TABLE OF CONTENTS




|                                                                                              |                                                                    |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |  |  |  |  |  |  | 
|National Processing, Inc.
Consolidated Balance Sheets
Unaudited                              
|National Processing, Inc.
Consolidated Statements of Operations
Unaudited                    
|National Processing, Inc.
Consolidated Statement of Changes in Shareholders Equity
Unaudited
|National Processing, Inc.
Consolidated Statements of Cash Flows
Unaudited                    
|NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited               
|Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
|Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|Part II  Other Information                                                                  
|                                                                                              | Item 1. Legal Proceedings (None)                                  
|                                                                                              | Item 2. Changes in Securities and Use of Proceeds (None)          
|                                                                                              | Item 3. Defaults Upon Senior Securities (None)                    
|                                                                                              | Item 4. Submission of Matters to a Vote of Security Holders (None)
|                                                                                              | Item 5. Other Information (None)                                  
|                                                                                              | Item 6. Exhibits and Reports on Form 8-K:                         
|SIGNATURES                                                                                   
|EXHIBIT 27                                                                                   



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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 September 30, 2000

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
October 31, 2000 was 50,866,888.





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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  September 30, 2000 and       
|        |  | December 31, 1999                                           |  |          | 3  | 
|       
|        |  | Consolidated Statements of Operations                     
|        |  | Three and Nine Months Ended September 30, 2000 and 1999     |  |          | 4  | 
|       
|        |  | Consolidated Statement of Changes in Shareholders Equity 
|        |  | Nine Months Ended September 30, 2000                        |  |          | 5  | 
|       
|        |  | Consolidated Statements of Cash Flows                     
|        |  | Nine Months Ended September 30, 2000 and 1999               |  |          | 6  | 
|       
|        |  | Notes to Consolidated Financial Statements                  |  |          | 7  | 
|       
|Item 2. |  | Managements Discussion and Analysis of                    
|        |  | Financial Condition and Results of Operations               |  |          | 10 | 
|       
|Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk   |  |          | 16 | 

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                           | 17 | 

|           |  |  |  |  |    | 
|---------- |  |  |  |  | -- | 
|Signatures |  |  |  |  | 17 | 

2



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##### Table of Contents






National Processing, Inc.
Consolidated Balance Sheets
Unaudited

(Dollars in thousands)

|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | ------- | ----------- | - | ------- | ------- | 
|                                                |                                                                                                                                                       |   | September 30 |         | December 31
|                                                |                                                                                                                                                       |   | 2000         |         | 1999       
|                                                |                                                                                                                                                       |   |              |         |            
|Assets                                         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                                             |   | $            | 67,696  |             |   | $       | 32,042  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Securities available for sale                                                                                                                         |   |              | 76,000  |             |   |         | 60,000  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade                                                                                                                           |   |              | 83,183  |             |   |         | 104,486 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                  |   |              | 30,635  |             |   |         | 22,177  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |              | 546     |             |   |         | 812     | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other current assets                                                                                                                                  |   |              | 11,244  |             |   |         | 11,743  | 
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total current assets                            |                                                                                                                                                       |   | 269,304      |         |             |   | 231,260 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                        
|                                               
|                                               
|                                               
|                                               
|                                                | Furniture and equipment                                                                                                                               |   |              | 79,502  |             |   |         | 81,439  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Building and leasehold improvements                                                                                                                   |   |              | 19,324  |             |   |         | 21,006  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Software                                                                                                                                              |   |              | 22,993  |             |   |         | 18,027  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Property leased from affiliate                                                                                                                        |   |              | 4,173   |             |   |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Land and improvements                                                                                                                                 |   |              | 2,433   |             |   |         | 2,851   | 
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|                                                |                                                                                                                                                       |   | 128,425      |         |             |   | 127,496 |        
|                                               
|                                               
|                                               
|                                               
|Accumulated depreciation and amortization       |                                                                                                                                                       |   | 68,814       |         |             |   | 62,408  |        
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|                                                |                                                                                                                                                       |   | 59,611       |         |             |   | 65,088  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                  
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of
$6,794 in   2000 and $5,040 in 1999                                                                      |   |              | 86,677  |             |   |         | 88,431  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets                                                                                                                               |   |              | 30,900  |             |   |         | 34,628  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |              | 2,906   |             |   |         | 3,698   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                          |   |              | 6,130   |             |   |         | 6,109   | 
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total other assets                              |                                                                                                                                                       |   | 126,613      |         |             |   | 132,866 |        
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total assets                                    |                                                                                                                                                       | $ | 455,528      |         |             | $ | 429,214 |        
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Liabilities and shareholders equity           
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                           
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                  |   | $            | 30,635  |             |   | $       | 22,177  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable  trade                                                                                                                              |   |              | 10,310  |             |   |         | 12,262  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued bankcard assessments                                                                                                                          |   |              | 19,286  |             |   |         | 20,122  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax payable                                                                                                                                    |   |              | 5,281   |             |   |         | 16,318  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other accrued liabilities                                                                                                                             |   |              | 35,029  |             |   |         | 35,963  | 
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total current liabilities                       |                                                                                                                                                       |   | 100,541      |         |             |   | 106,842 |        
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                       |   | 2,025        |         |             |   | 2,123   |        
|                                               
|                                               
|                                               
|                                               
|Other long-term liabilities                     |                                                                                                                                                       |   | 332          |         |             |   | 796     |        
|                                               
|                                               
|                                               
|                                               
|Deferred tax liabilities                        |                                                                                                                                                       |   | 2,621        |         |             |   | 3,047   |        
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total liabilities                               |                                                                                                                                                       |   | 105,519      |         |             |   | 112,808 |        
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                          
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, without par value; 5,000,000 shares
authorized; no shares issued or outstanding                                                      |   |              |        |             |   |         |        | 
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, without par value; 95,000,000 shares
authorized; 50,849,987 and 50,785,652 shares
issued and outstanding in 2000 and 1999,
respectively |   |              | 1       |             |   |         | 1       | 
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                   |   |              | 177,559 |             |   |         | 176,964 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                     |   |              | 172,449 |             |   |         | 139,441 | 
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total shareholders equity                      |                                                                                                                                                       |   | 350,009      |         |             |   | 316,406 |        
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 
|Total liabilities and shareholders equity      |                                                                                                                                                       | $ | 455,528      |         |             | $ | 429,214 |        
|                                                |                                                                                                                                                       |   |              |         |             |   |         |         | 

See notes to consolidated financial statements

3



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##### Table of Contents






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

|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  
|----------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------- | -
|                                                |  | Three Months Ended |         | Nine Months Ended
|                                                |  | September 30       |         | September 30     
|                                                |  |                    |         |                  
|                                                |  | 2000               |         | 1999              |  | 2000 |        | 1999
|                                                |  |                    |         |                   |  |      |        |     
|Revenue                                         |  | $                  | 108,632 |                   |  | $    | 94,909 |      |  | $ | 311,012 |  |  | $ | 329,185 |  
|                                               
|                                               
|                                               
|                                               
|Operating expenses                              |  |                    | 53,921  |                   |  |      | 47,477 |      |  |   | 154,121 |  |  |   | 165,288 |  
|                                               
|                                               
|                                               
|                                               
|Wages and other personnel expenses              |  |                    | 19,433  |                   |  |      | 18,930 |      |  |   | 58,307  |  |  |   | 74,085  |  
|                                               
|                                               
|                                               
|                                               
|General and administrative expenses             |  |                    | 10,973  |                   |  |      | 12,625 |      |  |   | 33,094  |  |  |   | 42,104  |  
|                                               
|                                               
|                                               
|                                               
|Depreciation and amortization                   |  |                    | 5,377   |                   |  |      | 5,249  |      |  |   | 16,075  |  |  |   | 17,081  |  
|                                               
|                                               
|                                               
|                                               
|Impairment, restructuring and related expenses  |  |                    |        |                   |  |      |       |      |  |   | 1,500   |  |  |   | 69,666  |  
|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  
|                                               
|Operating profit (loss)                         |  |                    | 18,928  |                   |  |      | 10,628 |      |  |   | 47,915  |  |  |   | (39,039 | )
|                                               
|Net interest income                             |  |                    | 2,231   |                   |  |      | 2,042  |      |  |   | 5,924   |  |  |   | 2,626   |  
|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  
|                                               
|Income (loss) before provision for income taxes |  |                    | 21,159  |                   |  |      | 12,670 |      |  |   | 53,839  |  |  |   | (36,413 | )
|                                               
|Provision for income taxes                      |  |                    | 8,175   |                   |  |      | 4,349  |      |  |   | 20,831  |  |  |   | 11,478  |  
|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  
|                                               
|Net income (loss)                               |  | $                  | 12,984  |                   |  | $    | 8,321  |      |  | $ | 33,008  |  |  | $ | (47,891 | )
|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  
|                                               
|Basic net income (loss) per common share        |  | $                  | 0.26    |                   |  | $    | 0.16   |      |  | $ | 0.65    |  |  | $ | ( 0.94  | )
|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  
|                                               
|Diluted net income (loss) per common share      |  | $                  | 0.25    |                   |  | $    | 0.16   |      |  | $ | 0.65    |  |  | $ | ( 0.94  | )
|                                                |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         |  

See notes to consolidated financial statements

4



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##### Table of Contents






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

|                              |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 
|----------------------------- |  | ------ | - | ----------- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                              |  | Common |   | Contributed |  | Retained
|                              |  | Stock  |   | Capital     |  | Earnings |         | Total
|                              |  |        |   |             |  |          |         |      
|Balance at January 1, 2000    |  | $      | 1 |             |  | $        | 176,964 |       |  | $ | 139,441 |  |  | $ | 316,406 | 
|                             
|                             
|                             
|                             
|Net income                    |  |        |  |             |  |          |        |       |  |   | 33,008  |  |  |   | 33,008  | 
|                             
|                             
|                             
|                             
|Stock options exercised       |  |        |  |             |  |          | 595     |       |  |   |        |  |  |   | 595     | 
|                              |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 
|Balance at September 30, 2000 |  | $      | 1 |             |  | $        | 177,559 |       |  | $ | 172,449 |  |  | $ | 350,009 | 
|                              |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

5



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##### Table of Contents






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

|                                               |                                                           |                       |                                                |         |                   |         |        |         |        |        |  
|---------------------------------------------- | --------------------------------------------------------- | --------------------- | ---------------------------------------------- | ------- | ----------------- | ------- | ------ | ------- | ------ | ------ | -
|                                               |                                                           |                       |                                                |         | Nine Months Ended
|                                               |                                                           |                       |                                                |         | September 30     
|                                               |                                                           |                       |                                                |         |                  
|                                               |                                                           |                       |                                                |         | 2000              |         | 1999  
|                                               |                                                           |                       |                                                |         |                   |         |       
|Operating Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Net income (loss)                                         |                       | $                                              | 33,008  |                   |         | $      | (47,891 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Items not requiring cash currently:                      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Depreciation and amortization                  |         |                   | 16,075  |        |         |        | 17,081 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Impairment, restructuring and related expenses |         |                   | 1,431   |        |         |        | 58,214 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Deferred income taxes                          |         |                   | 632     |        |         |        | (1,384 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Loss on disposition of fixed assets            |         |                   | 591     |        |         |        | 585    |  
|                                              
|                                              
|                                              
|                                              
|                                               | Change in current assets and liabilities:                
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Accounts receivable  trade                    |         |                   | 21,303  |        |         |        | 26,581 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Accounts payable  trade                       |         |                   | 48      |        |         |        | (12    | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Accrued bankcard assessments                   |         |                   | (836    | )      |         |        | (1,349 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Income taxes payable                           |         |                   | (11,037 | )      |         |        | 14,779 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Other current assets/liabilities               |         |                   | 922     |        |         |        | 11,314 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |                       | Other, net                                     |         |                   | (485    | )      |         |        | 1,088  |  
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                               | Net cash provided by operating activities                 |                       |                                                | 61,652  |                   |         |        | 79,006  |       
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                              
|Investing Activities                          
|                                               | Capital expenditures                                      |                       |                                                | (8,804  | )                 |         |        | (11,660 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sales of fixed assets                       |                       |                                                | 309     |                   |         |        | 456     |       
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of securities available for sale                |                       |                                                | (76,000 | )                 |         |        | (60,000 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from maturities of securities
available for sale |                       |                                                | 60,000  |                   |         |        |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of business lines                      |                       |                                                |        |                   |         |        | 62,554  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Other investing activities                                |                       |                                                | (2,000  | )                 |         |        |        |       
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                               | Net cash used by investing activities                     |                       |                                                | (26,495 | )                 |         |        | (8,650  | )     
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                              
|Financing Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments under property leased from affiliate   |                       |                                                | (98     | )                 |         |        | (109    | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Exercise of stock options                                 |                       |                                                | 595     |                   |         |        | 1,019   |       
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                              
|                                               | Net cash provided by financing activities                 |                       |                                                | 497     |                   |         |        | 910     |       
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                              
|Net increase in cash and cash equivalents      |                                                           |                       | 35,654                                         |         |                   |         | 71,266 |        
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                           |                       | 32,042                                         |         |                   |         | 7,254  |        
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|Cash and cash equivalents, end of period       |                                                           | $                     | 67,696                                         |         |                   | $       | 78,520 |        
|                                               |                                                           |                       |                                                |         |                   |         |        |         |       
|                                              
|Supplemental cash flow information:           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           | Taxes paid (refunded) |                                                | $       | 29,417            |         |        | $       | (7,028 | )     

See notes to consolidated financial statements

6



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##### Table of Contents






NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

1.     BASIS OF PRESENTATION AND ACCOUNTING POLICIES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of
National Processing, Inc. (the Company) and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain prior period amounts have been reclassified to conform with the
current period presentation. The accounting and reporting policies of
the Company conform with accounting principles generally accepted in the
United States. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. 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.
|
| | Although the balance sheet at December 31, 1999 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 generally accepted
accounting principles. These interim financial statements should be read
in conjunction with the Companys 1999 Annual Report and Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

2.     IMPAIRMENT, RESTRUCTURING AND RELATED EXPENSES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the second quarter of 2000, a pre-tax charge of $1.5 million was
recorded for site consolidation initiatives. The charge totaled $1.0
million after-tax, or $0.02 per share, and related primarily to the
write-off of leasehold improvements and the accrual of future contractual
rent payments on abandoned facilities.                                                                                                                                                                                                                                                                                                                  
|
| | During the quarter ended March 31, 1999, the Company recorded
nonrecurring restructuring charges of $2.2 million, including $1.9
million for severance pay for approximately 540 employees and $0.3
million for other costs. These charges related to two of the Companys
facilities which have been closed and consolidated into the Companys
other operating facilities. These charges decreased net income and
earnings per share by approximately $1.8 million and $.04, respectively.
At September 30, 2000, the remaining liability was $0.2 million and
related primarily to future severance payments for approximately 40
employees.
|
| | During the first quarter of 1999, the Company committed to a formal
plan to dispose of its Freight, Payables, Remittance and Check Services
business lines and recorded impairment losses and related expenses of
$73.9 million related to the sale and wind-down of these business lines.
The charges decreased first quarter 1999 net income and earnings per
share by $72.0 million and $1.42, respectively. Effective April 1, 1999,
the Company sold its Freight and Payables business lines for $18.3
million. Effective June 1,                                                                                                         

7



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##### Table of Contents

1999, the Company sold its Remittance and Check business lines for
$44.3 million. As a result of the final dispositions of these business
lines, the Company recorded a pre-tax credit of $6.5 million to the
impairment loss in the second quarter of 1999. At September 30, 2000,
the Company had $1.1 million remaining related to the final obligations
of these dispositions recorded in other accrued liabilities. The
remaining obligations are primarily for future severance payments, rent
subsidies and legal claims. For the nine months ended September 30, 1999,
these divested business units had revenues of $57.3 million.

3.     COMMITMENTS AND CONTINGENCIES



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

4.     NET INCOME PER COMMON SHARE



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

|        |                                              |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |         |  
|------- | -------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | -
|        |                                              |  | Three Months Ended |        | Nine Months Ended
|        |                                              |  | September 30       |        | September 30     
|        |                                              |  |                    |        |                  
|        |                                              |  | 2000               |        | 1999              |  | 2000 |        | 1999
|        |                                              |  |                    |        |                   |  |      |        |     
|BASIC  
|       
|       
|       
|       
|        | Net income (loss)                            |  | $                  | 12,984 |                   |  | $    | 8,321  |      |  | $ | 33,008 |  |  | $ | (47,891 | )
|       
|       
|       
|       
|        | Average common shares
outstanding            |  |                    | 50,830 |                   |  |      | 50,749 |      |  |   | 50,807 |  |  |   | 50,680  |  
|       
|       
|       
|       
|        | Net income (loss) per
common share  basic   |  | $                  | 0.26   |                   |  | $    | 0.16   |      |  | $ | 0.65   |  |  | $ | (.94    | )
|       
|DILUTED
|       
|       
|       
|       
|        | Net income (loss)                            |  | $                  | 12,984 |                   |  | $    | 8,321  |      |  | $ | 33,008 |  |  | $ | (47,891 | )
|       
|       
|       
|       
|        | Average common shares
outstanding            |  |                    | 50,830 |                   |  |      | 50,749 |      |  |   | 50,807 |  |  |   | 50,680  |  
|       
|       
|       
|       
|        | Stock option adjustment                      |  |                    | 253    |                   |  |      | 77     |      |  |   | 125    |  |  |   |        |  
|       
|       
|       
|       
|        | Average common shares
outstanding  diluted  |  |                    | 51,083 |                   |  |      | 50,826 |      |  |   | 50,932 |  |  |   | 50,680  |  
|       
|       
|       
|       
|        | Net income (loss) per
common share  diluted |  | $                  | 0.25   |                   |  | $    | 0.16   |      |  | $ | 0.65   |  |  | $ | (.94    | )

5.     SEGMENT REPORTING



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | National Processing, Inc. operates two business segments  Merchant
Services and Corporate Outsourcing Solutions. Merchant Services
authorizes, processes and settles credit and debit card transactions for
a variety of merchants. Corporate Outsourcing Solutions provides a
variety of financial and administrative processing solutions to large
corporate customers. These solutions include financial settlement, image
scanning, data capture, storage and retrieval, and
value-added customer reporting.

8



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the first half of 1999, the Company sold its Check business
line (formerly part of the Merchant Services segment) and its Remittance,
Payables and Freight business lines (all formerly part of the Corporate
Outsourcing Solutions segment). The Company identifies business segments
by the services they offer. The accounting policies of the reportable
segments are the same as those of the Company. Prior period amounts were
classified to conform to the current line of business reporting
structure. The segment previously defined as Travel Services is now
included in the Corporate Outsourcing Solutions segment.
|
| | General and administrative expenses, other than direct Corporate
expenses, are allocated to the segments based upon various methods
determined by the nature of the expenses. There are no intersegment
revenues. Impairment, restructuring and related expenses are reflected
in the business segments to which they relate. Depreciation and
amortization expense for
corporate fixed assets is allocated to the segments. Corporate net
operating assets are comprised primarily of cash, securities available
for sale and income tax balances.                                                                                      

|                                         |  |                  |   |                               |  |           |   |                   |  |  |   |         |   |  |   |         |  |  |  | 
|---------------------------------------- |  | ---------------- | - | ----------------------------- |  | --------- | - | ----------------- |  |  | - | ------- | - |  | - | ------- |  |  |  | 
|(Dollars in thousands)                  
|                                         |  | MerchantServices |   | CorporateOutsourcingSolutions |  | Corporate |   | ConsolidatedTotal
|                                         |  |                  |   |                               |  |           |   |                  
|For the quarter ended September 30, 2000
|                                        
|                                        
|                                        
|                                        
|Revenue                                  |  |                  | $ | 79,687                        |  |           | $ | 28,945            |  |  | $ |        |   |  | $ | 108,632 | 
|                                        
|                                        
|                                        
|                                        
|Operating profit (loss)                  |  |                  |   | 15,315                        |  |           |   | 5,831             |  |  |   | (2,218  | ) |  |   | 18,928  | 
|                                        
|                                        
|                                        
|                                        
|Depreciation and amortization            |  |                  |   | 3,655                         |  |           |   | 1,722             |  |  |   |        |   |  |   | 5,377   | 
|                                        
|                                        
|                                        
|                                        
|Net interest income                      |  |                  |   | 1,612                         |  |           |   | 619               |  |  |   |        |   |  |   | 2,231   | 
|                                        
|                                        
|                                        
|                                        
|Net operating assets                     |  |                  |   | 132,940                       |  |           |   | 62,717            |  |  |   | 154,352 |   |  |   | 350,009 | 
|                                        
|For the quarter ended September 30, 1999
|                                        
|                                        
|                                        
|                                        
|Revenue                                  |  |                  | $ | 66,119                        |  |           | $ | 28,790            |  |  | $ |        |   |  | $ | 94,909  | 
|                                        
|                                        
|                                        
|                                        
|Operating profit (loss)                  |  |                  |   | 9,195                         |  |           |   | 4,545             |  |  |   | (3,112  | ) |  |   | 10,628  | 
|                                        
|                                        
|                                        
|                                        
|Depreciation and amortization            |  |                  |   | 2,961                         |  |           |   | 2,288             |  |  |   |        |   |  |   | 5,249   | 
|                                        
|                                        
|                                        
|                                        
|Net interest income                      |  |                  |   | 1,363                         |  |           |   | 679               |  |  |   |        |   |  |   | 2,042   | 
|                                        
|                                        
|                                        
|                                        
|Net operating assets                     |  |                  |   | 108,018                       |  |           |   | 42,648            |  |  |   | 155,121 |   |  |   | 305,787 | 

|                                                    |  |                  |         |                               |  |           |         |                   |  |   |         |   |  |   |         |   |  |  |  | 
|--------------------------------------------------- |  | ---------------- | ------- | ----------------------------- |  | --------- | ------- | ----------------- |  | - | ------- | - |  | - | ------- | - |  |  |  | 
|(Dollars in thousands)                             
|                                                    |  | MerchantServices |         | CorporateOutsourcingSolutions |  | Corporate |         | ConsolidatedTotal
|                                                    |  |                  |         |                               |  |           |         |                  
|For the nine months ended September 30, 2000       
|                                                   
|                                                   
|                                                   
|                                                   
|Revenue                                             |  | $                | 226,702 |                               |  | $         | 84,310  |                   |  | $ |        |   |  | $ | 311,012 |  
|                                                   
|                                                   
|                                                   
|                                                   
|Impairment, restructuring loss and
related expenses |  |                  |        |                               |  |           | 1,500   |                   |  |   |        |   |  |   | 1,500   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Operating profit (loss)                             |  |                  | 40,974  |                               |  |           | 13,013  |                   |  |   | (6,072  | ) |  |   | 47,915  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Depreciation and amortization                       |  |                  | 10,751  |                               |  |           | 5,324   |                   |  |   |        |   |  |   | 16,075  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net interest income                                 |  |                  | 4,395   |                               |  |           | 1,529   |                   |  |   |        |   |  |   | 5,924   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net operating assets                                |  |                  | 132,940 |                               |  |           | 62,717  |                   |  |   | 154,352 |   |  |   | 350,009 |  
|                                                   
|For the nine months ended September 30, 1999       
|                                                   
|                                                   
|                                                   
|                                                   
|Revenue                                             |  | $                | 213,931 |                               |  | $         | 115,254 |                   |  | $ |        |   |  | $ | 329,185 |  
|                                                   
|                                                   
|                                                   
|                                                   
|Impairment, restructuring and related
expenses      |  |                  | 21,636  |                               |  |           | 48,030  |                   |  |   |        |   |  |   | 69,666  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Operating profit (loss)                             |  |                  | 2,483   |                               |  |           | (35,144 | )                 |  |   | (6,378  | ) |  |   | (39,039 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Depreciation and amortization                       |  |                  | 9,187   |                               |  |           | 7,894   |                   |  |   |        |   |  |   | 17,081  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net interest income                                 |  |                  | 1,750   |                               |  |           | 876     |                   |  |   |        |   |  |   | 2,626   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net operating assets                                |  |                  | 108,018 |                               |  |           | 42,648  |                   |  |   | 155,121 |   |  |   | 305,787 |  

9



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##### Table of Contents






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

Components of Revenue and Expenses

Revenue.The Companys Merchant Services revenue is primarily derived from
fees paid by merchants for the authorization and settlement of credit and debit
card transactions. Revenue is recorded net of interchange fees charged by the
credit card associations. Corporate Outsourcing Solutions provides a variety
of financial and administrative processing solutions to large corporate
customers in three primary industries: Healthcare, Travel and Financial
Services. These solutions include financial settlement, image scanning, data
capture, storage and retrieval, and value-added customer reporting. A portion
of Corporate Outsourcing Solutions revenue is derived from an exclusive
long-term contract with the Airlines Reporting Corporation (ARC) under which
the Company is compensated on a cost plus basis. A small portion of revenue
for both segments is derived from earnings on customer cash balances.

Expenses.Expenses include all costs of providing services to customers.
The most significant components of expenses are assessment fees, authorization
fees, data processing expenses, wages and benefits, and general and
administrative expenses.

Results of Operations

The Company divested certain business units during 1999 in order to focus
on its core business lines. Accordingly, the segment results presented below
for the comparison of 2000 to 1999 segregate the operating performance for the
remaining core business lines versus those that were divested. The segment
profits as presented herein differ from the operating profits presented in Note
5 in the accompanying consolidated financial statements due to the segregation
of nonrecurring items and divested business lines.

10



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##### Table of Contents



Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999

|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |     |  
|-------------------------------- | ------------------------------- | ------------------------ | ------ | ------ | ------- | -------- | -- | ------ | --- | -------- | ------ | ------ | ------ | - | -- | -- | --- | - | ----- | ------ | ------ | - | -- | -- | --- | -
|                                 |                                 |                          |        | 2000   |         | 1999     |    | Change
|                                 |                                 |                          |        |        |         |          |    |       
|(Dollars in thousands)           |                                 |                          |        |        |         | % of     |    |        |     |          |        | % of  
|                                 |                                 |                          |        | Amount |         | Revenues |    | Amount |     | Revenues |        | Amount |        | %
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |  
|Revenue:                        
|                                
|                                
|                                
|                                
|                                 | Merchant Services               |                          | $      | 79,687 |         |          |    | 73     | %   |          | $      | 66,119 |        |   |    | 70 | %   |   | $     | 13,568 |        |   |    | 21 | %  
|                                
|                                
|                                
|                                
|                                 | Corporate Outsourcing Solutions |                          |        | 28,945 |         |          |    | 27     |     |          |        | 28,790 |        |   |    | 30 |     |   |       | 155    |        |   |    | 1  |    
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |    
|                                 |                                 | Total Revenue            |        |        | 108,632 |          |    |        | 100 |          |        |        | 94,909 |   |    |    | 100 |   |       |        | 13,723 |   |    |    | 14  |  
|                                
|                                
|                                
|                                
|Operating Expenses:             
|                                
|                                
|                                
|                                
|                                 | Merchant Services               |                          |        | 64,372 |         |          |    | 81     |     |          |        | 56,924 |        |   |    | 86 |     |   |       | 7,448  |        |   |    | 13 |    
|                                
|                                
|                                
|                                
|                                 | Corporate Outsourcing Solutions |                          |        | 23,114 |         |          |    | 80     |     |          |        | 24,245 |        |   |    | 84 |     |   |       | (1,131 | )      |   |    | (5 | )  
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |    
|                                 |                                 | Total Operating Expenses |        |        | 87,486  |          |    |        | 81  |          |        |        | 81,169 |   |    |    | 86  |   |       |        | 6,317  |   |    |    | 8   |  
|                                
|                                
|                                
|                                
|Segment Profit:                 
|                                
|                                
|                                
|                                
|                                 | Merchant Services               |                          |        | 15,315 |         |          |    | 19     |     |          |        | 9,195  |        |   |    | 14 |     |   |       | 6,120  |        |   |    | 67 |    
|                                
|                                
|                                
|                                
|                                 | Corporate Outsourcing Solutions |                          |        | 5,831  |         |          |    | 20     |     |          |        | 4,545  |        |   |    | 16 |     |   |       | 1,286  |        |   |    | 28 |    
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |    
|                                 |                                 | Total Segment Profit     |        |        | 21,146  |          |    |        | 19  |          |        |        | 13,740 |   |    |    | 14  |   |       |        | 7,406  |   |    |    | 54  |  
|                                
|Other General and Administrative
|                                 | Expenses                        |                          |        |        | 2,218   |          |    |        | 2   |          |        |        | 3,112  |   |    |    | 3   |   |       |        | (894   | ) |    |    | (29 | )
|                                
|                                
|                                
|                                
|Net Interest Income              |                                 |                          | 2,231  |        |         |          | 2  |        |     |          | 2,042  |        |        |   | 2  |    |     |   | 189   |        |        |   | 9  |   
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |    
|Income Before Taxes              |                                 |                          | 21,159 |        |         |          | 19 |        |     |          | 12,670 |        |        |   | 13 |    |     |   | 8,489 |        |        |   | 67 |   
|                                
|                                
|                                
|                                
|Provision for Income Taxes       |                                 |                          | 8,175  |        |         |          | 8  |        |     |          | 4,349  |        |        |   | 5  |    |     |   | 3,826 |        |        |   | 88 |   
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |    
|Net Income                       |                                 | $                        | 12,984 |        |         |          | 12 |        |     | $        | 8,321  |        |        |   | 9  |    |     | $ | 4,663 |        |        |   | 56 |   
|                                 |                                 |                          |        |        |         |          |    |        |     |          |        |        |        |   |    |    |     |   |       |        |        |   |    |    |    

Merchant Services

Revenue increased 21% to $79.7 million from $66.1 million. Transaction
and dollar volume processed increased 24% and 21%, respectively, primarily due
to new customer accounts, including the acquisition of a merchant processing
portfolio on December 31, 1999, and increased volume from existing customers.

Operating expenses increased 13% to $64.4 million from $57.0 million
primarily due to increased volume. Operating margins as a percentage of
revenue increased to 19% from 14%, primarily due to increased revenue from
higher-margin regional merchants, economies of scale from increased volumes and
improved pricing related to vendor negotiations. In addition, the 1999 period
contained testing and remedition expenses for Year 2000 that did not re-occur
in 2000. Due primarily to the factors outlined above, segment profit for the
quarter ended September 30, 2000 increased 67% to $15.3 million in 2000 from
$9.2 million in 1999.

11



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##### Table of Contents



Corporate Outsourcing Solutions

Revenue increased 1% to $28.9 million from $28.8 million. The Company
experienced additional revenue from volume growth in the Healthcare business
line and certain products within the Travel business line. However, these
additional revenues were mostly offset by expected volume decreases in other
product lines resulting from the continuing conversion from paper to electronic
ticketing and reporting in the airline industry, which reduces the demand for
the Companys data capture services.

Operating expenses decreased 5% to $23.1 million from $24.2 million due
primarily to cost containment initiatives. As a result of the items discussed
above, segment profit for the quarter ended September 30, 2000 increased 28% to
$5.8 million from $4.5 million in 1999.

Other General and Administrative Expenses

Other general and administrative expenses are comprised of corporate
expenses that are not included in the determination of segment profit for the
business segments. For the quarter ended September 30, 2000, these expenses
decreased 29% to $2.2 million from $3.1 million in 1999, due primarily to legal
expenses incurred in the 1999 quarter that did not recur in 2000.

Net Interest Income

Net interest income for the third quarter increased to $2.2 million from
$2.0 million for the same period of 1999 due to the increased level of cash and
investments as well as rising interest rates. The increased levels of cash and
investments were due primarily to cash flow from operations.

Provision for Income Taxes

The effective tax rate was 38.6% for the third quarter of 2000 compared to
34.3% for the same period a year ago. This increase is due primarily to
recording income tax on all foreign income at its U.S. statutory rate in 2000,
as well as an increase in U.S. income versus offshore income, which is
additionally subject to state and local taxation. The increase in the
effective tax rate in the third quarter of 2000 was partially offset by $0.3
million due to a reduction in the valuation allowance for state net operating
loss carryforwards.

12



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Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999

|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  |  |  |  | 
|------------------------------------------ | ------------------------------- | ---------------------------------------------- | ------------------------ | ------------------------- | ------ | ------- | ------ | -------- |  |  | -- | ---- | - | ------ | ------ | -------- |  | - | ------- | ------- | ------- | ------- | ------ | ---- | --- | --- | -- | - | ------ | ------- | ------ | ------- | ------ | --- | -- |  |  |  |  | 
|                                           |                                 |                                                |                          |                           |        | 2000    |        |          |  |  |    | 1999 |   |        | Change
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |       
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   | % of   |        |          |  |   |         |         |         |         |        | % of
|(Dollars in thousands)                     |                                 | Amount                                         |                          |                           |        |         |        | Revenues |  |  |    |      |   | Amount |        | Revenues |  |   | Amount  |         | %      
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |        
|Revenue:                                  
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                | $                        | 226,702                   |        |         |        |          |  |  |    | 73   | % |        |        |          |  |   | $       | 189,638 |         |         |        | 58   | %   |     |    |   | $      | 37,064  |        | 20      | %     
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                          | 84,310                    |        |         |        |          |  |  |    | 27   |   |        |        |          |  |   |         | 82,212  |         |         |        | 25   |     |     |    |   |        | 2,098   |        | 3       |       
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|                                           |                                 |                                                | Total Core Revenue       |                           |        | 311,012 |        |          |  |  |    |      |   | 100    |        |          |  |   |         |         |         | 271,850 |        |      |     | 83  |    |   |        |         |        | 39,162  |        | 14  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                          |                          |        |         |        |          |  |  |    |     |   |        |        |          |  |   |         | 57,335  |         |         |        | 17   |     |     |    |   |        | (57,335 | )      | (100    | )     
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|                                           |                                 |                                                | Total Revenue            |                           |        | 311,012 |        |          |  |  |    |      |   | 100    |        |          |  |   |         |         |         | 329,185 |        |      |     | 100 |    |   |        |         |        | (18,173 | )      | (6  | ) 
|                                          
|                                          
|                                          
|                                          
|Operating Expenses:                       
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                |                          | 185,728                   |        |         |        |          |  |  |    | 82   |   |        |        |          |  |   |         | 166,089 |         |         |        | 88   |     |     |    |   |        | 19,639  |        | 12      |       
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                          | 69,797                    |        |         |        |          |  |  |    | 83   |   |        |        |          |  |   |         | 68,429  |         |         |        | 83   |     |     |    |   |        | 1,368   |        | 2       |       
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|                                           |                                 |                                                | Core Operating Expenses  |                           |        | 255,525 |        |          |  |  |    |      |   | 82     |        |          |  |   |         |         |         | 234,518 |        |      |     | 86  |    |   |        |         |        | 21,007  |        | 9   |   
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                          |                          |        |         |        |          |  |  |    |     |   |        |        |          |  |   |         | 57,662  |         |         |        | 101  |     |     |    |   |        | (57,662 | )      | (100    | )     
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                 |                                                | Total Operating Expenses |                           |        | 255,525 |        |          |  |  |    |      |   | 82     |        |          |  |   |         |         |         | 292,180 |        |      |     | 89  |    |   |        |         |        | (36,655 | )      | (13 | ) 
|                                          
|                                          
|                                          
|                                          
|Segment Profit (Loss):                    
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                |                          | 40,974                    |        |         |        |          |  |  |    | 18   |   |        |        |          |  |   |         | 23,549  | (1)     |         |        | 12   |     |     |    |   |        | 17,425  |        | 74      |       
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                          | 14,513                    | (4)    |         |        |          |  |  |    | 17   |   |        |        |          |  |   |         | 13,783  | (2)     |         |        | 17   |     |     |    |   |        | 730     |        | 5       |       
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|                                           |                                 |                                                |                          | Total Core Segment Profit |        |         | 55,487 |          |  |  |    |      |   |        | 18     |          |  |   |         |         |         |         | 37,332 |      |     |     | 14 |   |        |         |        |         | 18,155 |     | 49 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                          |                          |        |         |        |          |  |  |    |     |   |        |        |          |  |   |         | (327    | )(3)    |         |        | (1   | )   |     |    |   |        | 327     |        | (100    | )     
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|                                           |                                 |                                                |                          | Total Segment Profit      |        |         | 55,487 |          |  |  |    |      |   |        | 18     |          |  |   |         |         |         |         | 37,005 |      |     |     | 11 |   |        |         |        |         | 18,482 |     | 50 | 
|                                          
|Other General and Administrative Expenses  |                                 |                                                | 6,072                    |                           |        |         |        |          |  |  | 2  |      |   |        |        |          |  |   | 6,378   |         |         |         | 2      |      |     |     |    |   | (306   | )       | (5     | )      
|                                          
|                                          
|                                          
|                                          
|Net Interest Income                        |                                 |                                                | 5,924                    |                           |        |         |        |          |  |  | 2  |      |   |        |        |          |  |   | 2,626   |         |         |         | 1      |      |     |     |    |   | 3,298  |         | 126    |        
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|Income Before Taxes and Nonrecurring Items |                                 |                                                | 55,339                   |                           |        |         |        |          |  |  | 18 |      |   |        |        |          |  |   | 33,253  |         |         |         | 10     |      |     |     |    |   | 22,086 |         | 66     |        
|                                          
|                                          
|                                          
|                                          
|Nonrecurring Items:                       
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Impairment, Restructuring and Related
Expenses |                          |                           | (1,500 | )       |        |          |  |  |    |      |  |        |        |          |  |   |         |         | (69,666 | )       |        |      | (21 | )   |    |   |        |         | 68,166 |         | NM     |    
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|Income (Loss) Before Taxes                 |                                 |                                                | 53,839                   |                           |        |         |        |          |  |  | 17 |      |   |        |        |          |  |   | (36,413 | )       |         |         | (11    | )    |     |     |    |   | 90,252 |         | NM     |        
|                                          
|                                          
|                                          
|                                          
|Provision for Income Taxes                 |                                 |                                                | 20,831                   |                           |        |         |        |          |  |  | 7  |      |   |        |        |          |  |   | 11,478  |         |         |         | 3      |      |     |     |    |   | 9,353  |         | NM     |        
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 
|Net Income (Loss)                          |                                 | $                                              | 33,008                   |                           |        |         |        |          |  |  | 11 |      |   |        |        |          |  | $ | (47,891 | )       |         |         | (15    | )    |     |     |    | $ | 80,899 |         | NM     |        
|                                           |                                 |                                                |                          |                           |        |         |        |          |  |  |    |      |   |        |        |          |  |   |         |         |         |         |        |      |     |     |    |   |        |         |        |         |        |     |    |  | 

NM  Not meaningful

(1) Excludes $0.5 million of restructuring charges related to facility
closing.
(2) Excludes $1.7 million of restructuring charges related to facility
closing.
(3) Excludes $67.4 million of impairment and related expenses for the
business lines      divested in the first half of 1999 (Freight,
Payables, Remittance and Check Services).
(4) Excludes $1.5 million charge for site consolidation initiatives.





|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |    |    | 
|----------------------------- | --------------------- | ------------------- | ------------------- | ------ | ------ | ------ | ---- | --- | ------ | ------ | - | ------- | ------ | ------- | - | --- | -- | --- | - | ------ | ------ | ------ |  | -- | -- | -- | 
|                              |                       |                     |                     |        | 2000   |        | 1999 |     | Change
|                              |                       |                     |                     |        |        |        |      |     |       
|(Dollars in thousands,        |                       | Amount              |                     | %      |        | Amount |      | %   |        | Amount |   | %      
|except per share amounts)     |                       |                     |                     |        |        |        |      |     |        |        |   |        
|                             
|Excluding Nonrecurring Items:
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income        |                     | $                   | 55,339 |        |        |      | 100 | %      |        | $ | 33,253  |        |         |   | 100 | %  |     | $ | 22,086 |        |        |  | 66 | % 
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | 21,356 |        |        |      | 39  |        |        |   | 11,006  |        |         |   | 33  |    |     |   | 10,350 |        |        |  | 94 |   
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|                              |                       | Net Income          |                     | $      | 33,983 |        |      |     | 61     |        |   | $       | 22,247 |         |   |     | 67 |     |   | $      | 11,736 |        |  |    | 53 |   
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|                              |                       | Per Share  Diluted |                     | $      | 0.67   |        |      |     |        |        |   | $       | 0.44   |         |   |     |    |     |   | $      | 0.23   |        |  |    | 52 |   
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|Nonrecurring Items:          
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income (Loss) |                     | $                   | (1,500 | )      |        |      | 100 |        |        | $ | (69,666 | )      |         |   | 100 | %  |     | $ | 68,166 |        |        |  | NM |   
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | (525   | )      |        |      | 35  |        |        |   | 472     |        |         |   | (1  | )  |     |   | (997   | )      |        |  | NM |   
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|                              |                       |                     | Net Income (Loss)   |        | $      | (975   | )    |     |        | 65     |   |         | $      | (70,138 | ) |     |    | 101 |   |        | $      | 69,163 |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|                              |                       |                     | Per Share  Diluted |        | $      | (0.02  | )    |     |        |        |   |         | $      | (1.38   | ) |     |    |     |   |        | $      | 1.36   |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|Total:                       
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income (Loss) |                     | $                   | 53,839 |        |        |      | 100 | %      |        | $ | (36,413 | )      |         |   | 100 | %  |     | $ | 90,252 |        |        |  | NM |   
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | 20,831 |        |        |      | 39  |        |        |   | 11,478  |        |         |   | (32 | )  |     |   | 9,353  |        |        |  | NM |   
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|                              |                       |                     | Net Income (Loss)   |        | $      | 33,008 |      |     |        | 61     |   |         | $      | (47,891 | ) |     |    | 132 |   |        | $      | 80,899 |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|                              |                       |                     | Per Share  Diluted |        | $      | 0.65   |      |     |        |        |   |         | $      | (.94    | ) |     |    |     |   |        | $      | 1.59   |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |      |     |        |        |   |         |        |         |   |     |    |     |   |        |        |        |  |    |   
|NM  Not meaningful          

13



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##### Table of Contents



Nine months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999

Merchant Services

Revenue for the core business line increased 20% to $226.7 million from
$189.6 million. Transaction and dollar volume increased 26% and 21%,
respectively, primarily due to new customer accounts, including the acquisition
of a merchant processing portfolio on December 31, 1999, and increased volume
from existing customers.

Operating expenses for the core business line increased 12% to $185.7
million from $166.1 million primarily due to increased volume. Operating
margins as a percentage of revenue increased to 18% from 12%, primarily due to
increased revenue from higher-margin regional merchants, economies of scale
from increased volumes and improved pricing related to vendor negotiations. In
addition, the 1999 period contained testing and remedition expenses for Year
2000 that did not re-occur in 2000. Due primarily to the factors outlined
above, segment profit for the nine months ended September 30, 2000, increased
74% to $41.0 million in 2000 from $23.5 million in 1999.

Corporate Outsourcing Solutions

Revenue for the core business lines increased 3% to $84.3 million from
$82.2 million. The Company experienced additional revenue from volume growth in
the Healthcare business line and certain products within the Travel business
line. However, these additional revenues were mostly offset by expected volume
decreases in other product lines resulting from the continuing conversion from
paper to electronic ticketing and reporting in the airline industry, which
reduces the demand for the Companys data capture services.

Operating expenses for the core business lines increased 2% to $69.8
million from $68.4 million due primarily to increased volumes, as well as
severance expense of $0.5 million recorded in the first quarter of 2000. As a
result of the items discussed above, segment profit for the nine months ended
September 30, 2000 increased 5% to $14.5 million in 2000 from $13.8 million in
1999.

Other General and Administrative Expenses

Other general and administrative expenses are comprised of corporate
expenses that are not included in the determination of segment profit for the
business segments. For the nine months ended September 30, 2000, these
expenses decreased 5% to $6.1 million in 2000 from $6.4 million in 1999, due
primarily to legal expenses incurred in 1999 that did not recur in 2000.

Divested Business Lines

Divested business lines are comprised of the Remittance, Payables, Freight
(all formerly part of the Corporate Outsourcing Solutions segment) and Check
Services (formerly part of the Merchant Services segment) business lines that
were sold by the Company in the first half of 1999. Segment loss for the
divested business lines was $0.3 million in the nine months ended September 30,
1999.

14



---



##### Table of Contents



Net Interest Income

Net interest income for the nine months ended September 30, 2000 increased
to $5.9 from $2.6 million for the same period in 1999 due to the increased
level of cash and investments as well as rising interest rates. The increased
levels of cash and investments were due to the receipt of sale proceeds from
the business lines that were divested in the second quarter of 1999 and cash
flow from operations.

Nonrecurring Items

In the second quarter of 2000, a pre-tax charge of $1.5 million was
recorded related to site consolidation initiatives. The charge totaled $1.0
million after-tax, or $0.02 per share.

During the quarter ended March 31, 1999, the Company recorded nonrecurring
restructuring charges of $2.2 million, including $1.9 million for severance pay
for approximately 540 employees and $0.3 million for other costs. These
charges related to two of the Companys facilities which have been closed and
consolidated into the Companys other operating facilities. These charges
decreased net income and earnings per share by approximately $1.8 million and
$.04, respectively. At September 30, 2000, the remaining liability was $0.2
million and related primarily to future severance payments for approximately 40
employees.

During the first half of 1999, the Company committed to a formal plan to
dispose of its Freight, Payables, Remittance and Check Services business lines
and recorded impairment losses and related expenses of $67.4 million related to
the sale and wind-down of these business lines. The charges decreased net
income and earnings per share for the nine months ended September 30, 1999 by
$68.3 million and $1.35, respectively. Effective April 1, 1999, the Company
sold its Freight and Payables business lines for $18.3 million. Effective June
1, 1999, the Company sold its Remittance and Check business lines for $44.3
million. At September 30, 2000, the Company had $1.1 million remaining related
to the final obligations of these dispositions recorded in other accrued
liabilities. The remaining obligations are primarily for future severance
payments, rent subsidies and legal claims. For the nine months ended September
30, 1999, these divested business units had revenues of $57.3 million.

Provision for Income Taxes

Excluding the impact of nonrecurring items, the effective tax rate was
38.6% for the nine months ended September 30, 2000 compared to 33.1% for the
same period a year ago. This increase is due primarily to recording income tax
on all foreign income at its U.S. statutory tax rate in 2000, as well as an
increase in U.S. income versus offshore income, which is additionally subject
to state and local taxation. The increase in the effective tax rate in the
first nine months of 2000 was partially offset by $0.9 million due to a
reduction in the valuation allowance for state net operating loss
carryforwards.

The overall effective tax rate for 1999 included the effect of the
write-off of $65.7 million of nondeductible goodwill related to the divested
business lines.

15



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##### Table of Contents






Seasonality

The Company experiences seasonality in its businesses. The Company
typically realizes higher revenues in the third and fourth calendar quarters
and lower revenues in the first calendar quarter, reflecting increased
transaction volume and travel in the summer and holiday months and decreased
transaction volume during the quarter immediately following the holiday
seasons.

Liquidity and Capital Resources

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

The Companys capital expenditures include amounts for computer hardware
and software, scanning and other document processing equipment as well as
leasehold improvements to operating facilities. During the nine month period
ended September 30, 2000, the Companys capital expenditures totaled $8.8
million. Such expenditures were financed from operating cash flow, which
totaled approximately $61.7 million for the nine month period. Operating cash
flow during the nine month period ended September 30, 1999 totaled $79.0
million and capital expenditures were $11.7 million. Operating cash flow was
less in the 2000 period compared to 1999 due to the timing of certain cash
payments related to income taxes. It is anticipated that future capital
expenditures will be funded with operating cash flow.

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

The Company maintains restricted cash balances held on behalf of clients
pending distribution to vendors which are shown on the balance sheet as assets
and equivalent offsetting liabilities. These cash balances totaled
approximately $30.6 million and $22.2 million as of
September 30, 2000 and December 31, 1999, respectively.

Forward Looking Statements

The section entitled Business Segment Review contains certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements involve significant
risks and uncertainties, including changes in general economic and financial
market conditions and the Companys ability to execute its business plans.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ
materially.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in market risk as disclosed in the
Companys 1999 Form 10-K.

16



---



##### Table of Contents






Part II  Other Information




Item 1.   Legal Proceedings (None)




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




Item 3.   Defaults Upon Senior Securities (None)




Item 4.   Submission of Matters to a Vote of Security Holders (None)




Item 5.   Other Information (None)




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

a.          Exhibits

27.1      Financial Data Schedule

b.         Reports on Form 8-K

July 18, 2000: On July 17, 2000, the Registrant issued a press release
reporting earnings for the quarter and six months ended June 30, 2000.




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:  November 13, 2000 |  |  |  |  | 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)

17