<PAGE>

<TABLE>
<CAPTION>
                              Year ended     Year ended    10-month period ended
                             December 31,   December 31,      December 31,(a)
                             ---------------------------------------------------
(In thousands)                   1997           1996              1995
                             ---------------------------------------------------
<S>                          <C>            <C>            <C>
Revenues                      $ 335,625      $ 265,829          $129,035
Operating income              $  28,362      $  11,905          $  2,789
Net income                    $  17,385      $   7,267          $  4,887(b)
Net income per share -
assuming dilution             $    0.58      $    0.25             $0.24(b)
Total assets                  $ 170,528      $ 107,705          $ 61,001
Total long-term debt          $  33,646      $   1,366          $ 22,922
Total shareholders' equity    $ 102,937      $  84,882          $ 26,017
</TABLE>



                             FINANCIAL HIGHLIGHTS

   [GRAPH]         [GRAPH]                [GRAPH]            [GRAPH]

Total Revenues    Net Income        Net Income per Share  Operating Income
(In thousands)    (In thousands)                          (In thousands)
95    $ 129,035   95   $ 4,887        95      $0.24       95      $ 2,789
96    $ 265,829   96   $ 7,267        96      $0.25       96      $11,905
97    $ 335,625   97   $17,385        97      $0.58       97      $28,362



  ---------------------------------------------------------------------------
   (a) The Company changed its fiscal year from the last day of February to
       December 31, effective December 31, 1995.

     (b) Includes a one-time tax benefit of $5 million or $0.28 per share.
<PAGE>

                              INDEX TO FINANCIALS


Selected Consolidated Financial Data                                    16

Management's Discussion and Analysis of Financial Condition &
Results of Operations                                                   17

Consolidated Balance Sheets                                             24

Consolidated Statements of Operations                                   25

Consolidated Statements of Shareholders' Equity                         26

Consolidated Statements of Cash Flows                                   27

Notes to Consolidated Financial Statements                              28

Report of Independent Auditors                                          45
<PAGE>

                Selected Consolidated Financial and Other Data

The following table sets forth selected consolidated financial and other data
for the Company as of and for the years ended December 31, 1997 and 1996, the
10-month period ended December 31, 1995 and the years ended February 28, 1995
and 1994. The selected consolidated financial data have been derived from the
Company's Consolidated Financial Statements and notes thereto, which have been
audited by Ernst & Young LLP, independent auditors. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto appearing elsewhere in this Annual Report. The Company changed
its fiscal year-end from the last day of February to December 31, effective
December 31, 1995. For financial reporting purposes, the 10-month period ended
December 31, 1995, is considered an annual period.

<TABLE>
<CAPTION>
                                                                                   10-month
                                                          Years ended            period ended            Year ended
                                                          December 31,           December 31,            February 28,
                                               -----------------------------    -------------   -----------------------------------
(in thousands, except per share and
   merchant location data)                            1997           1996           1995(1)          1995                1994
                                               -----------------------------    -------------   -----------------------------------
<S>                                            <C>              <C>             <C>             <C>                   <C>
Statement of Operations Data:
Revenues                                        $    335,625    $    265,829    $    129,035    $     93,592           $     68,213
Cost of service                                      260,058         207,595         100,375          74,032                 54,984
Conversion costs                                       2,595           6,395           3,441           1,827                  2,080
Selling, general and administrative                   33,952          32,952          17,795          14,091                 12,419
Depreciation and amortization                         10,658           6,982           4,635           3,887                  2,661
                                               -----------------------------    -------------   -----------------------------------
Operating income (loss)                               28,362          11,905           2,789            (245)                (3,931)
Interest expense (income), net                          (721)           (126)          1,959             968                    211
Minority interest in income of subsidiary                776              --              --              --                     --
                                               -----------------------------    -------------   -----------------------------------
Income (loss) before provision for
  income taxes                                        28,307          12,031             830          (1,213)                (4,142)
Provision (benefit) for income taxes                  10,922           4,764          (4,057)           --                     --
                                               -----------------------------    -------------   -----------------------------------
Net income (loss)(2)                            $     17,385    $      7,267    $      4,887    $     (1,213)          $     (4,142)
Net income (loss) per common share(3)           $       0.60    $       0.25    $       0.24    $      (0.13)                  --
Net income (loss) per common share -
  assuming dilution(3)                          $       0.58    $       0.25    $       0.24    $      (0.13)                  --

Other Data:
Merchant sales volume processed                 $ 14,980,287    $ 11,925,126    $  5,975,013    $  4,131,071           $  2,871,793
Merchant locations at period end                     152,456          82,906          77,884          43,980                 24,838
Balance Sheet Data (at period end):
Total assets                                    $    170,528    $    107,705    $     61,001    $     47,823           $     26,437
Long-term debt and capital lease
  obligations, less current portion                   33,296             859          17,738          16,694                  1,950
Total shareholders' equity                           102,937          84,882          26,017          18,719                 18,783
</TABLE>

(1) Revenues and net income for the 12 months ended December 31, 1995, were
    $147.8 million and $3.6 million, respectively.
(2) Net income for the 10-month period ended December 31, 1995, reflects the
    reduction of valuation allowance against deferred taxes of $5.0 million, the
    benefits of which have been recognized in the provision for income taxes.
    See Note 4 to the Company's Consolidated Financial Statements.
(3) Pro forma prior to May 8, 1996. See Note 11 to the Company's Consolidated
    Financial Statements.

<PAGE>

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            & RESULTS OF OPERATIONS

                                   OVERVIEW

The Company's predecessor, NOVA Information Systems, Inc., was formed in
February 1991 to provide sophisticated and cost-effective transaction
processing and related services to predominantly small- to medium-sized
merchants by effectively employing the latest advances in transaction
processing and telecommunications technology.

Since inception, the Company has invested significant capital to develop an
integrated operating platform consisting of hardware, software and network
architecture to process large volumes of card transactions. In addition, the
Company continues to develop the marketing, customer support and managerial
expertise necessary to execute its business strategy. Through the fiscal year
ended February 28, 1995, the Company incurred losses, as the expenditures for
the development of this infrastructure and the cost to convert purchased
portfolios, combined with the cost of providing service, exceeded revenues from
its merchant portfolio. The Company's ongoing expansion of its customer base
resulted in the Company achieving profitability for the first time in the
10-month period ended December 31, 1995.

The Company has increased its customer base through a combination of its own
marketing programs and through a series of merchant portfolio purchases, joint
ventures and alliances that have produced significant additional revenue in
each year since formation. Since its inception in 1991, the Company has
consummated 90 transactions consisting of 84 merchant portfolio purchases,
three operating business acquisitions, two joint ventures and the First Union
Alliance.

On January 21, 1998, the Company consummated a transaction (the "KeyBank
Joint Venture") with KeyBank National Association ("KeyBank") pursuant to which
the Company will provide transaction processing services to, and jointly own
and operate with KeyBank, a newly created limited liability company called Key
Merchant Services, LLC ("KMS"). The KeyBank Joint Venture, on the basis of
anticipated processed volume, is the largest transaction in the Company's
history as it is expected to add approximately $5.1 billion in annualized
credit and debit card volume to the Company's operating platform. KMS will
market transaction processing services with its own employees throughout the
U.S.A. Further, KeyBank will market and promote, on an exclusive basis,
transaction processing services on behalf of KMS through KeyBank's bank branch
locations. The Company owns a 51% interest in KMS.

On December 30, 1997, the Company consummated a transaction (the "MBNA
Alliance") with MBNA America Bank, N.A. ("MBNA") pursuant to which the Company
purchased substantially all of MBNA's merchant portfolio. MBNA also agreed to
cooperate with the Company in marketing the Company's merchant transaction
processing services and referring exclusively to the Company all merchants,
trade associations, financial institutions, independent sales organizations
("ISOs") and other organizations that request or evidence an interest in
merchant transaction processing services. The Company estimates that the MBNA
portfolio will add approximately $1.0 billion in annualized credit and debit
card transaction processing volume.

Effective October 31, 1997, the Company consummated a transaction (the
"Firstar Joint Venture") with Firstar Bank, U.S.A., N.A. ("Firstar") and
Firstar Bank Milwaukee, N.A., pursuant to which the Company will provide
payment processing services to, and jointly own and operate with Firstar, a
newly created limited liability company called Elan Merchant Services, LLC. In
connection with the Firstar Joint Venture, Firstar and each of the other
banking affiliates of Firstar contributed substantially all of their then
existing bankcard payment processing contracts (representing approximately $3.0
billion in annualized
<PAGE>

credit and debit card volume) to Elan Merchant Services. Further, Firstar will
market and promote, on an exclusive basis, transaction processing services on
behalf of Elan Merchant Services directly and through a network of over 850
correspondent financial institutions. The Company owns a 51% interest in Elan
Merchant Services.

On May 29, 1997, the Company consummated the purchase of the Crestar Bank
merchant portfolio. The Company estimates that the Crestar portfolio will add
approximately $1.8 billion in annualized credit and debit card transaction
processing volume to the Company's network. In addition, NOVA and Crestar Bank
will market and promote, on an exclusive basis, the Company's transaction
processing services through Crestar Bank's approximately 500 branch bank
locations.

The Company expects each of these transactions to provide significant
strategic and financial benefits, including: (i) enhanced distribution channels
to facilitate growth of the Company's processed transaction volume and the
number of merchant locations served; (ii) further geographic diversification of
the Company's portfolio into additional regions of the United States; and (iii)
economies of scale from substantial increases in transaction processing volume
once merchant accounts and other services are fully integrated into the
Company's operating platform.

Historically, the Company has achieved savings through economies of scale
and operating efficiencies derived from the conversion and integration of its
purchased portfolios. The costs of these conversion activities are expensed as
incurred. As a result of the recent acquisition activity undertaken by the
Company, the magnitude, scope, timing, duration and expense of the conversion
of the KeyBank Joint Venture, the Firstar Joint Venture and the MBNA portfolio
purchase will, in the aggregate, be greater than any conversion previously
undertaken by the Company. Failure to complete these conversions in accordance
with management plans could have a material adverse effect on the Company's
financial condition and results of operations.

The Company changed its fiscal year end from the last day of February to
December 31, effective December 31, 1995. Accordingly, the following discussion
of results of operations includes a comparison of the year ended December 31,
1997, with the year ended December 31, 1996, and the year ended December 31,
1996, with the 10-month period ended December 31, 1995.

                      COMPONENTS OF REVENUES AND EXPENSES

                                   Revenues

The Company derives revenues principally from processing credit, charge and
debit card transactions that are authorized and captured through the Company's
proprietary telecommunications network (the "NOVA Network") and through
third-party networks prior to conversion. The Company typically charges
merchants for these card processing services at a bundled rate that is a
percentage of the dollar amount of each transaction and, in some instances,
additional fees per transaction. These charges, referred to as "discount
fees,'' are individually negotiated with each merchant and, in the aggregate,
represented approximately 92.4%, 94.6% and 93.7% of the Company's revenues for
the years ended December 31, 1997 and 1996 and the 10-month period ended
December 31, 1995, respectively. Certain of the Company's merchant customers
are charged a flat fee per transaction, while others are also charged
miscellaneous fees, including fees assessed by the Company for handling
chargebacks, monthly minimums, equipment leases, rentals and sales, and other
miscellaneous services. The Company's revenues are reported net of amounts paid
to ISOs and agent banks under revenue sharing agreements pursuant to which such
parties receive payments based primarily on processing volume for particular
groups of merchants.
<PAGE>

                                   Expenses

Cost of service includes all costs directly attributable to the Company's
provision of services to its merchant customers. The most significant component
of cost of service includes interchange and assessment fees, which are amounts
charged by the credit card associations for clearing services, advertising and
other expenses. Interchange and assessment fees are billed primarily as a
percent of dollar volume processed and, to a lesser extent, as a
per-transaction fee. Cost of service also includes charges paid to third
parties for point-of-sale ("POS") network service (for merchant customers
acquired but not yet converted to the NOVA Network), merchant accounting and
settlement fees paid to third-party vendors, cost of equipment leased, rented
or sold, NOVA Network costs and other operating expenses.

Conversion costs include costs incurred to convert the acquired portfolios
to the NOVA Network and operating systems. These costs include expenses related
to reprogramming POS terminals at merchant locations, duplicate costs to
process transactions prior to conversion, unfavorable contract payments for
transaction authorizations and independent contractor fees.

Selling, general and administrative expenses include salaries, commissions and
benefits, travel and entertainment, telephone, and other operating costs of the
Company's operations and marketing centers and its corporate office.

Depreciation and amortization are related to the Company's capital
expenditures, merchant portfolio purchases and business acquisitions.
Depreciation of property and equipment is recognized on a straight-line basis
over periods of three to seven years for equipment and 30 years for buildings.
Merchant portfolio purchases result in the capitalization of merchant and
customer contract values, which are amortized over 10 years based upon the
Company's merchant attrition experience and projected revenue streams. Excess
cost of businesses acquired is amortized over 30 years.

                             RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
revenues represented by certain items on the Company's consolidated statements
of operations:

                         Percentage of Total Revenues

<TABLE>
<CAPTION>
                                              Years ended      10-month period
                                              December 31,    ended December 31,
                                            ----------------  ------------------
                                             1997      1996           1995
                                            ----------------  ------------------
<S>                                         <C>       <C>     <C>
Revenues                                    100.0%    100.0%        100.0%
Cost of service                              77.5      78.1          77.8
Conversion costs                              0.8       2.4           2.7
Selling, general and administrative          10.1      12.4          13.8
Depreciation and amortization                 3.2       2.6           3.6
Operating income                              8.4       4.5           2.1
Interest (income) expense, net               (0.2)        -           1.5
Minority interest in income of subsidiary     0.2         -             -
Income before provision for income taxes      8.4       4.5           0.6
Provision (benefit) for income taxes          3.2       1.8          (3.1)
Net income                                    5.2%      2.7%          3.7%
</TABLE>
<PAGE>

                  YEAR ENDED DECEMBER 31, 1997 COMPARED WITH
                         YEAR ENDED DECEMBER 31, 1996

                                   Revenues

Revenues increased 26.3% to $335.6 million for the year ended December 31,
1997, compared with $265.8 million for the same period in 1996. The increase
resulted from a 25.6% increase in merchant sales volume processed to $15.0
billion for 1997, compared to $11.9 billion in 1996. Of these increases, $34.0
million in revenues and $1.5 billion in sales volume processed are attributable
to the Firstar Joint Venture and the Crestar portfolio purchase, with the
remainder resulting primarily from internal sales efforts and other bank
marketing relationships.


                                Cost of Service

Cost of service increased 25.3% to $260.1 million for the year ended
December 31, 1997, compared with $207.6 million for the same period in 1996.
The increase resulted from additional interchange and assessment fees and other
operating costs associated with the higher volume of merchant sales. Cost of
service as a percentage of revenues declined from 78.1% to 77.5%, reflecting
continuing cost efficiencies. These cost efficiencies result from
proportionately lower payments to third-party networks as fewer company
merchants utilize third-party networks and merchant accounting processors, as
well as increased economies of scale.

                               Conversion Costs

Conversion costs decreased 59.4% to $2.6 million for the year ended December
31, 1997, compared with $6.4 million for the same period in 1996. The decrease
resulted primarily from the substantial completion of the conversion of the
First Union Corporation portfolio in 1996.

                 Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 3.0% to $34.0 million
for the year ended December 31, 1997, compared with $33.0 million for the same
period in 1996. Higher expenses in 1997 resulted from the addition of personnel
in the Company's operations center to support the increased merchant sales
volume processed. Additionally, sales and marketing expenses increased to
support the Company's growing number of merchants and bank marketing
relationships. Selling, general and administrative expenses declined to 10.1%
of revenues for the year ended December 31, 1997, compared with 12.4% for the
same period in 1996, reflecting operational efficiencies.
<PAGE>

                         Depreciation and Amortization

Depreciation and amortization increased 52.6% to $10.7 million for the year
ended December 31, 1997, compared with $7.0 million for the same period in
1996. This increase is attributable to increased depreciation from significant
investments in the Company's transaction processing network to expand capacity
and additional amortization from merchant portfolio purchases.

                               Operating Income

For the foregoing reasons, operating income for the year ended December 31,
1997, increased 138.3% to $28.4 million compared with $11.9 million for the
same period in 1996.

                        Interest Expense (Income) - Net

Net interest income increased to $721,000 for the year ended December 31, 1997,
compared with $126,000 for the same period in 1996. This increase relates to
lower average bank debt during 1997 than existed during 1996. The Company used
the net proceeds received from the initial public offering in May 1996 to reduce
the bank debt. Further, interest income was generated from the investment of the
remaining net proceeds of the offering and cash flow from operations.

                                 Income Taxes

Income tax expense was recorded at an effective tax rate of 38.6% in fiscal
1997. Income tax expense increased to $10.9 million for the year ended December
31, 1997, compared to $4.8 million for the same period in 1996. This increase
resulted from increased pre-tax income.

                                  Net Income

Net income increased $10.1 million to $17.4 million for the year ended
December 31, 1997, compared with net income of $7.3 million for the same period
in 1996, due to the factors discussed above.

                   YEAR ENDED DECEMBER 31, 1996 COMPARED TO
                    10-MONTH PERIOD ENDED DECEMBER 31, 1995

                                   Revenues

Revenues for the year ended December 31, 1996, increased 106.0% to $265.8
million compared with $129.0 million for the 10-month period ended December 31,
1995. The increase resulted primarily from a 99.6 %, or $5.9 billion, increase
in sales volume processed for the year to $11.9 billion from $6.0 billion in
1995.  First Union's merchant processing portfolio, which was acquired effective
December 1, 1995, accounts for increases of $106.7 million in revenues and $4.6
billion in sales volume processed. Due to the Company's change in fiscal year
end, effective as of December 31, 1995, the Company's revenues in 1996 included
a full 12 months, as compared to the prior year's 10- month fiscal year.
Additionally, the Company entered into 17 exclusive bank marketing agreements
in 1996.

                                Cost of Service

NOVA's cost of service increased 106.8% to $207.6 million for the year ended
December 31, 1996, from $100.4 million for the 10-month period ended December
31, 1995. As a percentage of revenues, cost of service increased to 78.1% for
the year ended December 31, 1996, from 77.8% for the 10-month period ended
December 31, 1995. These increases resulted from additional interchange and
assessment fees associated with the higher volume of merchant sales and from
authorization fees paid to third- party networks and merchant accounting
processors for merchants not yet converted to the NOVA Network.
<PAGE>

                               Conversion Costs

Conversion costs increased 85.8% to $6.4 million for the year ended December
31, 1996, as compared with $3.4 million for the 10-month period ended December
31, 1995. The increase resulted primarily from the ongoing conversion of the
First Union portfolio, acquired in December 1995.

                 Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 85.2% to $33.0
million in the year ended December 31, 1996 from $17.8 million for the 10-month
period ended December 31, 1995. Higher expenses in 1996 resulted from
additional staffing levels in the Company's operations center to support the
increased merchant sales volume processed, as well as a one-time cost involved
in consolidating three operational offices around the country to NOVA's
corporate headquarters and the Knoxville, Tennessee center. In addition, sales
and marketing expenses increased to support the Company's growing merchant and
bank alliance relationships. Selling, general and administrative expenses
decreased as a percent of revenues to 12.4% in 1996 from 13.8% in the prior
year, reflecting operating efficiencies.

                         Depreciation and Amortization

Depreciation and amortization increased 50.6% to $7.0 million for the year ended
December 31, 1996, from $4.6 million for the 10-month period ended December 31,
1995. The increase was principally due to greater depreciation for POS
terminals, additional systems hardware and software purchases to enhance the
Company's transaction processing system, as well as operational equipment needed
to support NOVA's growth. To a lesser extent, this expense increased due to
additional amortization of certain intangible assets related to the merchant
portfolios purchases.

                               Operating Income

For the foregoing reasons, operating income increased 326.9%, or $9.1
million, to $11.9 million for the year ended December 31, 1996, compared to
$2.8 million for the 10-month period ended December 31, 1995.

                        Interest Expense (Income) - Net

Net interest expense decreased $2.1 million for the year ended December 31,
1996, resulting in net interest income of $126,000, compared to net interest
expense of $2.0 million for the prior year. The decrease in interest expense
was due to reduced levels of bank debt and purchase note obligations resulting
from the use of net proceeds received from the Company's initial public
offering. The increase in interest income was generated from the investment of
the net proceeds received from the Company's initial public offering, as well
as cash generated from operating activities in 1996.

                                 Income Taxes

Income tax expense was recorded at an effective tax rate of 40% in 1996.
During the 10-month period ended December 31, 1995, a one-time tax benefit of
$5.0 million was included in the provision for income tax reflecting the
reversal of a deferred tax valuation allowance as a result of the Company's
improved profitability in 1995.

                                  Net Income

For the year ended December 31, 1996, net income increased $2.4 million, or
48.7%, to $7.3 million compared to $4.9 million for the 10-month period ended
December 31, 1995, due to the factors discussed above. Net income for 1995
included a one-time tax benefit of $5.0 million.
<PAGE>

                        LIQUIDITY AND CAPITAL RESOURCES

The Company's primary uses of its capital resources include purchases of
merchant portfolios, capital expenditures and working capital.

In October 1997, the Company obtained from a third party bank an $80 million
credit facility, the proceeds of which may be used for acquisitions (subject to
certain restrictions) and other corporate purposes. The Company, at its option
and subject to the satisfaction of certain conditions, may increase the
aggregate amount available on the credit facility to $100 million. As of
December 31, 1997, $32.8 million in borrowings were outstanding under this
facility.

Net cash provided by operating activities was $18.0 million for the year
ended December 31, 1997, as compared to $20.7 million for the year ended
December 31, 1996 and $4.9 million for the 10-month period ended December 31,
1995.

Net cash used in investing activities was $90.6 million for the year ended
December 31, 1997, as compared to $10.0 million for the year ended December 31,
1996 and $5.1 million for the 10-month period ended December 31, 1995. The
Company's investment expenditures primarily consist of merchant portfolio
purchases and investments in computer hardware and software necessary to
support the NOVA Network and the systems at the Company's operations center.
Other significant investment activities include facility expansions necessary
to accommodate the Company's growth. For the years ended December 31, 1997 and
1996, and the 10-month period ended December 31, 1995, the Company's capital
expenditures totaled approximately $15.2 million, $6.1 million and $1.6
million, respectively. For these same periods, merchant processing portfolio
purchases and joint venture investments totaled $75.4 million, $4.0 million and
$3.3 million, respectively.

Net cash provided by financing activities was $33.0 million and $28.9
million for the years ended December 31, 1997 and 1996, respectively. Net cash
provided in 1997 resulted from borrowings under the above credit agreement
which were used for investing activities. Net cash provided in 1996 resulted
primarily from the Company's initial public offering. The proceeds received
from this offering were used to reduce most of its then existing bank debt, to
redeem the 5,000 shares of Series D Preferred Stock for $5.0 million and to pay
all cumulative dividends of $11.7 million to holders of Preferred Stock
concurrent upon the liquidation of all series of Preferred Stock.

The Company typically has relatively low working capital requirements because
discount fees charged to merchants are collected in an average of 15 days, while
normal payables are paid in 30 days or longer. In addition, increasing
acquisition activity may cause variations in working capital due to conversion-
period operating costs and the transition in the payment of expenses and the
collection of receivables from the former processor to the Company. Such
variations are particularly evident at December 31, 1997, in their effect on
trade receivables, which increased 119.1% over 1996, and accounts payable,
including accounts payable to affiliates, which, on a combined basis, increased
80.1% over 1996. Typically, the changes in these working capital accounts would
more closely follow changes in the level of processed volume, which from
December 1996 to December 1997 increased 69.9%. Because of the seasonality of
the Company's business, capital requirements may be greater in certain months.

The Company anticipates that it will incur approximately $20.0 million in
capital expenditures during 1998 for additional operations facilities and for
expansion of the Company's information systems. Such investments relate
directly to the recent portfolio purchases and joint venture investments
described above. The Company anticipates that it will incur substantially lower
capital expenditures in 1999. However, no assurances can be given that the
Company will not incur additional capital expenditures during 1998 and 1999.

The Company must address Year 2000 compliance for POS merchant activity,
internal operating systems and suppliers and vendors. In June of 1997, the
Company was certified by VISA U.S.A. and
<PAGE>

Mastercard International as capable of processing transactions for cards issued
with expiration dates of 2000 and beyond. This means all of the Company's
customers have been upgraded with compliant software, and the Company's network
and switch can accommodate the Year 2000.

The Company has developed a plan to ensure all internal systems are
compliant with the Year 2000. These efforts are well under way and are
scheduled to be completed by year end 1998. Significant outside vendors and
suppliers are also scheduled to be Year 2000 compliant by year end 1998.
However, while the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
properly converted on a timely basis and will not have a material effect on the
Company. It is assumed should any vendor not be compliant by January 1, 1999,
the Company will have sufficient time to switch their business to an entity
which is compliant. The cost of Year 2000 initiatives has not been and is not
expected to be material to the Company's results of operations or financial
position.

In February 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to a proposed public offering
of 7,100,000 shares of Common Stock. Of the shares to be offered, 5,300,000
shares will be sold by the Company and 1,800,000 shares will be sold by certain
selling shareholders. The Company intends to use the proceeds from the offering
to retire indebtedness, to finance potential future acquisitions, to fund
capital expenditures and for general corporate purposes.

The Company believes its existing cash and cash equivalents, cash generated
from operations, proceeds from the proposed public offering and available
credit facilities are sufficient to fund future merchant portfolio purchases,
capital investment needs and working capital requirements for the foreseeable
future.
<PAGE>

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      ---------------------------
                                                                                           1997         1996
                                                                                      ---------------------------
Assets
Current Assets:
<S>                                                                                   <C>           <C>
Cash and cash equivalents                                                             $    739,000   $ 40,326,000
Trade receivables, less allowance for doubtful accounts
  of $2,822,000 and $2,707,000 at December 31, 1997 and
  December 31, 1996, respectively                                                       35,377,000     16,147,000
Inventory                                                                                1,156,000        857,000
Deferred tax asset and
  other current assets                                                                   5,373,000      3,160,000
                                                                                      ------------   ------------
  Total current assets                                                                  42,645,000     60,490,000
Merchant and customer contracts                                                         92,197,000     21,868,000
Property and equipment, net                                                             21,017,000     10,212,000
Excess cost of businesses acquired                                                      12,805,000     13,301,000
Deferred tax asset and other non-current assets                                          1,864,000      1,834,000
                                                                                      ------------   ------------

                                                                                      $ 170,528,000 $ 107,705,000
                                                                                      ============   ============

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable                                                                      $  8,015,000   $  4,810,000
Accounts payable to affiliate                                                            3,410,000      1,534,000
Accrued compensation and related costs                                                     726,000      1,416,000
Settlement obligations                                                                  10,896,000      7,691,000
Other accrued liabilities                                                                7,010,000      5,157,000
Long-term debt obligations due within one year                                             350,000        507,000
                                                                                      ------------   ------------
           Total current liabilities                                                    30,407,000     21,115,000
Deferred tax liability                                                                   3,112,000        849,000
Long-term debt obligations                                                              33,296,000        859,000
Minority interest in subsidiary                                                            776,000           --
Commitments and Contingencies
Shareholders' Equity:
Common Stock, $.01 par value, 50,000,000 shares
  authorized, 29,031,000 and 28,721,000 shares issued at
  December 31, 1997 and 1996, respectively                                                 290,000        288,000
  Additional paid in capital                                                            99,967,000     99,299,000
  Retained earnings (accumulated deficit)                                                2,680,000    (14,705,000)
                                                                                      ------------   ------------
  Total shareholders' equity                                                           102,937,000     84,882,000
                                                                                      ------------   ------------
                                                                                      $170,528,000   $107,705,000
                                                                                      ============   ============
</TABLE>

                            See accompanying notes.

<PAGE>

                     Consolidated Statements of Operations
<TABLE>
<CAPTION>                                                                         10-month
                                                       Years ended              period ended
                                                       December 31,             December 31,
                                              ------------------------------    -------------
                                                  1997               1996             1995
                                              ------------------------------    -------------
<S>                                          <C>              <C>              <C>
Revenues                                      $ 335,625,000    $ 265,829,000    $ 129,035,000
Operating Expenses:
Cost of service                                 260,058,000      207,595,000      100,375,000
Conversion costs                                  2,595,000        6,395,000        3,441,000
Selling, general and administrative              33,952,000       32,952,000       17,795,000
Depreciation and amortization                    10,658,000        6,982,000        4,635,000
                                              -----------------------------------------------
Operating Income                                 28,362,000       11,905,000        2,789,000
Interest (income) expense, net                     (721,000)        (126,000)       1,959,000
Minority interest in income of subsidiary           776,000             --               --
                                              -----------------------------------------------
Income before provision for income taxes         28,307,000       12,031,000          830,000
Provision (benefit) for income taxes             10,922,000        4,764,000       (4,057,000)
                                              ------------------------------    -------------
Net Income                                    $  17,385,000    $   7,267,000    $   4,887,000
                                              ------------------------------    -------------
Net income per common share
  (pro forma prior to May 8, 1996)            $        0.60    $        0.25    $        0.24
                                              ------------------------------    -------------
Net income per common share -
  assuming dilution (pro forma
  prior to May 8, 1996)                       $        0.58    $        0.25    $        0.24
                                              ------------------------------    -------------
</TABLE>
                            See accompanying notes

<PAGE>

                Consolidated Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                                      Retained Earnings
                                                                                           Additional    (Accumulated    Treasury
                                         Preferred Stock             Common Stock         Paid-in Capital   Deficit)       Stock
                                       ----------------------    -----------------------   ------------- -------------   ----------
                                       Shares      Amount        Shares         Amount
                                       ----------------------    -----------------------   ------------- -------------   ----------
<S>                                    <C>       <C>           <C>          <C>            <C>           <C>            <C>
Balance at February 28, 1995             33,571  $ 33,571,000    1,792,000   $    18,000    $    301,000 $ (15,028,000)  $ (143,000)
  Retirement of
    treasury stock                         --            --       (121,000)       (1,000)           --        (142,000)     143,000
  Issuance of Common Stock in
    a non-monetary transaction
    with First Union                       --            --      9,149,000        91,000       2,320,000          --           --
  Issuance of Common Stock in
    exchange for outstanding
    warrants                               --            --        558,000         6,000          (6,000)         --           --
  Net Income                               --            --           --            --              --       4,887,000         --
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1995             33,571    33,571,000   11,378,000       114,000       2,615,000   (10,283,000)        --
  Exchange of
    Preferred Stock for
    Common Stock                        (28,571)  (28,571,000)  11,876,000       119,000      28,452,000          --           --
  Redemption of Series D
    Preferred Stock                      (5,000)   (5,000,000)        --            --              --            --           --
  Payment of accrued dividends
    on Preferred Stock                     --            --           --            --              --     (11,689,000)        --
  Exercise of stock options                --            --      1,674,000        17,000       1,965,000          --           --
  Income tax benefit from
    stock option exercises                 --            --           --            --           977,000          --           --
  Issuance of Common Stock
    related to initial
    public offering                        --            --      3,793,000        38,000      72,038,000          --           --
  Initial public offering expenses         --            --           --            --        (6,748,000)         --           --
  Net Income                               --            --           --            --              --       7,267,000         --
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1996               --            --     28,721,000       288,000      99,299,000   (14,705,000)        --
  Exercise of stock options                --            --        310,000         2,000         668,000          --           --
  Net Income                               --            --           --            --              --      17,385,000         --
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1997               --    $       --     29,031,000  $    290,000    $ 99,967,000  $  2,680,000  $      --
                                       =============================================================================================
</TABLE>

                            See accompanying notes.


<PAGE>

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                             Years ended       10-month period ended
                                                                              December 31,           December 31,
                                                                     -----------------------------   -------------
                                                                          1997            1996          1995
                                                                     -----------------------------   -------------
<S>                                                                  <C>             <C>              <C>
Cash Flows From Operating Activities:

Net income                                                            $ 17,385,000    $  7,267,000    $  4,887,000
Adjustments to reconcile net income
  to net cash provided by operating activities:
  Depreciation and amortization                                         10,658,000       6,982,000       4,635,000
  Deferred income taxes                                                  2,331,000       3,045,000      (4,057,000)
  Loss on disposal of equipment                                             12,000            --              --
  Minority interest                                                        776,000            --              --
  Gain on disposition of non-compete agreement                                --          (150,000)           --
  Changes in assets and liabilities, net of the effects of business
  acquisitions:
  Trade receivables                                                    (19,230,000)     (6,079,000)     (4,606,000)
  Inventory                                                               (299,000)        223,000        (303,000)
  Other assets                                                          (3,057,000)        (84,000)       (348,000)
  Accounts payable                                                       5,081,000        (719,000)      3,451,000
  Accrued liabilities                                                    4,368,000      10,242,000       1,260,000
                                                                        ------------------------------------------
  Net cash provided by operating activities                             18,025,000      20,727,000       4,919,000
Cash Flows from Investing Activities:
Purchases of merchant contracts                                        (75,410,000)     (3,967,000)     (3,302,000)
Additions to property and equipment                                    (15,152,000)     (6,065,000)     (1,624,000)
Other                                                                         --            64,000        (130,000)
                                                                        ------------------------------------------
Net cash used in investing activities                                  (90,562,000)     (9,968,000)     (5,056,000)
Cash Flows from Financing Activities:
Proceeds from line of credit and notes payable, net                     32,800,000       4,008,000       4,900,000
Payment of long-term debt and capital leases                              (520,000)    (25,692,000)     (5,129,000)
Payment of Preferred Stock dividends                                          --       (11,689,000)           --
Proceeds from stock options exercised                                      670,000       1,982,000            --
Proceeds from initial public offering, net                                    --        65,328,000            --
Redemption of Preferred Stock                                                 --        (5,000,000)           --
Net cash provided by (used in) financing activities                     ------------------------------------------
                                                                        32,950,000      28,937,000        (229,000)
                                                                        ------------------------------------------
(Decrease) Increase in Cash and Cash Equivalent                        (39,587,000)     39,696,000        (366,000)
Cash and Cash Equivalents, Beginning of Year                            40,326,000         630,000         996,000
                                                                        ------------------------------------------
Cash and Cash Equivalents,
End of Year                                                           $    739,000    $ 40,326,000    $    630,000
                                                                        ==========================================
</TABLE>

                            See accompanying notes.

<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    NOTE 1

                  Summary of Significant Accounting Policies

Description of Business and Organization . NOVA Corporation (the "Company'' or
"NOVA'') is an integrated provider of transaction processing services, related
software application products and value-added services primarily to small- to
medium-sized merchants. The Company provides transaction processing support for
all major credit and charge cards, including VISA, MasterCard, American Express,
Discover, Diners Club and JCB, and also provides access to debit card processing
and check verification services. The Company provides merchants with a broad
range of transaction processing services, including authorizing card
transactions at the point-of-sale ("POS"), capturing and transmitting
transaction data, effecting the settlement of payments and assisting merchants
in resolving billing disputes with their customers.

NOVA Corporation was incorporated in December 1995. NOVA Information Systems,
Inc., a wholly owned subsidiary and predecessor to the Company ("NOVA
Information Systems''), was incorporated in Georgia in February 1991. Effective
December 1, 1995, the then current shareholders of NOVA Information Systems
contributed to NOVA Corporation all of the shares of capital stock of NOVA
Information Systems owned by them, thereby causing NOVA Information Systems to
become a wholly owned subsidiary of NOVA Corporation .

On October 30, 1995, NOVA entered into an agreement with First Union
Corporation ("First Union") whereby First Union agreed to contribute its
transaction processing assets, including those acquired by First Union through
its acquisition of First Fidelity Bancorporation, to NOVA in exchange for
9,149,209 shares of NOVA's Common Stock. The transaction, which was consummated
on January 31, 1996, is reflected in the accompanying financial statements
since December 1, 1995, because, pursuant to the terms of the agreement,
revenues since December 1, 1995, derived from the First Union assets have
irrevocably accrued to the benefit of NOVA. The transfer of these nonmonetary
assets, primarily terminals at merchant locations, by First Union has been
accounted for at their historical cost of $2,411,000, because First Union is
deemed under the rules and regulations of the Securities and Exchange
Commission to be a promoter of NOVA.

Principles of Consolidation . The consolidated financial statements include the
accounts of NOVA Corporation and its wholly owned subsidiaries as if NOVA
Corporation existed for all periods presented. Also included in the consolidated
financial statements are the accounts of Elan Merchant Services, LLC, a joint
venture owned 51% by the Company. The operating results from the joint venture
are included from the date the Company purchased its membership interest,
October 31, 1997. All significant intercompany accounts and transactions have
been eliminated in consolidation. The Company has made business and customer
base purchases and has accounted for them as purchase transactions, and,
accordingly, the results of the acquired businesses or customer bases are
included since the dates of purchase.

Use of Estimates in the Preparation of Financial Statements . In preparing
financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>

Revenue and Cost Recognition . Revenues derived from the electronic processing
of transactions (principally merchant discount) are recognized at the time the
merchants' transactions are processed. Related commissions and processing
charges are also recognized at that time.

When the Company purchases merchant portfolios, it generally enters into
revenue sharing agreements with sellers. The revenue sharing amounts are
determined primarily based on sales volume processed for a particular group of
merchants. The revenue sharing agreements generally have an initial term of at
least three years with renewal provisions. Revenue is shown in the accompanying
statements of operations, net of revenue sharing amounts of $8,153,000,
$6,455,000 and $5,446,000, for the years ended December 31, 1997 and 1996 and
the 10-month period ended December 31, 1995, respectively.

Cost of service includes interchange fees paid to the credit card issuing-
bank, communications costs, VISA and MasterCard assessments, and merchant
accounting processing fees. These costs are recognized at the time the
merchants' transactions are processed and the related revenue is recorded.

Rental Equipment . The Company rents POS equipment to merchants under month-to-
month agreements. The rented equipment is capitalized and depreciated over three
years. The cost of such equipment and accumulated depreciation at December 31,
1997, and December 31, 1996, included in property and equipment were as follows:

                                        December 31,
                                ---------------------------
                                    1997            1996
                                ---------------------------
Cost of equipment               $ 6,715,000     $ 5,796,000
Less accumulated depreciation     4,490,000       2,939,000
                                -----------     -----------
                                $ 2,225,000     $ 2,857,000
                                ===========     ===========

Accounts Receivable . Accounts receivable are primarily comprised of amounts due
from the Company's clearing and settlement banks and represent the discount
earned, after related interchange fees on transactions processed during the
month ending on the balance sheet date. Such balances are received from the
Company's clearing and settlement banks approximately 15 days following the end
of each month.

The Company's merchant customers have liability for charges disputed by
cardholders. However, in the case of merchant insolvency, bankruptcy or other
nonpayment, the Company may be liable for any of such charges disputed by
cardholders. The Company believes that the diversification of its merchant
portfolio among industries and geographic regions minimizes its risk of loss.
Based on its historical loss experience, the Company has established reserves
for estimated credit losses on transactions processed.

Stock Compensation . The Company accounts for its stock option plans in
accordance with Accounting Principles Board Opinion Number 25, "Accounting for
Stock Issued to Employees'' ("APB 25''). In accordance with APB 25, no
compensation expense has been recognized because the options had an exercise
price equal to the market value of Common Stock on the day of grant. Refer to
Note 10 regarding pro forma information provided pursuant to Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation."
<PAGE>

Inventory . Inventory, which consists of electronic POS equipment, held for sale
or rental to merchants, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.

Conversion Costs . The cost of converting purchased merchant portfolios from the
seller's processing platform and telecommunications network to the Company's
network is expensed as incurred.

Property and Equipment . Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method for financial reporting purposes and primarily accelerated methods for
tax purposes. For financial reporting purposes, equipment is depreciated over
three to seven years and buildings are depreciated over 30 years. Leasehold
improvements and property acquired under capital leases are amortized over the
useful life of the asset or the lease term, whichever is shorter. The Company
capitalizes costs associated with the development of software for the Company's
internal use. Such costs are depreciated over the useful life of the software of
up to seven years.

Intangibles . The excess cost of businesses acquired is amortized on the
straight-line basis over 30 years. Accumulated amortization at December 31, 1997
and 1996 was $2,048,000 and $1,552,000, respectively.

Amortization of merchant and customer contracts (portfolios) is provided on
a straight-line basis over a 10-year life, based on the Company's estimates of
future merchant sales volumes. Accumulated amortization of portfolios was
$13,255,000 and $8,174,000 at December 31, 1997 and 1996, respectively. The
Company evaluates the reasonableness of the amortization period for its
portfolios by monitoring the merchant sales volume processed for those
merchants included in the portfolio at the purchase date. The Company will
adjust the amortization period of the portfolios if actual merchant sales
volumes indicate a different amortization period is more appropriate.

Management periodically evaluates intangibles for indications of impairment
based on the operating results of the related business or merchant portfolio
purchased. If this evaluation indicates that the intangible asset will not be
recoverable, as determined based on the undiscounted cash flows related to the
intangible asset over the remaining life of the asset, the carrying value of
the related intangible asset will be reduced to fair value.

The Company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets
to be Disposed Of'' ("SFAS 121") on January 1, 1996. The adoption of SFAS 121
did not have any effect on the financial statements.

Income Taxes . The Company accounts for income taxes under the liability method.
Under the liability method, deferred income taxes are recorded to reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and the amounts used for income tax
purposes.

Settlement Obligations . Settlement obligations result from timing differences
in the Company's settlement processes with merchants.

Cash and Cash Equivalents . For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
<PAGE>

Net Income per Share . In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and, where appropriate, restated to conform to
the SFAS 128 requirements.

                                    NOTE 2

            Merchant Portfolio Purchases and Business Acquisitions

During the years ended December 31, 1997 and 1996, and the 10-month period
ended December 31, 1995, the Company made purchases from various banks and
third parties, including investments in a joint venture, for an aggregate
purchase price of $75,660,000, $4,095,000 and $3,476,000, respectively.

Significant 1997 transactions include purchases of the Crestar Bank
("Crestar") merchant portfolio effective May 29, 1997 and the MBNA America
Bank, N.A. ("MBNA") merchant portfolio effective December 31, 1997. The Company
also entered into a joint venture with Firstar Bank, U.S.A., N.A. ("Firstar")
effective October 31, 1997, whereby Firstar and each of the other banking
affiliates of Firstar contributed substantially all merchant portfolio
contracts to the joint venture. The Company owns 51% of the joint venture and
will perform the transaction processing services for the joint venture's
merchant contracts. Estimated annual processing volume for the Crestar, MBNA
and Firstar merchant contracts are $1.8 billion, $1.0 billion and $3.0 billion,
respectively. The Company's operating results reflect each of these purchases
from the effective dates of the transactions.

The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed resulting from the
acquisitions:

                                                    December 31,
                                      --------------------------------------
                                           1997         1996         1995
                                      --------------------------------------
Current assets                        $         -  $         -   $   157,000
  Property and equipment                        -            -        15,000
  Non-compete agreement                   250,000      128,000       330,000
  Excess cost of businesses acquired            -            -       354,000
  Merchant contracts                   75,410,000    3,967,000     2,620,000
                                       75,660,000    4,095,000     3,476,000
  Liabilities assumed                           -            -             -
  Notes payable to seller                       -      128,000       174,000
  Net cash paid                       $75,660,000  $ 3,967,000   $ 3,302,000
<PAGE>

                                   (Note 3)

                            Property and Equipment

Property and equipment at December 31, 1997 and 1996 consist of:

                                                           December 31,
                                                 ----------------------------
                                                       1997           1996
                                                 ----------------------------
Land and building                                $    744,000    $    614,000
Equipment                                          20,641,000      13,179,000
Software, internally developed                      4,125,000          68,000
Furniture and fixtures                              1,934,000       1,394,000
Leasehold improvements                              1,375,000       1,129,000
Work-in-progress                                    2,701,000            --

                                                   31,520,000      16,384,000

Less accumulated depreciation and amortization    (10,503,000)     (6,172,000)

                                                 $ 21,017,000    $ 10,212,000


                                    Note 4

                                 Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:

                                                    December 31,
                                            ----------------------------
                                                1997            1996
                                            ----------------------------
Deferred Tax Liabilities:
Property and equipment                      $ 2,576,000    $   426,000
Tax over book amortization                         --           22,000
Other                                           540,000        411,000
  Total deferred tax liabilities              3,116,000        859,000
Deferred Tax Assets:
Start-up expenses                                 4,000         10,000
Allowance for doubtful accounts               1,590,000      1,348,000
Accrued liabilities                             761,000        305,000
Book over tax amortization                      121,000           --
Credit carryforwards                               --           39,000
Net operating loss carryforwards                   --          848,000
  Total deferred tax assets                   2,476,000      2,550,000
Net deferred taxes                          $  (640,000)   $ 1,691,000


<PAGE>

In the 10-month period ended December 31, 1995, there was a $5,206,000
change in the valuation allowance which resulted in a reduction of the excess
cost of business acquired of $228,000 as a result of deductible temporary
differences acquired in businesses combinations. The remainder of $4,978,000
was included in the provision for income taxes. In assessing the likelihood of
utilization of existing net deferred tax assets, management considered (a) its
current operating environment, (b) results of future operations to generate
sufficient taxable income and (c) the excess of its appreciated asset values
over the related tax basis and, accordingly, has determined that it is more
likely than not that the deferred tax assets will be realized.

The components of the provision (benefit) for income taxes are as follows:

                                        Years ended        10-month period ended
                                        December 31,            December 31
                                 ------------------------- ---------------------
                                     1997          1996            1995
                                 ------------------------- ---------------------
Current:
  Federal                        $ 7,922,000   $ 1,541,000     $         -
  State                              669,000       178,000               -
Deferred:
  Federal                          2,149,000     2,638,000         871,000
  State                              182,000       407,000          50,000
  Change in valuation allowance            -             -      (4,978,000)
                                 -----------   -----------     ------------
                                 $10,922,000   $ 4,764,000     $(4,057,000)
                                 ===========   ===========     ============

The provision (benefit) for income taxes differs from the amount computed by
applying the federal statutory rate to income before provision for income taxes
for the following reasons:

                                        Years ended        10-month period ended
                                        December 31,            December 31
                                 ------------------------- ---------------------
                                     1997          1996            1995
                                 ------------------------- ---------------------
Provision for income taxes at
  statutory rate                 $ 9,907,000   $ 4,211,000     $     282,000
Amortization of excess cost of
  businesses acquired                 57,000        57,000            48,000
Change in valuation allowance              -             -        (4,978,000)
State income taxes, net of
  federal tax benefit                494,000       381,000            33,000
Other                                464,000       115,000           558,000
                                 -----------   -----------      ------------
                                 $10,922,000   $ 4,764,000      $ (4,057,000)
                                 ===========   ===========      ============
<PAGE>

                                    NOTE 5

                                Capitalization

Preferred Stock . The Company is authorized to issue 5,000,000 shares of
Preferred Stock in one or more series with such designations, powers,
preferences, rights, qualifications, limitations and restrictions as may be
fixed by the Board of Directors.

On May 8, 1996, upon consummation of the Company's initial public offering,
the Series A, B and C Preferred Stock totaling 28,571 shares were converted
into 11,876,218 shares of Common Stock. In addition, the Company redeemed the
5,000 shares of Series D Preferred Stock for $5,000,000 on May 8, 1996.

Cumulative dividends of $11,689,000 were paid to holders of Preferred Stock
concurrent upon the liquidation of all series of Preferred Stock.

Effective December 1, 1995, all outstanding warrants held by two principal
investors to purchase 1,177,600 shares of Common Stock at prices from $2.34 -
$8.20 per share were exchanged for 557,616 shares of the Company's Common Stock.
The fair value of the shares issued in exchange for the warrants was based upon
the value of the shares inherent in the First Union transaction, which
approximated market value. No compensation or distributions were recorded with
respect to the exchange.

                                    NOTE 6

                          Long-Term Debt Obligations

Long-term debt obligations at December 31, 1997 and 1996 consist of:

                                                    December 31,
                                             --------------------------
                                                  1997           1996
                                             --------------------------
Revolving loans due September 30, 2002       $ 32,800,000    $        -
Non-compete payable to The Bank of
  Boulder, discounted at an effective rate
  of 9% and due in equal annual
  installments of $180,000 through 1999           320,000       459,000
Other                                              94,000       182,000
Capital lease obligations (Note 7)                432,000       725,000
Total long-term debt obligations               33,646,000     1,366,000
Less amounts due within one year                  350,000       507,000
Long-term debt obligations                   $ 33,296,000    $  859,000

The annual aggregate maturities of long-term obligations, excluding capital
lease obligations, at December 31, 1997, are as follows:

1998                                                          $    247,000
1999                                                               167,000
2000                                                                     -
2001                                                                     -
2002                                                            32,800,000
                                                              $ 33,214,000
<PAGE>

In October 1997, the Company entered into an agreement with a bank for
aggregate loans of up to $80 million. The Company, at its option and subject to
the satisfaction of certain conditions, may increase the aggregate amount
available on the credit facility to $100 million. On September 30, 2000, all
outstanding borrowings in excess of $50 million convert to term loans due in
eight equal quarterly installments commencing December 31, 2000 and ending
September 30, 2002. All outstanding borrowings under the then remaining $50
million revolving loan commitment are due September 30, 2002.

The Company pays a quarterly commitment fee in arrears on the average daily
unused portion of the funds available for revolving loans and letters of
credit. This commitment fee ranges from .125% to .200% depending on certain
financial ratios. The Company also pays commitment fees for outstanding letters
of credit. Such fees range from .35% to .65% depending on certain financial
ratios. Interest on outstanding borrowings is charged using, at the Company's
option, either the bank's base rate, as defined, or the prevailing Eurodollar
rate plus a margin determined from certain financial ratios. At December 31,
1997, outstanding borrowings included $22.8 million at the bank's base rate of
8.5% and $10.0 million in Eurodollar-based loans at a weighted-average rate of
6.2%. Concurrent with entering the above credit agreement, the Company
cancelled its previous credit facility, which had available borrowings of $10.0
million. There were no borrowings outstanding under the previous facility at
the date of cancellation.

Borrowings under the loan agreement are collateralized by substantially all
the assets of the Company. The loan agreement contains restrictive covenants
which include, among other items, maintenance of specified ratios of EBITDA
(earnings before interest, taxes, depreciation and amortization) to fixed
charges and funded debt and restrictions on the payment of dividends.


                                    NOTE 7

                               Lease Obligations

The Company leases office facilities and equipment under non-cancelable
capital lease agreements.

The Company also has entered into non-cancelable operating leases covering
certain other equipment and office facilities. Rental expense for the years
ended December 31, 1997 and 1996 and the 10-month period ended December 31,
1995, was approximately $1,454,000, $912,000 and $509,000, respectively.

Asset balances for property acquired under capital leases included in
property and equipment consist of:

                                         December 31,
                                ----------------------------
                                     1997            1996
                                ----------------------------
Building                        $   273,000     $   273,000
Equipment                         1,658,000       1,658,000
                                  1,931,000       1,931,000
Less accumulated depreciation     1,468,000       1,409,000
                                $   463,000     $   522,000
<PAGE>

Future minimum lease payments for all non-cancelable leases at December 31,
1997, are summarized below:

                                     Operating Leases   Capital Leases
                                     ----------------   --------------
Year ending December 31,
1998                                    $ 1,434,000       $ 159,000
1999                                      1,163,000         151,000
2000                                      1,081,000          95,000
2001                                        926,000          70,000
2002                                        157,000          70,000
Thereafter                                        -          45,000
Total future minimum lease payments     $ 4,761,000       $ 590,000
Less amount representing interest                           158,000
Present value of minimum lease payments                     432,000
Less amounts due within one year                            103,000
Long-term obligations under capital leases                $ 329,000


                                    NOTE 8

                                Contingencies

The Company is, from time to time, subject to claims and suits arising in
the ordinary course of its business. In the opinion of management, the ultimate
resolution of any such pending matters will not have a material effect on the
Company's financial position and results of operations.

                                    NOTE 9

                      Supplemental Cash Flow Information

Supplemental cash flow disclosures, including non-cash investing and
financing activities, are:

<TABLE>
<CAPTION>
                                                Years ended        10-month period ended
                                                December 31,           December 31,
                                         ------------------------  ---------------------
                                             1997         1996             1995
                                         ------------------------  ---------------------
<S>                                      <C>          <C>          <C>
Interest paid                            $   300,000  $ 1,178,000      $ 2,251,000
Income taxes paid                         10,350,000      230,000                -
Acquisition of equipment in exchange for
  debt or capital leases                           -            -          383,000
Note payable issued in conjunction with
  business acquisition                             -      128,000          174,000
Transfer of transaction processing assets,
  primarily terminals at merchant locations,
  in exchange for Common Stock                     -            -        2,411,000
</TABLE>
<PAGE>

                                    NOTE 10

                              Stock Option Plans

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model, with the following weighted-average
assumptions for 1997: risk-free interest rate of 5.70%; a dividend yield of 0%;
volatility factors of the expected market price of the Company's Common Stock
of 0.544 and a weighted-average expected life of the option of seven years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

                                                         1997           1996
                                                    ---------------------------
Pro forma net income                                $ 16,245,000    $ 6,824,000
Pro forma net income per share                              0.56           0.23
Pro forma net income per share - assuming dilution          0.54           0.23

The effect of applying Statement 123's fair value method to the Company's
stock-based awards granted in 1995 results in net income and earnings per share
that are not materially different from amounts reported because the Company
elected to use the minimum value method allowed under Statement 123 for
non-public companies. Because Statement 123 is applicable only to options
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999.
<PAGE>

A description and summary of the Company's stock option plans and activity
follows:

The Company has reserved 3,100,000 common shares related to options and
550,000 shares related to stock appreciation rights, pursuant to its 1991 stock
option and stock appreciation rights plan. The Plan is administered by a
committee of the Board of Directors, which determines the number of shares to
be granted and the option price per share. Each option expires 10 years from
the grant date. The options may be exercised in 20% increments annually,
beginning on March 1 following the date of grant. No options or rights shall be
granted under the Plan after November 2, 2001. No appreciation rights have been
granted.

A summary of the Company's stock option activity under the 1991 Plan, and
related information, follows:

                                                         Weighted-Average
                                    Number of Options     Exercise Price
                                    -----------------    ----------------
Balance at February 28, 1995            2,872,189               1.18
        Granted                            64,000               2.34
        Terminated                        (24,320)              1.18
Balance at December 31, 1995            2,911,869               1.21
        Terminated                        (31,029)              1.18
        Exercised                      (1,673,432)              1.18
Balance at December 31, 1996            1,207,408               1.24
        Terminated                        (20,736)              1.47
        Exercised                        (289,673)              1.25
Balance at December 31, 1997              896,999               1.18
Exercisable at December 31, 1997          710,139               1.18

Exercise prices for options outstanding as of December 31, 1997, ranged from
$1.18 to $2.34. The weighted-average remaining contractual life of those
options is 6.4 years.

The Company has reserved 2,000,000 shares of Common Stock for issuance under
the 1996 Employees Stock Incentive Plan related to Incentive Stock Options,
Non-qualified Stock Options, stock appreciation rights and restricted stock
awards. The shares subject to options can be purchased, and rights exercised,
in 25% increments at the end of each of the four years subsequent to the date
of grant. The option price per share for Incentive Stock Options cannot be less
than the fair market value of the Common Stock on the date the option is
granted. Each option expires 10 years after the date of grant.
<PAGE>

A summary of the Company's stock option activity under the 1996 Employees
Plan, and related information, follows:

                                                         Weighted-Average
                                    Number of Options     Exercise Price
                                    -----------------    ----------------
Balance at December 31, 1995                    -
        Granted                           666,890            $ 19.51
        Terminated                        (57,420)             25.57
Balance at December 31, 1996              609,470              18.94
        Granted                           504,090              13.74
        Terminated                       (118,202)             17.53
        Exercised                         (33,054)             18.99
Balance at December 31, 1997              962,304              16.37
Exercisable at December 31, 1997          111,475              18.93
Weighted-average fair value of options
        granted during 1996                                    13.46
Weighted-average fair value of options
        granted during 1997                                     8.49

Exercise prices for options outstanding as of December 31, 1997, ranged from
$13.63 to $19.00. The weighted-average remaining contractual life of those
options is 8.8 years.

On October 17, 1996, the Company adopted the NOVA Corporation 1996 Directors
Stock Option Plan, and reserved 150,000 shares of Common Stock for issuance
pursuant to this plan. Stock options granted under this plan are exercisable in
25% increments at the end of each of the four years subsequent to the date of
grant. Options are granted at a purchase price per share no less than the
market value per share on the grant date. The weighted-average remaining
contractual life of those options is 9.3 years.

A summary of the Company's stock option activity under the 1996 Directors Plan,
and related information, follows:

                                                         Weighted-Average
                                    Number of Options     Exercise Price
                                    -----------------    ----------------
Balance at December 31, 1995                    -
        Granted                             3,000            $ 30.50
        Terminated                              -                  -
Balance at December 31, 1996                3,000              30.50
        Granted                             5,000              23.49
        Terminated                              -                  -
Balance at December 31, 1997                8,000              26.12
Exercisable at December 31, 1997              750              30.50
<PAGE>

                                    NOTE 11

                             Pro Forma Information

Pro forma net income per common share is based on net income attributable to
holders of the Company's Common Stock (net income less dividends on Series D
Preferred Stock of $230,000 and $489,000 for the year ended December 31, 1996
and the 10-month period ended December 31, 1995, respectively) and the
weighted-average number of common and common equivalent shares outstanding
during the respective periods, assuming the conversion of Series A, B and C
Convertible Preferred Stock into Common Stock. Dilutive common equivalents
consist of stock options (calculated using the treasury-stock method). Pursuant
to the requirements of the Securities and Exchange Commission, common shares
and common equivalent shares issued at prices below the public offering price
of $19.00 per share during the 10 months immediately preceding the date of the
initial filing of the Registration Statement have been included in the
calculation of common shares and common shares equivalents, using the
treasury-stock method, as if they were outstanding for all periods presented.
Weighted-average shares outstanding do not include Common Stock equivalents
which are anti-dilutive. All common share and per share data, except par value
per share, have been retroactively adjusted to reflect the 2.56-for-one stock
split effected in the form of a stock dividend of the Company's Common Stock,
effective February 1996.
<PAGE>

                                   (Note 12)

                             Net Income Per Share

The following table sets forth the computation of basic and diluted net income
per share in accordance with SFAS 128:

<TABLE>
<CAPTION>
                                                       Years ended   10-month period ended
(In thousands, except per share data)                  December 31,      December 31,
                                                   -------------------    ---------
                                                      1997      1996         1995
                                                   -------------------    ---------
<S>                                                <C>         <C>        <C>
Numerator:
  Net income                                        $ 17,385   $  7,267    $  4,887
  Preferred stock dividends                             --       (1,486)     (3,178)
  Numerator for basic net income per share - income
  available to common shareholders                    17,385      5,781       1,709
  Effect of dilutive securities:
  Preferred stock dividends for Series A,
    B and C preferred stock                             --        1,256       2,689
  Numerator for diluted net income per share -
    income available to common shareholders
    after assumed conversions                         17,385      7,037       4,398

Denominator:
  Denominator for basic net income per share -
  weighted-average shares                             28,863     22,811       2,646
  Effect of dilutive securities:
  Employee stock options                               1,253      1,672       1,756
  Cheap stock                                           --         --            52
  Convertible preferred stock                           --         --        11,876
  Effect of conversion of preferred stock               --        4,121        --
                                                       1,253      5,793      13,684
  Dilutive potential common shares
  Denominator for diluted net income per share -
    adjusted weighted-average shares and
    assumed conversions                               30,116     28,604      16,330
Basic net income per share                          $   0.60   $   0.25    $   0.65
Diluted net income per share                        $   0.58   $   0.25    $   0.27
</TABLE>


<PAGE>

                                    NOTE 13

                            Related Party Support

The Company paid one of its shareholders $2,730,000, $1,817,000 and
$1,220,000 in the years ended December 31, 1997 and 1996 and the 10- month
period ended December 31, 1995, respectively, relating to the Company's
utilization of the shareholder's telecommunications network.

The Company paid another of its shareholders $2,595,000, $9,532,000 and $943,000
in the years ended December 31, 1997 and 1996 and the 10- month period ended
December 31, 1995, respectively, relating to the Company's utilization of the
shareholder's labor force during conversion, as well as fees paid for certain
transaction processing expenses.

The Company received $850,000 and $1,154,000 of interest income from one of
its shareholders in the years ended December 31, 1997 and 1996, respectively.

                                    NOTE 14

                                Retirement Plan

The Company maintains the NOVA Information Systems, Inc. 401(k) and Profit
Sharing Plan (the "Plan''), which covers substantially all eligible employees
of the Company. Under the Plan, the Company may match a percentage of employee
contributions. The Company may also make a profit-sharing contribution to the
Plan on behalf of eligible employees. During the years ended December 31, 1997
and 1996 and the 10-month period ended December 31, 1995, contribution expenses
related to the Plan were not significant.

                                    NOTE 15

                            Financial Instruments

The Company's financial instruments at December 31, 1997 and 1996 consist
primarily of cash and cash equivalents and loans payable to a bank. Due to the
short maturities of the cash and cash equivalents, carrying amounts approximate
the respective fair values. The loans payable are variable rate instruments at
terms the Company believes would be available if similar financing were
obtained from another third party. As such, their carrying amounts also
approximate their fair value.

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable
and cash investments. Concentrations of credit risk with respect to trade
accounts receivable are limited, due to the large number of entities comprising
the Company's customer base. In addition, the Company performs ongoing credit
evaluations of their customers' financial condition. The Company's cash and
cash equivalents at December 31, 1997, are primarily held at one financial
institution; however, the Company believes the credit risk is limited, due to
the credit standing of the financial institution. In addition, since the
amounts are invested in cash equivalents, there is limited market risk (such as
a reduction in the fair value of investment securities due to rising interest
rates).
<PAGE>

                                    NOTE 16

                 Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                1997 calendar quarter ended           1996 calendar quarter ended
                                        ---------------------------------------  --------------------------------------
(in thousands except per share data)     Mar. 31   June 30  Sept. 30    Dec. 31   Mar. 31   June 30  Sept. 30   Dec. 31
                                        ---------------------------------------  --------------------------------------
<S>                                     <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>
Revenues                                $ 66,525  $ 78,044  $ 87,489  $ 103,567  $ 60,199  $ 67,568  $ 70,459  $ 67,603
Cost of service                           52,071    59,595    67,499     80,893    46,634    52,624    55,223    53,114
Net income                                 3,145     4,416     4,757      5,067     1,115     1,439     2,369     2,344
Net income per share                        0.11      0.15      0.16       0.17      0.01      0.04      0.08      0.08
Net income per share -
  assuming dilution                         0.11      0.15      0.16       0.17      0.04      0.05      0.08      0.08
</TABLE>

The Company has experienced, and expects to continue to experience,
significant seasonality in its business. The Company typically realizes higher
revenues in the third calendar quarter and lower revenues in the first calendar
quarter, reflecting increased transaction volumes during the summer months and
a significant decrease in transaction volume during the period immediately
following the holiday season. Quarterly results are also affected by the timing
of merchant portfolio purchases and the timing and magnitude of expenses for
merchant portfolio conversions. Therefore, the results reported in the table
above do not necessarily indicate the Company's normal seasonal trends.

                                    NOTE 17

                               Subsequent Event

On January 21, 1998, the Company consummated a transaction (the "KeyBank
Joint Venture") with KeyBank National Association ("KeyBank") pursuant to which
the Company will provide transaction processing services to, and jointly own
and operate with KeyBank, a newly created limited liability company called Key
Merchant Services, LLC ("KMS"). The purchase price of the Company's membership
interest is payable over a three year period and is contingent upon achieving
certain levels of credit and debit card transaction processing volume. The
maximum consideration payable is $74 million. The Company owns a 51% interest
in KMS.
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS


       To the Board of Directors and Shareholders of NOVA Corporation:

We have audited the accompanying consolidated balance sheets of NOVA
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1997 and 1996, and the 10-month period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NOVA
Corporation at December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1996
and the 10-month period ended December 31, 1995, in conformity with generally
accepted accounting principles.


                                        /s/ Ernst & Young LLP

Atlanta, Georgia
February 17, 1998
<PAGE>

                              BOARD OF DIRECTORS

     Edward Grzedzinski            Chairman of the Board, President and
                                   Chief Executive Officer
                                   NOVA Corporation

     James M. Bahin                Vice Chairman of the Board,
                                   Chief Financial Officer and Secretary
                                   NOVA Corporation

     Charles T. Cannada            Senior Vice President
                                   WorldCom, Inc.

     Dr. James E. Carnes           President and Chief Executive Officer
                                   Sarnoff Corporation

     U. Bertram Ellis, Jr.         Chairman and Chief Executive Officer
                                   IXL Holdings, Inc.

     Dr. Henry Kressel             Managing Director
                                   E.M. Warburg, Pincus & Co., Inc.

     Joseph P. Landy               Managing Director
                                   E.M. Warburg, Pincus & Co., Inc.

     Maurice F. Terbrueggen, Jr.   Senior Vice President and Division Manager -
                                   Merchant Acquiring Business
                                   First Union National Bank of Florida



                     REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning existing and new products and services, technologies and
opportunities, return on investments in products, transaction volume, and the
impact of acquisitions, joint ventures and alliances. When used in the report,
the words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control. The Company cautions that various factors, including the factors
described in the Company's filings with the Securities and Exchange Commission,
as well as general economic conditions and industry trends could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company. Any forward-looking statement speaks
only as of the date of this Annual Report, and the Company undertakes no
obligation to update any forward-looking statement or statements to reflect the
events or circumstances after the date on which such statement is made or to
reflect the occurrence of an unanticipated event. New factors emerge from time
to time, and it is not possible for the Company to predict all of such factors.
Further, the Company cannot assess the impact of each such factor on its
business or the extent to which any factor, or combination of factors, may
cause factor results to differ materially from those contained in any
forward-looking statements.