##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange of 1934

For the quarterly period ended June 30, 2002

or

(box) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from________________to___________

Commission File Number: 1-11905

National Processing, Inc.
(Exact name of Registrant as specified in its charter)

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  YES 
þ   NO  (box)

The number of shares outstanding of the Registrants Common Stock as of July
31, 2002 was 52,078,812.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                           |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Consolidated Financial Statements (unaudited)                                        
|                              |                                                                                               | Consolidated Balance Sheets                              
|                              |                                                                                               | Consolidated Statements of Income                        
|                              |                                                                                               | Consolidated Statement of Changes in Shareholders Equity
|                              |                                                                                               | Consolidated Statements of Cash Flows                    
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosure of Market Risk                               
|Part II  Other Information  
|                              | Item 1. Legal Proceedings (None)                                                             
|                              | Item 2. Changes in Securities and Use of Proceeds (None)                                     
|                              | Item 3. Defaults Upon Senior Securities (None)                                               
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information (None)                                                             
|                              | Item 6. Exhibits and Reports on Form 8-K:                                                    
|EXHIBIT INDEX                
|SIGNATURES                   



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##### Table of Contents



NATIONAL PROCESSING, INC.

INDEX

Part I.           Financial Information

|                                    |  |                                                                                       |  |                                                                                            |    |          |   | 
|----------------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ | -- | -------- | - | 
|                                    |  |                                                                                       |  |                                                                                            |    | Page No.
|                                    |  |                                                                                       |  |                                                                                            |    |         
|Item 1.                             |  | Consolidated Financial Statements (unaudited)                                         |  |                                                                                            |    |         
|                                   
|                                   
|                                   
|                                   
|                                    |  |                                                                                       |  | Consolidated Balance Sheets  June 30, 2002,
December 31, 2001 and June 30, 2001           |    |          | 3 | 
|                                   
|                                   
|                                   
|                                   
|                                    |  |                                                                                       |  | Consolidated Statements of Income  Three and Six
Months Ended June 30, 2002 and 2001      |    |          | 4 | 
|                                   
|                                   
|                                   
|                                   
|                                    |  |                                                                                       |  | Consolidated Statement of Changes in Shareholders
Equity  Six Months Ended June 30, 2002 |    |          | 5 | 
|                                   
|                                   
|                                   
|                                   
|                                    |  |                                                                                       |  | Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001            |    |          | 6 | 
|                                   
|                                   
|                                   
|                                   
|                                    |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                 |    |          | 7 | 
|                                   
|                                   
|                                   
|                                   
|Item 2.                             |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  |                                                                                            | 15 |         
|                                   
|                                   
|                                   
|                                   
|Item 3.                             |  | Quantitative and Qualitative Disclosure of
Market Risk                                |  |                                                                                            | 25 |         
|                                   
|                                   
|                                   
|                                   
|Part
II.          Other Information |  |                                                                                       |  |                                                                                           
|                                   
|                                   
|                                   
|                                   
|Item 1.                             |  | Legal Proceedings (None)                                                              |  |                                                                                            | 26 |         
|                                   
|                                   
|                                   
|                                   
|Item 2.                             |  | Changes in Securities and Use of Proceeds (None)                                      |  |                                                                                            | 26 |         
|                                   
|                                   
|                                   
|                                   
|Item 3.                             |  | Defaults Upon Senior Securities (None)                                                |  |                                                                                            | 26 |         
|                                   
|                                   
|                                   
|                                   
|Item 4.                             |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                            | 26 |         
|                                   
|                                   
|                                   
|                                   
|Item 5.                             |  | Other Information (None)                                                              |  |                                                                                            | 26 |         
|                                   
|                                   
|                                   
|                                   
|Item 6.                             |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                            | 26 |         
|                                   
|                                   
|                                   
|                                   
|Signatures                          |  |                                                                                       |  |                                                                                            | 29 |         

2



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##### Table of Contents












National Processing, Inc.
Consolidated Balance Sheets
Unaudited
(Dollars in thousands)

|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | ------- | ------- | ------- | ----------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                |                                                                                                                                                                                                  |                                      |         | June 30 |         | December 31 |         | June 30
|                                                |                                                                                                                                                                                                  |                                      |         | 2002    |         | 2001        |         | 2001   
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |        
|Assets                                          |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Cash and cash equivalents            |         | $       | 182,679 |             |         | $       | 101,257 |   |         | $       | 136,249 | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Accounts receivable  trade          |         |         | 108,003 |             |         |         | 163,644 |   |         |         | 83,230  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Deferred tax assets                  |         |         | 2,904   |             |         |         | 3,299   |   |         |         | 1,785   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Assets held for sale                 |         |         |        |             |         |         |        |   |         |         | 38,869  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Other current assets                 |         |         | 6,929   |             |         |         | 7,138   |   |         |         | 7,517   | 
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total current assets                            |                                                                                                                                                                                                  |                                      | 300,515 |         |         |             | 275,338 |         |         |   | 267,650 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                         |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Furniture and equipment              |         |         | 55,301  |             |         |         | 54,178  |   |         |         | 51,366  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Building and leasehold improvements  |         |         | 10,842  |             |         |         | 10,770  |   |         |         | 11,025  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Software                             |         |         | 35,922  |             |         |         | 30,453  |   |         |         | 24,060  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Property leased from affiliate       |         |         | 4,173   |             |         |         | 4,173   |   |         |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Land and improvements                |         |         | 442     |             |         |         | 442     |   |         |         | 442     | 
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|                                                |                                                                                                                                                                                                  |                                      | 106,680 |         |         |             | 100,016 |         |         |   | 91,066  |        
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |                                                                                                                                                                                                  |                                      | 52,015  |         |         |             | 50,244  |         |         |   | 46,100  |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Property and equipment, net                     |                                                                                                                                                                                                  |                                      | 54,665  |         |         |             | 49,772  |         |         |   | 44,966  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                   |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of $8,283 at June 30, 2002
and December 31, 2001, and $6,698 at June 30, 2001                                                                          |                                      |         | 91,227  |         |             |         | 91,227  |         |   |         | 92,563  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets, net of accumulated amortization of $17,946,
$14,610 and $11,430 at June 30, 2002, December 31, 2001 and
June 30, 2001, respectively                                     |                                      |         | 41,614  |         |             |         | 44,950  |         |   |         | 45,630  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                                                              |                                      |         | 12,801  |         |             |         | 13,310  |         |   |         | 18,570  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                                                                     |                                      |         | 3,421   |         |             |         | 3,741   |         |   |         | 6,406   |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total other assets                              |                                                                                                                                                                                                  |                                      | 149,063 |         |         |             | 153,228 |         |         |   | 163,169 |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total assets                                    |                                                                                                                                                                                                  | $                                    | 504,243 |         |         | $           | 478,338 |         |         | $ | 475,785 |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Liabilities and shareholders equity            |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Accounts payable  trade             |         | $       | 21,533  |             |         | $       | 19,080  |   |         | $       | 13,578  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Accrued bankcard assessments         |         |         | 25,459  |             |         |         | 28,113  |   |         |         | 23,131  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Accrued compensation and benefits    |         |         | 3,086   |             |         |         | 6,465   |   |         |         | 7,186   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Income tax payable                   |         |         | 9,905   |             |         |         | 8,089   |   |         |         | 15,145  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | AAMS purchase price payable (Note 4) |         |         |        |             |         |         |        |   |         |         | 48,500  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                  | Other accrued liabilities            |         |         | 12,081  |             |         |         | 13,906  |   |         |         | 5,458   | 
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total current liabilities                       |                                                                                                                                                                                                  |                                      | 72,064  |         |         |             | 75,653  |         |         |   | 112,998 |        
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                                                                  |                                      | 1,797   |         |         |             | 1,862   |         |         |   | 1,927   |        
|                                               
|                                               
|                                               
|                                               
|Deferred tax liabilities                        |                                                                                                                                                                                                  |                                      |        |         |         |             |        |         |         |   | 2,271   |        
|                                               
|                                               
|                                               
|                                               
|Minority interest                               |                                                                                                                                                                                                  |                                      | 2,040   |         |         |             | 827     |         |         |   |        |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total liabilities                               |                                                                                                                                                                                                  |                                      | 75,901  |         |         |             | 78,342  |         |         |   | 117,196 |        
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                           |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, without par value; 5,000,000 shares authorized; no
shares issued or outstanding                                                                                                 |                                      |         |        |         |             |         |        |         |   |         |        |        
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, without par value; 95,000,000 shares authorized;
52,040,701, 51,818,508, and 51,293,029 issued and outstanding at
June 30, 2002, December 31, 2001 and June 30, 2001, respectively |                                      |         | 1       |         |             |         | 1       |         |   |         | 1       |        
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                                                              |                                      |         | 197,570 |         |             |         | 193,584 |         |   |         | 184,903 |        
|                                               
|                                               
|                                               
|                                               
|                                                | Unearned compensation                                                                                                                                                                            |                                      |         | (364    | )       |             |         | (477    | )       |   |         |        |        
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                                                                |                                      |         | 231,135 |         |             |         | 206,888 |         |   |         | 173,685 |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total shareholders equity                      |                                                                                                                                                                                                  |                                      | 428,342 |         |         |             | 399,996 |         |         |   | 358,589 |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 
|Total liabilities and shareholders equity      |                                                                                                                                                                                                  | $                                    | 504,243 |         |         | $           | 478,338 |         |         | $ | 475,785 |        
|                                                |                                                                                                                                                                                                  |                                      |         |         |         |             |         |         |         |   |         |         |         | 

See notes to consolidated financial statements

3



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##### Table of Contents






National Processing, Inc.
Consolidated Statements of Income
Unaudited
(In thousands, except per share amounts)

|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|-------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                               |  | Three Months Ended |         | Six Months Ended
|                                                               |  | June 30            |         | June 30         
|                                                               |  |                    |         |                 
|                                                               |  | 2002               |         | 2001             |  | 2002 |         | 2001
|                                                               |  |                    |         |                  |  |      |         |     
|Revenue                                                        |  | $                  | 112,664 |                  |  | $    | 117,876 |      |  | $ | 222,609 |  |  | $ | 226,921 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Operating expense                                              |  |                    | 80,859  |                  |  |      | 84,606  |      |  |   | 163,163 |  |  |   | 166,464 | 
|                                                              
|                                                              
|                                                              
|                                                              
|General and administrative expense                             |  |                    | 4,082   |                  |  |      | 7,083   |      |  |   | 8,684   |  |  |   | 12,658  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Depreciation and amortization                                  |  |                    | 4,456   |                  |  |      | 5,184   |      |  |   | 8,479   |  |  |   | 10,364  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Impairment, restructuring, and related expense                 |  |                    | 1,650   |                  |  |      | 6,250   |      |  |   | 1,650   |  |  |   | 6,250   | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Operating profit                                               |  |                    | 21,617  |                  |  |      | 14,753  |      |  |   | 40,633  |  |  |   | 31,185  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Net interest income                                            |  |                    | 1,069   |                  |  |      | 1,893   |      |  |   | 2,104   |  |  |   | 4,113   | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Income before provision for income taxes
and minority interest |  |                    | 22,686  |                  |  |      | 16,646  |      |  |   | 42,737  |  |  |   | 35,298  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Provision for income taxes                                     |  |                    | 9,861   |                  |  |      | 8,728   |      |  |   | 17,277  |  |  |   | 15,841  | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Income before minority interest                                |  |                    | 12,825  |                  |  |      | 7,918   |      |  |   | 25,460  |  |  |   | 19,457  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Minority interest                                              |  |                    | 626     |                  |  |      |        |      |  |   | 1,213   |  |  |   |        | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Net income                                                     |  | $                  | 12,199  |                  |  | $    | 7,918   |      |  | $ | 24,247  |  |  | $ | 19,457  | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Basic income per common share                                  |  | $                  | 0.23    |                  |  | $    | 0.15    |      |  | $ | 0.47    |  |  | $ | 0.38    | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Diluted income per common share                                |  | $                  | 0.23    |                  |  | $    | 0.15    |      |  | $ | 0.46    |  |  | $ | 0.38    | 
|                                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

4



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##### Table of Contents






National Processing, Inc.
Consolidated Statement of Changes in Shareholders Equity
Unaudited
(In thousands, except share amounts)

|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------ | ---------- | ------ |  | ----------- | - | ------------ |  | -------- | ------- | ----- |  | - | ---- | - |  | - | ------- |  |  | - | ------- | 
|                                                                                              |  | Common |            | Common |  | Contributed |   | Unearned     |  | Retained |         |       |  |  
|                                                                                              |  | Shares |            | Stock  |  | Capital     |   | Compensation |  | Earnings |         | Total
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |      
|Balance at January 1, 2002                                                                    |  |        | 51,818,508 |        |  | $           | 1 |              |  | $        | 193,584 |       |  | $ | (477 | ) |  | $ | 206,888 |  |  | $ | 399,996 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net income                                                                                    |  |        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 24,247  |  |  |   | 24,247  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Issuance of common shares under stock-based
compensation plans, including related
tax effects |  |        | 222,193    |        |  |             |  |              |  |          | 3,986   |       |  |   | 113  |   |  |   |        |  |  |   | 4,099   | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|Balance at June 30, 2002                                                                      |  |        | 52,040,701 |        |  | $           | 1 |              |  | $        | 197,570 |       |  | $ | (364 | ) |  | $ | 231,135 |  |  | $ | 428,342 | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

5



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##### Table of Contents






National Processing, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)

|                                               |                                                               |                                                    |         |                  |        |      |         |         |        |  
|---------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------- | ------- | ---------------- | ------ | ---- | ------- | ------- | ------ | -
|                                               |                                                               |                                                    |         | Six Months Ended
|                                               |                                                               |                                                    |         | June 30         
|                                               |                                                               |                                                    |         | 2002             |        | 2001
|                                               |                                                               |                                                    |         |                  |        |     
|Operating Activities                           |                                                               |                                                    |         |                  |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Net income                                                    |                                                    | $       | 24,247           |        |      | $       | 19,457  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Items not requiring cash currently:                           |                                                    |         |                  |        |      |         |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Depreciation and amortization                      |         |                  | 8,479  |      |         |         | 10,364 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Restructuring, divestiture, and impairment charges |         |                  | 1,650  |      |         |         | 6,250  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Deferred income taxes                              |         |                  | 904    |      |         |         | 2,567  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Loss on disposition of fixed assets                |         |                  | 180    |      |         |         | 33     |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Minority interest                                  |         |                  | 1,213  |      |         |         |       |  
|                                              
|                                              
|                                              
|                                              
|                                               | Change in current assets and liabilities:                     |                                                    |         |                  |        |      |         |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Accounts receivable  trade                        |         |                  | 55,641 |      |         |         | 33,871 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Accounts payable  trade                           |         |                  | 2,453  |      |         |         | (1,033 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Accrued bankcard assessments                       |         |                  | (2,654 | )    |         |         | (1,327 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Income taxes payable                               |         |                  | 2,830  |      |         |         | 8,101  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Other current assets/liabilities                   |         |                  | (6,124 | )    |         |         | (7,603 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Other, net                                         |         |                  | (139   | )    |         |         | (80    | )
|                                               |                                                               |                                                    |         |                  |        |      |         |         |       
|                                               | Net cash provided by operating activities                     |                                                    |         | 88,680           |        |      |         | 70,600  |       
|                                              
|                                              
|                                              
|                                              
|Investing Activities                           |                                                               |                                                    |         |                  |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Capital expenditures                                          |                                                    |         | (10,559          | )      |      |         | (8,931  | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of fixed assets                            |                                                    |         |                 |        |      |         | 34      |       
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from maturities of Eurodollar deposits               |                                                    |         |                 |        |      |         | 56,000  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Common control business unit purchase                         |                                                    |         |                 |        |      |         | (44,000 | )     
|                                               |                                                               |                                                    |         |                  |        |      |         |         |       
|                                               | Net cash provided by (used in) investing activities           |                                                    |         | (10,559          | )      |      |         | 3,103   |       
|                                              
|                                              
|                                              
|                                              
|Financing Activities                           |                                                               |                                                    |         |                  |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments under property leased from affiliate       |                                                    |         | (65              | )      |      |         | (66     | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of common stock under stock-based compensation plans |                                                    |         | 3,366            |        |      |         | 4,505   |       
|                                               |                                                               |                                                    |         |                  |        |      |         |         |       
|                                               | Net cash provided by financing activities                     |                                                    |         | 3,301            |        |      |         | 4,439   |       
|                                               |                                                               |                                                    |         |                  |        |      |         |         |       
|Net increase in cash and cash equivalents      |                                                               |                                                    | 81,422  |                  |        |      | 78,142  |        
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                               |                                                    | 101,257 |                  |        |      | 58,107  |        
|                                               |                                                               |                                                    |         |                  |        |      |         |         |       
|Cash and cash equivalents, end of period       |                                                               | $                                                  | 182,679 |                  |        | $    | 136,249 |        
|                                               |                                                               |                                                    |         |                  |        |      |         |         |       
|Supplemental cash flow information:            |                                                               |                                                    |         |                  |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Taxes paid                                                    |                                                    | $       | 13,819           |        |      | $       | 9,197   |       

See notes to consolidated financial statements

6



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##### Table of Contents






NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited



|1. |  | ORGANIZATION AND BUSINESS
|-- |  | -------------------------
|  
|   |  | Organization             



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | National Processing, Inc. and subsidiaries (the Company) is a
provider of electronic payment processing headquartered in Louisville,
Kentucky. The Company is 85% owned by National City Corporation
(National City), a financial holding company headquartered in Cleveland,
Ohio.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company currently operates two business segments, Merchant Card
Services and Payment Services. Merchant Card Services authorizes,
processes, and performs financial settlement and reporting of card
transactions, including credit, debit, and electronic benefits transfer
(EBT). Merchant Card Services provides services to merchant locations primarily in the United States. Merchant Card Services
represents approximately 95% of the Companys revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payment Services was formerly a component of the Companys Corporate
Outsourcing Solutions segment. This segment was renamed Payment Services
in 2001 after the sale of the Business Process Outsourcing (BPO)
business, which was also formerly a component of the Companys Corporate
Outsourcing Solutions segment. Payment Services provides financial
settlement and reporting solutions to large and mid-size corporate
customers in the travel and healthcare industries. Payment Services
settles 100% of domestic airline tickets issued by travel agencies and
settled through the Airlines Reporting Corporation. Payment Services also
settles commission payments for car rental companies, cruise line
operators, and hotels. Payment Services represents approximately 5% of
the Companys revenue.



| |  | Sponsorship Agreement
| |  | ---------------------



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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of
National Processing, Inc. and its subsidiaries. On June 28, 2001, the
Company acquired a 70% ownership interest in ABN AMRO Merchant Services,
LLC (AAMS) from ABN AMRO North America, Inc. and its subsidiaries
(AANA) (see Note 4). Since the date of its acquisition, the results of
operations of AAMS have been included in the consolidated financial
statements and AANAs 30% ownership interest has been accounted for as a
minority interest. All
significant intercompany transactions and balances have been eliminated.
The accounting and reporting

7



---



##### Table of Contents





| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | policies of the Company conform with accounting principles generally
accepted in the United States.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the interim periods presented, management believes the unaudited
consolidated financial statements reflect all adjustments of a normal
recurring nature and disclosures which are necessary for a fair
presentation of the results for the interim periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year or any
other interim period.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although the consolidated balance sheet at December 31, 2001 has been
derived from the audited consolidated financial statements at that date,
the accompanying interim consolidated financial statements do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States. These interim financial
statements should be read in conjunction with the Companys 2001 Annual
Report on Form 10-K.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Certain 2001 amounts have been reclassified to conform with the 2002
presentation.



|3. |  | RECENT ACCOUNTING PRONOUNCEMENTS    
|-- |  | ------------------------------------
|  
|   |  | Goodwill and Other Intangible Assets



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



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

8



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##### Table of Contents





| |          
| | ---------
| | standard.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If SFAS 142 had been adopted effective January 1, 2001, goodwill
amortization expense, which is primarily nondeductible for income tax
purposes, would have been reduced by $0.5 million and $1.1 million for the
three and six months ended June 30, 2001, respectively. For the three
months ended June 30, 2001, proforma net income would have been $8.4
million, or $0.16 per diluted share, versus reported net income of $7.9
million, or $0.15 per diluted share. For the six months ended June 30,
2001, proforma net income would have been $20.5 million, $0.40 per diluted
share, versus reported net income of $19.5 million, or $0.38 per diluted
share.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys amortizable intangible assets as of June 30, 2002
related almost exclusively to acquired merchant portfolios. These costs
are amortized on a straight-line basis over periods ranging from 7 to 10
years. Amortization expense for the quarter and six months ended June 30,
2002 was $1.7 million and $3.3 million, respectively. The estimated
annual amortization expense for existing intangible assets for 2002 and
each of the next five years is as follows: 2002 
$6.8 million; 2003  $7.0 million; 2004  $6.6 million; 2005, 2006 and 2007  $4.7 million.



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



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



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



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



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

9



---



##### Table of Contents





|4. |  | ACQUISITIONS
|-- |  | ------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 28, 2001, the Company acquired a 70% ownership interest in
AAMS from AANA for $48.5 million, which was settled on July 2, 2001 using
existing cash balances. Under the terms of the agreement, the Company
provides AAMS with all merchant-processing services including both
authorization and settlement of all card-based transactions. The
acquisition, accounted for as a purchase, increased the Companys goodwill
by approximately $27.0 million. The remainder of the purchase price was
allocated to other identifiable intangibles, primarily acquired merchant
contracts, which are being amortized on a straight-line basis over 10
years. Since the date of its acquisition, the results of operations of
AAMS have been included in the consolidated financial statements and
AANAs 30% ownership interest has been accounted for as a minority
interest. Incremental revenue as
a result of this acquisition was $8.9 million and $18.9 million, for the
quarter and six months ended June 30, 2002, respectively. Incremental
operating profit as a result of this acquisition was $1.6 million and $3.0
million for the quarter and six months ended June 30, 2002, respectively.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 3, 2002, the Company acquired processing contracts from a key
strategic partner for $2.7 million in cash. The terms of the agreement
also include future payments to the seller for a portion of the revenue
derived from these contracts for a specified period plus an additional
one-time payment of up to $1.0 million. Under the terms of the agreement,
the Company will provide front-end authorization services for
approximately 50,000 merchant locations. Prior to the acquisition, the
Company was already providing back-end settlement services for these
merchants.



|5. |  | DIVESTED AND DISCONTINUED BUSINESS UNITS
|-- |  | ----------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, the Company divested its Business Process Outsourcing
(BPO) business and discontinued its Denver collections business, which
were components of the former Corporate Outsourcing Solutions segment. The
Denver collections business was discontinued on March 30, 2001. The sale
of the BPO unit to Affiliated Computer Services (ACS) was completed on
August 29, 2001 for $43.0 million in cash ($41.3 million after
transaction-related expenses). For the three and six months ended June
30, 2001, the divested and discontinued business units had revenue of
$15.3 million and $31.4 million, respectively. Operating profit (loss)
for the divested and discontinued business units, which includes a $6.3
million impairment charge taken in the second quarter of 2001, was $(5.1)
million and $(3.8) million, respectively, for the quarter and six months
ended June 30, 2001.

10



---



##### Table of Contents





|6. |  | IMPAIRMENT AND RESTRUCTURING CHARGES
|-- |  | ------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2002, the Company announced plans to close its remaining
operations in Juarez, Mexico by the end of 2002. The work currently
performed in Mexico will be relocated to existing facilities in the United
States. The Company recorded a pre-tax restructuring charge of $1.7
million ($2.4 million after-tax, or $0.04 per diluted share) in the second
quarter of 2002 related to severance costs for approximately 120
employees, building and equipment write-downs, and related items. The
after-tax charge exceeds the pre-tax amount due to additional provisions
required for nondeductible losses and dividends from foreign subsidiaries.
As of June 30, 2002, the Company had $0.6 million remaining in accrued
liabilities for future severance and other obligations related to this
closure.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2001, the Company recorded a net pre-tax charge of $3.9
million ($4.6 million after-tax, or $0.09 per diluted share) related to
the BPO divestiture. The after-tax charge exceeds the pre-tax amount due
to additional provisions required for nondeductible losses, repatriation
of previously untaxed earnings in foreign countries, and dividends from
foreign subsidiaries. This net charge consisted of a second quarter
pre-tax charge of $6.3 million ($6.2 million after-tax, or $0.12 per
share), which was partially offset by net positive pre-tax adjustment of
$2.4 million ($1.5 million after-tax, or $0.03 per diluted share) in the
fourth quarter. The second quarter charge was for the estimated loss for
the sale of the BPO business. The net fourth quarter gain represented a
$3.0 million pre-tax ($1.9 million after-tax, or $0.04 per diluted share)
adjustment to the second quarter charge due to changes in estimates for
legal and other post-closing matters, partially offset by a $0.6 million
pre-tax ($0.4 million after-tax, or $0.01 per diluted share) severance
charge related to organizational restructuring actions taken to reduce
support costs associated with the BPO unit. As of June 30, 2002, the
Company had $0.8 million remaining in accrued liabilities related to the
final obligations associated with the BPO divestiture.



|7. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------
|  
|   |  | Chargebacks                  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under
the rules of Visa® and MasterCard®, when a merchant processor
acquires card transactions, it has certain contingent liabilities for the
transactions processed. This contingent liability arises in the event of
a billing dispute between the merchant and a cardholder that is not
ultimately resolved in the merchants favor. In such a case, the
transaction is charged back to the merchant and the disputed amount is
credited or otherwise refunded to the cardholder. If the Company is
unable to collect this amount from the merchants account, and if the
merchant is unable to reimburse the Company for the chargeback due to
liquidation or other reasons, the Company will bear the loss for the amount
of the refund paid to the cardholder. In most cases, this contingent
liability situation is unlikely to arise because most products or services
are delivered when purchased, and credits are issued on returned items.
However, where the product or service is not provided until some later
time following the purchase, the contingent liability could be more
likely. The Company mitigates some of its contingent liability risk by requiring
deposits and withholding settlement funds for certain merchants based on
contractual terms.



| |                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company currently processes card transactions for several of the
largest airlines in the United States. Airline customers represented
approximately 9% of the Companys consolidated revenue (6% from Merchant Card Services
and 3% from Payment Services) for the six months ended June 30,

11



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2002. In the event of liquidation of one or more of the
Companys airline customers, the Company could become financially
responsible for refunding tickets purchased through
Visa® or MasterCard®
under the chargeback rules of those associations. In the near term,
management believes liquidations are unlikely for any
of the Companys airline customers given the Federal financial support for
the airline industry. In November 2001, Congress passed the Aviation and
Transportation Security Act, which requires airlines to honor tickets for
eighteen months for other airlines that may suspend, interrupt or
discontinue services due to insolvency or liquidation. In May 2002, the
Company announced its decision to discontinue processing debit and credit
card transactions for the airline industry. The Company will honor its
existing contractual obligations to the airlines it currently serves but
does not intend to renew such contracts when their current terms expire. The
contracts currently in effect have various expiration dates extending
through November 2005.



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One
of the Companys airline customers is US Airways Group, Inc. US
Airways Group, Inc. has filed for bankruptcy court protection under Chapter
11. Based upon information currently available to the Company and actions management
is taking to mitigate these risks, management currently believes a material loss under the chargeback rules is unlikely.



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



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



|8. |  | NET INCOME PER COMMON SHARE
|-- |  | ---------------------------



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

|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|------- | ------------------------------------------- |  | -------------------------- | ------ | ------------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|        |                                             |  | Three Months Ended June 30 |        | Six Months Ended June 30
|        |                                             |  |                            |        |                         
|        |                                             |  | 2002                       |        | 2001                     |  | 2002 |        | 2001
|        |                                             |  |                            |        |                          |  |      |        |     
|BASIC   |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |       
|       
|       
|       
|       
|        | Net income                                  |  | $                          | 12,199 |                          |  | $    | 7,918  |      |  | $ | 24,247 |  |  | $ | 19,457 | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|        | Average common shares outstanding           |  |                            | 52,010 |                          |  |      | 51,255 |      |  |   | 51,935 |  |  |   | 51,107 | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|        | Net income per common share  basic         |  | $                          | 0.23   |                          |  | $    | 0.15   |      |  | $ | 0.47   |  |  | $ | 0.38   | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|DILUTED |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |       
|       
|       
|       
|       
|        | Net income                                  |  | $                          | 12,199 |                          |  | $    | 7,918  |      |  | $ | 24,247 |  |  | $ | 19,457 | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|        | Average common shares outstanding           |  |                            | 52,010 |                          |  |      | 51,255 |      |  |   | 51,935 |  |  |   | 51,107 | 
|       
|       
|       
|       
|        | Dilutive effect of stock options            |  |                            | 714    |                          |  |      | 798    |      |  |   | 690    |  |  |   | 703    | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|        | Average common shares outstanding 
diluted |  |                            | 52,724 |                          |  |      | 52,053 |      |  |   | 52,625 |  |  |   | 51,810 | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|        | Net income per common share  diluted       |  | $                          | 0.23   |                          |  | $    | 0.15   |      |  | $ | 0.46   |  |  | $ | 0.38   | 
|        |                                             |  |                            |        |                          |  |      |        |      |  |   |        |  |  |   |        | 

12



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##### Table of Contents





|9. |  | TRANSACTIONS WITH AFFILIATES
|-- |  | ----------------------------



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
leases certain facilities from NCBK, a wholly owned subsidiary of National City, under
long-term agreements classified as Property Leased from Affiliate in the
accompanying consolidated balance sheets. The Company has paid $0.1 million, including
interest, under this lease for the six months ended June 30, 2002.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company receives certain administrative services, such as
internal audit and legal services, from National City and its affiliates.
The Company also utilizes NCBK and other National City subsidiaries for the majority of its banking services.
Charges for these services are included in general and administrative
expenses and totaled $0.5 million and $1.0 million for the quarter and six
months ended June 30, 2002. For the quarter and six months ended June 30,
2001, charges for these services totaled $0.4 million and $0.8 million,
respectively. As of June 30, 2002, December 31, 2001 and June 30, 2001,
no amounts were due to or from National City.



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



|10. |  | SEGMENT REPORTING
|--- |  | -----------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company currently operates two business segments, Merchant Card
Services and Payment Services. Merchant Card Services authorizes,
processes, and performs financial settlement and reporting of card
transactions including credit, debit, and EBT. Payment Services provides
financial settlement and reporting solutions to large and mid-size
corporate customers in the travel and healthcare industries.



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

13



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##### Table of Contents



|                                               |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|---------------------------------------------- |  | ------------- | ------- | ------------ |  | --------- | ------ | ----- |  | ------------ | ------- |  |  | - | ------- | 
|                                               |  | Merchant
Card |         | Payment      |  |           |        |       |  | Consolidated
|                                               |  | Services      |         | Services
(1) |  | Corporate |        | Total
|                                               |  |               |         |              |  |           |        |      
|For the three months ended June 30, 2002       |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 107,619 |              |  | $         | 5,045  |       |  | $            |        |  |  | $ | 112,664 | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring, and related expense |  |               | 1,650   |              |  |           |       |       |  |              |        |  |  |   | 1,650   | 
|                                              
|                                              
|                                              
|                                              
|Operating profit                               |  |               | 19,397  |              |  |           | 2,220  |       |  |              |        |  |  |   | 21,617  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 4,011   |              |  |           | 445    |       |  |              |        |  |  |   | 4,456   | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 960     |              |  |           | 109    |       |  |              |        |  |  |   | 1,069   | 
|                                              
|                                              
|                                              
|                                              
|For the three months ended June 30, 2001       |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 95,364  |              |  | $         | 22,512 |       |  | $            |        |  |  | $ | 117,876 | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring, and related expense |  |               |        |              |  |           | 6,250  |       |  |              |        |  |  |   | 6,250   | 
|                                              
|                                              
|                                              
|                                              
|Operating profit (loss)                        |  |               | 18,646  |              |  |           | (3,893 | )     |  |              |        |  |  |   | 14,753  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 3,527   |              |  |           | 1,657  |       |  |              |        |  |  |   | 5,184   | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 1,664   |              |  |           | 229    |       |  |              |        |  |  |   | 1,893   | 
|                                              
|                                              
|                                              
|                                              
|For the six months ended June 30, 2002         |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 212,235 |              |  | $         | 10,374 |       |  | $            |        |  |  | $ | 222,609 | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring, and related expense |  |               | 1,650   |              |  |           |       |       |  |              |        |  |  |   | 1,650   | 
|                                              
|                                              
|                                              
|                                              
|Operating profit                               |  |               | 36,596  |              |  |           | 4,037  |       |  |              |        |  |  |   | 40,633  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 7,597   |              |  |           | 882    |       |  |              |        |  |  |   | 8,479   | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 1,884   |              |  |           | 220    |       |  |              |        |  |  |   | 2,104   | 
|                                              
|                                              
|                                              
|                                              
|For the six months ended June 30, 2001         |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 180,704 |              |  | $         | 46,217 |       |  | $            |        |  |  | $ | 226,921 | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring, and related expense |  |               |        |              |  |           | 6,250  |       |  |              |        |  |  |   | 6,250   | 
|                                              
|                                              
|                                              
|                                              
|Operating profit (loss)                        |  |               | 32,249  |              |  |           | (1,064 | )     |  |              |        |  |  |   | 31,185  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 7,019   |              |  |           | 3,345  |       |  |              |        |  |  |   | 10,364  | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 3,481   |              |  |           | 632    |       |  |              |        |  |  |   | 4,113   | 
|                                              
|                                              
|                                              
|                                              
|As of June 30, 2002                            |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |  | $             | 91,227  |              |  | $         |       |       |  | $            |        |  |  | $ | 91,227  | 
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 277,425 |              |  |           | 3,628  |       |  |              | 223,190 |  |  |   | 504,243 | 
|                                              
|                                              
|                                              
|                                              
|As of December 31, 2001                        |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |  | $             | 91,227  |              |  | $         |       |       |  | $            |        |  |  | $ | 91,227  | 
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 326,409 |              |  |           | 6,383  |       |  |              | 145,546 |  |  |   | 478,338 | 
|                                              
|                                              
|                                              
|                                              
|As of June 30, 2001                            |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |  | $             | 92,563  |              |  | $         |       |       |  | $            |        |  |  | $ | 92,563  | 
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 247,909 |              |  |           | 45,661 |       |  |              | 182,215 |  |  |   | 475,785 | 



---

|(1) |  | Payment Services was formerly a component of the Companys Corporate
Outsourcing Solutions segment. This segment was renamed Payment Services
after the sale of the BPO business unit in August 2001. The Payment
Services segment disclosures for 2001 include the results of divested and
discontinued business units formerly classified as part of the Corporate
Outsourcing Solutions segment.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



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##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with the Companys 2001 Annual
Report on Form 10-K, 2002 Quarterly Reports on Form 10-Q and other 2002 filings
with the Securities and Exchange Commission.

Critical Accounting Policies

General

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

Income Taxes

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

Management judgments and estimates are required in determining the income
tax provision as well as the balances of deferred tax assets and liabilities.
As of June 30, 2002, the Company has net deferred tax assets of $15.7 million.
The Company records a valuation allowance to reduce deferred tax assets when it
is more likely than not that certain amounts will not be realized. As
of June 30, 2002 the Company had a valuation allowance of $0.4
million related to foreign net operating loss carryforwards. The Company considers projected
future taxable income and tax planning strategies in assessing the need for a
valuation allowance. Should the Company determine in the future that all or
part of its net deferred tax asset is unrealizable, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made. Management provides reserves when it is likely that a taxing
authority may take a sustainable position on a matter contrary to the Companys
position.

Long-Lived Assets

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

Property and equipment, net of accumulated depreciation, totaled $54.7
million as of June 30, 2002, which represented 11% of total assets. Useful
lives of property and equipment (which includes internal use software) are
estimated in order to determine the amount of depreciation expense to be
recorded during each reporting period. The useful lives are estimated at the
time the assets are acquired based on historical experience with similar assets
and current business plans. Based on future events and changes in business
plans, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation expense in future
periods. These changes could also result in the recognition of an

15



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##### Table of Contents



immediate impairment charge to reflect the write-down in value of the
assets. Alternatively, assets may ultimately be used by the Company for longer
than their assigned depreciable lives.

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

Goodwill and other intangible assets, net of accumulated amortization,
totaled $132.8 million as of June 30, 2002, which represented 26% of total
assets. The Company analyzes goodwill and other intangible assets for
impairment issues on an annual basis or more frequently if events or
circumstances warrant. In assessing the recoverability of goodwill and
intangible assets, the Company must make estimates regarding future cash flows
and assumptions about other factors to determine the fair value. Changes in
estimates or the related assumptions may cause the Company to record impairment
charges for the related assets.

Contingencies

The Company records reserves for contingent liabilities when such amounts
are deemed to be probable and estimable in accordance with SFAS 5, Accounting
for Contingencies. The required reserves may change in the future due to new
developments including but not limited to changes in litigation or increased
chargeback exposure as the result of merchant insolvency, liquidation or other reasons.
The required reserves are reviewed periodically to determine if adjustments are
required. (See Note 7 to the Consolidated Financial Statements.)

16



---



##### Table of Contents



Components of Revenue and Expense

Revenue

Approximately 95% of Merchant Card Services revenue is derived from
long-term processing contracts with merchants for the authorization,
processing, and settlement of credit and debit card transactions. Processing
fee revenue is earned either on a per transaction basis or discount basis,
which is a percent of dollar volume processed. Merchant contracts generally
have terms ranging from three to five years. Processing fee revenue is
recorded in the period that the related transaction is processed and is
recorded net of interchange fees charged by the credit card associations.
The remainder of Merchant Card Services revenue is derived from
sources other than processing fees, including equipment and supply sales,
equipment repair fees, application and installation fees, and
third-party commissions.

Over 50% of Payment Services revenue is earned from an exclusive long-term
contract with the Airlines Reporting Corporation under which the Company is
compensated on a cost-plus basis. The remainder of Payment Services revenue
is derived from other non-card based electronic settlement products. Revenue
is recorded in the period services are provided.

A small portion of total consolidated revenue is derived from earnings on
customer cash balances, which are maintained by National City pursuant to
contractual terms. For the three months ended June 30, 2002 and 2001, earnings
on customer balances were $0.9 million and $2.2 million, respectively. For the
six months ended June 30, 2002 and 2001, earnings on customer balances were
$2.0 million and $4.4 million, respectively.

Expense

Expenses include costs of providing services to customers including wages
and personnel costs, assessment fees, authorization fees, data processing
costs, and general and administrative expenses.

Results of Operations

The Companys operating results are presented below in the manner in which
they are viewed by management. The Company exited certain business units
during 2001 in order to focus on its core business of electronic payment
settlement. Accordingly, the segment results presented below segregate the
operating performance for the remaining core business lines from those that
were exited. Certain prior year amounts have been reclassified to conform with
the 2002 presentation.

17



---



##### Table of Contents



Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |    |     |  
|----------------------------------------- | ----------------------- | ------------------ | --------------------------- | ------- | ------- | ------ | ------- | -- | ------ | -- | ------- | ------ | ------- | ------- | -- | --- | --- | -- | ----- | ------- | ------ | ------- | --- | ---- | -- | --- | -
|                                          |                         |                    |                             |         | 2002    |        | 2001    |    | Change
|                                          |                         |                    |                             |         |         |        |         |    |       
|(Dollars in thousands)                    |                         |                    |                             |         |         | % of   |         |    |        |    |         | % of   |         |         |    |     |     |    |       |        
|                                          |                         |                    |                             |         | Amount  |        | Revenue |    | Amount |    | Revenue |        | Amount  |         | % 
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |   
|Revenue:                                  |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Merchant Card Services  |                    | $                           | 107,619 |         |        |         | 96 |        |    | $       | 95,364 |         |         |    | 81  |     |    | $     | 12,255  |        |         |     | 13   |   
|                                         
|                                         
|                                         
|                                         
|                                          | Payment Services        |                    |                             | 5,045   |         |        |         | 4  |        |    |         | 7,179  |         |         |    | 6   |     |    |       | (2,134  | )      |         |     | (30  | ) 
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|                                          |                         | Total Core Revenue |                             |         | 112,664 |        |         |    | 100    |    |         |        | 102,543 |         |    |     | 87  |    |       |         | 10,121 |         |     |      | 10 |    
|                                         
|                                         
|                                         
|                                         
|                                          | Divested Business Lines |                    |                             |        |         |        |         |   |        |    |         | 15,333 |         |         |    | 13  |     |    |       | (15,333 | )      |         |     | (100 | ) 
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|                                          |                         | Total Revenue      |                             |         | 112,664 |        |         |    | 100    |    |         |        | 117,876 |         |    |     | 100 |    |       |         | (5,212 | )       |     |      | (4 | )  
|                                         
|                                         
|                                         
|                                         
|Expenses:                                 |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Merchant Card Services  |                    |                             | 88,222  |         |        |         | 82 |        |    |         | 76,718 |         |         |    | 80  |     |    |       | 11,504  |        |         |     | 15   |   
|                                         
|                                         
|                                         
|                                         
|                                          | Payment Services        |                    |                             | 2,825   |         |        |         | 56 |        |    |         | 5,968  |         |         |    | 83  |     |    |       | (3,143  | )      |         |     | (53  | ) 
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|                                          |                         |                    | Total Core Expenses         |         |         | 91,047 |         |    |        | 81 |         |        |         | 82,686  |    |     |     | 81 |       |         |        | 8,361   |     |      |    | 10  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Divested Business Lines |                    |                             |        |         |        |         |   |        |    |         | 20,437 |         |         |    | 133 |     |    |       | (20,437 | )      |         |     | (100 | ) 
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|                                          |                         |                    | Total Expenses              |         |         | 91,047 |         |    |        | 81 |         |        |         | 103,123 |    |     |     | 87 |       |         |        | (12,076 | )   |      |    | (12 | )
|                                         
|                                         
|                                         
|                                         
|Operating Profit (Loss):                  |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Merchant Card Services  |                    |                             | 19,397  |         |        |         | 18 |        |    |         | 18,646 |         |         |    | 20  |     |    |       | 751     |        |         |     | 4    |   
|                                         
|                                         
|                                         
|                                         
|                                          | Payment Services        |                    |                             | 2,220   |         |        |         | 44 |        |    |         | 1,211  |         |         |    | 17  |     |    |       | 1,009   |        |         |     | 83   |   
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|                                          |                         |                    | Total Core Operating Profit |         |         | 21,617 |         |    |        | 19 |         |        |         | 19,857  |    |     |     | 19 |       |         |        | 1,760   |     |      |    | 9   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Divested Business Lines |                    |                             |        |         |        |         |   |        |    |         | (5,104 | )       |         |    | (33 | )   |    |       | 5,104   |        |         |     | 100  |   
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|                                          |                         |                    | Total Operating Profit      |         |         | 21,617 |         |    |        | 19 |         |        |         | 14,753  |    |     |     | 13 |       |         |        | 6,864   |     |      |    | 47  |  
|                                         
|                                         
|                                         
|                                         
|Net Interest Income                       |                         |                    | 1,069                       |         |         |        | 1       |    |        |    | 1,893   |        |         |         | 2  |     |     |    | (824  | )       |        |         | (44 | )   
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|Income Before Taxes and Minority Interest |                         |                    | 22,686                      |         |         |        | 20      |    |        |    | 16,646  |        |         |         | 14 |     |     |    | 6,040 |         |        |         | 36  |     
|                                         
|                                         
|                                         
|                                         
|Provision for Income Taxes                |                         |                    | 9,861                       |         |         |        | 9       |    |        |    | 8,728   |        |         |         | 7  |     |     |    | 1,133 |         |        |         | 13  |     
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|Income Before Minority Interest           |                         |                    | 12,825                      |         |         |        | 11      |    |        |    | 7,918   |        |         |         | 7  |     |     |    | 4,907 |         |        |         | 62  |     
|                                         
|                                         
|                                         
|                                         
|Minority Interest                         |                         |                    | 626                         |         |         |        | 1       |    |        |    |        |        |         |         |   |     |     |    | 626   |         |        |         | 100 |     
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   
|Net Income                                |                         | $                  | 12,199                      |         |         |        | 11      |    |        | $  | 7,918   |        |         |         | 7  |     |     |    | 4,281 |         |        |         | 54  |     
|                                          |                         |                    |                             |         |         |        |         |    |        |    |         |        |         |         |    |     |     |    |       |         |        |         |     |      |   

Merchant Card Services

Revenue for the three months ended June 30, 2002 increased 13% to $107.6
million from $95.4 million in 2001. The acquisition of ABN AMRO Merchant
Services, LLC (AAMS) on June 28, 2001 contributed $8.9 million of incremental
revenue in the second quarter of 2002. Organic revenue growth, which excludes
the impact of acquisitions, was 4% for the three months ended June 30, 2002.

Transaction volume processed for the three months ended June 30, 2002
increased 14% to 955 million from 840 million in 2001. Dollar volume processed
for the three months ended June 30, 2002 increased 14% to $42.9 billion from
$37.7 billion in 2001. Organic transaction and dollar volume, which excludes
the impact of acquisitions, increased 11% and 9%, respectively, for the 2002
second quarter. The volume increases were primarily due to growth in existing
national customers, strong execution in the regional sales channels, and
continued expansion in new vertical markets.

Expenses for the three months ended June 30, 2002 increased 15% to $88.2
million from $76.7 million in 2001. Total expenses increased due to increased
processing volume and a restructuring charge of $1.7 million partially offset
by the non-amortization of goodwill. In the second quarter of 2002, the
Company recorded a restructuring charge of $1.7 million related to the closure
of its remaining operations in Juarez, Mexico (see discussion in Impairment and
Restructuring Charges). Expenses for the three months ended June 30, 2001
included $0.5 million of goodwill amortization expense that did not recur in
2002 due to the adoption of a new accounting standard (see Recent Accounting
Pronouncements). Operating margins as a percentage of revenue decreased to 18%
from 20% in 2001 primarily due to the restructuring charge. Operating profit
for the quarter ended June 30, 2002 increased 4% to $19.4 million from $18.6
million in the 2001 second quarter due primarily to the factors outlined above.
Excluding the restructuring charge, operating profit rose 13% and operating
margins remained consistent at 20%.

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Payment Services

Revenue for the three months ended June 30, 2002 decreased 30% to $5.0
million from $7.2 million in 2001. Revenue decreased primarily due to
decreased paper-based transactions from the Companys Airlines Reporting
Corporation contract and lower earnings on customer balances due to lower
average rates in 2002. The revenue decrease was partially offset by increased
pricing in the Companys commission settlement product.

Expenses for the three months ended June 30, 2002 decreased 53% to $2.8
million from $6.0 million in 2001 due primarily to decreased paper-based
transactions and related staff reductions. Operating margins as a percentage
of revenue increased to 44% from 17% in 2001 due to decreased costs combined
with price increases in the Companys commission settlement product. Operating
profit for the quarter ended June 30, 2002 increased 83% to $2.2 million from
$1.2 million in the 2001 second quarter.

Divested and Discontinued Business Units

In 2001, the Company divested its Business Process Outsourcing (BPO)
business and discontinued its Denver collections business, which were
components of the former Corporate Outsourcing Solutions segment. The Denver
collections business was discontinued on March 30, 2001. The sale of the BPO
unit to Affiliated Computer Services (ACS) was completed on August 29, 2001
for $43.0 million in cash ($41.3 million after transaction-related expenses).
For the three months ended June 30, 2001, the divested business units had
revenue of $15.3 million. Operating profit (loss) for the divested and
discontinued business units was $(5.1) million for the quarter ended June 30,
2001 and includes a $6.3 million impairment charge taken in the second quarter
of 2001.

Impairment and Restructuring Charges

In May 2002, the Company announced its plans to close its remaining
operations in Juarez, Mexico by the end of 2002. The work currently performed
in Mexico will be relocated to existing facilities in the United States. The
Company recorded a pre-tax restructuring charge of $1.7 million ($2.4 million
after-tax, or $0.04 per diluted share) in the second quarter of 2002 related to
severance costs for approximately 120 employees, building and equipment
write-downs, and related items. The after-tax charge exceeds the pre-tax
amount due to additional provisions required for nondeductible losses and
dividends from foreign subsidiaries. As of June 30, 2002, the Company had $0.6
million remaining in accrued liabilities for future severance and other
obligations related to the closure.

During 2001, the Company recorded a net pre-tax charge of $3.9 million
($4.6 million after-tax, or $0.09 per diluted share) related to the BPO
divestiture. The after-tax charge exceeds the pre-tax amount due to additional
provisions required for nondeductible losses, repatriation of previously
untaxed earnings in foreign countries, and dividends on foreign subsidiaries.
This net charge consisted of a second quarter pre-tax charge of $6.3 million
($6.2 million after-tax, or $0.12 per share), which was partially offset by net
positive pre-tax adjustment of $2.4 million ($1.5 million after-tax, or $0.03
per diluted share) in the fourth quarter. The second quarter charge was for
the estimated loss for the sale of the BPO business. The net fourth quarter
gain represented a $3.0 million pre-tax ($1.9 million after-tax, or $0.04 per
diluted share) adjustment to the second quarter charge due to changes in
estimates for legal and other post-closing matters, partially offset by a $0.6
million pre-tax ($0.4 million after-tax, or $0.01 per diluted share) severance
charge related to organizational restructuring actions taken to reduce support
costs associated with the BPO unit. As of June 30, 2002, the Company had $0.8
million remaining in accrued liabilities related to the final obligations
associated with the BPO divestiture.

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##### Table of Contents



Net Interest Income

Net interest income earned on the Companys cash and cash equivalents for
the three months ended June 30, 2002, was $1.1 million, down 44% from $1.9
million in the 2001 second quarter due to lower average interest rates in 2002.

Provision for Income Taxes

The overall effective tax rate for the second quarter of 2002 was 43.5%
compared to 52.4% for the same quarter a year ago. The decrease in the
effective tax rate was principally due to additional provisions in 2001 related
to the sale of the BPO business unit for nondeductible losses, repatriation of
previously untaxed earnings in foreign countries, and dividends from foreign
subsidiaries.

Exclusive of the additional provisions required in both years related to
exiting foreign operations, the effective tax rate was 37.6% in the second
quarter of 2002 compared to 38.6% in 2001. This decrease is due principally to
differences in income tax rates between legal entities within the Company.

Minority Interest

On June 28, 2001, the Company acquired 70% interest in AAMS. For the three months ended
June 30, 2002, minority interest was $0.6 million.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |    |    |  
|----------------------------------------- | ----------------------- | ------------------ | ----------------------------- | ------- | ------- | ------- | ------- | -- | ------ | -- | ------- | ------- | ------- | ------- | -- | --- | --- | -- | ------ | ------- | ------ | ------- | --- | ---- | -- | -- | -
|                                          |                         |                    |                               |         | 2002    |         | 2001    |    | Change
|                                          |                         |                    |                               |         |         |         |         |    |       
|(Dollars in thousands)                    |                         |                    |                               |         |         | %
of    |         |    |        |    |         | % of    |         |         |    |     |     |    |        |        
|                                          |                         |                    |                               |         | Amount  |         | Revenue |    | Amount |    | Revenue |         | Amount  |         | % 
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |   
|Revenue:                                  |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Merchant Card Services  |                    | $                             | 212,235 |         |         |         | 95 |        |    | $       | 180,704 |         |         |    | 80  |     |    |        | 31,531  |        |         |     | 17   |   
|                                         
|                                         
|                                         
|                                         
|                                          | Payment Services        |                    |                               | 10,374  |         |         |         | 5  |        |    |         | 14,809  |         |         |    | 7   |     |    |        | (4,435  | )      |         |     | (30  | ) 
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|                                          |                         | Total Core Revenue |                               |         | 222,609 |         |         |    | 100    |    |         |         | 195,513 |         |    |     | 86  |    |        |         | 27,096 |         |     |      | 14 |   
|                                         
|                                         
|                                         
|                                         
|                                          | Divested Business Lines |                    |                               |        |         |         |         |   |        |    |         | 31,408  |         |         |    | 14  |     |    |        | (31,408 | )      |         |     | (100 | ) 
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|                                          |                         | Total Revenue      |                               |         | 222,609 |         |         |    | 100    |    |         |         | 226,921 |         |    |     | 100 |    |        |         | (4,312 | )       |     |      | (2 | ) 
|                                         
|                                         
|                                         
|                                         
|Expenses:                                 |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Merchant Card Services  |                    |                               | 175,639 |         |         |         | 83 |        |    |         | 148,455 |         |         |    | 82  |     |    |        | 27,184  |        |         |     | 18   |   
|                                         
|                                         
|                                         
|                                         
|                                          | Payment Services        |                    |                               | 6,337   |         |         |         | 61 |        |    |         | 12,027  |         |         |    | 81  |     |    |        | (5,690  | )      |         |     | (47  | ) 
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|                                          |                         |                    | Total Core Operating Expenses |         |         | 181,976 |         |    |        | 82 |         |         |         | 160,482 |    |     |     | 82 |        |         |        | 21,494  |     |      |    | 13 |  
|                                         
|                                         
|                                         
|                                         
|                                          | Divested Business Lines |                    |                               |        |         |         |         |   |        |    |         | 35,254  |         |         |    | 112 |     |    |        | (35,254 | )      |         |     | (100 | ) 
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|                                          |                         |                    | Total Expenses                |         |         | 181,976 |         |    |        | 82 |         |         |         | 195,736 |    |     |     | 86 |        |         |        | (13,760 | )   |      |    | (7 | )
|                                         
|                                         
|                                         
|                                         
|Operating Profit (Loss):                  |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Merchant Card Services  |                    |                               | 36,596  |         |         |         | 17 |        |    |         | 32,249  |         |         |    | 18  |     |    |        | 4,347   |        |         |     | 13   |   
|                                         
|                                         
|                                         
|                                         
|                                          | Payment Services        |                    |                               | 4,037   |         |         |         | 39 |        |    |         | 2,782   |         |         |    | 19  |     |    |        | 1,255   |        |         |     | 45   |   
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|                                          |                         |                    | Total Core Operating Profit   |         |         | 40,633  |         |    |        | 18 |         |         |         | 35,031  |    |     |     | 18 |        |         |        | 5,602   |     |      |    | 16 |  
|                                         
|                                         
|                                         
|                                         
|                                          | Divested Business Lines |                    |                               |        |         |         |         |   |        |    |         | (3,846  | )       |         |    | (12 | )   |    |        | 3,846   |        |         |     | 100  |   
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|                                          |                         |                    | Total Operating Profit        |         |         | 40,633  |         |    |        | 18 |         |         |         | 31,185  |    |     |     | 14 |        |         |        | 9,448   |     |      |    | 30 |  
|                                         
|                                         
|                                         
|                                         
|Net Interest Income                       |                         |                    | 2,104                         |         |         |         | 1       |    |        |    | 4,113   |         |         |         | 2  |     |     |    | (2,009 | )       |        |         | (49 | )   
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|Income Before Taxes and Minority Interest |                         |                    | 42,737                        |         |         |         | 19      |    |        |    | 35,298  |         |         |         | 16 |     |     |    | 7,439  |         |        |         | 21  |     
|                                         
|                                         
|                                         
|                                         
|Provision for Income Taxes                |                         |                    | 17,277                        |         |         |         | 8       |    |        |    | 15,841  |         |         |         | 7  |     |     |    | 1,436  |         |        |         | 9   |     
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|Net Income Before Minority Interest       |                         |                    | 25,460                        |         |         |         | 11      |    |        |    | 19,457  |         |         |         | 9  |     |     |    | 6,003  |         |        |         | 31  |     
|                                         
|                                         
|                                         
|                                         
|Minority Interest                         |                         |                    | 1,213                         |         |         |         | 1       |    |        |    |        |         |         |         |   |     |     |    | 1,213  |         |        |         | 100 |     
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   
|Net Income                                |                         | $                  | 24,247                        |         |         |         | 11      |    |        | $  | 19,457  |         |         |         | 9  |     |     | $  | 4,790  |         |        |         | 25  |     
|                                          |                         |                    |                               |         |         |         |         |    |        |    |         |         |         |         |    |     |     |    |        |         |        |         |     |      |   

Merchant Card Services

Revenue for the six months ended June 30, 2002 increased 17% to $212.2
million from $180.7 million in 2001. The acquisition of ABN AMRO Merchant
Services, LLC (AAMS) on June 28, 2001 contributed $18.9 million of incremental
revenue for the six months ended June 30, 2002. Organic revenue

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growth, which excludes the impact of acquisitions, was 7% for the six months
ended June 30, 2002.

Transaction volume processed for the six months ended June 30, 2002
increased 16% to 1.8 billion from 1.6 billion in 2001. Dollar volume processed
for the six months ended June 30, 2002 increased 16% to $82.0 billion from
$71.0 billion in 2001. Organic transaction and dollar volume, which excludes
the impact of acquisitions, increased 13% and 10%, respectively for the six
months ended June 30, 2002. The volume increases were primarily due to growth
in existing national customers, strong execution in the regional sales
channels, and continued expansion in new vertical markets.

Expenses for the six months ended June 30, 2002 increased 18% to $175.6
million from $148.5 million in 2001. Total expenses increased due to increased
processing volume and a restructuring charge of $1.7 million partially offset
by the non-amortization of goodwill. In the second quarter of 2002, the
Company recorded a restructuring charge of $1.7 million related to the closure
of its remaining operations in Juarez, Mexico (see discussion in Impairment and
Restructuring Charges). Expenses for the six months ended June 30, 2001
included $1.1 million of goodwill amortization expense that did not recur in
2002 due to the adoption of a new accounting standard (see Recent Accounting
Pronouncements). Operating margins as a percentage of revenue decreased to 17%
from 18% in 2001 primarily due to the restructuring charge. Operating profit
for the quarter ended June 30, 2002 increased 13% to $36.6 million from $32.2
million for 2001 due primarily to the factors outlined above. Excluding the
restructuring charge, operating profit increased 19% and operating margins
remained consistent at 18%.

Payment Services

Revenue for the six months ended June 30, 2002 decreased 30% to $10.4
million from $14.8 million in 2001. Revenue decreased primarily due to
decreased paper-based transactions from the Companys Airlines Reporting
Corporation contract and lower earnings on customer balances due to lower
average interest rates in 2002. The revenue decrease was partially offset by
increased pricing in the Companys commission settlement product.

Expenses for the six months ended June 30, 2002 decreased 47% to $6.3
million from $12.0 million due primarily to decreased paper-based transactions
and related staff reductions. Operating margins as a percentage of revenue
increased to 39% from 19% in 2001 due to decreased costs combined with price
increases in the Companys commission settlement product. Operating profit for
the six months ended June 30, 2002 increased 45% to $4.0 million from $2.8
million for 2001 due primarily to improved profit margins.

Divested and Discontinued Business Units

In 2001, the Company divested its Business Process Outsourcing (BPO)
business and discontinued its Denver collections business, which were
components of the former Corporate Outsourcing Solutions segment. The Denver
collections business was discontinued on March 30, 2001. The sale of the BPO
unit to Affiliated Computer Services (ACS) was completed on August 29, 2001
for $43.0 million in cash ($41.3 million after-tax transaction related
expenses). For the six months ended June 30, 2001, the divested business units
had revenue of $31.4 million. Operating profit (loss) for the divested and
discontinued business units was $(3.8) million for the six months ended June
30, 2001 and includes a $6.3 million impairment charge taken in the second
quarter of 2001.

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Impairment and Restructuring Charges

In May 2002, the Company announced its plans to close its remaining
operations in Juarez, Mexico by the end of 2002. The work currently performed
in Mexico will be relocated to existing facilities in the United States. The
Company recorded a pre-tax restructuring charge of $1.7 million ($2.4 million
after-tax, or $0.04 per diluted share) in the second quarter of 2002 related to
severance costs for approximately 120 employees, building and equipment
write-downs, and related items. The after-tax charge exceeds the pre-tax
amount due to additional provisions required for nondeductible losses and
dividends from foreign subsidiaries. As of June 30, 2002, the Company had $0.6
million remaining in accrued liabilities for future severance and other
obligations related to the closure.

During 2001, the Company recorded a net pre-tax charge of $3.9 million
($4.6 million after-tax, or $0.09 per diluted share) related to the BPO
divestiture. The after-tax charge exceeds the pre-tax amount due to additional
provisions required for nondeductible losses, repatriation of previously
untaxed earnings in foreign countries, and dividends from foreign subsidiaries.
This net charge consisted of a second quarter pre-tax charge of $6.3 million
($6.2 million after-tax, or $0.12 per share), which was partially offset by net
positive pre-tax adjustment of $2.4 million ($1.5 million after-tax, or $0.03
per diluted share) in the fourth quarter. The second quarter charge was for
the estimated loss for the sale of the BPO business. The net fourth quarter
gain represented a $3.0 million pre-tax ($1.9 million after-tax, or $0.04 per
diluted share) adjustment to the second quarter charge due to changes in
estimates for legal and other post-closing matters, partially offset by a $0.6
million pre-tax ($0.4 million after-tax, or $0.01 per diluted share) severance
charge related to organizational restructuring actions taken to reduce support
costs associated with the BPO unit. As of June 30, 2002, the Company had $0.8
million remaining in accrued liabilities related to the final obligations
associated with the BPO divestiture.

Net Interest Income

Net interest income earned on the Companys cash and cash equivalents for
the six months ended June 30, 2002, was $2.1 million, down 49% from $4.1
million for the six months ended June 30, 2001 due to lower average interest
rates in 2002.

Provision For Income Taxes

The overall effective tax rate for the six months ended June 30, 2002 was
40.4% compared to 44.9% for the same period a year ago. The decrease in the
effective tax rate was due to additional provisions in 2001 related to the sale
of the BPO business unit for nondeductible losses, repatriation of previously
untaxed earnings in foreign countries, and dividends from foreign subsidiaries.

Exclusive of the additional provisions required in both years related to
existing foreign operations, the effective tax rate was 37.3% for the six
months ended June 30, 2002 compared to 38.4% in 2001. This decrease is due
principally to differences in income tax rates between legal entities within
the Company.

Minority Interest

On June 28, 2001, the Company acquired 70% interest in AAMS. For the six months ended
June 30, 2002, minority interest was $1.2 million.

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Recent Accounting Pronouncements

Goodwill and Other Intangible Assets

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

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

If SFAS 142 had been adopted effective January 1, 2001, goodwill
amortization expense, which is primarily nondeductible for income tax purposes,
would have been reduced by $0.5 million and $1.1 million for the three and six
months ended June 30, 2001, respectively. For the three months ended June 30,
2001, proforma net income would have been $8.4 million, or $0.16 per diluted
share, versus reported net income of $7.9 million, or $0.15 per diluted share.
For the six months ended June 30, 2001, proforma net income would have been
$20.5 million, $0.40 per diluted share, versus reported net income of $19.5
million, or $0.38 per diluted share.

The Companys amortizable intangible assets as of June 30, 2002 related
almost exclusively to acquired merchant portfolios. These costs are amortized
on a straight-line basis over periods ranging from 7 to 10 years. Amortization
expense for the quarter and six months ended June 30, 2002 was $1.7 million and
$3.3 million, respectively. The estimated annual amortization expense for
existing intangible assets for 2002 and each of the next five years is as
follows: 2002  $6.8 million; 2003  $7.0 million; 2004  $6.6 million; 2005,
2006 and 2007  $4.7 million.

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

Accounting for Long-Lived Assets

SFAS 144, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, was issued in October 2001 and addresses
how and when to measure impairment on long-lived assets and how to account for
long-lived assets that an entity plans to dispose of either through sale,
abandonment, exchange, or distribution to owners. The new provisions supersede
SFAS 121, which addressed asset impairment, and certain provisions of APB
Opinion 30 related to reporting the effects of the disposal of a business
segment, and require expected future operating losses from discontinued
operations

23



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to be recorded in the period in which the losses are incurred rather than
the measurement date. Under SFAS 144, more dispositions may qualify for
discontinued operations treatment in the income statement. The provisions of
SFAS 144 became effective for the Company January 1, 2002 and have not had a
material impact on the Companys results of operations, financial position, or
liquidity.

Accounting for Exit or Disposal Activities

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

Seasonality

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

Liquidity and Capital Resources

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

The Companys capital expenditures include amounts for computers, external
and internally developed software, and improvements to operating facilities.
During the six months ended June 30, 2002, the Companys capital expenditures
totaled $10.6 million. Such expenditures were financed from operating cash
flow, which totaled $88.7 million for the six months ended June 30, 2002.
Operating cash flow and capital expenditures during the six months ended June
30, 2001 totaled $70.6 million and $8.9 million, respectively. Operating cash
flow increased in the 2002 period compared to 2001 due to strong operating
results from the Merchant Card Services business segment.

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

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

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

24



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##### Table of Contents



On July 3, 2002, the Company acquired processing contracts from a key
strategic partner for $2.7 million in cash. The terms of the agreement also
include future payments to the seller for a portion of the revenue derived from
these contracts for a specified period plus an additional one-time payment of up to $1.0 million.

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

Forward-Looking Statements and Risk Factors

The section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of
1995). Although management believes the expectations reflected in such
forward-looking statements are reasonable, actual results may differ
materially. Refer to the Companys Annual Report on Form 10-K for the year
ended December 31, 2001 and subsequent filings with the Securities and Exchange
Commission for risks and uncertainties that could cause actual results to
differ materially.

The Company currently processes card transactions for
several of the largest airlines in the United States. Airline
customers represented approximately 9% of the Companys
consolidated revenue (6% from Merchant Card Services and 3% from
Payment Services) for the six months ended June 30, 2002. In the
event of liquidation of one or more of the Companys airline
customers, the Company could become financially responsible for
refunding tickets purchased through Visa® or
MasterCard® under the chargeback rules of those
associations. In the near term, management believes liquidations are
unlikely for any of the Companys airline customers given the
Federal financial support for the airline industry. In November 2001,
Congress passed the Aviation and Transportation Security Act, which
requires airlines to honor tickets for eighteen months for other
airlines that may suspend, interrupt or discontinue services due to
insolvency or liquidation. In May 2002, the Company announced its
decision to discontinue processing debit and credit card transactions
for the airline industry. The Company will honor its existing
contractual obligations to the airlines it currently serves but does
not intend to renew such contracts when their current terms expire.
The contracts currently in effect have various expiration dates
extending through November 2005.

One
of the Companys airline customers is US Airways Group, Inc. US
Airways Group, Inc. has filed for bankruptcy court protection under Chapter
11. Based upon information currently available to the Company and
actions management is taking to mitigate these risks, management
currently believes a material loss under the chargeback rules is
unlikely.




Item 3. Quantitative and Qualitative Disclosure of Market Risk

Derivative Instruments

The Company does not use derivative instruments.

Market Risk of Financial Instruments

The Companys primary market risk exposure with regard to financial
instruments is to changes in interest rates. As of June 30, 2002, the Company
had $183 million in cash and cash equivalents. For the first quarter of 2002,
National City also held an average of approximately $150 million of customer cash balances,
on which the Company earns interest. Interest earned on customer cash balances
is included as a component of revenue.

Because of the short-term nature of these instruments, a sudden change in
market interest rates would not impact the fair value of these instruments.
The Companys earnings, however, are impacted by changes in interest rates,
which affects both interest earnings on the Companys cash and cash equivalents
and interest earnings on customer funds maintained by National City. At June
30, 2002, a hypothetical 100 basis point increase in short-term interest rates
would result in an increase of approximately $3 million in annual pre-tax
earnings. A hypothetical 100 basis point decrease in short-term interest rates
would result in a decrease of approximately $3 million in annual pre-tax
earnings.

25



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##### Table of Contents






Part II  Other Information




Item 1. Legal Proceedings (None)




Item 2. Changes in Securities and Use of Proceeds (None)




Item 3. Defaults Upon Senior Securities (None)




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



| |  | On April 11, 2002, at the Annual Shareholders Meeting of the Registrant,
the shareholders took the following actions:
| |  | ---------------------------------------------------------------------------------------------------------------------

1.     Elected as directors all nominees designated in the proxy statement
dated March 11, 2002 as follows:

|                       |  |                 |            |          |  |  |           | 
|---------------------- |  | --------------- | ---------- | -------- |  |  | --------- | 
|                       |  | Number of Votes
|                      
|                      
|                      
|                      
|                       |  | For             |            | Withheld
|                       |  |                 |            |         
|Aureliano Gonzalez-Baz |  |                 | 50,978,149 |          |  |  | 302,120   | 
|                      
|                      
|                      
|                      
|Jon L. Gorney          |  |                 | 49,793,054 |          |  |  | 1,487,215 | 
|                      
|                      
|                      
|                      
|J. Armando Ramirez     |  |                 | 50,105,740 |          |  |  | 1,174,529 | 



| | 2. |  | Approved the selection of Ernst & Young LLP as independent auditors
for the Registrant for 2002: 51,178,768 votes cast for, 100,541 votes
cast against, and 1,036 votes withheld.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 5. Other Information (None)




Item 6. Exhibits and Reports on Form 8-K:



|a. |  | Exhibits
|-- |  | --------

|               |  |                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT INDEX 
|              
|EXHIBIT NUMBER |  | DESCRIPTION                                                                                                                                                                 
|               |  |                                                                                                                                                                             
|3.1 (i)        |  | Amended Articles of Incorporation of the Registrant. (A)                                                                                                                    
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|3.1 (ii)       |  | Code of Regulations of the Registrant. (A)                                                                                                                                  
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|4.1            |  | Specimen Certificate for the Common Stock, without par value, of the Registrant. (B)                                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|4.2            |  | Registration Rights Agreement between the Registrant and National City
Corporation, dated July 16, 1996. (B)                                                                
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.1           |  | Absolute Net Ground Lease by and between Preston Manor, Inc. and Allied
Stores Corporation, dated January 16, 1969. (A)                                                     
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.2           |  | Second Amendment to Lease by and between William G. Earley, Plaza
Centers, Inc. and First National Bank of Louisville, dated
April 15, 1986. (A)                            
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.3           |  | (Intentionally Omitted)                                                                                                                                                     
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.4           |  | Sponsorship Agreement between NPC and National City Bank of Kentucky,
dated June 30, 1996. (B)                                                                              
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.5           |  | Administrative Services Agreement between NPC and National City
Corporation, dated July 15, 1996. (B)                                                                       
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.6           |  | (Intentionally Omitted)                                                                                                                                                     
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.7           |  | (Intentionally Omitted)                                                                                                                                                     
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.8           |  | Form of Card Services Agreement by and among NPC and its affiliated
corporations and certain bank subsidiaries of National City
Corporation. (B)                            
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.9           |  | Tax Sharing Agreement between the Company and National City Corporation,
dated July 17, 1996. (B)                                                                           
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.10          |  | The Agreement between Airlines Reporting Corporation and First National
Bank of Louisville and NPC for Area Settlement Plan Processing Services,
dated October 16, 1986. (B)
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.11          |  | First Amendment to Agreements between Airlines Reporting Corporation and
First National Bank of Louisville and NPC, dated December 12, 1991. (A)                            
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.12          |  | 1994 Amendment to Agreements between Airlines Reporting Corporation and
NPC, dated December 31, 1994. (A)                                                                   
|              
|              
|              
|              
|               |  |                                                                                                                                                                             
|              
|              
|              
|              
|10.13          |  | Supplemental Agreement by and between NPC and Airlines Reporting
Corporation, dated February 24, 1995. (A)                                                                  
|              
|              
|              
|              
|               |  |                                                                                                                                                                             

26



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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Amendment to Agreement between Airlines Reporting Corporation and
National City Bank of Kentucky and NPC, for Area Settlement Plan
Processing Services, dated August 19, 1995. (A)                                                                           
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|10.15 |  | December 1, 1998 Amendment to the ARC and NPC Processing Agreement.
(Incorporated herein by reference to Exhibit 10.15 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 1999)                                                  
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.16 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.17 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.18 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.19 |  | Employment Agreement between the Registrant and Mark Pyke
dated March 4, 1996. (Incorporated herein by reference to Exhibit
10.19 to the Registrants Annual Report on Form 10-K for the year
ended December 31, 1999) **                                    
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.20 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.21 |  | Employment Agreement and Undertaking of Confidentiality between NPC and
Thomas A. Wimsett dated May 23, 1995. (A)**                                                                                                                                          
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.22 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.23 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.24 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.25 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.26 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.27 |  | Severance Agreement between the Registrant and Thomas A. Wimsett, dated June 7, 1996. (B)**                                                                                                                                                                  
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.28 |  | National Processing, Inc. 2000 Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.28 to the Registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2000) **                                                               
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.29 |  | 1996 Stock Option Plan and Form of Stock Option Agreement. (B)**                                                                                                                                                                                             
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.30 |  | Nonemployee Directors Stock Option Plan and Form of Stock Option Agreement. (B)**                                                                                                                                                                            
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.31 |  | Amended and Restated NPC Short-Term Incentive Compensation Plan for
Senior Executives, effective February 9, 2000. (Incorporated herein by
reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K
for the year ended December 31, 1999) **
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.32 |  | NPCs Long-Term Incentive Compensation Plan for Senior Officers,
effective January 1, 1998. (Incorporated herein by reference to Exhibit
10.32 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000) **                       
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.33 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.34 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.35 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.36 |  | Amendment to Building Lease between National City Bank of Kentucky and
NPC, dated July 3, 1996. (B)**                                                                                                                                                        
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.37 |  | Form of Severance Agreement between the Registrant and certain Senior Vice Presidents. (B)**                                                                                                                                                                 
|     
|10.38 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.39 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.40 |  | (Intentionally Omitted)                                                                                                                                                                                                                                      
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.41 |  | National Processing, Inc. 2001 Restricted Stock Plan (Incorporated
herein by reference to Exhibit A to National Processing, Inc.s Proxy
Statement on Form 14A #001-11905, dated March 31, 2001).                                                            
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.42 |  | National Processing, Inc.s U.S. Asset Purchase Agreement, dated July
11, 2001 (Incorporated herein by reference to Exhibit 10.42 to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001).                                    
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.43 |  | National Processing, Inc.s Mexico Asset Purchase Agreement, dated July
11, 2001 (Incorporated herein by reference to Exhibit 10.43 to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001).                                  
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                              
|     
|     
|     
|     
|10.44 |  | National Processing, Inc.s Stock Purchase Agreement, dated July 11,
2001 (Incorporated herein by reference to Exhibit 10.44 to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001).                                         

27



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##### Table of Contents



---

|(A) |  | Exhibit is incorporated herein by reference to the applicable exhibit in
the Registrants Registration Statement on Form S-1 (Registration No.
333-05507) filed on June 7, 1996.                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(B) |  | Exhibit is incorporated herein by reference to the applicable exhibit in
the Registrants Amendment No. 1 to Form S-1 Registration Statement
(Registration No. 333-05507) filed on July 18, 1996.
|   
|   
|   
|   
|**  |  | Represents a management contract or compensatory plan required to be
filed pursuant to Item 14 of Form 10-K.                                                                                     



|b. |  | Reports on Form 8-K
|-- |  | -------------------



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | April 17, 2002: On April 17, 2002, the Registrant issued a press release
reporting earnings for the quarter ended March 31, 2002.



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | May 29, 2002: On May 29, 2002, the Registrant issued a press release
announcing its plans to close its remaining operations in Juarez,
Mexico and announcing its decision to discontinue processing debit and credit card
transactions for the airline industry.

28



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                      |  |                                                                                                  
|--------------------- |  | -------------------------------------------------------------------------------------------------
|                      |  | NATIONAL PROCESSING, INC.                                                                        
|                     
|                     
|                     
|                     
|                      |  |                                                                                                  
|                     
|                     
|                     
|                     
|Date: August 14, 2002 |  | By:  /s/ Thomas A. Wimsett                                                                       
|                      |  |                                                                                                  
|                      |  | Thomas A. Wimsett
President and Chief Executive Officer
(Duly Authorized Signer)                 
|                     
|                     
|                     
|                     
|                      |  |                                                                                                  
|                     
|                     
|                     
|                     
|                      |  | By:  /s/ David E. Fountain                                                                       
|                      |  |                                                                                                  
|                      |  | David E. Fountain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

29