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       23
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
  Description of Business - BA Merchant Services, Inc. (the Company) provides
an array of payment processing and related information products and services
to merchants throughout the United States and certain Asian countries who
accept credit, charge and debit cards as payment for goods and services. The
Company is the fourth largest processor of merchant credit card transactions
and one of the largest processors of debit card transactions in the United
States.
 
  The Company was incorporated on October 11, 1996 and commenced operations
December 4, 1996, upon the transfer by Bank of America National Trust &
Savings Association (the Bank) and Bank of America NW, National Association
(BANW, formerly Seattle-First National Bank) of their respective United States
merchant processing businesses to BAMS in consideration for 30.2 million
shares of Class B Common Stock (the Reorganization). Effective January 1,
1997, BANW was merged into the Bank. The Bank is a wholly owned subsidiary of
BankAmerica Corporation (BAC). Reference to "BAC" in the Consolidated
Financial Statements and notes thereto shall be deemed to be references to
BankAmerica Corporation and its subsidiaries and affiliates, including the
Bank and, prior to January 1, 1997, BANW.
 
  During December 1996, the Company issued 16.1 million shares of Class A
Common Stock in underwritten initial public offerings (the Offerings) which
generated gross cash proceeds of $249.6 million less the underwriters'
discount and expense totaling $16.7 million, resulting in net cash proceeds of
$232.9 million. In late December 1996, $126.3 million of the net proceeds were
used to pay down the outstanding balance of a revolving line of credit with an
affiliate. The borrowing had been used to finance operations between the
Reorganization and the Offerings.
 
  On June 2, 1997, the Company acquired BAC's merchant processing business in
Thailand (net assets of approximately $91,000) in consideration for 150,000
shares of Class B Common Stock. On July 1, 1997, the Company acquired BAC's
merchant processing business in the Philippines (net assets of approximately
$153,000) in consideration for 550,000 shares of Class B Common Stock. On
September 30, 1997 the Company acquired BAC's merchant processing business in
Taiwan and merchant processing administrative office in Hong Kong (net assets
of approximately $2.2 million) in consideration for 1,500,000 shares of Class
B Common Stock. The acquisition of these entities will be collectively
referred to as the "Asia Acquisitions". Approximately $33.0 million of the
proceeds from the Offerings were used to fund the regulatory and working
capital requirements of the Asia Acquisitions. With the issuance by the
Company of additional shares of Class B Common Stock to BAC in connection with
the Asia Acquisitions, BAC's financial interest in BAMS increased from 65.0
percent, to 66.6 percent.
 
  Basis of Presentation - BAC's transfer to the Company of certain assets and
liabilities of its United States and certain Asian merchant processing
businesses (net assets) was accounted for as a reorganization of entities
under common control and, accordingly, the transfer of these net assets was
accounted for at historical cost in a manner similar to a pooling of
interests. Included in the transfer of net assets was Seafirst Merchant
Services, Inc., a wholly owned subsidiary of BANW. The accompanying financial
statements have been prepared as if the Company had operated as a separate
entity for all periods presented. The financial statements include the
combined historical results of operations, assets and liabilities of the U.S.
merchant processing businesses of BAC for all periods prior to the
Reorganization. The financial statements also include the combined historical
results of operations, assets and liabilities of BAC's merchant processing
businesses in Thailand, the Philippines, Taiwan and the merchant processing
administrative office in Hong Kong for all periods prior to the Asia
Acquisitions. For simplicity of presentation, these financial statements are
referred to herein as Consolidated Financial Statements.
 
 
                                      24
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Prior to the respective dates of the Asia Acquisitions and the
Reorganization, changes in BAC's equity interest represented net income of the
Company adjusted for net cash transfers to and from BAC. Additionally, prior
to these dates, the Consolidated Financial Statements include allocations of
certain assets (primarily property and equipment) and expenses relating to the
merchant processing businesses transferred from BAC. Management believes these
allocations are reasonable.
 
  Certain of the pre-Asia Acquisition and pre-Reorganization expenses in the
Consolidated Financial Statements are not necessarily indicative of the costs
that would have been incurred if the Company had performed these functions as
a stand-alone entity. Therefore, prior to the respective dates of the Asia
Acquisitions and the Reorganization, the Consolidated Financial Statements may
not necessarily reflect the Company's consolidated results of operations,
changes in equity and cash flows as they would have been had the Company been
a separate, stand-alone entity during the periods presented. Subsequent to
these dates, the Company performed these functions using its own resources and
purchased services (from BAC and other companies) and was responsible for the
cost and expenses associated with the management of a stand-alone entity.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation - The consolidated financial statements of the
Company are prepared in conformity with generally accepted accounting
principles and include the accounts of BA Merchant Services, Inc. and its
wholly owned subsidiary, Seafirst Merchant Services, Inc. (SMSI). SMSI was
dissolved on December 29, 1997. Significant intercompany balances and
transactions have been eliminated. Certain amounts in prior periods have been
reclassified to conform to the presentation in the current year.
 
  Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The amounts reflected on the balance sheet at December 31, 1997
and 1996 are held on deposit or invested through BAC.
 
  Short-term Investments - The Company's short-term investments include U.S.
Treasury and other government agency securities, certificates of deposit and
money market funds with remaining maturities ranging from approximately one
week to eleven months at December 31, 1997. Securities held by the Company are
considered available-for-sale securities and are reported at their fair
values, with unrealized gains and losses included on a net-of-tax basis as a
separate component of stockholders' equity. Dividend and interest income,
including amortization of premiums and accretion of discounts are included in
interest income. Realized gains and losses from sales of available-for-sale
securities are computed using the specific identification method. Any decision
to sell available-for-sale securities is based on various factors, including
movements in interest rates, changes in the maturity mix of assets and
liabilities, liquidity demands or other similar factors.
 
  Drafts in Transit - Drafts in transit represent those transactions for which
merchants have been paid by the Company, but for which payment has not yet
been received from the credit card associations or debit card networks.
Payment from those entities is generally received within one to three days.
 
  Accounts Receivable - Accounts receivable primarily represents fee income
earned but not collected under processing agreements with merchants, agent
banks, and independent sales organizations.
 
  Property and Equipment - Property and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed on a straight-line basis
over the estimated useful lives of the related assets which range from two to
eight years for furniture and equipment and from three to five years for
point-of-sale terminals.
 
 
                                      25
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Identifiable Intangible Assets - Included in other assets at December 31,
1997 are unamortized identifiable intangible assets of $17.7 million relating
primarily to the September 1997 acquisition cost of a portfolio of
approximately 4,200 merchant processing contracts. The assets are being
amortized on a straight-line basis over a ten year period corresponding to the
estimated period of benefit related to the merchant base acquired. Included in
other assets at December 31, 1996 are unamortized identifiable intangible
assets of $0.4 million related to customer bases acquired and the buyout of a
non-competition agreement that occurred in 1992. These assets were amortized
on a straight-line basis over a five year period corresponding to the original
life of the buyout agreement and the estimated period of benefit related to
the customer bases acquired.
 
  Merchants Payable - Merchants payable represents those transactions for
which the Company has been paid, but for which amounts have not yet been
remitted to merchants.
 
  Net Revenue - Net revenue primarily includes fees earned from merchants
related to the processing of transactions (including merchant discount fees),
offset by interchange fees payable to credit card issuers and fees payable to
credit card associations and debit card networks, and is recorded as services
are performed. Net revenue also includes fees earned from the deployment of
point of sale terminals.
 
  Derivative Financial Instruments - The Company uses foreign exchange forward
contracts in the management of its foreign currency exposure for its Asian
operations. Foreign exchange contracts are agreements to exchange the currency
of one country for the currency of another at an agreed-upon price on an
agreed-upon settlement date. To qualify for hedge accounting, the contract
must reduce risk at the level of the specific transaction, with effectiveness
expected at the inception of the hedge and on an ongoing basis. Hedge
effectiveness is assessed by matching the basis and terms of the hedging
instruments with those of the underlying exposure. If a high level of
correlation is not being achieved, hedge accounting will be terminated.
Discounts and premiums (the difference between the current spot exchange rate
and the forward exchange rate at inception of the contract) are amortized over
the contract lives using the straight-line method and realized and unrealized
gains and losses (including those from open, matured, and terminated
contracts), net of related taxes, are included in the cumulative translation
adjustment account in the Consolidated Statement of Changes in Equity (the
deferral accounting method). The related amounts due to or from counterparties
are included in other liabilities or other assets. Realized and unrealized
gains and losses on instruments that hedge capital exposure are recorded in
stockholders' equity as foreign currency translation adjustments.
 
  Foreign Currency Translation - Assets, liabilities and operations of foreign
offices are recorded based on the functional currency of each branch, which is
the local currency. Assets, liabilities and operations are translated, for
consolidation purposes, at current exchange rates from one local currency to
the reporting currency, the U.S. dollar. The resulting gains or losses are
reported as a component of retained earnings within stockholders' equity on a
net-of-tax basis.
 
  Provision for Income Taxes - The liability method of accounting is used for
income taxes. Under the liability method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of existing
differences between financial reporting and tax reporting bases of assets and
liabilities, as well as for operating losses and tax credit carryforwards,
using enacted tax laws and rates. Deferred tax expense represents the net
change in the deferred tax asset or liability balance during the year. This
amount, together with income taxes currently payable or refundable for the
current year, represents the total income tax expense for the year.
 
  Prior to December 20, 1996, the Company was included in the consolidated
federal return, and in certain consolidated and combined state and local
returns, filed by BAC. The Company settled its consolidated and combined tax
liabilities by making payments to BAC. Since December 20, 1996, the Company
has filed separate federal and certain separate state and local tax returns
according to the taxable activity of its operations. As a result, the
Company's federal and separate state and local income tax provisions and
related tax liabilities were
 
                                      26
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
calculated on a stand-alone basis. In addition, the Company continues to be
included in certain consolidated and combined state and local tax returns
filed by BAC. In accordance with the Company's tax allocation agreement with
BAC, the consolidated and combined state and local income tax provision and
related tax liabilities and assets for the Company will be determined as
though the Company had filed separate tax returns. If the Company is unable to
fully recognize all of its state and local deferred tax assets on a separate
return basis, the Company will recognize additional deferred tax assets to the
extent they are expected to be realized in the consolidated and combined state
and local returns. Tax payments related to excess losses or tax credits will
be received by the Company if these deductions and credits are utilized in the
consolidated and combined state and local returns.
 
  Accounting for Stock-Based Compensation - Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation" provides an
alternative to Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees". The Company accounts for its stock-based
compensation plans in accordance with APB Opinion No. 25, and related
interpretations. Accordingly, if the exercise price of the Company's employee
stock options equals or exceeds the fair market value of the underlying stock
on the date of grant, no compensation expense is recognized by the Company. If
the exercise price of an award is less than the fair market value of the
underlying stock at the date of grant, the Company recognizes the difference
as compensation expense over the vesting period of the award. The Company also
provides the required pro forma net income and pro forma earnings per share
disclosures as if the fair value measurement provisions of SFAS No. 123 had
been adopted. See Note 9 of the Notes to Consolidated Financial Statements for
additional information.
 
  Earnings per Common Share - Effective December 15, 1997, the Company adopted
SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes new requirements
for computing and presenting earnings per share. Under the new requirements,
the method previously used to compute earnings per share is changed and all
prior periods presented must be restated to conform to the new requirements.
The new requirements eliminate primary earnings per share and earnings per
common share, assuming full dilution, and require the presentation of earnings
per common share and diluted earnings per common share. As a result, under the
new requirements, earnings per common share excludes any dilutive effects of
stock options and warrants. Also, the dilutive effect of stock options and
warrants used to compute diluted earnings per common share is based on the
average market price of the Company's common stock for the period.
 
  Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
drafts in transit and accounts receivable.
 
  Fair Value of Financial Instruments - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Balance Sheet. Considerable judgement is required in interpreting market data
to develop estimates of fair value. Therefore, for substantially all financial
instruments, the fair value estimates presented herein are not necessarily
indicative of the amounts the Company could have realized in a sales
transaction at either December 31, 1997 or 1996. The use of different markets
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
 
  The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, short-term investments, receivables and obligations
under accounts payable and other short-term liabilities, approximate their
fair value.
 
  Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Stands Board (FASB) issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires companies to report and display comprehensive
income and its components (revenues, expenses, gains, and losses) in the
financial statements. The adoption of SFAS No. 130,
 
                                      27
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
which will be implemented in the first quarter of 1998, will result in a
change in financial statement presentation and will not have an impact on the
Company's financial position or results of operations.
 
  Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which is effective for financial
statements for periods beginning after December 15, 1997 and need not be
applied to interim financial statements in the initial year of its
application. SFAS No. 131 establishes standards for a more comprehensive
disclosure about an enterprise's operating segments. The Company plans to
adopt SFAS No. 131 in the fourth quarter of 1998. The adoption of SFAS No. 131
applies solely to disclosures and will not have an impact on the Company's
financial position or results of operations.
 
  Use of Estimates in the Preparation of Financial Statements - The
preparation of the consolidated financial statements of the Company requires
management to make estimates and assumptions that affect reported amounts.
These estimates are based on information available as of the date of the
financial statements. Therefore, actual results could differ from those
estimates.
 
3. MERCHANT DEPOSITS
 
  Merchant deposits are restricted deposit accounts held at the Bank that may
be used by the Company to satisfy chargebacks and other disputes. When a
credit card is used to initiate a transaction which is disputed by the
cardholder, it is the responsibility of the card-accepting processor to see
that the merchant resolves the dispute. If the merchant is unable or unwilling
to do so, the processor may have to refund to the cardholder the purchase
price of the disputed transaction. As protection against such liability, the
Company may require certain merchants to maintain restricted deposit accounts
in which the Company has a security interest. Because these deposits are legal
liabilities of the respective Bank branches, such deposits do not appear on
the balance sheet of the Company. At December 31, 1997, merchant deposits were
approximately $6.7 million.
 
4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
  During 1996, the Company exchanged 30.2 million shares of Class B Common
Stock for the Bank's interest in certain net assets of its United States
merchant processing operations. In addition, the Company issued 134,000 shares
of restricted stock to management personnel. During 1997, the Company
exchanged 2.2 million shares of Class B Common Stock for the Bank's interest
in specific net assets of certain of its Asian merchant processing operations.
Additionally, during 1997 the Company issued 17,000 shares of restricted stock
to management personnel.
 
  During the years ended December 31, 1997, 1996 and 1995, the Company made
net income tax payments to BAC of $3.9 million, $15.9 million, and $14.7
million, respectively. During the years ended December 31, 1997, 1996 and
1995, the Company made additional income tax payments of $22.5 million, $1.3
million and $1.3 million, respectively, directly to various taxing
authorities. Cash payments for interest were approximately $0.8 million, $1.5
million, and $0.8 million for the years ended December 31, 1997, 1996 and
1995, respectively.
 
                                      28
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
5. PROPERTY AND EQUIPMENT
 
  The following is a summary of property and equipment as of December 31, 1997
and 1996:
 
<TABLE>
<CAPTION>
                                                               1997      1996
                                                             --------  --------
   (AMOUNTS IN THOUSANDS)
   <S>                                                       <C>       <C>
   Furniture and equipment.................................  $ 12,373  $  7,292
   Payment processing terminals............................    56,044    43,170
                                                             --------  --------
                                                               68,417    50,462
   Less: Accumulated depreciation..........................   (40,655)  (31,895)
                                                             --------  --------
                                                             $ 27,762  $ 18,567
                                                             ========  ========
</TABLE>
 
6. OTHER CURRENT LIABILITIES
 
  The following is a summary of other current liabilities as of December 31,
1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                  1997    1996
                                                                 ------- ------
   (AMOUNTS IN THOUSANDS)
   <S>                                                           <C>     <C>
   Merchant settlement liabilities.............................. $10,070 $1,467
   Payable to affiliates........................................   2,681  3,787
   Other........................................................     456  1,342
                                                                 ------- ------
                                                                 $13,207 $6,596
                                                                 ======= ======
</TABLE>
 
7. REVOLVING LINE OF CREDIT
 
  During 1997, the Company had a $75 million revolving line of credit with
Bank of America Texas, N.A. (an affiliate) that expired on December 31, 1997.
The Company currently has a $100 million revolving line of credit facility
(inclusive of overdraft facilities) established with the Bank that bears
interest based on various optional rates at the Company's election, including
the Bank's reference rate, or LIBOR plus 50 basis points, and includes a
commitment fee of 0.125% on the unused portion of the line of credit. Interest
and any commitment fees are payable quarterly. The revolving line of credit
expires on December 31, 1998.
 
8. INCOME TAXES
 
  The significant components of the provision for income taxes were as
follows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                      -------------------------
                                                       1997     1996     1995
                                                      -------  -------  -------
   (DOLLAR AMOUNTS IN THOUSANDS)
   <S>                                                <C>      <C>      <C>
   Current:
   Federal........................................... $21,411  $14,515  $11,058
   State and local...................................   5,869    4,691    3,678
   Foreign...........................................     909    1,343    1,263
                                                      -------  -------  -------
                                                       28,189   20,549   15,999
                                                      -------  -------  -------
   Deferred:
   Federal...........................................  (2,026)  (1,065)    (240)
   State and local...................................    (143)    (232)     (28)
                                                      -------  -------  -------
                                                       (2,169)  (1,297)    (268)
                                                      -------  -------  -------
     Total........................................... $26,020  $19,252  $15,731
                                                      =======  =======  =======
   Effective tax rate................................    41.0%    41.3%    41.4%
                                                      =======  =======  =======
</TABLE>
 
 
                                      29
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The Company's provision for income taxes differs from amounts computed by
applying the federal statutory tax rate of 35% primarily due to state income
taxes.
 
  The significant components of the Company's deferred income tax assets and
liabilities are shown below:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  -------------
                                                                   1997   1996
                                                                  ------ ------
   (AMOUNTS IN THOUSANDS)
   <S>                                                            <C>    <C>
   Deferred income tax assets:
   Accrued expenses.............................................  $2,075 $2,183
   State taxes..................................................   1,584  1,338
   Identifiable intangible assets...............................     167    --
                                                                  ------ ------
     Total deferred income tax assets...........................   3,826  3,521
   Deferred income tax liabilities:
   Identifiable intangible assets...............................     --    (180)
                                                                  ------ ------
   Net deferred income tax assets...............................  $3,826 $3,341
                                                                  ====== ======
</TABLE>
 
  Management believes that the Company will fully realize its total deferred
income tax assets based upon its total deferred income tax liabilities and its
current level of operating income. Accordingly, no valuation allowance was
established for any reporting period presented.
 
9. EMPLOYEE BENEFIT PLANS
 
  The Company participates in defined benefit pension plans, defined
contribution plans, welfare benefit plans, and post-retirement and post-
employment plans sponsored by BAC which cover substantially all salaried
employees of the Company. The Company receives a monthly charge from BAC for
its share of pension costs in an amount equivalent to the employer expense of
the employee benefit plans, health and dental insurance plans, workers'
compensation insurance, and other compensation-related expenses for its
employees participating in the plans. Employee benefits costs incurred by the
Company are calculated by applying a benefit factor percentage, as determined
by BAC, against employee base salaries for the defined benefit pension plan
and defined contribution plans and a per employee charge for welfare benefits.
For the years ended December 31, 1997, 1996, and 1995, the Company incurred a
total expense of $4.4 million, $4.1 million, and $3.0 million, respectively,
for its share of retirement and welfare plan expenses.
 
  Defined Benefit Plans - Eligible salaried U.S. employees of the Company are
covered under the BankAmerica Pension Plan (the Pension Plan), which is a
defined benefit cash balance plan. Prior to January 1, 1996, certain Company
employees were covered by the Seafirst Corporation Retirement Plan (the
Seafirst Plan), a final average pay defined benefit plan. Effective December
31, 1995, the Seafirst Plan was merged into the Pension Plan; however, the
Seafirst Plan benefit formula remained in effect for Seafirst employees
through March 31, 1996.
 
  Benefits are based on the employees' length of service, level of
compensation and a specified interest rate (6.50%, 7.25%, and 6.50% for the
years ending December 31, 1997, 1996 and 1995, respectively). Effective
January 1, 1996, the benefit formula of the Pension Plan was amended such that
eligible participants receive nonmatching employer contributions, called pay-
based credits, of 7 percent of annual qualified earnings over one-half of the
Social Security wage base. Contributions are made by the Company to BAC based
on actuarial computations of the amount sufficient to fund the current service
cost plus amortization of the unfunded actuarial accrued liability.
Contributions are determined in accordance with Internal Revenue Service
funding requirements and are invested in diversified portfolios. Effective
April 1, 1998, eligible hourly employees will also realize pension-based
credits.
 
                                      30
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Certain non-U.S. employees of the Company are covered by noncontributory
defined pension plans that the Company funds primarily in accordance with
local laws. The actuarial assumptions used in computing the present value of
the accumulated benefit obligation, the projected benefit obligation, and net
pension expense for the non-U.S. plans are substantially consistent with those
assumptions used for the U.S. plans, given local conditions.
 
  Aggregate contributions for all the defined benefit plans were $1.8 million,
$1.1 million, and $0.4 million for the years ended December 31, 1997, 1996,
and 1995, respectively.
 
  Defined Contribution Plans - The majority of salaried U.S. employees of the
Company participate in the BankAmerica 401(k) Investment Plan. This plan
provides tax-deferred investment opportunities to salaried employees who have
completed a required length of service. Employees may contribute to the plan
up to certain limits prescribed by the Internal Revenue Service. A portion of
these contributions is matched by the Company. Contributions are invested at
the direction of the participant. Prior to April 1, 1996, certain Company
employees participated in the Seafirst Corporation Employee Matched Savings
Plan (Seafirst Savings Plan), also a defined contribution plan with matching
employer contributions. Effective April 1, 1996, the Seafirst Savings Plan was
merged into and replaced by the BankAmerica 401(k) Investment Plan. Effective
January 1, 1996, the BankAmerica 401(k) Investment Plan was amended to provide
eligible employees with pay-based credits equal to 3 percent or 7 percent of
an eligible employee's annual qualified earnings up to one-half of the Social
Security wage base, depending upon the employee's age or length of service.
Effective April 1, 1998, eligible hourly employees will be able to contribute
to the plan and receive company matching contributions and pay-based credits.
Matching contributions made by the Company on behalf of eligible U.S.
employees to BankAmerica's 401(k) Investment Plan were $0.7 million, $0.6
million, and $0.6 million for the years ended December 31, 1997, 1996 and
1995, respectively.
 
  Post-Retirement Health Care and Life Insurance Benefits - Currently, the
Company provides certain defined health care and life insurance benefits under
plans for certain U.S. retired employees sponsored by BAC. Retiree health care
benefits are offered under self-insured arrangements, as well as through
various health maintenance organizations. Retiree life insurance benefits are
provided through an insurance company. BAC allocates the cost of post-
retirement benefits to the Company as part of a per employee charge for
welfare benefits. That charge is periodically reviewed and evaluated. The
retiree's share is the remainder of the cost for the given coverage. BAC's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management. Employer contributions are invested in diversified
portfolios, including fixed income and equity investments.
 
  Contributions expense to the Plan were $0.5 million, $0.4 million and $0.4
million for the three years ended December 31, 1997, 1996 and 1995,
respectively.
 
  Stock Plans - During 1996, the Company adopted two stock-based compensation
plans: the BA Merchant Services, Inc. Long-Term Incentive Plan (the LTIP) and
the BA Merchant Services, Inc. Nonemployee Director Stock Plan (the Director
Plan). Compensation expense related to these stock plans was $2.5 million in
1996, substantially all of which represents a one-time charge for the
conversion of employee options from BAC shares to the Company shares, as
discussed below.
 
  The Company offers shares of its common stock to certain officers and
employees of the Company and its subsidiaries under the LTIP and to directors
of the Company who are not also employees of the Company or BAC (nonemployee
directors) under the Director Plan. Seven million shares of the Company's
Class A Common Stock have been authorized for issuance through the LTIP and
the Director Plan in the aggregate. Both plans are administered by the
Executive Personnel and Compensation Committee of the Board of Directors (the
 
                                      31
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
 
Compensation Committee). The Compensation Committee may award a number of
forms of stock-based compensation to eligible employees, including incentive
and nonqualified stock options, stock appreciation rights, restricted stock,
performance units, and performance shares, and may award nonqualified stock
options to nonemployee directors.
 
  On December 19, 1996, contingent upon completion of the Offerings, the
Company awarded to its executive officers stock options representing 257,000
shares of Class A Common Stock and 134,000 Class A Common Restricted Stock
with a fair value at the date of grant of $15.50 per share. The transfer of
stock was at no cost to the officers. The shares under option vest ratably
over three years and have a maximum term of ten years after the grant date. An
additional 17,000 restricted shares were issued during 1997. As of December
31, 1997, 140,395 restricted shares were outstanding. One-third of the
restricted shares vest three years after the date of grant. The remaining
shares vest ratably thereafter over the next two years. Compensation expense
related to the restricted shares was $0.6 million for the year ended December
31, 1997.
 
  The Company has adopted a program within the LTIP called Ownership
Counts!(TM) under which substantially all employees of the Company receive
periodic stock option grants, or stock appreciation rights (SARs) in certain
foreign locations, for no more than 600 shares of the Company's Class A Common
Stock annually. SARs are generally exercisable under the same terms as the
options. The shares under option vest ratably over three years and have a
maximum term of five years after the date the options are granted.
 
  On December 31, 1996, certain employees of the Company who had received BAC
stock options and restricted stock under BAC's management stock plans elected
to exchange their BAC stock options and restricted stock for stock options
representing 329,711 shares of the Company's Class A Common Stock and 2,092
shares of the Company's Class A Common Restricted Stock with a fair value at
the date of exchange of $17.88, as provided by the LTIP agreement. The
employee stock exchange resulted in a one-time charge of $2.4 million to
compensation expense.
 
  Under the Director Plan, each nonemployee director is granted options to
purchase shares of the Company's Class A Common Stock upon election to the
Board of Directors and on the day following each annual meeting of the
Company's stockholders. The shares under option vest on the day before the
annual meeting of the Company's stockholders following the date of grant and
have a ten-year term.
 
  At December 31, 1997, shares available for grant under the LTIP and Director
Plan as either stock options or restricted stock were 5,957,913. Shares
subject to options that are canceled become available for future grants.
 
  The following is a summary of the Company's stock option activity, and
related information for the periods ended December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                         1997                    1996
                                ----------------------- -----------------------
                                           WEIGHTED-               WEIGHTED-
                                            AVERAGE                 AVERAGE
                                SHARES   EXERCISE PRICE SHARES   EXERCISE PRICE
                                -------  -------------- -------  --------------
<S>                             <C>      <C>            <C>      <C>
Balance, beginning of year..... 658,765      $13.06         --          --
Granted........................ 253,083      $16.01     658,865      $13.06
Exercised......................     (34)     $15.50         --          --
Forfeited...................... (20,829)     $16.23        (100)     $15.50
                                -------      ------     -------      ------
Balance, end of year........... 890,985      $13.82     658,765      $13.06
                                =======      ======     =======      ======
Exercisable at end of year..... 369,959      $11.67     132,570      $ 8.38
                                =======      ======     =======      ======
</TABLE>
 
 
                                      32
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  At December 31, 1997, 393,261 options were outstanding with exercise prices
ranging from $7.97 to $14.89 having a weighted-average remaining contractual
life of 6.7 years, and 497,724 options were outstanding with exercise prices
ranging from $15.50 to $19.19 having a weighted-average remaining contractual
life of 7.3 years.
 
  The table below reflects the Company's pro forma net income and pro forma
earnings per share for the years ended December 31, 1997 and 1996, as if
compensation cost for the Company's stock plans had been determined based on
the estimated fair value at the grant dates for awards under those plans and
expensed. Since pro forma compensation cost relates to all periods over which
the awards vest, the initial impact on pro forma net income may not be
representative of compensation cost in subsequent years, when the effect of
the amortization of multiple awards would be reflected.
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                        -----------------------
   PRO FORMA RESULTS                                       1997        1996
   -----------------                                    ----------- -----------
   (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                                  <C>         <C>
   Net income.......................................... $    36,674 $    27,309
   Earnings per common share........................... $      0.75 $      0.56
   Diluted earnings per common share................... $      0.75 $      0.56
</TABLE>
 
  Fair values of the options were estimated at the date of grant using a
variation of the Black-Scholes option pricing model, which includes the
following assumptions used for the stock options awarded during 1997 and 1996,
respectively: risk free weighted average interest rate of 6.23 percent and
6.13 percent; weighted average expected volatility of 64.2 percent and 23.0
percent; expected option life of the LTIP of 4.3 and 4.1 years; expected life
for Ownership Counts!(TM) of 2.6 and 2.6 years and the expected life for the
Director Plan of 10.0 and 10.0 years; and expected dividend yield of zero.
 
  The weighted-average grant date fair value of the options granted during
1997 and 1996 was $7.64 and $4.67 per share, respectively. The exercise price
of each option equals the market price of the Company's Class A Common Stock
on the date of grant. Expiration dates for options outstanding at December 31,
1997 ranged from December 18, 2001 to August 1, 2007.
 
10. COMMITMENTS
 
  The Company has contractual agreements with third parties to receive
merchant data processing services and data processing and card transaction
services. Included in these contracts is an agreement with a third party who
provides the primary processing service to the Company and with whom the
Company has a long-term contract which expires in 2001. Future commitments
under this contract are unknown as payment amounts vary with volumes
processed.
 
11. RELATED PARTIES
 
  The Company and BAC engage in various intercompany transactions and
arrangements including the provision by BAC of various services to the
Company. Such services are currently provided pursuant to various intercompany
agreements which, among other things, grant to the Company a license to use
the Bank of America name and certain trademarks and services marks in
connection with the Company's business.
 
  Additional services provided by BAC under the intercompany agreements
include product distribution, processing, system support, telecommunications,
marketing, regulatory compliance, legal, tax and treasury, accounting and
audit and other miscellaneous support and administrative services. Fees paid
for these services were approximately $7.8 million, $10.9 million, and $8.4
million, for the years ended December 31, 1997, 1996, and 1995, respectively.
 
                                      33
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As part of the intercompany agreements, the Company paid BAC total rental
expense of $2.6 million, $2.2 million, and $2.2 million, for the years ended
December 31, 1997, 1996, and 1995, respectively. The Company leases its
facilities from BAC under a five-year lease agreement which can be cancelled
with six months notice.
 
  The Company believes that the cost of services provided under the
intercompany arrangements are not materially different from the costs that
would have been incurred if the Company was unaffiliated with BAC.
 
  In connection with the Offerings, BAC and the Company also entered into a
Non-Competition and Corporate Opportunities Allocation Agreement pursuant to
which BAC will not compete with the Company for a period of five years with
respect to payment processing for merchants to the extent that such payments
arise in the use of credit, charge or debit cards for the purchase of goods
and services and are authorized through an electronic medium originating at
the point of sale in the United States and, following the transfer of the
Bank's merchant processing business in Taiwan, Thailand and the Philippines,
in those Asian countries. Any or all of the intercompany agreements may be
terminated by BAC, if at any time it beneficially owns shares representing
less than a majority of the voting power of the Company's outstanding common
stock.
 
12. EARNINGS PER SHARE
 
  Historical earnings per share have not been presented for the years ended
December 31, 1996 and 1995 since such information would not be meaningful
because the Company had no outstanding stock prior to the Reorganization. Pro
forma earnings per share for the years ended December 31, 1996 and 1995 were
computed by dividing net income by the weighted-average number of common
shares outstanding and the additional dilutive effect of the stock rights and
options outstanding assuming the Reorganization and Asia Acquisitions had
occurred as of January 1, 1994 and the stock issued in the Reorganization,
Offerings and Asia Acquisitions had been outstanding for the two years ended
December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1996    1995
                                                                ------- -------
   (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                                          <C>     <C>
   Net income.................................................  $27,365 $22,294
   Average number of shares outstanding.......................   48,500  48,500
   Pro forma earnings per share (unaudited)...................     $.56    $.46
   Pro forma earnings per share, as adjusted (unaudited)(a)...     $.69    $.57
</TABLE>
--------
(a) Pro forma earnings per share, as adjusted (unaudited), assumes that
    proceeds from the Offerings in the fourth quarter of 1996 were available
    from January 1, 1994 and were invested in short-term investments, and
    excludes the one-time expense related to the employee stock exchange ($2.4
    million) and interest expense ($492,000) from the 1996 results.
 
13. COMMON AND PREFERRED STOCK
 
  The Company has two classes of authorized common stock: Class A Common Stock
and Class B Common Stock. Holders of the Class A Common Stock generally have
identical rights to holders of Class B Common Stock, except that holders of
Class A Common Stock are entitled to one vote per share while holders of the
Class B Common Stock are entitled to ten votes per share on all matters
submitted to a vote of stockholders.
 
  The Company is authorized to issue, in one or more series, ten million
shares of preferred stock and to fix the dividend rights, conversion rights,
terms and rights of redemption, liquidation preferences and sinking fund
terms. At December 31, 1997 and 1996, no preferred stock was outstanding.
 
                                      34
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
14. FORWARD EXCHANGE CONTRACTS
 
  At December 31, 1997, the Company had entered into short-term non-delivery
forward exchange contracts with BAC. Those contracts had notional principal
amounts totaling $30.4 million at forward rates ranging from New Taiwanese
(NT) $28.99 to NT $33.34. Exposure to loss on these contracts will increase or
decrease over the contract life as currency exchange rates fluctuate. No such
foreign exchange contracts were outstanding at December 31, 1996.
 
15. SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
 
  Supplemental unaudited pro forma Condensed Consolidated Statements of
Operations for the years ended December 31, 1996 and 1995 have not been
presented since the effects of the Reorganization, Offerings and the Asia
Acquisitions will not have a material impact on the Company's operating
results.
 
16. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31, 1997
                                             ----------------------------------
                                              FIRST   SECOND    THIRD   FOURTH
                                             QUARTER  QUARTER  QUARTER  QUARTER
                                             -------  -------  -------  -------
   (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
   DATA)
   <S>                                       <C>      <C>      <C>      <C>
   Net revenue............................   $35,969  $38,882  $41,192  $44,932
   Operating expense......................    24,360   25,579   26,115   29,235
                                             -------  -------  -------  -------
   Operating income.......................    11,609   13,303   15,077   15,697
   Net interest income (expense)..........     1,524    2,228    2,059    1,951
                                             -------  -------  -------  -------
     Income before income taxes...........    13,133   15,531   17,136   17,648
   Provision for income taxes.............     5,428    6,420    7,082    7,090
                                             -------  -------  -------  -------
     Net income...........................   $ 7,705  $ 9,111  $10,054  $10,558
                                             =======  =======  =======  =======
   Diluted earnings per common share (1)..   $  0.16  $  0.19  $  0.21  $  0.22
                                             =======  =======  =======  =======
<CAPTION>
                                              YEAR ENDED DECEMBER 31, 1996
                                             ----------------------------------
                                              FIRST   SECOND    THIRD   FOURTH
                                             QUARTER  QUARTER  QUARTER  QUARTER
                                             -------  -------  -------  -------
   <S>                                       <C>      <C>      <C>      <C>
   Net revenue............................   $30,841  $34,392  $35,444  $38,099
   Operating expense......................    19,985   21,888   23,704   25,124
                                             -------  -------  -------  -------
   Operating income.......................    10,856   12,504   11,740   12,975
   Net interest income (expense)..........      (291)    (269)    (254)    (644)
                                             -------  -------  -------  -------
     Income before income taxes...........    10,565   12,235   11,486   12,331
   Provision for income taxes.............     4,363    5,053    4,744    5,092
                                             -------  -------  -------  -------
     Net income...........................   $ 6,202  $ 7,182  $ 6,742  $ 7,239
                                             =======  =======  =======  =======
   Pro forma diluted earnings per common
    share (1).............................   $  0.13  $  0.15  $  0.14  $  0.15
                                             =======  =======  =======  =======
   Pro forma diluted earnings per common
    share,
    as adjusted (1)(2) ...................   $  0.15  $  0.17  $  0.16  $  0.21
                                             =======  =======  =======  =======
</TABLE>
--------
(1) The earnings per common share amounts are the same for each period
    presented.
(2) See Note 12 of the Notes to Consolidated Financial Statements.
 
 
                                      35
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information concerning directors and executive officers of the Company is
incorporated by reference from the text under the captions, "Proposal 1:
Election of Directors," and "Executive Officers of the Company" in the Proxy
Statement for the Company's May 7, 1998 Annual Meeting of Stockholders.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  Information concerning executive compensation is incorporated by reference
from the text under the caption, "Executive Compensation" in the Proxy
Statement for the May 7, 1998 Annual Meeting of Stockholders.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT
 
  Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the text under the caption,
"Ownership of Company Common Stock" and "Section 16 (a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for the Company's May 7, 1998
Annual Meeting of Stockholders.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Information concerning certain relationships and related transactions is
incorporated by reference from the text under the captions, "Certain
Transactions and Other Matters" and "Relationship with BankAmerica
Corporation" in the Proxy Statement for the Company's May 7, 1998 Annual
Meeting of Stockholders.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(A)(1)FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
    <S>                                                                     <C>
    BA Merchant Services Inc.:
    Report of Independent Auditors.........................................  19
    Consolidated Balance Sheet-
     December 31, 1997 and 1998............................................  20
    Consolidated Statement of Operations-
     Years Ended December 31, 1997, 1996 and 1995..........................  21
    Consolidated Statement of Cash Flows-
     Years ended December 31, 1997, 1996 and 1995..........................  22
    Consolidated Statement of Changes in Equity-
     Years Ended December 31, 1997, 1996 and 1995..........................  23
    Notes to Consolidated Financial Statements.............................  24
</TABLE>
 
(A)(2)FINANCIAL STATEMENT SCHEDULES
 
   Financial statement schedules have been omitted because they are not
   applicable, not required, or the required information is included in the
   financial statements and notes thereto.
 
 
                                      36
<PAGE>
 
(A)(3)EXHIBITS
<TABLE>
<CAPTION>
                                                INCORPORATED
                                                BY REFERENCE
                                                    FROM     INCORPORATED
                                                REGISTRATION BY REFERENCE
                                                STATEMENT ON  FROM FILE
                                                 FORM S-1,   NO. 1-12365
                                                  REG. NO.    REPORT ON
                                                 333-13985,  FORM 10-Q OR
                                                OR AMENDMENT 10-K FOR THE
                                        FILED     THERETO       PERIOD    EXHIBIT
    NO.            DESCRIPTION         HEREWITH    FILED        ENDING      NO.
    ---     ------------------------   -------- ------------ ------------ --------
 <C>        <S>                        <C>      <C>          <C>          <C>
   3.1(i)   BA Merchant Services,                  12/9/96                    3.1(i)
            Inc.'s amended and
            restated Certificate of
            Incorporation.
   3.1(ii)  BA Merchant Services,                               6/30/97       3.b
            Inc.'s Bylaws, as
            amended.
   4.1      Specimen Certificate for               12/9/96                    4.1
            the Class A Common
            Stock, par value $.01
            per share, of
            Registrant.
   4.2      Registration Rights                                12/31/96       4.2
            Agreement dated as of
            December 3, 1996 among
            the Registrant, Bank of
            America NT&SA and Bank
            of America NW, National
            Association.
  10.1      Lease Agreement dated as                           12/31/96      10.1
            of December 3, 1996
            among the Registrant,
            Bank of America NT&SA
            and Bank of America NW,
            National Association.
  10.2      Sponsorship and                        12/9/96                   10.2
            Processing Agreement
            dated as of December 3,
            1996 between the
            Registrant and Bank of
            America, NT&SA.
  10.3      Trademark License                      12/9/96                   10.3
            Agreement dated as of
            December 3, 1996 between
            the Registrant and Bank
            of America NT&SA.
  10.4      Administrative and                     12/9/96                   10.4
            Support Services
            Agreement dated December
            3, 1996 among the
            Registrant, Bank of
            America NT&SA and Bank
            of America NW, National
            Association.
  10.5(i)   Marketing Agreement                                12/31/96      10.5(i)
            dated as of December 3,
            1996 among the
            Registrant, Bank of
            America NT&SA and Bank
            of America NW, National
            Association.
  10.5(ii)  Marketing Agreement                                12/31/96      10.5(ii)
            dated as of December 3,
            1996 among Bank of
            America NA, Bank of
            America NW, National
            Association and the
            Registrant.
  10.6      Tax Allocation Agreement                           12/31/96      10.6
            dated as of December 3,
            1996 between the
            Registrant and
            BankAmerica Corporation.
  10.7      Merchant Card Services                12/16/96                   10.7
            Agreement dated June 29,
            1994 between the
            Registrant and Total
            System Services, Inc.
  10.8      Asset Transfer Agreement               12/9/96                   10.8
            dated as of December 3,
            1996 among the
            Registrant, Bank of
            America NT&SA and Bank
            of America NW, National
            Association.
  10.9      BA Merchant Services,                  12/9/96                   10.9
            Inc. Nonemployee
            Director Stock Plan*
  10.10     BA Merchant Services,                  12/9/96                   10.10
            Inc. Short-Term
            Incentive Plan.*
  10.11     BA Merchant Services,                  12/9/96                   10.11
            Inc. Long-Term Incentive
            Plan. *
  10.12     Revolving Credit                                   12/31/96      10.16
            Agreement dated March 5,
            1997 between the
            Registrant and Bank of
            America Texas, N.A.
  10.13     Non-Competition and                    12/9/96                   10.13
            Corporate Opportunities
            Allocation Agreement
            dated as of December 3,
            1996 between the
            Registrant and
            BankAmerica Corporation.
  10.14     Stockholders' Agreement                12/9/96                   10.14
            dated as of December 3,
            1996 among the
            Registrant, Bank of
            America NT&SA and Bank
            of America NW, National
            Association.
  10.15(i)  Processing Services                    12/9/96                   10.15(i)
            Agreement dated December
            3, 1996 between the
            Registrant and Bank of
            America Texas, N.A.
  10.15(ii) Processing Services                    12/9/96                   10.15(ii)
            Agreement dated December
            3, 1996 between the
            Registrant and Bank of
            America, F.S.B.
  21.1      Subsidiaries.                  x
  23.1      Consent of Ernst & Young       x
            LLP.
  24.1      Powers of Attorney.            x
  27.1      Financial Data Schedule.       x
</TABLE>
--------
* Management contract or compensation plan, contract, or arrangement.
 
(B)REPORTS ON FORM 8-K
 
  During the fourth quarter of 1997, BA Merchant Services Inc. did not file any
reports on Form 8-K.
 
                                       37
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
March 20, 1998                            BA Merchant Services, Inc.
 
                                                   /s/ JAMES H. WILLIAMS
                                          By __________________________________
                                                    (JAMES H. WILLIAMS,
                                                 EXECUTIVE VICE PRESIDENT,
                                                 CHIEF FINANCIAL OFFICER,
                                               CHIEF ACCOUNTING OFFICER, AND
                                                        TREASURER)
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
              SIGNATURE                                   TITLE
 
Principal Executive Officer and Director:
 
        /s/ SHARIF M. BAYYARI             President and Chief Executive
_____________________________________      Officer
         (SHARIF M. BAYYARI)
 
Principal Financial or Accounting Officer:
 
        /s/ JAMES H. WILLIAMS             Executive Vice President, Chief
_____________________________________      Financial Officer, Chief Accounting
         (JAMES H. WILLIAMS)               Officer, and Treasurer
 
Directors:
 
        /s/ SHARIF M. BAYYARI             Director
_____________________________________
         (SHARIF M. BAYYARI)
 
       /s/ H. EUGENE LOCKHART*            Director
_____________________________________
        (H. EUGENE LOCKHART)
 
       /s/ BARBARA J. DESOER*             Director
_____________________________________
         (BARBARA J. DESOER)
 
        /s/ DONALD R. DIXON*              Director
_____________________________________
          (DONALD R. DIXON)
 
         /s/ JAMES G. JONES*              Chairman of the Board of Directors
_____________________________________
          (JAMES G. JONES)
 
       /s/ WILLIAM E. FISHER*             Director
_____________________________________
         (WILLIAM E. FISHER)
 
A majority of the members of the Board of Directors.
 
          /s/ CHERYL SOROKIN
*By _________________________________
  (CHERYL SOROKIN, ATTORNEY-IN-FACT)
 
Dated: March 20, 1998
 
                                      38
<PAGE>
 
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------------
No.           Description                                             Filed            Incorporated by      Incorporated     Exhibit
                                                                      Herewith         Reference from       by Reference     No.
                                                                                       Registration         from File No.
                                                                                       Statement on         1-12365
                                                                                       Form S-1,Reg.        Report on
                                                                                       No. 333-13985,       Form 10-Q or
                                                                                       or Amendment         10-K for the
                                                                                       Thereto Filed        Period
                                                                                                            Ending
---------------------------------------------------------------------------------------------------------------------------------
<S>           <C>                                                      <C>             <C>                    <C>           <C>
3.1(i)        BA Merchant Services, Inc.'s amended and restated                        12/9/96                              3.1(i)
              Certificate of Incorporation.
3.1(ii)       BA Merchant Services, Inc.'s Bylaws, as amended.                                                6/30/97       3.b
4.1           Specimen Certificate for the Class A Common Stock, par                   12/9/96                              4.1
              value $.01 per share, of Registrant.
4.2           Registration Rights Agreement dated as of December 3, 1996                                     12/31/96       4.2
              among the Registrant, Bank of America NT&SA and Bank of
              America NW, National Association.
10.1          Lease Agreement dated as of December 3, 1996 among the                                         12/31/96      10.1
              Registrant, Bank of America NT&SA and Bank of America
              NW, National Association.
10.2          Sponsorship and Processing Agreement dated as of                         12/9/96                             10.2
              December 3, 1996 between the Registrant and Bank of
              America, NT&SA.
10.3          Trademark License Agreement dated as of December 3, 1996                 12/9/96                             10.3
              between the Registrant and Bank of America NT&SA.
10.4          Administrative and Support Services Agreement dated                      12/9/96                             10.4
              December 3, 1996 among the Registrant, Bank of America
              NT&SA and Bank of America NW, National Association.
10.5(i)       Marketing Agreement dated as of December 3, 1996 among                                         12/31/96      10.5(i)
              the Registrant, Bank of America NT&SA and Bank of
              America NW, National Association.
10.5(ii)      Marketing Agreement dated as of December 3, 1996 among                                         12/31/96      10.5(ii)
              Bank of America NA, Bank of America NW, National
              Association and the Registrant.
10.6          Tax Allocation Agreement dated as of December 3, 1996                                          12/31/96      10.6
              between the Registrant and BankAmerica Corporation.
10.7          Merchant Card Services Agreement dated June 29, 1994                     12/16/96                            10.7
              between the Registrant and Total System Services, Inc.              
10.8          Asset Transfer Agreement dated as of December 3, 1996                    12/9/96                             10.8
              among the Registrant, Bank of America NT&SA and Bank of
              America NW, National Association.
10.9          BA Merchant Services, Inc. Nonemployee Director Stock Plan*              12/9/96                             10.9
10.10         BA Merchant Services, Inc. Short-Term Incentive Plan.*                   12/9/96                             10.10
10.11         BA Merchant Services, Inc. Long-Term Incentive Plan.*                    12/9/96                             10.11
10.12         Revolving Credit Agreement dated March 5, 1997 between                                         12/31/96      10.16
              the Registrant and Bank of America Texas, N.A.    
10.13         Non-Competition and Corporate Opportunities Allocation                   12/9/96                             10.13
              Agreement dated as of December 3, 1996 between the
              Registrant and BankAmerica Corporation.
10.14         Stockholders' Agreement dated as of December 3, 1996                     12/9/96                             10.14
              among the Registrant, Bank of America NT&SA and Bank of
              America NW, National Association.
10.15(i)      Processing Services Agreement dated December 3, 1996                     12/9/96                             10.15(i)
              between the Registrant and Bank of America Texas, N.A.
10.15(ii)     Processing Services Agreement dated December 3, 1996                     12/9/96                      10.15(ii)
              between the Registrant and Bank of America, F.S.B.
21.1          Subsidiaries.                                                x
23.1          Consent of Ernst & Young LLP.                                x
24.1          Powers of Attorney.                                          x
27.1          Financial Data Schedule.                                     x
</TABLE>