##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

/X/               Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange of 1934

For the quarterly period ended March 31, 2002

or

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

For the transition period from________________to___________

Commission File Number: 1-11905

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

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

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

(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  X NO

The number of shares outstanding of the Registrants Common Stock as of April
30, 2002 was 51,986,118.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|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                                                                  
|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 - March 31, 2002,      |                                                  |  |    |   
|           |                       | December 31, 2001 and March 31, 2001               |                                                  |  | 3  |   
|          
|           |                       | Consolidated Statements of Income - Three          |                                                  |  |    |   
|           |                       | Months Ended March 31, 2002 and 2001               |                                                  |  | 4  |   
|          
|           |                       | Consolidated Statement of Changes in Shareholders' |                                                  |  |    |   
|           |                       | Equity - Three Months Ended March 31, 2002         |                                                  |  | 5  |   
|          
|           |                       | Consolidated Statements of Cash Flows -            |                                                  |  |    |   
|           |                       | Three Months Ended March 31, 2002 and 2001         |                                                  |  | 6  |   
|          
|           |                       | Notes to Consolidated Financial Statements         |                                                  |  | 7  |   
|          
|           | Item 2.               |                                                    | Management's Discussion and Analysis of          |  |    |    |   
|           |                       | Financial Condition and Results of Operations      |                                                  |  | 13 |   
|          
|           | Item 3.               |                                                    | Quantitative and Qualitative Disclosure of       |  |    |    |   
|           |                       | Market Risk                                        |                                                  |  | 18 |   
|          
|Part II.   |                       | Other Information                                  |                                                  |  |    |   
|          
|           | Item 1.               |                                                    | Legal Proceedings (None)                         |  |    | 19 |   
|          
|           | Item 2.               |                                                    | Changes in Securities and Use of Proceeds (None) |  |    | 19 |   
|          
|           | Item 3.               |                                                    | Defaults Upon Senior Securities (None)           |  |    | 19 |   
|          
|           | Item 4.               |                                                    | Submission of Matters to a Vote of Security      |  |    |    |   
|           |                       | Holders (None)                                     |                                                  |  | 19 |   
|          
|           | Item 5.               |                                                    | Other Information (None)                         |  |    | 19 |   
|          
|           | Item 6.               |                                                    | Exhibits and Reports on Form 8-K                 |  |    | 19 |   
|          
|Signatures |                       |                                                    |                                                  |  |    |    | 19 |         
|          

2



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National Processing, Inc.

Consolidated Balance Sheets


Unaudited
(Dollars in thousands)


|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |         |        | 
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------- | -------- | ------- | ----------- | ------- | -------- | ------- | - | ------- | ------- | ------ | 
|                                                |                                                                                                                                                                                                    |                                     |         | March 31 |         | December 31 |         | March 31
|                                                |                                                                                                                                                                                                    |                                     |         | 2002     |         | 2001        |         | 2001    
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |         
|Assets                                          |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Current assets:                                 |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|                                                |                                                                                                                                                                                                    | Cash and cash equivalents           |         | $        | 155,436 |             |         | $        | 101,257 |   |         | $       | 63,280 | 
|                                                |                                                                                                                                                                                                    | Eurodollar deposits                 |         |          |        |             |         |          |        |   |         |         | 56,000 | 
|                                                |                                                                                                                                                                                                    | Accounts receivable  trade         |         |          | 112,083 |             |         |          | 163,644 |   |         |         | 89,750 | 
|                                                |                                                                                                                                                                                                    | Deferred tax assets                 |         |          | 3,983   |             |         |          | 3,299   |   |         |         | 1,392  | 
|                                                |                                                                                                                                                                                                    | Other current assets                |         |          | 7,009   |             |         |          | 7,138   |   |         |         | 11,671 | 
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total current assets                            |                                                                                                                                                                                                    |                                     | 278,511 |          |         |             | 275,338 |          |         |   | 222,093 |        
|Property and equipment:                         |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|                                                |                                                                                                                                                                                                    | Furniture and equipment             |         |          | 56,032  |             |         |          | 54,178  |   |         |         | 71,088 | 
|                                                |                                                                                                                                                                                                    | Building and leasehold improvements |         |          | 10,870  |             |         |          | 10,770  |   |         |         | 19,580 | 
|                                                |                                                                                                                                                                                                    | Software                            |         |          | 33,162  |             |         |          | 30,453  |   |         |         | 25,518 | 
|                                                |                                                                                                                                                                                                    | Property leased from affiliate      |         |          | 4,173   |             |         |          | 4,173   |   |         |         | 4,173  | 
|                                                |                                                                                                                                                                                                    | Land and improvements               |         |          | 442     |             |         |          | 442     |   |         |         | 2,390  | 
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|                                                |                                                                                                                                                                                                    |                                     | 104,679 |          |         |             | 100,016 |          |         |   | 122,749 |        
|Less: Accumulated depreciation and amortization |                                                                                                                                                                                                    |                                     | 50,767  |          |         |             | 50,244  |          |         |   | 60,499  |        
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Property and equipment, net                     |                                                                                                                                                                                                    |                                     | 53,912  |          |         |             | 49,772  |          |         |   | 62,250  |        
|Other assets:                                   |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|                                                | Goodwill, net of accumulated amortization of
$8,283 at March 31, 2002 and December 31, 2001,
and $7,479 at March 31, 2001                                                                          |                                     |         | 91,227   |         |             |         | 91,227   |         |   |         | 78,859  |       
|                                                | Other intangible assets, net of accumulated
amortization of $16,278, $14,610 and $12,097 at
March 31, 2002, December 31, 2001 and March 31,
2001, respectively                                     |                                     |         | 43,282   |         |             |         | 44,950   |         |   |         | 27,403  |       
|                                                |                                                                                                                                                                                                    | Deferred tax assets                 |         |          | 13,785  |             |         |          | 13,310  |   |         |         | 19,145 | 
|                                                |                                                                                                                                                                                                    | Other assets                        |         |          | 3,418   |             |         |          | 3,741   |   |         |         | 6,234  | 
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total other assets                              |                                                                                                                                                                                                    |                                     | 151,712 |          |         |             | 153,228 |          |         |   | 131,641 |        
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total assets                                    |                                                                                                                                                                                                    | $                                   | 484,135 |          |         | $           | 478,338 |          |         | $ | 415,984 |        
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|                                               
|Liabilities and shareholders equity            |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Current liabilities:                            |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|                                                |                                                                                                                                                                                                    | Accounts payable  trade            |         | $        | 15,037  |             |         | $        | 19,080  |   |         | $       | 12,553 | 
|                                                |                                                                                                                                                                                                    | Accrued bankcard assessments        |         |          | 23,685  |             |         |          | 28,113  |   |         |         | 21,015 | 
|                                                |                                                                                                                                                                                                    | Accrued compensation and benefits   |         |          | 3,540   |             |         |          | 6,465   |   |         |         | 5,942  | 
|                                                |                                                                                                                                                                                                    | Income tax payable                  |         |          | 12,101  |             |         |          | 8,089   |   |         |         | 12,275 | 
|                                                |                                                                                                                                                                                                    | Other accrued liabilities           |         |          | 11,311  |             |         |          | 13,906  |   |         |         | 13,420 | 
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total current liabilities                       |                                                                                                                                                                                                    |                                     | 65,674  |          |         |             | 75,653  |          |         |   | 65,205  |        
|Obligation under property leased from affiliate |                                                                                                                                                                                                    |                                     | 1,829   |          |         |             | 1,862   |          |         |   | 1,960   |        
|Deferred tax liabilities                        |                                                                                                                                                                                                    |                                     |        |          |         |             |        |          |         |   | 307     |        
|Minority interest                               |                                                                                                                                                                                                    |                                     | 1,414   |          |         |             | 827     |          |         |   |        |        
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total liabilities                               |                                                                                                                                                                                                    |                                     | 68,917  |          |         |             | 78,342  |          |         |   | 67,472  |        
|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; 51,979,283, 51,818,508, and 51,214,393
issued and outstanding at March 31, 2002, December
31, 2001 and March 31, 2001, respectively |                                     |         | 1        |         |             |         | 1        |         |   |         | 1       |       
|                                                | Contributed capital                                                                                                                                                                                |                                     |         | 196,682  |         |             |         | 193,584  |         |   |         | 182,744 |       
|                                                | Unearned compensation                                                                                                                                                                              |                                     |         | (401     | )       |             |         | (477     | )       |   |         |        |       
|                                                | Retained earnings                                                                                                                                                                                  |                                     |         | 218,936  |         |             |         | 206,888  |         |   |         | 165,767 |       
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total shareholders equity                      |                                                                                                                                                                                                    |                                     | 415,218 |          |         |             | 399,996 |          |         |   | 348,512 |        
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                                                                    | $                                   | 484,135 |          |         | $           | 478,338 |          |         | $ | 415,984 |        
|                                                |                                                                                                                                                                                                    |                                     |         |          |         |             |         |          |         |   |         |        

See notes to consolidated financial statements

3



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National Processing, Inc.







Consolidated Statements of Income


Unaudited
(In thousands, except per share amounts)




|                                                               |  |                    |         |      |  |   |         | 
|-------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | 
|                                                               |  | Three Months Ended
|                                                               |  | March 31          
|                                                               |  |                   
|                                                               |  | 2002               |         | 2001
|                                                               |  |                    |         |     
|Revenue                                                        |  | $                  | 109,945 |      |  | $ | 109,045 | 
|Operating expense                                              |  |                    | 82,304  |      |  |   | 81,858  | 
|General and administrative expense                             |  |                    | 4,602   |      |  |   | 5,575   | 
|Depreciation and amortization                                  |  |                    | 4,023   |      |  |   | 5,180   | 
|                                                               |  |                    |         |      |  |   |         | 
|Operating profit                                               |  |                    | 19,016  |      |  |   | 16,432  | 
|Net interest income                                            |  |                    | 1,035   |      |  |   | 2,220   | 
|                                                               |  |                    |         |      |  |   |         | 
|Income before provision for income taxes
and minority interest |  |                    | 20,051  |      |  |   | 18,652  | 
|Provision for income taxes                                     |  |                    | 7,416   |      |  |   | 7,113   | 
|                                                               |  |                    |         |      |  |   |         | 
|Income before minority interest                                |  |                    | 12,635  |      |  |   | 11,539  | 
|Minority interest                                              |  |                    | 587     |      |  |   |        | 
|                                                               |  |                    |         |      |  |   |         | 
|Net income                                                     |  | $                  | 12,048  |      |  | $ | 11,539  | 
|                                                               |  |                    |         |      |  |   |         | 
|Basic income per common share                                  |  | $                  | 0.23    |      |  | $ | 0.23    | 
|                                                               |  |                    |         |      |  |   |         | 
|Diluted income per common share                                |  | $                  | 0.23    |      |  | $ | 0.22    | 
|                                                               |  |                    |         |      |  |   |         | 

See notes to consolidated financial statements

4



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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                                                                                    |  |        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 12,048  |  |  |   | 12,048  | 
|Issuance of common shares under stock-based
compensation plans, including related
tax effects |  |        | 160,775    |        |  |             |  |              |  |          | 3,098   |       |  |   | 76   |   |  |   |        |  |  |   | 3,174   | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|Balance at March 31, 2002                                                                     |  |        | 51,979,283 |        |  | $           | 1 |              |  | $        | 196,682 |       |  | $ | (401 | ) |  | $ | 218,936 |  |  | $ | 415,218 | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

5



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National Processing, Inc.

Consolidated Statements of Cash Flows


Unaudited
(In thousands)


|                                               |                                                         |                                     |         |                    |        |      |        |         |        |  
|---------------------------------------------- | ------------------------------------------------------- | ----------------------------------- | ------- | ------------------ | ------ | ---- | ------ | ------- | ------ | -
|                                               |                                                         |                                     |         | Three Months Ended
|                                               |                                                         |                                     |         | March 31          
|                                               |                                                         |                                     |         | 2002               |        | 2001
|                                               |                                                         |                                     |         |                    |        |     
|Operating Activities                           |                                                         |                                     |         |                    |        |      |        |        
|                                               | Net income                                              |                                     | $       | 12,048             |        |      | $      | 11,539  |       
|                                               | Items not requiring cash currently:                     |                                     |         |                    |        |      |        |         |       
|                                               |                                                         | Depreciation and amortization       |         |                    | 4,023  |      |        |         | 5,180  |  
|                                               |                                                         | Deferred income taxes               |         |                    | (1,159 | )    |        |         | 421    |  
|                                               |                                                         | Loss on disposition of fixed assets |         |                    | 114    |      |        |         | 32     |  
|                                               |                                                         | Minority interest                   |         |                    | 587    |      |        |         |       |  
|                                               | Change in current assets and liabilities:               |                                     |         |                    |        |      |        |         |       
|                                               |                                                         | Accounts receivable  trade         |         |                    | 51,561 |      |        |         | 38,877 |  
|                                               |                                                         | Accounts payable  trade            |         |                    | (4,043 | )    |        |         | (2,690 | )
|                                               |                                                         | Accrued bankcard assessments        |         |                    | (4,428 | )    |        |         | (3,443 | )
|                                               |                                                         | Income taxes payable                |         |                    | 4,742  |      |        |         | 4,929  |  
|                                               |                                                         | Other current assets/liabilities    |         |                    | (5,391 | )    |        |         | (5,555 | )
|                                               |                                                         | Other, net                          |         |                    | 351    |      |        |         | 1,194  |  
|                                               |                                                         |                                     |         |                    |        |      |        |        
|                                               | Net cash provided by operating activities               |                                     |         | 58,405             |        |      |        | 50,484  |       
|                                              
|Investing Activities                           |                                                         |                                     |         |                    |        |      |        |        
|                                               | Capital expenditures                                    |                                     |         | (6,609             | )      |      |        | (4,778  | )     
|                                               | Proceeds from sale of fixed assets                      |                                     |         |                   |        |      |        | 4       |       
|                                               | Common control business unit purchase                   |                                     |         |                   |        |      |        | (44,000 | )     
|                                               |                                                         |                                     |         |                    |        |      |        |        
|                                               | Net cash used in investing activities                   |                                     |         | (6,609             | )      |      |        | (48,774 | )     
|                                              
|Financing Activities                           |                                                         |                                     |         |                    |        |      |        |        
|                                               | Principal payments under property leased from affiliate |                                     |         | (33                | )      |      |        | (33     | )     
|                                               | Issuance of common stock                                |                                     |         | 2,416              |        |      |        | 3,496   |       
|                                               |                                                         |                                     |         |                    |        |      |        |        
|                                               | Net cash provided by financing activities               |                                     |         | 2,383              |        |      |        | 3,463   |       
|                                               |                                                         |                                     |         |                    |        |      |        |        
|Net increase in cash and cash equivalents      |                                                         |                                     | 54,179  |                    |        |      | 5,173  |        
|Cash and cash equivalents, beginning of period |                                                         |                                     | 101,257 |                    |        |      | 58,107 |        
|                                               |                                                         |                                     |         |                    |        |      |        |        
|Cash and cash equivalents, end of period       |                                                         | $                                   | 155,436 |                    |        | $    | 63,280 |        
|                                               |                                                         |                                     |         |                    |        |      |        |        
|Supplemental cash flow information:            |                                                         |                                     |         |                    |        |      |        |        
|                                               | Taxes paid                                              |                                     | $       | 3,751              |        |      | $      | 1,621   |       

See notes to consolidated financial statements

6



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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 and is 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, stored value, and electronic
benefits transfer (EBT). Merchant Card Services provides services to
over 600,000 merchant locations primarily in the United States.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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 sold through travel agencies in the United States. Payment
Services also settles commission payments for car rental companies, cruise
line operators, and hotels.

Sponsorship Agreement



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company and National City 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, being a member of such associations, acts as the Companys sole
sponsor under the terms of the Sponsorship Agreement.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of
National Processing, Inc. and its subsidiaries (the Company). Beginning
June 29, 2001, the consolidated financial statements also include the
Companys 70% ownership interest in ABN AMRO Merchant Services, LLC
(AAMS) (see Note 3). All significant intercompany transactions and
balances have been eliminated. The accounting and reporting policies of
the Company conform with accounting principles generally accepted in the
United States.

7



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. As a result, cash balances are typically lowest in the
fourth quarter.



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

8



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| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If SFAS 142 had been adopted effective January 1, 2001, goodwill
amortization would have been reduced by $0.5 million for the three months
ended March 31, 2001, resulting in proforma net income of $12.0 million,
$0.23 per diluted share, versus reported net income of $11.5 million, or
$0.22 per diluted share.



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys amortizable intangible assets as of March 31, 2002
related almost exclusively to acquired merchant portfolios. Amortization
expense for the quarter ended March 31, 2002 was $1.7 million. The
estimated annual amortization expense for existing intangible assets for
each of the next five years is as follows: 2002 and 2003  $6.7 million;
2004  $6.3 million and 2005 and 2006  $4.4 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.

4.  ACQUISITIONS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 28, 2001, the Company acquired a 70% ownership interest in
AAMS for $48.5 million in cash. Under the terms of the agreement, the
Company will provide 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. The results of operations of AAMS have been included in the
consolidated financial statements since the date of its acquisition.
Incremental revenue and operating profit as a result of this acquisition
was $10.0 million and $1.4 million, respectively, for the three months
ended March 31, 2002.

9



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 8, 2001, the Company purchased the merchant services
business units from several of National City Corporations (National City)
banking subsidiaries for $44.0 million in cash. This acquisition included
merchant contracts and additional sales personnel. The Company also
assumed responsibility for all merchant processing sales efforts
throughout National Citys 1,200 branch network via an exclusive
multi-year marketing agreement. The Company had previously provided the
authorization and settlement processing for these merchants via a third
party processing contract with National City. The acquisition was
accounted for as a transaction among entities under common control and was
recorded at the historical cost bases of National City. 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.

5.  DIVESTED BUSINESS UNITS AND RELATED CHARGES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
For the three months ended March 31, 2001, the divested and discontinued
business units had revenue of $16.1 million and operating profit of $1.3
million. 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).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2001, the Company recorded charges of $3.9 million ($4.6
million after-tax, or $0.09 per diluted share) related to the BPO
divestiture. These charges consisted of a loss of $3.3 million ($4.2
million after-tax, or $0.08 per diluted share) on the sale of the business
and a $0.6 million ($0.4 million after-tax, or $0.01 per diluted share)
charge for severance costs related to organizational restructuring actions
taken to reduce support costs associated with the BPO unit. These charges
were recorded in the second and fourth quarters of 2001, respectively.
All actions had been substantially completed by March 31, 2002 related to
the $0.6 million severance charge.

6.  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 refuses or is unable to reimburse the Company for the chargeback
due to bankruptcy 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. Management believes the likelihood of any
material loss under the chargeback rules is remote.

10



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company currently processes card transactions for several
of the largest airlines in the United States. Travel-related
customers, principally airlines, represented approximately 12% of
revenue from continuing businesses for the quarter ended
March 31, 2002, 7% from Merchant Card Services and 5% from
Payment Services. In the event of bankruptcy
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 that airline
bankruptcy liquidations are highly unlikely given the recent 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 bankruptcy. Based on
information available to the Company and actions management is taking
to mitigate the situation, management further believes the likelihood
of any material loss under the chargeback rules is remote.

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.

7.  NET INCOME PER COMMON SHARE



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

|        |                                             |  |                             |        |      |  |   |        | 
|------- | ------------------------------------------- |  | --------------------------- | ------ | ---- |  | - | ------ | 
|        |                                             |  | Three Months Ended March 31
|        |                                             |  |                            
|        |                                             |  | 2002                        |        | 2001
|        |                                             |  |                             |        |     
|BASIC  
|        | Net income                                  |  | $                           | 12,048 |      |  | $ | 11,539 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Average common shares outstanding           |  |                             | 51,860 |      |  |   | 51,060 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Net income per common share  basic         |  | $                           | 0.23   |      |  | $ | 0.23   | 
|        |                                             |  |                             |        |      |  |   |       
|       
|DILUTED |                                             |  |                             |        |      |  |   |       
|        | Net income                                  |  | $                           | 12,048 |      |  | $ | 11,539 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Average common shares outstanding           |  |                             | 51,860 |      |  |   | 51,060 | 
|        | Dilutive effect of stock options            |  |                             | 694    |      |  |   | 591    | 
|        |                                             |  |                             |        |      |  |   |       
|        | Average common shares outstanding  diluted |  |                             | 52,554 |      |  |   | 51,651 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Net income per common share  diluted       |  | $                           | 0.23   |      |  | $ | 0.22   | 
|        |                                             |  |                             |        |      |  |   |       

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8.  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, stored value, 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, Eurodollar deposits, 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.

|                                          |  |               |         |              |  |           |        |       |  |              |         |  |  |   |         | 
|----------------------------------------- |  | ------------- | ------- | ------------ |  | --------- | ------ | ----- |  | ------------ | ------- |  |  | - | ------- | 
|                                          |  | Merchant Card |         | Payment      |  |           |        |       |  | Consolidated
|                                          |  | Services      |         | Services (1) |  | Corporate |        | Total
|                                          |  |               |         |              |  |           |        |      
|For the three months ended March 31, 2002
|Revenue                                   |  | $             | 104,616 |              |  | $         | 5,329  |       |  | $            |        |  |  | $ | 109,945 | 
|Operating profit                          |  |               | 17,199  |              |  |           | 1,817  |       |  |              |        |  |  |   | 19,016  | 
|Depreciation and amortization             |  |               | 3,586   |              |  |           | 437    |       |  |              |        |  |  |   | 4,023   | 
|Net interest income                       |  |               | 924     |              |  |           | 111    |       |  |              |        |  |  |   | 1,035   | 
|Goodwill                                  |  |               | 91,227  |              |  |           |       |       |  |              |        |  |  |   | 91,227  | 
|Total assets                              |  |               | 276,219 |              |  |           | 3,288  |       |  |              | 204,628 |  |  |   | 484,135 | 
|                                         
|For the three months ended March 31, 2001
|Revenue                                   |  | $             | 85,340  |              |  | $         | 23,705 |       |  | $            |        |  |  | $ | 109,045 | 
|Operating profit                          |  |               | 13,603  |              |  |           | 2,829  |       |  |              |        |  |  |   | 16,432  | 
|Depreciation and amortization             |  |               | 3,492   |              |  |           | 1,688  |       |  |              |        |  |  |   | 5,180   | 
|Net interest income                       |  |               | 1,817   |              |  |           | 403    |       |  |              |        |  |  |   | 2,220   | 
|Goodwill                                  |  |               | 65,868  |              |  |           | 12,991 |       |  |              |        |  |  |   | 78,859  | 
|Total assets                              |  |               | 192,496 |              |  |           | 54,824 |       |  |              | 168,664 |  |  |   | 415,984 | 



| |  | (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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Components of Revenue and Expenses

Revenue

Merchant Card Services revenue is primarily derived from fees paid by
merchants for the authorization, processing, and settlement of credit and debit
card transactions. Fees are earned either on a per transaction basis or on a
discount basis, which is a percent of dollar volume processed. Revenue is
recorded net of interchange fees charged by the credit card associations as
such costs are not controlled by the Company.

Payment Services revenue is generated from a variety of non-card based
financial settlement products. The majority 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.

A small portion of total revenue is derived from earnings on customer cash
balances, which are maintained by National City pursuant to contractual terms.
For the quarters ended March 31, 2002 and 2001, earnings on customer balances
were $1.1 million and $2.3 million, respectively.

Expenses

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.

13



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Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

|                                          |                         |                               |        |         |         |        |    |         |     |        |        |        |         |  |    |      |     |   |        |         |        |   |     |      |    |   |  | 
|----------------------------------------- | ----------------------- | ----------------------------- | ------ | ------- | ------- | ------ | -- | ------- | --- | ------ | ------ | ------ | ------- |  | -- | ---- | --- | - | ------ | ------- | ------ | - | --- | ---- | -- | - |  | 
|                                          |                         |                               |        |         |         | 2002   |    | 2001    |     | Change
|                                          |                         |                               |        |         |         |        |    |         |     |       
|                                          |                         |                               |        |         |         |        |    |         |     | % of   |        |        |         |  |    | % of |     |   |        |         |        |   |     |     
|(Dollars in thousands)                    |                         | Amount                        |        | Revenue |         | Amount |    | Revenue |     | Amount |        | %     
|                                          |                         |                               |        |         |         |        |    |         |     |        |        |       
|Revenue:                                  |                         |                               |        |         |         |        |    |         |     |        |        |        |         |  |    |      |     |   |        |         |        |   |     |     
|                                          | Merchant Card Services  |                               | $      | 104,616 |         |        |    | 95      |     |        | $      | 85,340 |         |  |    | 78   |     |   | $      | 19,276  |        |   |     | 23   |   
|                                          | Payment Services        |                               |        | 5,329   |         |        |    | 5       |     |        |        | 7,630  |         |  |    | 7    |     |   |        | (2,301  | )      |   |     | (30  | ) 
|                                          |                         |                               |        |         |         |       
|                                          |                         | Total Core Revenue            |        |         | 109,945 |        |    |         | 100 |        |        |        | 92,970  |  |    |      | 85  |   |        |         | 16,975 |   |     |      | 18 |  
|                                          | Divested Business Lines |                               |        |        |         |        |    |        |     |        |        | 16,075 |         |  |    | 15   |     |   |        | (16,075 | )      |   |     | (100 | ) 
|                                          |                         |                               |        |         |         |       
|                                          |                         | Total Revenue                 |        |         | 109,945 |        |    |         | 100 |        |        |        | 109,045 |  |    |      | 100 |   |        |         | 900    |   |     |      | 1  |  
|Expenses:                                 |                         |                               |        |         |         |        |    |         |     |        |        |        |         |  |    |      |     |   |        |         |        |   |     |     
|                                          | Merchant Card Services  |                               |        | 87,417  |         |        |    | 84      |     |        |        | 71,737 |         |  |    | 84   |     |   |        | 15,680  |        |   |     | 22   |   
|                                          | Payment Services        |                               |        | 3,512   |         |        |    | 66      |     |        |        | 6,059  |         |  |    | 79   |     |   |        | (2,547  | )      |   |     | (42  | ) 
|                                          |                         |                               |        |         |         |       
|                                          |                         | Total Core Operating Expenses |        |         | 90,929  |        |    |         | 83  |        |        |        | 77,796  |  |    |      | 84  |   |        |         | 13,133 |   |     |      | 17 |  
|                                          | Divested Business Lines |                               |        |        |         |        |    |        |     |        |        | 14,817 |         |  |    | 92   |     |   |        | (14,817 | )      |   |     | (100 | ) 
|                                          |                         |                               |        |         |         |       
|                                          |                         | Total Expenses                |        |         | 90,929  |        |    |         | 83  |        |        |        | 92,613  |  |    |      | 85  |   |        |         | (1,684 | ) |     |      | (2 | )
|Operating Profit:                         |                         |                               |        |         |         |        |    |         |     |        |        |        |         |  |    |      |     |   |        |         |        |   |     |     
|                                          | Merchant Card Services  |                               |        | 17,199  |         |        |    | 16      |     |        |        | 13,603 |         |  |    | 16   |     |   |        | 3,596   |        |   |     | 26   |   
|                                          | Payment Services        |                               |        | 1,817   |         |        |    | 34      |     |        |        | 1,571  |         |  |    | 21   |     |   |        | 246     |        |   |     | 16   |   
|                                          |                         |                               |        |         |         |       
|                                          |                         | Total Core Operating Profit   |        |         | 19,016  |        |    |         | 17  |        |        |        | 15,174  |  |    |      | 16  |   |        |         | 3,842  |   |     |      | 25 |  
|                                          | Divested Business Lines |                               |        |        |         |        |    |        |     |        |        | 1,258  |         |  |    | 8    |     |   |        | (1,258  | )      |   |     | (100 | ) 
|                                          |                         |                               |        |         |         |       
|                                          |                         | Total Operating Profit        |        |         | 19,016  |        |    |         | 17  |        |        |        | 16,432  |  |    |      | 15  |   |        |         | 2,584  |   |     |      | 16 |  
|Net Interest Income                       |                         |                               | 1,035  |         |         |        | 1  |         |     |        | 2,220  |        |         |  | 2  |      |     |   | (1,185 | )       |        |   | (53 | )   
|                                          |                         |                               |        |         |         |       
|Income Before Taxes and Minority Interest |                         |                               | 20,051 |         |         |        | 18 |         |     |        | 18,652 |        |         |  | 17 |      |     |   | 1,399  |         |        |   | 8   |     
|Provision for Income Taxes                |                         |                               | 7,416  |         |         |        | 7  |         |     |        | 7,113  |        |         |  | 7  |      |     |   | 303    |         |        |   | 4   |     
|                                          |                         |                               |        |         |         |       
|Income before Minority Interest           |                         |                               | 12,635 |         |         |        | 11 |         |     |        | 11,539 |        |         |  | 11 |      |     |   | 1,096  |         |        |   | 9   |     
|Minority Interest                         |                         |                               | 587    |         |         |        |   |         |     |        |       |        |         |  |   |      |     |   | 587    |         |        |   | 100 |     
|                                          |                         |                               |        |         |         |       
|Net Income                                |                         | $                             | 12,048 |         |         |        | 11 |         |     | $      | 11,539 |        |         |  | 11 |      |     | $ | 509    |         |        |   | 4   |     
|                                          |                         |                               |        |         |         |       

Merchant Card Services

Revenue for the three months ended March 31, 2002 increased 23% to $104.6
million from $85.3 million in 2001. The acquisition of ABN AMRO Merchant
Services, LLC (AAMS) on June 28, 2001 contributed $10.0 million of incremental
revenue in the first quarter of 2002. Organic revenue growth, which excludes
the impact of acquisitions, was 11% for the three months ended March 31, 2002.

Transaction volume processed for the three months ended March 31, 2002
increased 19% to 881 million from 738 million in 2001. Dollar volume for the
three months ended March 31, 2002 increased 18% to $39.1 billion from $33.3
billion in 2001. Organic transaction and dollar volume increased 16% and 11%,
respectively, for the 2002 first quarter. The volume increases were primarily
due to the addition of new national customers, strong execution in the regional
sales channels, and continued expansion in new vertical markets.

Expenses for the three months ended March 31, 2002 increased 22% to $87.4
million from
$71.7 million in 2001 primarily due to increased processing volume.
Expenses for the three months ended March 31, 2001 also 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 remained consistent at 16%. Operating
profit for the quarter ended March 31, 2002 increased 26% to $17.2 million from
$13.6 million in the 2001 first quarter due primarily to the factors outlined
above.

Payment Services

Revenue for the three months ended March 31, 2002 decreased 30% to $5.3
million from $7.6

14



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million in 2001. Revenue decreased primarily due to
decreased volume from the Companys Airlines
Reporting Corporation contract and lower average interest rates on
customer balances.

Expenses for the three months ended March 31, 2002 decreased 42% to $3.5
million from $6.1 million in 2001 due primarily to decreased volume and staff
reductions. Operating margins as a percentage of revenue increased to 34% from
21% in 2001. Operating profit for the quarter ended March 31, 2002 increased
16% to $1.8 million from $1.6 million in the 2001 first quarter.

Divested Business Units and Related Charges

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. For the
three months ended March 31, 2001, the divested business units had revenue of
$16.1 million and operating profit of $1.3 million. 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).

During 2001, the Company recorded charges of $3.9 million ($4.6 million
after-tax, or $0.09 per diluted share) related to the BPO divestiture. These
charges consisted of a loss of $3.3 million ($4.2 million after-tax, or $0.08
per diluted share) on the sale of the business and a $0.6 million ($0.4 million
after-tax, or $0.01 per diluted share) charge for severance costs related to
organizational restructuring actions taken to reduce support costs associated
with the BPO unit. These charges were recorded in the second and fourth
quarters of 2001, respectively. All actions had been substantially completed
by March 31, 2002 related to the $0.6 million severance charge.

Net Interest Income

Net interest income earned on the Companys cash, cash equivalents and
Eurodollar deposits for the three months ended March 31, 2002, was $1.0
million, down 53% from $2.2 million in the prior year first quarter due to
lower average interest rates in 2002.

Provision for Income Taxes

The overall effective tax rate for the first quarter of 2002 was 37.0%
compared to 38.1% for the same quarter a year ago. The decrease in the
effective tax rate was principally due to differences in state income tax rates
between legal entities within the Company.

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Recent Accounting Pronouncements

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 would have been reduced by $0.5 million for the three months ended
March 31, 2001, resulting in proforma net income of $12.0 million, or $0.23 per
diluted share, versus reported net income of $11.5 million, or $0.22 per
diluted share.

The Companys amortizable intangible assets as of March 31, 2002 related
almost exclusively to acquired merchant portfolios. Amortization expense for
the quarter ended March 31, 2002 was $1.7 million. The estimated annual
amortization expense for existing intangible assets for each of the next five
years is as follows: 2002 and 2003  $6.7 million; 2004  $6.3 million and 2005
and 2006  $4.4 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.

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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. As a result, cash balances are typically lowest in the fourth quarter.

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 three months ended March 31, 2002, the Companys capital
expenditures totaled $6.6 million. Such expenditures were financed from
operating cash flow, which totaled $58.4 million for the three months ended
March 31, 2002. Operating cash flow and capital expenditures during the three
months ended March 31, 2001 totaled $50.5 million and $4.8 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 Business
Units and Related Charges, Note 5 to Consolidated Financial Statements).

As the Company does not carry significant amounts of inventory and
historically has experienced short collection periods for its accounts
receivable, it does not require substantial working capital to support revenue
growth. Working capital requirements will vary depending upon future
acquisition activity. Increases in working capital needs 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 for risks and uncertainties that could cause actual
results to differ materially.

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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 March 31, 2002, the Company
had $155 million in cash and cash equivalents. For the first quarter of 2002,
National City also held an average of $148 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 equivalents and
interest earnings on customer funds maintained by National City. At March 31,
2002, a hypothetical 100 basis point increase in short-term interest rates
would result in an increase of approximately $3 million in annual pre-tax
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.

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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 (None)

Item 5. Other Information (None)

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

a.  Exhibits (None)

b.  Reports on Form 8-K

January 22, 2002: On January 22, 2002, the Registrant issued a press
release reporting earnings for the quarter and year ended December 31, 2001.







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: |  | May 10, 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)

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