##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

|                                                                                             
|---------------------------------------------------------------------------------------------
|/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|For the quarterly period ended March 31, 2003                                                
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).      YES  X      NO

The number of shares outstanding of the Registrants Common Stock as of April
30, 2003 was 52,229,234.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                           |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Consolidated Financial Statements (unaudited)                                        
|                              |                                                                                               | Consolidated Balance Sheets                              
|                              |                                                                                               | Consolidated Statements of Income                        
|                              |                                                                                               | Consolidated Statement of Changes in Shareholders Equity
|                              |                                                                                               | Consolidated Statements of Cash Flows                    
|                              |                                                                                               | Notes to Consolidated Financial Statements               
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosure of Market Risk                               
|                              | Item 4. Controls and Procedures                                                              
|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)                                                             
|                              | Itme 6. Exhibits and Reports on Form 8-K:                                                    
|CERTIFICATIONS               
|EX-99.1  Certification of CEO
|EX-99.2  Certification of CFO



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##### Table of Contents



NATIONAL PROCESSING, INC.

INDEX

|               |                       |                                                                                               |    |          |    | 
|-------------- | --------------------- | --------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|               |                       |                                                                                               |    | Page No.
|               |                       |                                                                                               |    |         
|Part I.        | Financial Information |                                                                                               |    |          |   
|              
|              
|              
|              
|               | Item 1.               | Consolidated Financial Statements (unaudited)                                                 |    |          |    | 
|              
|              
|              
|              
|               |                       | Consolidated Balance Sheets  March 31, 2003,
December 31, 2002, and March 31, 2002           |    |          | 3  | 
|              
|              
|              
|              
|               |                       | Consolidated Statements of Income  Three
Months Ended March 31, 2003 and 2002                |    |          | 4  | 
|              
|              
|              
|              
|               |                       | Consolidated Statement of Changes in Shareholders
Equity  Three Months Ended March 31, 2003 |    |          | 5  | 
|              
|              
|              
|              
|               |                       | Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002            |    |          | 6  | 
|              
|              
|              
|              
|               |                       | Notes to Consolidated Financial Statements                                                    |    |          | 7  | 
|              
|              
|              
|              
|               | Item 2.               | Managements Discussion and Analysis of
Financial Condition and Results of Operations         |    |          | 14 | 
|              
|              
|              
|              
|               | Item 3.               | Quantitative and Qualitative Disclosure of
Market Risk                                        |    |          | 21 | 
|              
|              
|              
|              
|               | Item 4.               | Controls and Procedures                                                                       |    |          | 21 | 
|              
|              
|              
|              
|Part II.       | Other Information     |                                                                                               |    |          |   
|              
|              
|              
|              
|               | Item 1.               | Legal Proceedings (None)                                                                      |    |          | 22 | 
|              
|              
|              
|              
|               | Item 2.               | Changes in Securities and Use of Proceeds (None)                                              |    |          | 22 | 
|              
|              
|              
|              
|               | Item 3.               | Defaults Upon Senior Securities (None)                                                        |    |          | 22 | 
|              
|              
|              
|              
|               | Item 4.               | Submission of Matters to a Vote of Security Holders (None)                                    |    |          | 22 | 
|              
|              
|              
|              
|               | Item 5.               | Other Information (None)                                                                      |    |          | 22 | 
|              
|              
|              
|              
|               | Item 6.               | Exhibits and Reports on Form 8-K                                                              |    |          | 22 | 
|              
|              
|              
|              
|Signatures     |                       |                                                                                               | 24 |         
|              
|              
|              
|              
|Certifications |                       |                                                                                               | 25 |         

2



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##### Table of Contents









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

|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |        |         |         |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------ | ------- | -------- | ------- | ----------- | ------- | -------- | ------- | ------ | ------- | ------- |  | 
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         | March 31 |         | December 31 |         | March 31
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         | 2003     |         | 2002        |         | 2002    
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |         
|Assets                                          |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Cash and cash equivalents           |        | $       | 229,390  |         |             | $       | 185,513  |         |        | $       | 155,436 | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Accounts receivable  trade         |        |         | 111,800  |         |             |         | 152,132  |         |        |         | 112,083 | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Deferred tax assets                 |        |         | 1,370    |         |             |         | 2,113    |         |        |         | 3,983   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Other current assets                |        |         | 10,374   |         |             |         | 7,287    |         |        |         | 7,009   | 
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total current assets                            |                                                                                                                                                                 |                                                                                                                                                                                                     | 352,934                             |        |         |          | 347,045 |             |         |          | 278,511 |       
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                         |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Furniture and equipment             |        |         | 51,381   |         |             |         | 51,253   |         |        |         | 56,032  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Building and leasehold improvements |        |         | 11,954   |         |             |         | 11,835   |         |        |         | 10,870  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Software                            |        |         | 39,094   |         |             |         | 37,666   |         |        |         | 33,162  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Property leased from affiliate      |        |         | 4,173    |         |             |         | 4,173    |         |        |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Land and improvements               |        |         | 442      |         |             |         | 442      |         |        |         | 442     | 
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | 107,044                             |        |         |          | 105,369 |             |         |          | 104,679 |       
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |                                                                                                                                                                 |                                                                                                                                                                                                     | 54,822                              |        |         |          | 51,662  |             |         |          | 50,767  |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Property and equipment, net                     |                                                                                                                                                                 |                                                                                                                                                                                                     | 52,222                              |        |         |          | 53,707  |             |         |          | 53,912  |       
|                                               
|                                               
|                                               
|                                               
|Other assets:                                   |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill                                                                                                                                                        |                                                                                                                                                                                                     |                                     | 91,227 |         |          |         | 91,227      |         |          |         | 91,227 |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets, net of accumulated amortization of
$23,240, $21,470 and $16,278 at March 31, 2003, December 31,
2002, and March 31, 2002, respectively |                                                                                                                                                                                                     |                                     | 40,220 |         |          |         | 41,990      |         |          |         | 43,282 |        
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                             |                                                                                                                                                                                                     |                                     | 11,004 |         |          |         | 12,231      |         |          |         | 13,785 |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                                    |                                                                                                                                                                                                     |                                     | 4,000  |         |          |         | 4,304       |         |          |         | 3,418  |        
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total other assets                              |                                                                                                                                                                 |                                                                                                                                                                                                     | 146,451                             |        |         |          | 149,752 |             |         |          | 151,712 |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total assets                                    |                                                                                                                                                                 | $                                                                                                                                                                                                   | 551,607                             |        |         | $        | 550,504 |             |         | $        | 484,135 |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Liabilities
and Shareholders Equity            |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|Current Liabilities:                            |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Accounts payable  trade            |        | $       | 19,865   |         |             | $       | 23,006   |         |        | $       | 15,037  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Accrued bankcard assessments        |        |         | 23,514   |         |             |         | 27,645   |         |        |         | 23,685  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Accrued compensation and benefits   |        |         | 2,151    |         |             |         | 3,321    |         |        |         | 3,540   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Income tax payable                  |        |         | 12,966   |         |             |         | 17,211   |         |        |         | 12,101  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     | Other accrued liabilities           |        |         | 24,799   |         |             |         | 18,744   |         |        |         | 11,311  | 
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total current liabilities                       |                                                                                                                                                                 |                                                                                                                                                                                                     | 83,295                              |        |         |          | 89,927  |             |         |          | 65,674  |       
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                                 |                                                                                                                                                                                                     | 1,699                               |        |         |          | 1,732   |             |         |          | 1,829   |       
|                                               
|                                               
|                                               
|                                               
|Minority interest                               |                                                                                                                                                                 |                                                                                                                                                                                                     | 550                                 |        |         |          | 2,462   |             |         |          | 1,414   |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total liabilities                               |                                                                                                                                                                 |                                                                                                                                                                                                     | 85,544                              |        |         |          | 94,121  |             |         |          | 68,917  |       
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                           |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 | Preferred stock, without par value; 5,000,000 shares authorized; no
shares issued or outstanding                                                                                                    |                                     |        |        |          |         |             |        |          |         |        |        |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 | Common stock, without par value; 95,000,000 shares authorized;
52,224,234, 52,093,945, and 51,979,283 issued and outstanding at
March 31, 2003, December 31, 2002, and March 31, 2002, respectively |                                     |        | 1       |          |         |             | 1       |          |         |        | 1       |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 | Contributed capital                                                                                                                                                                                 |                                     |        | 199,825 |          |         |             | 198,728 |          |         |        | 196,682 |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 | Unearned compensation                                                                                                                                                                               |                                     |        | (275    | )        |         |             | (311    | )        |         |        | (401    | )      
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                 | Retained earnings                                                                                                                                                                                   |                                     |        | 266,512 |          |         |             | 257,965 |          |         |        | 218,936 |        
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total shareholders equity                      |                                                                                                                                                                 |                                                                                                                                                                                                     | 466,063                             |        |         |          | 456,383 |             |         |          | 415,218 |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       
|Total liabilities and shareholders equity      |                                                                                                                                                                 | $                                                                                                                                                                                                   | 551,607                             |        |         | $        | 550,504 |             |         | $        | 484,135 |       
|                                                |                                                                                                                                                                 |                                                                                                                                                                                                     |                                     |        |         |          |         |             |         |          |         |       

See notes to consolidated financial statements

3



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##### Table of Contents



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

|                                                               |  |                    |         |      |  |   |         | 
|-------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | 
|                                                               |  | Three Months Ended
|                                                               |  | March 31          
|                                                               |  |                   
|                                                               |  | 2003               |         | 2002
|                                                               |  |                    |         |     
|Revenue                                                        |  | $                  | 105,954 |      |  | $ | 109,945 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Operating expenses                                             |  |                    | 82,752  |      |  |   | 82,304  | 
|                                                              
|                                                              
|                                                              
|                                                              
|General and administrative expenses                            |  |                    | 4,306   |      |  |   | 4,602   | 
|                                                              
|                                                              
|                                                              
|                                                              
|Depreciation and amortization                                  |  |                    | 4,967   |      |  |   | 4,023   | 
|                                                               |  |                    |         |      |  |   |         | 
|Operating profit                                               |  |                    | 13,929  |      |  |   | 19,016  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Net interest income                                            |  |                    | 842     |      |  |   | 1,035   | 
|                                                               |  |                    |         |      |  |   |         | 
|Income before provision for income taxes and minority interest |  |                    | 14,771  |      |  |   | 20,051  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Provision for income taxes                                     |  |                    | 5,695   |      |  |   | 7,416   | 
|                                                               |  |                    |         |      |  |   |         | 
|Income before minority interest                                |  |                    | 9,076   |      |  |   | 12,635  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Minority interest                                              |  |                    | 529     |      |  |   | 587     | 
|                                                               |  |                    |         |      |  |   |         | 
|Net income                                                     |  | $                  | 8,547   |      |  | $ | 12,048  | 
|                                                               |  |                    |         |      |  |   |         | 
|Basic income per common share                                  |  | $                  | 0.16    |      |  | $ | 0.23    | 
|                                                               |  |                    |         |      |  |   |         | 
|Diluted income per common share                                |  | $                  | 0.16    |      |  | $ | 0.23    | 
|                                                               |  |                    |         |      |  |   |         | 

See notes to consolidated financial statements

4



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##### Table of Contents



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

|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------ | ---------- | ------ |  | ----------- | - | ------------ |  | -------- | ------- | ----- |  | - | ---- | - |  | - | ------- |  |  | - | ------- | 
|                                                                                              |  | Common |            | Common |  | Contributed |   | Unearned     |  | Retained |         |       |  |  
|                                                                                              |  | Shares |            | Stock  |  | Capital     |   | Compensation |  | Earnings |         | Total
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |      
|Balance at January 1, 2003                                                                    |  |        | 52,093,945 |        |  | $           | 1 |              |  | $        | 198,728 |       |  | $ | (311 | ) |  | $ | 257,965 |  |  | $ | 456,383 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net income                                                                                    |  |        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 8,547   |  |  |   | 8,547   | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Issuance of common shares under stock-based
compensation plans, including related tax effects |  |        | 130,289    |        |  |             |  |              |  |          | 1,097   |       |  |   | 36   |   |  |   |        |  |  |   | 1,133   | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|Balance at March 31, 2003                                                                     |  |        | 52,224,234 |        |  | $           | 1 |              |  | $        | 199,825 |       |  | $ | (275 | ) |  | $ | 266,512 |  |  | $ | 466,063 | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 

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)

|                                               |                                                               |            |                                     |        |                    |        |         |        |       |        |  
|---------------------------------------------- | ------------------------------------------------------------- | ---------- | ----------------------------------- | ------ | ------------------ | ------ | ------- | ------ | ----- | ------ | -
|                                               |                                                               |            |                                     |        | Three Months Ended
|                                               |                                                               |            |                                     |        | March 31          
|                                               |                                                               |            |                                     |        |                   
|                                               |                                                               |            |                                     |        | 2003               |        | 2002   
|                                               |                                                               |            |                                     |        |                    |        |        
|Operating
Activities                           |                                                               |            |                                     |        |                    |        |         |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net income                                                    |            | $                                   | 8,547  |                    |        | $       | 12,048 |      
|                                              
|                                              
|                                              
|                                              
|                                               | Items not requiring cash currently:                           |            |                                     |        |                    |        |         |        |      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Depreciation and amortization       |        |                    | 4,967  |         |        |       | 4,023  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Deferred income taxes               |        |                    | 1,970  |         |        |       | (1,159 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Loss on disposition of fixed assets |        |                    | 4      |         |        |       | 114    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Minority interest                   |        |                    | 529    |         |        |       | 587    |  
|                                              
|                                              
|                                              
|                                              
|                                               | Change in current assets and liabilities:                     |            |                                     |        |                    |        |         |        |      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Accounts receivable  trade         |        |                    | 40,332 |         |        |       | 51,561 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Accounts payable  trade            |        |                    | (3,141 | )       |        |       | (4,043 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Accrued bankcard assessments        |        |                    | (4,131 | )       |        |       | (4,428 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Income taxes payable                |        |                    | (4,087 | )       |        |       | 4,742  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Other current assets/liabilities    |        |                    | 1,798  |         |        |       | (5,391 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               |            | Other, net                          |        |                    | (55    | )       |        |       | 351    |  
|                                               |                                                               |            |                                     |        |                    |        |         |       
|                                               | Net cash provided by operating activities                     |            |                                     | 46,733 |                    |        |         | 58,405 |      
|                                              
|                                              
|                                              
|                                              
|Investing
Activities                           |                                                               |            |                                     |        |                    |        |         |       
|                                              
|                                              
|                                              
|                                              
|                                               | Capital expenditures                                          |            |                                     | (1,716 | )                  |        |         | (6,609 | )    
|                                               |                                                               |            |                                     |        |                    |        |         |       
|                                               | Net cash used in investing activities                         |            |                                     | (1,716 | )                  |        |         | (6,609 | )    
|                                              
|                                              
|                                              
|                                              
|Financing
Activities                           |                                                               |            |                                     |        |                    |        |         |       
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments under property leased from affiliate       |            |                                     | (33    | )                  |        |         | (33    | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Distribution to minority shareholder                          |            |                                     | (2,441 | )                  |        |         |       |      
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of common stock under stock-based compensation plans |            |                                     | 1,334  |                    |        |         | 2,416  |      
|                                               |                                                               |            |                                     |        |                    |        |         |       
|                                               | Net cash (used in) provided by financing activities           |            |                                     | (1,140 | )                  |        |         | 2,383  |      
|                                               |                                                               |            |                                     |        |                    |        |         |       
|Net increase in cash and cash equivalents      |                                                               |            | 43,877                              |        |                    |        | 54,179  |       
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                               |            | 185,513                             |        |                    |        | 101,257 |       
|                                               |                                                               |            |                                     |        |                    |        |         |       
|Cash and cash equivalents, end of period       |                                                               | $          | 229,390                             |        |                    | $      | 155,436 |       
|                                               |                                                               |            |                                     |        |                    |        |         |       
|Supplemental cash flow information:            |                                                               |            |                                     |        |                    |        |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Taxes paid |                                     | $      | 8,038              |        |         | $      | 3,751 |       

See notes to consolidated financial statements

6



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##### Table of Contents



National Processing, Inc.
Notes to Consolidated Financial StatementsUnaudited



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | ORGANIZATION AND BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | National Processing, Inc. and its subsidiaries (the Company) are
providers of electronic payment processing headquartered in Louisville,
Kentucky. The Company is 85% owned by National City Corporation
(National City), a financial holding company headquartered in
Cleveland, Ohio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company currently operates two business segments, Merchant Card
Services and Payment Services. Merchant Card Services authorizes,
processes, and performs financial settlement and reporting of card
transactions, including credit and debit card transactions. Merchant
Card Services provides services to merchant locations primarily in the
United States and represents approximately 96% of the Companys
revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Payment Services provides financial settlement and reporting
solutions to large and mid-size corporate customers in the travel and
healthcare industries. Payment Services settles 100% of domestic
airline tickets issued by travel agencies and settled through the
Airlines Reporting Corporation. Payment Services also settles
commission payments for car rental companies, cruise line operators,
and hotels. In the healthcare industry, Payment Services provides
financial settlement and reporting to healthcare organizations such as
insurance companies, managed care organizations and self-insured
organizations. Payment Services represents approximately 4% of the
Companys revenue. Payment Services does not meet the materiality
thresholds for separate disclosures of segment information as defined
in Statement of Financial Accounting Standards (SFAS) 131,
Disclosures about Segments of an Enterprise and Related
Information. As
a result, these Notes to Consolidated Financial Statements do not
include additional segment disclosures.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Sponsorship Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company and National City Bank of Kentucky (NCBK), a wholly
owned subsidiary of National City, are parties to a sponsorship
agreement (the Sponsorship Agreement) whereby the Company acts as
NCBKs sole agent for the purposes of providing electronic data
authorization and capture, reporting, settlement, and clearing services
for merchants who participate in Visa® and MasterCard® programs.
The Company, along with other nonbank processors, must be sponsored by
a financial institution that is a member of the Visa® and
MasterCard® associations. NCBK is a member of such associations and
acts as the Companys primary sponsor.                                                                                                                                                                                                                                                                                                                                                                                                                  

7



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##### Table of Contents





|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The consolidated financial statements include the accounts of
National Processing, Inc. and its subsidiaries, including a 70%
ownership interest in ABN AMRO Merchant Services, LLC (AAMS). The
results of operations of AAMS are included in the consolidated
financial statements and the 30% minority ownership interest has been
accounted for as a minority interest. All significant intercompany
transactions and balances have been eliminated in consolidation. The
accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States. Certain
2002 amounts have been reclassified to conform with the 2003
presentation.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Financial statements prepared in accordance with accounting
principles generally accepted in the United States require the use of
estimates and assumptions by management that affect the reported
amounts of revenue and expenses, assets and liabilities, and the
disclosure requirements for contingent assets and liabilities during
and at the date of the financial statements. Consequently, actual
results could differ from those estimates.                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | For the interim periods presented, management believes the
unaudited consolidated financial statements reflect all adjustments of
a normal recurring nature and disclosures which are necessary for a
fair presentation of the results for the interim periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year or any
other interim period.                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company experiences seasonality in its businesses and
typically realizes higher revenue from increased transaction volume in
the summer and holiday months. Accounts receivable is generally highest
in the fourth quarter, as December is typically the highest volume
month due to holiday sales.                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Although the consolidated balance sheet at December 31, 2002 has
been derived from the audited consolidated financial statements at that
date, the accompanying interim consolidated financial statements do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States. These interim
financial statements should be read in conjunction with the Companys
2002 Annual Report on Form 10-K.                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company recognizes revenue as services are performed,
recording revenue net of certain costs not controlled by the Company,
primarily interchange and debit network fees. Interchange and debit
network fees for the three months ended March 31, 2003 and 2002 were
$570.4 million and $562.5 million, respectively.                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company records assessments charged by credit card
associations as operating expense in the Consolidated Statements of
Income as the Company is the primary obligor of these costs. Assessment
expense was $31.2 million for each of the quarters ended March 31, 2003
and 2002.                                                                                                                                                                                                                                                                                                                                                                                                          

8



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##### Table of Contents





| |                         
| | ------------------------
| | Stock-Based Compensation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has various stock-based compensation plans that allow
for the granting of stock to eligible employees and directors. Prior to
January 1, 2003, the Company accounted for these plans under the
recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and
related interpretations. Compensation expense for employee stock
options was not recognized if the exercise price of the option equaled
or exceeded the fair value of the stock on the date of grant.
Compensation expense for restricted share awards is recognized ratably
over the period of service, generally the restricted period, based on
the fair value of the stock on the date of grant. Effective January 1,
2003, the Company adopted the fair value method of recording stock
options under the transitional guidance of Statement of Financial
Accounting Standards (SFAS) 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Compensation expense for
employee stock options granted after January 1, 2003 will be recognized
in the Consolidated Financial Statements under the fair value method.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS 123, Accounting for Stock-Based Compensation, to
employee options. For purposes of providing the pro forma disclosures
required under SFAS 123, the fair value of stock options granted were
estimated at the date of grant using a Black-Scholes option pricing
model. The Black-Scholes option pricing model was originally developed
for use in estimating the fair value of traded options, which have
different characteristics than the Companys employee stock options.
The model is also sensitive to changes in the subjective assumptions,
which can materially affect the fair value estimate. As a result,
management believes the Black-Scholes model may not necessarily provide
a reliable single measure of the fair value of employee stock options.

|                                                                                                        |                       |                         |        |      |      |   |        |      | 
|------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ------ | ---- | ---- | - | ------ | ---- | 
|(in thousands, except share amounts)                                                                    |                       | Quarter Ended March 31,
|                                                                                                        |                       |                        
|                                                                                                        |                       |                         | 2003   |      | 2002
|                                                                                                        |                       |                         |        |      |     
|Net income, as reported                                                                                 |                       | $                       | 8,547  |      |      | $ | 12,048 |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Add: Stock option expense included in net income under fair value based method                          |                       |                         |       |      |      |   |       |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Deduct: Total stock option expense determined under fair value based method,
net of related tax effects |                       |                         | (1,971 | )    |      |   | (1,486 | )   
|                                                                                                        |                       |                         |        |      |      |   |        |     
|Pro forma net income                                                                                    |                       | $                       | 6,576  |      |      | $ | 10,562 |     
|                                                                                                        |                       |                         |        |      |      |   |        |     
|Earnings per share:                                                                                     |                       |                         |        |      |      |   |        |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Basic  as reported   |                         | $      | 0.16 |      |   | $      | 0.23 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Basic  pro forma     |                         |        | 0.13 |      |   |        | 0.20 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Diluted  as reported |                         |        | 0.16 |      |   |        | 0.23 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Diluted  pro forma   |                         |        | 0.13 |      |   |        | 0.20 | 



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The following weighted-average assumptions were used in the
option-pricing model for stock options issued in each of the respective
years:

|                                                  |  |         |       |         |  |         |       |   |  |   |      |  
|------------------------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | - |  | - | ---- | -
|                                                  |  | 2002    |       | 2001    |  | 2000   
|                                                  |  |         |       |         |  |        
|Risk free interest rate                           |  |         | 3.6   | %       |  |         | 5.5   | % |  |   | 5.0  | %
|                                                 
|                                                 
|                                                 
|                                                 
|Expected option life                              |  | 4 years |       | 7 years |  | 7 years
|                                                 
|                                                 
|                                                 
|                                                 
|Expected dividend yield                           |  |         | 0     | %       |  |         | 0     | % |  |   | 0    | %
|                                                 
|                                                 
|                                                 
|                                                 
|Volatility factor                                 |  |         | .485  |         |  |         | .495  |   |  |   | .479 |  
|                                                 
|                                                 
|                                                 
|                                                 
|Weighted average grant date fair value of options |  | $       | 11.45 |         |  | $       | 15.14 |   |  | $ | 6.36 |  



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No stock options were granted during the quarter ended March 31,
2003. Therefore, there was no compensation expense recorded in the
Statement of Income under the fair value method.

9



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##### Table of Contents





|   |                                 
|-- | --------------------------------
|3. | RECENT ACCOUNTING PRONOUNCEMENTS
|  

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



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



| |                                        
| | ---------------------------------------
| | Accounting for Stock-Based
Compensation



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, which provides guidance on how to transition from the
intrinsic value method of accounting for stock-based employee
compensation under APB 25 to SFAS 123s fair value method of
accounting, if a company so selects.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2003, the Company adopted the fair value method of
recording stock options under SFAS 123. In accordance with the
transitional guidance of SFAS 148, the fair value method of accounting
for stock options will be applied prospectively to awards granted
subsequent to December 31, 2002. As permitted, options granted prior to
January 1, 2003 will continue to be accounted for under APB Opinion 25,
and the proforma impact of accounting for these options at fair value
will continue to be disclosed in the Consolidated Financial Statements
until the last of those options vest in 2005.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As the cost of anticipated future option awards is phased in over a
four-year period, the annual impact will rise assuming options are
granted in future years at a similar level and under similar market
conditions to 2002. The actual impact per diluted share may vary in the
event the fair value or the number of options granted increases or
decreases from the current estimate, or if the current accounting
guidance changes. The Company uses the Black-Scholes model to estimate
option values. The Black-Scholes option pricing model was originally
developed for use in estimating the fair value of traded options, which
have different characteristics from the Companys employee stock
options. The model is also sensitive to changes in subjective
assumptions, which can materially affect the fair value estimate.



| |                          
| | -------------------------
| | Accounting for Guarantees



| |                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45
requires additional recognition and disclosure by a guarantor in its
financial statements about its obligations under certain guarantees.

10



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys contingent obligation to honor chargebacks under merchant
contracts is considered a performance guarantee under FIN 45.
Performance guarantees are contracts that contingently require the
guarantor to make payments to the guaranteed party based on another
entitys failure to perform under an obligating agreement. Performance
guarantees are subject to both the recognition and disclosure
requirements of FIN 45. The disclosure requirements of FIN 45 were
effective for the Company as of December 31, 2002. The required
disclosures are included in
Note 6 to the Consolidated Financial Statements. The recognition
requirements of FIN 45 were adopted January 1, 2003 for new guarantees
entered into after such date and did not have a material impact on the
Companys financial position or results of operations.



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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 3, 2002, the Company acquired a portfolio of processing
contracts for $2.7 million in cash, which was recorded as an intangible
asset. The terms of the agreement also include future payments to the
seller for a portion of the revenue derived from these contracts for a
specified period plus an additional one-time payment of up to $1.0
million in the third quarter of 2003. Under the terms of the agreement,
the Company provides front-end authorization services for approximately
50,000 merchant locations. Prior to the acquisition, the Company was
already providing settlement services for these merchants.



|   |                                             
|-- | --------------------------------------------
|5. | IMPAIRMENT, RESTRUCTURING, AND UNUSUAL ITEMS
|  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2002, the Company announced plans to close its remaining
operations in Juarez, Mexico by the end of 2002. The work performed in
Mexico has been relocated to existing facilities in the United States.
The Company recorded a pre-tax restructuring charge of $1.7 million
($2.4 million after-tax, or $0.04 per diluted share) in the second
quarter of 2002 related to severance costs for approximately 120
employees, building and equipment write-downs, and related items. The
after-tax charge exceeded the pre-tax amount due to additional tax
provisions required for nondeductible losses and dividends from foreign
subsidiaries. As of March 31, 2003, the Company had $0.5 million
remaining in accrued liabilities for future obligations related to this
closure.



|   |                              
|-- | -----------------------------
|6. | COMMITMENTS AND CONTINGENCIES
|  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the rules of Visa® and MasterCard®, when a merchant
processor acquires card transactions, it has certain contingent
liabilities for the transactions processed. This contingent liability
arises in the event of a billing dispute between the merchant and a
cardholder that is ultimately resolved in the cardholders favor. In
such a case, the transaction is charged back to the merchant and the
disputed amount is credited or otherwise refunded to the cardholder. If
the Company is unable to collect this amount from the merchants
account, and if the merchant refuses or is unable to reimburse the
Company for the chargeback due to liquidation or other reasons, the
Company will bear the loss for the amount of the refund paid to the
cardholder.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A cardholder, through its issuing bank, generally has until the
later of up to four months after the date a transaction is processed or
the delivery of the product or service to present a chargeback to the
Company as the merchant processor. Management believes the maximum
potential exposure for chargebacks would not exceed the total amount of
merchant transactions processed through Visa® and MasterCard® for
the last four months, plus any outstanding delayed-delivery
transactions

11



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | and unresolved chargebacks in the process of resolution.
For the period from December 2002 through March 2003, this amount
totaled approximately $51 billion. At March 31, 2003, the Company had
$4.1 million of unresolved chargebacks that were in process of
resolution.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the three months ended March 31, 2003 and 2002, the Company
processed $40.3 million and $48.6 million, respectively, in chargebacks
presented by issuing banks. Actual losses recorded for the three months
ended March 31, 2003 and 2002 were $0.9 million and $1.3 million,
respectively. The Company accrues for probable losses based on
historical experience and at March 31, 2003 had $1.1 million recorded
in other accrued liabilities for expected losses.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In most cases, a contingent liability for chargebacks is unlikely
to arise as most products or services are delivered when purchased, and
credits are issued on returned items. However, where the product or
service is not provided until some time after the purchase
(delayed-delivery), the potential for this contingent liability
increases. For the three months ended March 31, 2003, the Company
processed approximately $3.7 billion of merchant transactions related
to delayed-delivery purchases.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company currently processes card transactions for four of
the largest airlines in the United States. In May 2002, the Company
announced its decision to discontinue processing debit and credit card
transactions for the airline industry. The Company will honor its
existing contractual obligations to the airlines it currently serves
but does not intend to renew such contracts when their current terms
expire. The contracts currently in effect have various expiration dates
extending through November 2005. U.S. Airways Group, Inc. and United
Air Lines, Inc. are both merchant-processing customers of the Company.
United Air Lines, Inc. is currently operating under Chapter 11
protection. In March 2003, U.S. Airways Group, Inc. emerged from
bankruptcy court protection and is operating as a reorganized company.
In the event of liquidation of one or more of the Companys airline
customers, the Company could become financially responsible for
refunding tickets purchased through Visa®and MasterCard®under the
chargeback rules of those associations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At March 31, 2003, the dollar value of tickets purchased, but as
yet unflown, was approximately $1.3 billion. Based upon available
information, this is managements best estimate of maximum potential
chargebacks related to its airline customers. As of March 31, 2003,
NCBK held $139.0 million in merchant deposits and withheld settlement
funds for certain airline merchants. The merchant deposits
collateralize only individual airline merchants. Of the total merchant
deposits, $133.0 million was related to two airline merchants. During
the second quarter of 2003, the Companys contractual obligation to
process card transactions for these two airline customers will cease
and the merchants will transition to other card processors. As part of
the transition, those airlines $133.0 million of deposits will be
released as the Companys contingent liability for future flights is
reduced. These two airline merchants represent approximately 38% of the
total contingent liability for unflown tickets.



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based on current conditions in the airline industry and other
information currently available to the Company, management believes the
risk of a material loss under the chargeback rules has increased since
December 31, 2002 but is not probable at this time.

12



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##### Table of Contents





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



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



|   |                            
|-- | ---------------------------
|7. | NET INCOME PER COMMON SHARE
|  

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

|        |                                             |  |                             |        |      |  |   |        | 
|------- | ------------------------------------------- |  | --------------------------- | ------ | ---- |  | - | ------ | 
|        |                                             |  | Three Months Ended March 31
|        |                                             |  |                            
|        |                                             |  | 2003                        |        | 2002
|        |                                             |  |                             |        |     
|BASIC   |                                             |  |                             |        |      |  |   |       
|       
|       
|       
|       
|        | Net income                                  |  | $                           | 8,547  |      |  | $ | 12,048 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Average common shares outstanding           |  |                             | 52,145 |      |  |   | 51,860 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Net income per common share  basic         |  | $                           | 0.16   |      |  | $ | 0.23   | 
|        |                                             |  |                             |        |      |  |   |       
|DILUTED |                                             |  |                             |        |      |  |   |       
|       
|       
|       
|       
|        | Net income                                  |  | $                           | 8,547  |      |  | $ | 12,048 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Average common shares outstanding           |  |                             | 52,145 |      |  |   | 51,860 | 
|       
|       
|       
|       
|        | Dilutive effect of stock options            |  |                             | 161    |      |  |   | 694    | 
|        |                                             |  |                             |        |      |  |   |       
|        | Average common shares outstanding  diluted |  |                             | 52,306 |      |  |   | 52,554 | 
|        |                                             |  |                             |        |      |  |   |       
|        | Net income per common share  diluted       |  | $                           | 0.16   |      |  | $ | 0.23   | 
|        |                                             |  |                             |        |      |  |   |       



|   |                             
|-- | ----------------------------
|8. | TRANSACTIONS WITH AFFILIATES
|  

| |                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company leases certain facilities from NCBK, a wholly owned
subsidiary of National City, under long-term agreements classified as
Property Leased from Affiliate in the accompanying Consolidated
Balance Sheets. The Company has paid $0.1 million, including interest,
under this lease for each of the three months ended March 31, 2003 and
2002.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company receives certain administrative services, such as
internal audit and legal services, from National City and its
affiliates. The Company also uses NCBK and other National City
subsidiaries for the majority of its banking services. Charges for
these services are included in general and administrative expenses and
totaled $0.8 million and $0.5 million for the quarters ended March 31,
2003 and 2002, respectively. As of March 31, 2003, $0.5 million was due
to National City. As of December 31, 2002 and March 31, 2002, no
amounts were due to or from National City.

13



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##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

CRITICAL ACCOUNTING POLICIES

General

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

Income Taxes

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

Management judgments and estimates are required in determining the income
tax provision as well as the balances of deferred tax assets and liabilities. As
of March 31, 2003, the Company has net deferred tax assets of $12.4 million. The
Company records a valuation allowance to reduce deferred tax assets when it is
more likely than not that certain amounts will not be realized. The Company
considers projected future taxable income and tax planning strategies in
assessing the need for a valuation allowance. Should the Company determine in
the future that all or part of its net deferred tax asset is unrealizable, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made. Management provides reserves when it is likely that
a taxing authority may take a sustainable position on a matter contrary to the
Companys position.

Long-Lived Assets

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

14



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##### Table of Contents



Property and equipment, net of accumulated depreciation and amortization,
totaled $52.2 million as of March 31, 2003, which represented 9% of total
assets. Useful lives of property and equipment (which includes internal use
software) are estimated in order to determine the amount of depreciation expense
to be recorded during each reporting period. The useful lives are estimated at
the time the assets are acquired based on historical experience with similar
assets and current business plans. Based on future events and changes in
business plans, the useful lives assigned to these assets may need to be
shortened, resulting in the recognition of increased depreciation expense in
future periods. These changes could also result in the recognition of an
immediate impairment charge to reflect the write-down in the value of the
assets. Alternatively, assets may ultimately be used by the Company for longer
than their assigned depreciable lives.

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

Goodwill and other intangible assets, net of accumulated amortization,
totaled $131.4 million as of March 31, 2003, which represented 24% of total
assets. The Company analyzes goodwill and other intangible assets for impairment
on an annual basis or more frequently if events or circumstances warrant. In
assessing the recoverability of goodwill and intangible assets, the Company
makes estimates regarding future cash flows and assumptions about other factors
to determine the fair value. Changes in estimates or the related assumptions may
cause the Company to record impairment charges for the related assets.

Chargebacks and Other Contingencies

The Company records reserves for chargebacks and contingent liabilities when
such amounts are deemed to be probable and estimable in accordance with
Statement of Financial Accounting Standards (SFAS) 5, Accounting for
Contingencies. The required reserves may change in the future due to new
developments including but not limited to changes in litigation or increased
chargeback exposure as the result of merchant insolvency, liquidation, or other
reasons. The required reserves are reviewed periodically to determine if
adjustments are required. (See Note 6 to the accompanying Consolidated Financial
Statements.)

15



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##### Table of Contents



Components of Revenue and Expense

Revenue

Approximately 95% of Merchant Card Services revenue is derived from
processing contracts with merchants for the authorization, processing, and
settlement of credit and debit card transactions. Processing fee revenue is
earned either on a per transaction basis or discount basis, which is a
percent of dollar volume processed. Merchant contracts generally have terms
ranging from three to five years. Processing fee revenue is recorded in the
period the related transaction is processed and is recorded net of interchange
fees charged by the credit card associations and fees charged by debit networks.
Interchange and debit network fees for the three months ended March 31, 2003 and
2002 were $570.4 million and $562.5 million, respectively. The increase in
interchange and debit network fees for the three months ended March 31, 2003
over the comparable 2002 period is attributed to increased processing volume.
The remainder of Merchant Card Services revenue is derived from sources other
than processing fees, including equipment and supply sales, equipment repair
fees, application and installation fees, and third-party commissions.

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

A portion of total consolidated revenue is derived from earnings on customer
cash balances, which are maintained by National City pursuant to contractual
terms. For the three months ended March 31, 2003 and 2002, earnings on customer
balances were $0.5 million and $1.1 million, respectively.

Expense

Bankcard assessments are liabilities to Visa® and MasterCard® that
originate from the Companys agreements with these agencies. The Company
recovers these assessment charges through various contractual arrangements with
its customers. Bankcard assessment expense is the largest component of operating
expense and amounted to $31.2 million for each of the quarters ended March 31,
2003 and 2002. Operating expense also includes costs of providing services to
customers including wages and personnel costs, authorization fees, commissions
paid to independent sales organizations, and data processing costs.

General and administrative expense includes corporate management and
administrative expense as well as fees for certain administrative services, such
as internal audit and legal services, from National City and its affiliates.

Results of Operations

The Companys operating results are presented below in the manner in which
they are viewed by management. Certain prior year amounts have been reclassified
to conform with the 2003 presentation.

16



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##### Table of Contents



Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

|                                          |  |      |         |      |  |            |         |  |  |               |     |  
|----------------------------------------- |  | ---- | ------- | ---- |  | ---------- | ------- |  |  | ------------- | --- | -
|(Dollars in thousands)                    |  |      |         |      |  |            |         |  |  |               |     |  
|                                          |  |      |         |      |  |            |         |  |  | % Change from
|                                          |  | 2003 |         | 2002 |  | Prior Year
|                                          |  |      |         |      |  |           
|Revenue                                   |  | $    | 105,954 |      |  | $          | 109,945 |  |  |               | (4  | )
|                                         
|                                         
|                                         
|                                         
|Operating expense                         |  |      | 82,752  |      |  |            | 82,304  |  |  |               | 1   |  
|                                         
|                                         
|                                         
|                                         
|General and administrative expense        |  |      | 4,306   |      |  |            | 4,602   |  |  |               | (6  | )
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |      | 4,967   |      |  |            | 4,023   |  |  |               | 23  |  
|                                          |  |      |         |      |  |            |         |  |  |               |     |  
|Operating profit                          |  |      | 13,929  |      |  |            | 19,016  |  |  |               | (27 | )
|                                         
|                                         
|                                         
|                                         
|Net interest income                       |  |      | 842     |      |  |            | 1,035   |  |  |               | (19 | )
|                                          |  |      |         |      |  |            |         |  |  |               |     |  
|Income before taxes and minority interest |  |      | 14,771  |      |  |            | 20,051  |  |  |               | (26 | )
|                                         
|                                         
|                                         
|                                         
|Provision for income taxes                |  |      | 5,695   |      |  |            | 7,416   |  |  |               | (23 | )
|                                          |  |      |         |      |  |            |         |  |  |               |     |  
|Net income before minority interest       |  |      | 9,076   |      |  |            | 12,635  |  |  |               | (28 | )
|                                         
|                                         
|                                         
|                                         
|Minority interest                         |  |      | 529     |      |  |            | 587     |  |  |               | (10 | )
|                                          |  |      |         |      |  |            |         |  |  |               |     |  
|Net income                                |  | $    | 8,547   |      |  | $          | 12,048  |  |  |               | (29 | )
|                                          |  |      |         |      |  |            |         |  |  |               |     |  

Revenue for the three months ended March 31, 2003 decreased 4% to $106.0
million from $109.9 million in 2002. Merchant Card Services revenue was $101.9
million for the quarter, down 3% from first quarter 2002 revenue of $104.6
million. Merchant Card Services transaction volume processed for the three
months ended March 31, 2003 increased 8% to 952 million transactions from 881
million transactions in 2002. Merchant Card Services dollar volume processed for
the three months ended March 31, 2003 increased 1% to $39.5 billion from $39.1
billion in 2002. The volume increases were primarily due to growth in existing
national customers and the addition of new regional merchants. Merchant Card
Services revenue declined despite these volume increases due primarily to price
compression in the national merchant base, weak customer spending and the
Companys decision to exit the airline industry. Revenue from Payment Services
was $4.0 million for the quarter, down 24% from first quarter of 2002 revenue of
$5.3 million. This decrease was due to lower paper-based transactions from the
Companys Airlines Reporting Contract.

Operating expense for the three months ended March 31, 2003 increased 1% to
$82.8 million from $82.3 million in 2002 due primarily to increased processing
volume in Merchant Card Services.

General and administrative expense decreased by 6% to $4.3 million for the
three months ended March 31, 2003 from $4.6 million in 2002 due primarily to
lower compensation and incentive expenses.

Depreciation and amortization increased 23% to $5.0 million for the three
months ended March 31, 2003 from $4.0 million in 2002 due to additional
depreciation from a new web-based merchant accounting and reporting system added
in the second quarter of 2002, and a new data center added in the third quarter
of 2002.

Operating profit margin as a percentage of revenue decreased to 13% for the
three months ended March 31, 2003 from 17% in 2002 due to the items discussed
above.

For the three months ended March 31, 2003, minority interest was $0.5
million, down 10% from $0.6 million in the first quarter of 2002. This decrease
is due to lower earnings of ABN AMRO Merchant Services, LLC (AAMS) due to
lower transaction volumes. AAMS is 70% owned by National Processing.

17



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##### Table of Contents



Net Interest Income

Net interest income earned on the Companys cash and cash equivalents for
the three months ended March 31, 2003, was $0.8 million, down 19% from $1.0
million in the 2002 first quarter due to lower average interest rates in 2003,
offset partially by higher balances.

Provision for Income Taxes

The overall effective tax rate for the first quarter of 2003 was 38.6%
compared to 37.0% for the same quarter a year ago. The increase in the effective
tax rate was due to differences in state income tax rates among legal entities
within the Company.

Forward-Looking Results of Operations

Airlines

The Company currently processes card transactions for four of the largest
airlines in the United States. Airline customers represented approximately 6% of
the Companys consolidated revenue for the three months ended March 31, 2003. In
May 2002, the Company announced its decision to discontinue processing debit and
credit card transactions for the airline industry. The Company will honor its
existing contractual obligations to the airlines it currently serves but does
not intend to renew such contracts when their current terms expire. The
contracts currently in effect have various expiration dates extending through
November 2005. U.S. Airways Group, Inc. and United Air Lines, Inc. are both
merchant-processing customers of the Company. United Air Lines, Inc. is
currently operating under Chapter 11 protection. In March 2003, U.S. Airways
Group, Inc. emerged from bankruptcy court protection and is operating as a
reorganized company. In the event of liquidation of one or more of the Companys
airline customers, the Company could become financially responsible for
refunding tickets purchased through Visa® and MasterCard® under the chargeback
rules of those associations. See Note 6 to the Consolidated Financial
Statements.

At March 31, 2003, the dollar value of tickets purchased, but as yet
unflown, was approximately $1.3 billion. Based upon available information, this
is managements best estimate of maximum potential chargebacks related to its
airline customers. As of March 31, 2003, NCBK held $139.0 million in merchant
deposits and withheld settlement funds for certain airline merchants. The
merchant deposits collateralize only individual airline merchants. Of the total
merchant deposits, $133.0 million was related to two airline merchants. During
the second quarter of 2003, the Companys contractual obligation to process card
transactions for these two airline customers will cease and the merchants will
transition to other card processors. As part of the transition, those airlines
$133.0 million of deposits will be released as the Companys contingent
liability for future flights is reduced. These two airline merchants represent
approximately 38% of the total contingent liability for unflown tickets.

Based on current conditions in the airline industry and other information
currently available to the Company, management believes the risk of material
loss under the chargeback rules has increased since December 31, 2002 but is not
probable as this time.

18



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##### Table of Contents



Additional Factors

The Company is dependent on overall consumer spending trends. The Company is
also currently experiencing increased pricing pressure in competing for new
national merchants and in retaining the existing base of national merchants.
These factors may impact the Companys future revenue and operating profits.

Recent Accounting Pronouncements

Accounting for Exit or Disposal Activities

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

Accounting for Stock-Based Compensation

In December 2002, the
FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB 25 to SFAS 123s fair value method of
accounting, if a company so selects.

Effective January 1, 2003, the Company adopted the fair value method of
recording stock options under SFAS 123. In accordance with the transitional
guidance of SFAS 148, the fair value method of accounting for stock options will
be applied prospectively to awards granted subsequent to December 31, 2002. As
permitted, options granted prior to January 1, 2003, will continue to be
accounted for under APB 25, and the proforma impact of accounting for these
options at fair value will continue to be disclosed in the Consolidated
Financial Statements until the last of those options vest in 2005.

As the cost of anticipated future option awards is phased in over a
four-year period, the annual impact will rise assuming options are granted in
future years at a similar level and under similar market conditions to 2002. The
actual impact per diluted share may vary in the event the fair value or the
number of options granted increases or decreases from the current estimate, or
if the current accounting guidance changes. The Company uses the Black-Scholes
model to estimate option values. The Black-Scholes option pricing model was
originally developed for use in estimating the fair value of traded options,
which have different characteristics from the Companys employee stock options.
The model is also sensitive to changes in subjective assumptions, which can
materially affect the fair value estimate.

19



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##### Table of Contents



Accounting for Guarantees

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires additional
recognition and disclosure by a guarantor in its financial statements about its
obligations under certain guarantees.

The Companys contingent obligation to honor chargebacks under merchant
contracts is considered a performance guarantee under FIN 45. Performance
guarantees are contracts that contingently require the guarantor to make
payments to the guaranteed party based on another entitys failure to perform
under an obligating agreement. Performance guarantees are subject to both the
recognition and disclosure requirements of FIN 45. The disclosure requirements
of FIN 45 were effective for the Company as of December 31, 2002. The required
disclosures are included in Note 6 to the Consolidated Financial Statements. The
recognition requirements of FIN 45 were adopted January 1, 2003 for new
guarantees entered into after such date and did not have a material impact on
the Companys financial position or results of operations.

Seasonality

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

Liquidity and Capital Resources

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

The Companys capital expenditures include amounts for computer hardware,
external and internally developed software, and improvements to operating
facilities. During the three months ended March 31, 2003 and 2002, the Companys
capital expenditures totaled $1.7 million and $6.6 million, respectively. The
decline in capital expenditures is due to a new web-based merchant accounting
and reporting system and a new data center that were in process during the first
quarter of 2002. Such expenditures were financed from operating cash flow, which
totaled $46.7 million and $58.4 million for the three months ended March 31,
2003 and 2002, respectively. The decrease in operating cash flow is due
primarily to the timing of working capital items, including accounts receivable
and income tax payments.

On July 3, 2002, the Company acquired a portfolio of processing contracts
$2.7 million in cash. The terms of the agreement also include future payments to
the seller for a portion of the revenue derived from these contracts for a
specified period plus an additional one-time payment of up to $1.0 million in
the third quarter of 2003.

In March 2003, the Company paid $2.4 million to the minority shareholder of
AAMS. This payment represents the prorata share of earnings due to the minority
shareholder for the year ended December 31, 2002.

20



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##### Table of Contents



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

Forward-Looking Statements and Risk Factors

The section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995). Although
management believes the expectations reflected in such forward-looking
statements are reasonable, actual results may differ materially. Refer to the
Companys Annual Report on Form 10-K for the year ended December 31, 2002 and
subsequent filings with the Securities and Exchange Commission for risks and
uncertainties that could cause actual results to differ materially.




Item 3. Quantitative and Qualitative Disclosure of Market Risk

Derivative Instruments

The Company does not use derivative instruments.

Market Risk of Financial Instruments

The Companys primary market risk exposure with regard to financial
instruments is to changes in interest rates. As of March 31, 2003, the Company
had $229 million in cash and cash equivalents. For the first quarter of 2003,
National City also held an average of approximately $317 million of customer
cash balances. The Company retains the incremental interest earned on certain of
these funds above what is contractually due to the customers. Interest earned on
customer cash balances is included as a component of revenue.

Because of the short-term nature of these instruments, a sudden change in
market interest rates would not impact the fair value of these instruments. The
Companys earnings, however, are impacted by changes in interest rates, with
respect to interest on the Companys cash and cash equivalents and on customer
funds maintained by NCBK. At March 31, 2003, a hypothetical 100 basis point
increase in short-term interest rates would result in an increase of
approximately $4 million in annual pre-tax income. A hypothetical 100 basis
point decrease in short-term interest rates would result in a decrease of
approximately $4 million in annual pre-tax income.




Item 4. Controls and Procedures

Within 90 days of this report, an evaluation was performed under the
supervision and with the participation of the Corporations management,
including the Chairman and Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on that evaluation, the Companys
management, including the CEO and CFO, concluded the Companys disclosure
controls and procedures were effective as of the evaluation date. There have
been no significant changes in the Companys internal controls or in other
factors that could significantly affect internal controls subsequent to the
evaluation date.

21



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##### Table of Contents






Part II  Other Information




Item 1. Legal Proceedings (None)




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




Item 3. Defaults Upon Senior
Securities (None)




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




Item 5. Other Information
(None)




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



| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The exhibits filed as part of the Form 10-Q for the quarter period
ended March 31, 2003, are accessible at no cost on the Companys
website at www.npc.net or through the United States Securities and
Exchange Commissions website at www.sec.gov. Copies of the exhibits
may be requested at a cost of $0.30 per page from National Processings
investor relations department.

|         |  |                                                                                                                                                                                                                                                                                             
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT 
|NUMBER   |  | DESCRIPTION                                                                                                                                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                                             
|3.1 (i)  |  | Amended Articles of Incorporation of the Registrant. (A)                                                                                                                                                                                                                                    
|        
|        
|        
|        
|3.1 (ii) |  | Code of Regulations of the Registrant. (A)                                                                                                                                                                                                                                                  
|        
|        
|        
|        
|4.1      |  | Specimen Certification for the Common Stock, without par value, of the Registrant. (B)                                                                                                                                                                                                      
|        
|        
|        
|        
|4.2      |  | Registration Rights Agreement between the Registrant and National City Corporation, dated July 16, 1996. (B)                                                                                                                                                                                
|        
|        
|        
|        
|10.1     |  | Absolute Net Ground Lease by and between Preston Manor, Inc. and Allied Stores Corporation, dated January 16, 1969.
(A)                                                                                                                                                                     
|        
|        
|        
|        
|10.2     |  | Second Amendment to Lease by and between William G. Earley, Plaza Centers, Inc. and First National Bank of
Louisville, dated April 15, 1986. (A)                                                                                                                                            
|        
|        
|        
|        
|10.3     |  | Sponsorship Agreement between NPC and National City Bank of
Kentucky, dated June 30, 1996. (B)                                                                                                                                                                                              
|        
|        
|        
|        
|10.4     |  | Administrative Services Agreement between NPC and National City Corporation, dated July 15,
1996. (B)                                                                                                                                                                                       
|        
|        
|        
|        
|10.5     |  | Tax Sharing Agreement between the Company and National
City Corporation, dated July 17, 1996. (B)                                                                                                                                                                                           
|        
|        
|        
|        
|10.6     |  | Employment Agreement
and Undertaking of Confidentiality between the Registrant and Mark Pyke
dated March 4, 1996.
(Incorporated herein by reference to Exhibit 10.19 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002) **                                
|        
|        
|        
|        
|10.7     |  | Employment Agreement and Undertaking of Confidentiality between National Processing Company and Thomas A. Wimsett
dated December 12, 1997. (Incorporated herein by reference to Exhibit 10.21 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002) **
|        
|        
|        
|        
|10.8     |  | Separation Agreement, Release and Waiver between National Processing, Inc. and Thomas A. Wimsett dated September 29,
2002. (Incorporated herein by reference to Exhibit 10.22 to the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002) **                
|        
|        
|        
|        
|10.9     |  | Visa®U.S.A. Inc. Guaranty between National Processing, Inc. and Visa®U.S.A. Inc. dated August 6, 2002.
(Incorporated herein by reference to Exhibit 10.23 to the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002)                                       
|        
|        
|        
|        
|10.10    |  | National Processing, Inc. 2000 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.28 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002) **                                                                                                
|        
|        
|        
|        
|10.11    |  | National Processing Company 1996 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.29 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002) **                                                                                              
|        
|        
|        
|        
|10.12    |  | Nonemployee Directors Stock Option Plan and Form of
Stock Option Agreement. (B) **                                                                                                                                                                                                          
|        
|        
|        
|        
|10.13    |  | National Processing Company Short-Term Incentive Compensation
Plan for Senior Executives, effective February 1, 2003.
(Incorporated herein by reference to Exhibit 10.31 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002) **                            
|        
|        
|        
|        
|10.14    |  | National Processing Company Long-Term Incentive Compensation
Plan for Senior Officers, as amended and                                                                                                                                                                                       

22



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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                            
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | restated effective
February 1, 2003. (Incorporated herein by reference to Exhibit
10.32 to the Registrants Annual Report on Form 10-K for the
year ended December 31, 2002) **                                                                                            
|     
|     
|     
|     
|10.15 |  | Amendment to Building Lease between National City Bank of Kentucky and NPC, dated July 3, 1996. (B)                                                                                                                                                                        
|     
|     
|     
|     
|10.16 |  | Form of Severance Agreement between the Registrant and certain Senior Vice Presidents. (Incorporated herein by reference to
Exhibit 10.37 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) **                                   
|     
|     
|     
|     
|10.17 |  | Form of Severance Agreement between the Registrant and certain Executive Vice Presidents. (Incorporated herein by reference
to Exhibit 10.38 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) **                                
|     
|     
|     
|     
|10.18 |  | Employment Agreement and Undertaking of Confidentiality
between the Registrant and David Fountain dated October 27,
1998. (Incorporated herein by reference to Exhibit 10.39 to
the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002) **
|     
|     
|     
|     
|10.19 |  | National Processing, Inc. 2001 Restricted Stock Plan. (Incorporated herein by reference to Exhibit A to National
Processing, Inc.s Proxy Statement on Form 14A #001-11905, dated March 31, 2001) **                                                                       
|     
|     
|     
|     
|10.20 |  | National Processing, Inc.s U.S. Asset Purchase Agreement, dated July 11, 2001. (Incorporated herein by reference
to Exhibit 10.42 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)                                                  
|     
|     
|     
|     
|10.21 |  | National Processing, Inc.s Mexico Asset Purchase Agreement, dated July 11, 2001. (Incorporated herein by reference
to Exhibit 10.43 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)                                                
|     
|     
|     
|     
|10.22 |  | National Processing, Inc.s Stock Purchase Agreement, dated July 11, 2001. (Incorporated herein by reference to
Exhibit 10.44 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)                                                       
|     
|     
|     
|     
|99.1  |  | Chief Executive Officer 906 Certification dated May 9, 2003
for National Processing, Inc.s Quarterly Report on Form 10-Q
for quarter ended March 31, 2003 (Filed as Exhibit 99.1)                                                                                         
|     
|     
|     
|     
|99.2  |  | Chief Financial Officer 906 Certification dated May 9, 2003
for National Processing, Inc.s Quarterly Report on Form 10-Q
for quarter ended March 31, 2003 (Filed as Exhibit 99.2)                                                                                         
|     
|     
|     
|     
|(A)   |  | Exhibit is incorporated herein by reference to the applicable
exhibit in the Registrants Registration Statement on Form S-1
(Registration No. 333-05507) filed on June 7, 1996.                                                                                           
|     
|     
|     
|     
|(B)   |  | Exhibit is incorporated herein by reference to the applicable exhibit in the Registrants Amendment No. 1 to Form
S-1 Registration Statement (Registration No. 333-05507) filed on July 18, 1996.                                                                          
|     
|     
|     
|     
|**    |  | Represents a management contract or compensatory plan required to be filed pursuant to Item 14 of Form 10-K.                                                                                                                                                               

b.                      Reports on Form 8-K



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | January 15, 2003: On January 15, 2003, the Registrant issued a news
release reporting earnings for the fourth quarter and year ended
December 31, 2002.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | April 16, 2003: On April 16, 2003, the Registrant issued a news
release reporting earnings for the quarter ended March 31, 2003.

23



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##### Table of Contents



SIGNATURES

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

|                  |  |                                                                                                                           
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------
|                  |  | NATIONAL PROCESSING, INC.                                                                                                 
|                 
|Date: May 9, 2003 |  | By: /s/ Jon L.
Gorney                                                                                                     
|                  | 
|                  |  | Jon L. Gorney
Chairman and Chief Executive Officer
(Duly Authorized Signer)                                               
|                  | 
|                 
|                  |  | By: /s/ David E.
FountainDavid E. Fountain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)

24



---



##### Table of Contents






CERTIFICATIONS

I, Jon L. Gorney, certify that:

| |    |  |                                                                                                                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. |  | I have reviewed this quarterly report on Form 10-Q of National Processing, Inc.;                                                                                                                                                                                                                                              
| |   
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
| |   
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
| |   
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| |    |                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
|
| | b) | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| |    |  |                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weakness in internal
controls; and
|
| | b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                      



| |    |  |                                                                                                                                                                                                                                                                                                                                                                                       
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation
including any corrective actions with regard to significant
deficiencies and material weakness.

|                  |  |                                                                           
|----------------- |  | --------------------------------------------------------------------------
|Date: May 9, 2003 |  | /s/ Jon L.
Gorney
     
Jon L. Gorney
Chairman and Chief Executive Officer

25



---



##### Table of Contents



CERTIFICATIONS

I, David E. Fountain, certify that:

| |    |  |                                                                                                                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. |  | I have reviewed this quarterly report on Form 10-Q of National Processing, Inc.;                                                                                                                                                                                                                                              
| |   
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
| |   
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
| |   
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| |    |                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
|
| | b) | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        

| |    |  |                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weakness in internal
controls; and
|
| | b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                      

| |    |  |                                                                                                                                                                                                                                                                                                                                                                                       
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation
including any corrective actions with regard to significant
deficiencies and material weakness.

|                  |  |                                                                                                
|----------------- |  | -----------------------------------------------------------------------------------------------
|Date: May 9, 2003 |  | /s/ David E.
Fountain
     
David E. Fountain
Senior Vice President and Chief Financial Officer

26