TABLE OF CONTENTS




|                                                          |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|NATIONAL PROCESSING, INC.                                
|INDEX                                                    
|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 About Market Risk                            
|Part II  Other Information                              
|SIGNATURES                                               
|EX-10.42 US ASSET PURCHASE AGREEMENT                     
|EX-10.43 MEXICO ASSET PURCHASE AGREEMENT                 
|EX-10.44 STOCK PURCHASE AGREEMENT                        
|EX-10.45 LIMITED LIABILITY COMPANY AGREEMENT             



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##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

|                                             |  |                                                                                         
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------
|/X/                                          |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
of 1934     
|                                            
|                                            
|                                            
|                                            
|                                            
|For the quarterly period ended June 30, 2001
|                                            
|                                            
|                                            
|                                            
|                                            
|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                                                           |  | 61-1303983                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|1231 Durrett Lane
Louisville, Kentucky                         |  | 40213-2008                          
|                                                              
|                                                              
|                                                              
|                                                              
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

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

The number of shares outstanding of the Registrants Common Stock as of July
31, 2001 was 51,342,187.





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##### Table of Contents






NATIONAL PROCESSING, INC.




INDEX

|       |  |  |  |                       |  |  |  | 
|------ |  |  |  | --------------------- |  |  |  | 
|Part I |  |  |  | Financial Information

|           |  |         |    |                                                                                            |  |          |    | 
|---------- |  | ------- | -- | ------------------------------------------------------------------------------------------ |  | -------- | -- | 
|           |  |         |    |                                                                                            |  | Page No.
|           |  |         |    |                                                                                            |  |         
|           |  | Item 1. |    | Consolidated Financial Statements (unaudited)                                             
|          
|          
|          
|          
|          
|           |  |         |    | Consolidated Balance Sheets  June 30, 2001 and
December 31, 2000                          |  |          | 3  | 
|          
|          
|          
|          
|          
|           |  |         |    | Consolidated Statements of Income  Three and Six Months
Ended June 30, 2001 and 2000      |  |          | 4  | 
|          
|          
|          
|          
|          
|           |  |         |    | Consolidated
Statement of Changes in Shareholders Equity 
Six Months Ended June 30, 2001 |  |          | 5  | 
|          
|          
|          
|          
|          
|           |  |         |    | Consolidated
Statements of Cash Flows 
Six Months Ended June 30, 2001 and 2000            |  |          | 6  | 
|          
|          
|          
|          
|          
|           |  |         |    | Notes to Consolidated Financial Statements                                                 |  |          | 7  | 
|          
|          
|          
|          
|          
|           |  | Item 2. |    | Managements Discussion and Analysis of
Financial Condition and Results of Operations      |  |          | 11 | 
|          
|          
|          
|          
|          
|           |  | Item 3. |    | Quantitative and Qualitative Disclosure About Market Risk                                  |  |          | 17 | 
|          
|          
|          
|          
|          
|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                                        |  |          | 18 | 
|          
|          
|          
|          
|          
|           |  | Item 5. |    | Other Information (None)                                                                  
|          
|          
|          
|          
|          
|           |  | Item 6. |    | Exhibits and Reports on Form 8-K                                                           |  |          | 18 | 
|          
|          
|          
|          
|          
|Signatures |  |         | 19 |                                                                                           

2



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##### Table of Contents



National Processing, Inc.  
 Consolidated Balance Sheets


|                                                |                                                                                                                                                       |   |         |         |             |   |         |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------- | ----------- | - | ------- | ------- | 
|                                                |                                                                                                                                                       |   | June 30 |         | December 31
|                                                |                                                                                                                                                       |   | 2001    |         | 2000       
|                                                |                                                                                                                                                       |   |         |         |            
|Assets                                         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                                             |   | $       | 144,670 |             |   | $       | 68,590  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Eurodollar deposits                                                                                                                                   |   |         |        |             |   |         | 56,000  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade                                                                                                                           |   |         | 83,230  |             |   |         | 128,627 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                  |   |         | 36,071  |             |   |         | 31,543  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |         | 1,785   |             |   |         | 2,283   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other current assets                                                                                                                                  |   |         | 7,517   |             |   |         | 9,901   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Assets held for sale (Note 3)                                                                                                                         |   |         | 38,869  |             |   |         |        | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total current assets                            |                                                                                                                                                       |   | 312,142 |         |             |   | 296,944 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                        
|                                               
|                                               
|                                               
|                                               
|                                                | Furniture and equipment                                                                                                                               |   |         | 51,366  |             |   |         | 69,417  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Building and leasehold improvements                                                                                                                   |   |         | 11,025  |             |   |         | 19,231  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Software                                                                                                                                              |   |         | 24,060  |             |   |         | 24,418  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Property leased from affiliate                                                                                                                        |   |         | 4,173   |             |   |         | 4,173   | 
|                                                | Land and improvements                                                                                                                                 |   |         | 442     |             |   |         | 2,390   | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|                                                |                                                                                                                                                       |   | 91,066  |         |             |   | 119,629 |        
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |                                                                                                                                                       |   | 46,100  |         |             |   | 58,675  |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Property and equipment, net                     |                                                                                                                                                       |   | 44,966  |         |             |   | 60,954  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                  
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of
$6,698 in 2001 and $6,939 in 2000                                                                        |   |         | 92,563  |             |   |         | 79,399  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets                                                                                                                               |   |         | 45,630  |             |   |         | 29,697  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |         | 18,570  |             |   |         | 4,149   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                          |   |         | 6,406   |             |   |         | 6,328   | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total other assets                              |                                                                                                                                                       |   | 163,169 |         |             |   | 119,573 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total assets                                    |                                                                                                                                                       | $ | 520,277 |         |             | $ | 477,471 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Liabilities and shareholders equity           
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                           
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                  |   | $       | 36,071  |             |   | $       | 31,543  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable  trade                                                                                                                              |   |         | 13,578  |             |   |         | 15,243  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued bankcard assessments                                                                                                                          |   |         | 23,131  |             |   |         | 24,458  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax payable                                                                                                                                    |   |         | 15,145  |             |   |         | 7,865   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other accrued liabilities                                                                                                                             |   |         | 21,065  |             |   |         | 33,630  | 
|                                               
|                                               
|                                               
|                                               
|                                                | AAMS purchase price payable (Note 4)                                                                                                                  |   |         | 48,500  |             |   |         |        | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total current liabilities                       |                                                                                                                                                       |   | 157,490 |         |             |   | 112,739 |        
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                       |   | 1,927   |         |             |   | 1,993   |        
|                                               
|                                               
|                                               
|                                               
|Deferred tax liabilities                        |                                                                                                                                                       |   | 2,271   |         |             |   | 1,181   |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total liabilities                               |                                                                                                                                                       |   | 161,688 |         |             |   | 115,913 |        
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                          
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, without par value; 5,000,000 shares
authorized; no shares issued or outstanding                                                      |   |         |        |             |   |         |        | 
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, without par value; 95,000,000 shares
authorized; 51,293,029 and 50,935,460 shares issued
and outstanding in 2001 and 2000, respectively |   |         | 1       |             |   |         | 1       | 
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                   |   |         | 184,903 |             |   |         | 178,729 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                     |   |         | 173,685 |             |   |         | 182,828 | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total shareholders equity                      |                                                                                                                                                       |   | 358,589 |         |             |   | 361,558 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                       | $ | 520,277 |         |             | $ | 477,471 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        

See notes to consolidated financial statements

3



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##### Table of Contents



National Processing, Inc.  
 Consolidated Statements of Income


|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|---------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                               |  | Three Months Ended |         | Six Months Ended
|                                               |  | June 30            |         | June 30         
|                                               |  |                    |         |                 
|                                               |  | 2001               |         | 2000             |  | 2001 |         | 2000
|                                               |  |                    |         |                  |  |      |         |     
|Revenue                                        |  | $                  | 117,876 |                  |  | $    | 104,513 |      |  | $ | 226,921 |  |  | $ | 202,380 | 
|                                              
|                                              
|                                              
|                                              
|Operating expense                              |  |                    | 84,606  |                  |  |      | 76,108  |      |  |   | 166,464 |  |  |   | 147,217 | 
|                                              
|                                              
|                                              
|                                              
|General and administrative expense             |  |                    | 7,083   |                  |  |      | 6,224   |      |  |   | 12,658  |  |  |   | 13,976  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |                    | 5,184   |                  |  |      | 5,325   |      |  |   | 10,364  |  |  |   | 10,700  | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring, and related expense |  |                    | 6,250   |                  |  |      | 1,500   |      |  |   | 6,250   |  |  |   | 1,500   | 
|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Operating profit                               |  |                    | 14,753  |                  |  |      | 15,356  |      |  |   | 31,185  |  |  |   | 28,987  | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |                    | 1,893   |                  |  |      | 1,878   |      |  |   | 4,113   |  |  |   | 3,693   | 
|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Income before provision for income taxes       |  |                    | 16,646  |                  |  |      | 17,234  |      |  |   | 35,298  |  |  |   | 32,680  | 
|                                              
|                                              
|                                              
|                                              
|Provision for income taxes                     |  |                    | 8,728   |                  |  |      | 6,758   |      |  |   | 15,841  |  |  |   | 12,656  | 
|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Net income                                     |  | $                  | 7,918   |                  |  | $    | 10,476  |      |  | $ | 19,457  |  |  | $ | 20,024  | 
|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Basic income per common share                  |  | $                  | 0.15    |                  |  | $    | 0.21    |      |  | $ | 0.38    |  |  | $ | 0.39    | 
|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|Diluted income per common share                |  | $                  | 0.15    |                  |  | $    | 0.21    |      |  | $ | 0.38    |  |  | $ | 0.39    | 
|                                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

4



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##### Table of Contents



National Processing, Inc.  
 Consolidated Statement of Changes in Shareholders
Equity


|                                                                                              |  |        |            |        |  |             |   |          |  |       |         |  |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------ | ---------- | ------ |  | ----------- | - | -------- |  | ----- | ------- |  |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | Common |            | Common |  | Contributed |   | Retained
|                                                                                              |  | Shares |            | Stock  |  | Capital     |   | Earnings |  | Total
|                                                                                              |  |        |            |        |  |             |   |          |  |      
|Balance at January 1, 2001                                                                    |  |        | 50,935,460 |        |  | $           | 1 |          |  | $     | 178,729 |  |  | $ | 182,828 |   |  | $ | 361,558 |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net income                                                                                    |  |        |           |        |  |             |  |          |  |       |        |  |  |   | 19,457  |   |  |   | 19,457  |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Common control business unit purchase (Note 4)                                                |  |        |           |        |  |             |  |          |  |       |        |  |  |   | (28,600 | ) |  |   | (28,600 | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Issuance of common shares under stock-based
compensation plans, including related tax effects |  |        | 357,569    |        |  |             |  |          |  |       | 6,174   |  |  |   |        |   |  |   | 6,174   |  
|                                                                                              |  |        |            |        |  |             |   |          |  |       |         |  |  |   |         |   |  |   |         |  
|Balance at June 30, 2001                                                                      |  |        | 51,293,029 |        |  | $           | 1 |          |  | $     | 184,903 |  |  | $ | 173,685 |   |  | $ | 358,589 |  
|                                                                                              |  |        |            |        |  |             |   |          |  |       |         |  |  |   |         |   |  |   |         |  

See notes to consolidated financial statements

5



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##### Table of Contents



National Processing, Inc.  
 Consolidated Statements of Cash Flows


|                                                     |                                                         |                                                |         |                  |        |      |        |         |         |  
|---------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------- | ------- | ---------------- | ------ | ---- | ------ | ------- | ------- | -
|                                                     |                                                         |                                                |         | Six Months Ended
|                                                     |                                                         |                                                |         | June 30         
|                                                     |                                                         |                                                |         |                 
|                                                     |                                                         |                                                |         | 2001             |        | 2000
|                                                     |                                                         |                                                |         |                  |        |     
|Operating Activities                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income                                              |                                                | $       | 19,457           |        |      | $      | 20,024  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Items not requiring cash currently:                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Depreciation and amortization                  |         |                  | 10,364 |      |        |         | 10,700  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Impairment, restructuring and related expenses |         |                  | 6,250  |      |        |         | 1,500   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Deferred income taxes                          |         |                  | 2,567  |      |        |         | 792     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Loss on disposition of fixed assets            |         |                  | 33     |      |        |         | 16      |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Change in current assets and liabilities:              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Accounts receivable  trade                    |         |                  | 33,871 |      |        |         | 26,798  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Accounts payable  trade                       |         |                  | (1,033 | )    |        |         | (1,238  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Accrued bankcard assessments                   |         |                  | (1,327 | )    |        |         | (1,320  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Income taxes payable                           |         |                  | 8,101  |      |        |         | (11,653 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Other current assets/liabilities               |         |                  | (9,665 | )    |        |         | (2,049  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                         | Other, net                                     |         |                  | (80    | )    |        |         | (672    | )
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|                                                     | Net cash provided by operating activities               |                                                |         | 68,538           |        |      |        | 42,898  |        
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|Investing Activities                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                    |                                                |         | (8,931           | )      |      |        | (6,197  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales of fixed assets                     |                                                |         | 34               |        |      |        | 75      |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of Eurodollar deposits                        |                                                |         |                 |        |      |        | (76,000 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from maturities of Eurodollar deposits         |                                                |         | 56,000           |        |      |        | 40,000  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Common control business unit purchase                   |                                                |         | (44,000          | )      |      |        |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other investing activities                              |                                                |         |                 |        |      |        | (2,000  | )      
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|                                                     | Net cash provided by (used in) investing activities     |                                                |         | 3,103            |        |      |        | (44,122 | )      
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|Financing Activities                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under property leased from affiliate |                                                |         | (66              | )      |      |        | (65     | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock                                |                                                |         | 4,505            |        |      |        | 341     |        
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|                                                     | Net cash provided by financing activities               |                                                |         | 4,439            |        |      |        | 276     |        
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|Net increase (decrease) in cash and cash equivalents |                                                         |                                                | 76,080  |                  |        |      | (948   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                         |                                                | 68,590  |                  |        |      | 32,042 |        
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|Cash and cash equivalents, end of period             |                                                         | $                                              | 144,670 |                  |        | $    | 31,094 |        
|                                                     |                                                         |                                                |         |                  |        |      |        |        
|Supplemental cash flow information:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Taxes paid                                              |                                                | $       | 9,197            |        |      | $      | 21,905  |        

See notes to consolidated financial statements

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##### Table of Contents



NATIONAL PROCESSING, INC.  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | BASIS OF PRESENTATION AND ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|   |  | The consolidated financial statements include the accounts of
National Processing, Inc. and its subsidiaries (the Company). All
significant intercompany transactions and balances have been eliminated.
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. For the interim periods presented, management
believes the unaudited consolidated financial statements reflect all
adjustments of a normal recurring nature and disclosures which are
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the full
year or any other interim period. The Company experiences seasonality in
its businesses and typically realizes higher revenue in the third and
fourth quarters, reflecting increased transaction volume in the summer and
holiday months.
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|   |  | Although the balance sheet at December 31, 2000 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 2000 Annual
Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|   |  | Certain 2000 amounts have been reclassified to conform with the 2001
presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|2. |  | DIVESTED BUSINESS UNITS AND NONRECURRING ITEMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|   |  | In June 2001, the Company committed to a formal plan to dispose of
its Business Process Outsourcing (BPO) business units. These business
units primarily process healthcare claims, credit card applications, and
airline lift tickets. In conjunction with the formal plan of disposal in
June 2001 the Company recorded a $6.3 million pre-tax charge primarily
related to an impairment associated with the divestiture. The charge
totaled $6.2 million, after-tax, or $0.12 per share. On July 11, 2001 the
Company signed a definitive agreement with Affiliated Computer Services
(ACS), whereby ACS will acquire the BPO business units for $43 million in
cash. This transaction is expected to close in August 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|   |  | In the second quarter of 2000, a pre-tax charge of $1.5 million was
recorded for site consolidation initiatives related to the BPO business
units. The charge totaled $1.0 million after-tax, or $0.02 per share, and
related primarily to the write-off of leasehold improvements and the
accrual of future contractual rent payments on abandoned facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | Divested business units also include the Companys Springfield
remittance operation sold in August 2000 and the Denver collections
operation discontinued in March 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|  
|  
|  
|  
|   |  | For the three months ended June 30, 2001 and 2000, the divested
business units had revenue of $15.3 million and $19.4 million,
respectively, and operating profit (loss) of $(5.1) million and $0.8
million, respectively. For the six months ended June 30, 2001 and 2000,
the divested business units had revenue of $31.4 million and $37.3
million, respectively, and operating profit (loss) of $(3.8) million and
$2.3 million, respectively. Operating profit (loss) includes impairment
and restructuring charges related to the divested business units totaling
$6.3 million in the second quarter of 2001 and $1.5 million in the second
quarter of 2000.
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|   |  | The effective tax rates for the three and six months ended June 30,
2001 were 52.4% and 44.9%, respectively. The effective tax rates were
higher than prior year due to additional provisions related to the sale of
the BPO business units. These additional provisions were for
nondeductible losses, repatriation of previously untaxed earnings in
foreign countries, and dividends from foreign subsidiaries.                                                                                                                                                                                                                                                  
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|3. |  | ASSETS HELD FOR SALE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|   |  | At June 30, 2001, assets held for sale totaled $38.9 million related
to the divestiture of the BPO business units. These assets have been
classified as current assets on the consolidated balance sheet and are
summarized as follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                              

|                             |  |   |        |  
|---------------------------- |  | - | ------ | -
|Accounts receivable          |  | $ | 11,526 |  
|                            
|                            
|                            
|                            
|Other current assets         |  |   | 412    |  
|                            
|                            
|                            
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|Property and equipment, net  |  |   | 18,249 |  
|                            
|                            
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|Goodwill, net                |  |   | 9,602  |  
|                            
|                            
|                            
|                            
|Other intangible assets, net |  |   | 2,740  |  
|                            
|                            
|                            
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|Account payable  trade      |  |   | (632   | )
|                            
|                            
|                            
|                            
|Other accrued liabilities    |  |   | (3,028 | )
|                             |  |   |        |  
|Total net assets             |  | $ | 38,869 |  
|                             |  |   |        |  

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. |  | ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|   |  | On June 28, 2001, the Company acquired a 70 percent interest in ABN
AMRO Merchant Services, LLC (AAMS) for $48.5 million, which was settled on
July 2, 2001 using existing cash balances. Under the terms of the
agreement, the Company will provide AAMS with all merchant-processing
services including both authorization and settlement of all card-based
transactions. The Company expects AAMS to generate approximately $38
million in annual revenue. The acquisition, accounted for as a purchase,
increased the Companys goodwill by approximately $27 million, to be
amortized on a straight-line basis over 20 years. The remainder of the
purchase price was allocated to other identifiable intangibles, primarily
acquired merchant contracts, which are being amortized on a straight-line
basis over 10 years. The results of operations of AAMS have been included
in the consolidated financial statements since the date of its
acquisition.

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##### Table of Contents



|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | On January 8, 2001, the Company purchased the merchant services
business units from several of National City Corporations (National City)
banking subsidiaries for $44.0 million in cash. This acquisition included
merchant contracts and additional sales personnel. National Processing
also assumed responsibility for all merchant processing sales efforts
throughout National Citys 1,200 branch network via an exclusive
multi-year marketing agreement. The Company already provided the
authorization and settlement processing for these merchants via a third
party processing contract with National City. For the three and six
months ended June 30, 2001, the Company recorded $3.8 million and $7.9
million, respectively, of incremental revenue as a result of this
acquisition. The acquisition was accounted for as a transaction among
entities under common control and was recorded at the historical cost
bases of National City. The excess of the cash paid over the historical
cost bases was recorded as a reduction in shareholders equity, net of
income taxes. The results of operations of the National City merchant
services business units have been included in the consolidated financial
statements since the date of acquisition.
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|5. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|6. |  | NET INCOME PER COMMON SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|  
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|  
|   |  | The calculation of net income per common share follows
(in thousands, except per share amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|------- | ------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|        |                                             |  | Three Months Ended |        | Six Months Ended
|        |                                             |  | June 30            |        | June 30         
|        |                                             |  |                    |        |                 
|        |                                             |  | 2001               |        | 2000             |  | 2001 |        | 2000
|        |                                             |  |                    |        |                  |  |      |        |     
|BASIC  
|       
|       
|       
|       
|        | Net income                                  |  | $                  | 7,918  |                  |  | $    | 10,476 |      |  | $ | 19,457 |  |  | $ | 20,024 | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|        | Average common shares outstanding           |  |                    | 51,255 |                  |  |      | 50,799 |      |  |   | 51,107 |  |  |   | 50,792 | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|        | Net income per common share  basic         |  | $                  | 0.15   |                  |  | $    | 0.21   |      |  | $ | 0.38   |  |  | $ | 0.39   | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|DILUTED
|       
|       
|       
|       
|        | Net income                                  |  | $                  | 7,918  |                  |  | $    | 10,476 |      |  | $ | 19,457 |  |  | $ | 20,024 | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|        | Average common shares outstanding           |  |                    | 51,255 |                  |  |      | 50,799 |      |  |   | 51,107 |  |  |   | 50,792 | 
|       
|       
|       
|       
|        | Stock option adjustment                     |  |                    | 798    |                  |  |      | 166    |      |  |   | 703    |  |  |   | 106    | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|        | Average common shares outstanding  diluted |  |                    | 52,053 |                  |  |      | 50,965 |      |  |   | 51,810 |  |  |   | 50,898 | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|        | Net income per common share  diluted       |  | $                  | 0.15   |                  |  | $    | 0.21   |      |  | $ | 0.38   |  |  | $ | 0.39   | 
|        |                                             |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       

|   |  |                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. |  | SEGMENT REPORTING                                                                                                                                                                                                                                                                                                                                                      
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|   |  | The Company operates two business segments  Merchant Card Services
and Corporate Outsourcing Solutions. Merchant Card Services authorizes,
processes, and settles credit and debit card transactions. Corporate
Outsourcing Solutions provides financial settlement, image scanning, data
capture, storage and retrieval, and value-added customer reporting
services.
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|   |  | The accounting policies of the reportable segments are the same as
those of the Company. Prior period amounts have been classified to
conform to the current line of business reporting structure.                                                                                                                                                                     

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| |  |                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  | General and administrative expense is allocated to the segments based
upon various methods determined by the nature of the expenses. There are
no intersegment revenues. Depreciation and amortization expense for
corporate fixed assets is allocated to the segments. Corporate net
operating assets are comprised primarily of cash, Eurodollar deposits, and
income tax balances.
|
| |  | (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                               

|                                              |  |          |         |             |  |           |        |       |  |              |         |  |  |   |         | 
|--------------------------------------------- |  | -------- | ------- | ----------- |  | --------- | ------ | ----- |  | ------------ | ------- |  |  | - | ------- | 
|                                              |  | Merchant |         | Corporate  
|                                              |  | Card     |         | Outsourcing |  |           |        |       |  | Consolidated
|                                              |  | Services |         | Solutions   |  | Corporate |        | Total
|                                              |  |          |         |             |  |           |        |      
|For the three months ended June 30, 2001     
|                                             
|                                             
|                                             
|                                             
|Revenue                                       |  | $        | 95,364  |             |  | $         | 22,512 |       |  | $            |        |  |  | $ | 117,876 | 
|                                             
|                                             
|                                             
|                                             
|Impairment, restructuring and related
expense |  |          |        |             |  |           | 6,250  |       |  |              |        |  |  |   | 6,250   | 
|                                             
|                                             
|                                             
|                                             
|Operating profit (loss)                       |  |          | 18,646  |             |  |           | (3,893 | )     |  |              |        |  |  |   | 14,753  | 
|                                             
|                                             
|                                             
|                                             
|Depreciation and amortization                 |  |          | 3,527   |             |  |           | 1,657  |       |  |              |        |  |  |   | 5,184   | 
|                                             
|                                             
|                                             
|                                             
|Net interest income                           |  |          | 1,664   |             |  |           | 229    |       |  |              |        |  |  |   | 1,893   | 
|                                             
|                                             
|                                             
|                                             
|Net operating assets                          |  |          | 146,919 |             |  |           | 49,315 |       |  |              | 162,355 |  |  |   | 358,589 | 
|                                             
|                                             
|                                             
|                                             
|For the three months ended June 30, 2000     
|                                             
|                                             
|                                             
|                                             
|Revenue                                       |  | $        | 76,104  |             |  | $         | 28,409 |       |  | $            |        |  |  | $ | 104,513 | 
|                                             
|                                             
|                                             
|                                             
|Impairment, restructuring and related
expense |  |          |        |             |  |           | 1,500  |       |  |              |        |  |  |   | 1,500   | 
|                                             
|                                             
|                                             
|                                             
|Operating profit                              |  |          | 12,195  |             |  |           | 3,161  |       |  |              |        |  |  |   | 15,356  | 
|                                             
|                                             
|                                             
|                                             
|Depreciation and amortization                 |  |          | 3,372   |             |  |           | 1,953  |       |  |              |        |  |  |   | 5,325   | 
|                                             
|                                             
|                                             
|                                             
|Net interest income                           |  |          | 1,364   |             |  |           | 514    |       |  |              |        |  |  |   | 1,878   | 
|                                             
|                                             
|                                             
|                                             
|Net operating assets                          |  |          | 103,004 |             |  |           | 51,001 |       |  |              | 182,766 |  |  |   | 336,771 | 
|                                             
|                                             
|                                              |  | Merchant |         | Corporate  
|                                              |  | Card     |         | Outsourcing |  |           |        |       |  | Consolidated
|                                              |  | Services |         | Solutions   |  | Corporate |        | Total
|                                              |  |          |         |             |  |           |        |      
|For the six months ended June 30, 2001       
|                                             
|                                             
|                                             
|                                             
|Revenue                                       |  | $        | 180,704 |             |  | $         | 46,217 |       |  | $            |        |  |  | $ | 226,921 | 
|                                             
|                                             
|                                             
|                                             
|Impairment, restructuring and related
expense |  |          |        |             |  |           | 6,250  |       |  |              |        |  |  |   | 6,250   | 
|                                             
|                                             
|                                             
|                                             
|Operating profit (loss)                       |  |          | 32,249  |             |  |           | (1,064 | )     |  |              |        |  |  |   | 31,185  | 
|                                             
|                                             
|                                             
|                                             
|Depreciation and amortization                 |  |          | 7,019   |             |  |           | 3,345  |       |  |              |        |  |  |   | 10,364  | 
|                                             
|                                             
|                                             
|                                             
|Net interest income                           |  |          | 3,481   |             |  |           | 632    |       |  |              |        |  |  |   | 4,113   | 
|                                             
|                                             
|                                             
|                                             
|Net operating assets                          |  |          | 146,919 |             |  |           | 49,315 |       |  |              | 162,355 |  |  |   | 358,589 | 
|                                             
|                                             
|                                             
|                                             
|For the six months ended June 30, 2000       
|                                             
|                                             
|                                             
|                                             
|Revenue                                       |  | $        | 147,015 |             |  | $         | 55,365 |       |  | $            |        |  |  | $ | 202,380 | 
|                                             
|                                             
|                                             
|                                             
|Impairment, restructuring and related
expense |  |          |        |             |  |           | 1,500  |       |  |              |        |  |  |   | 1,500   | 
|                                             
|                                             
|                                             
|                                             
|Operating profit                              |  |          | 22,856  |             |  |           | 6,131  |       |  |              |        |  |  |   | 28,987  | 
|                                             
|                                             
|                                             
|                                             
|Depreciation and amortization                 |  |          | 6,743   |             |  |           | 3,957  |       |  |              |        |  |  |   | 10,700  | 
|                                             
|                                             
|                                             
|                                             
|Net interest income                           |  |          | 2,783   |             |  |           | 910    |       |  |              |        |  |  |   | 3,693   | 
|                                             
|                                             
|                                             
|                                             
|Net operating assets                          |  |          | 103,004 |             |  |           | 51,001 |       |  |              | 182,766 |  |  |   | 336,771 | 

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. |  | RECENT ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|  
|  
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|   |  | In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets.SFAS No.
141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. The
provisions of SFAS No. 142 are effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful
lives. During 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.

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

Components of Revenue and Expenses

Revenue.

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

Corporate Outsourcing Solutions revenue is generated from a variety of
financial and administrative processing solutions provided to customers. These
solutions include financial settlement, image scanning, data capture, storage
and retrieval, and value-added customer reporting. A portion of Corporate
Outsourcing Solutions revenue is earned from an exclusive long-term contract
with the Airlines Reporting Corporation under which the Company is compensated
on a cost-plus basis.

A small portion of total revenue is derived from earnings on customer cash
balances, which are maintained pursuant to contractual terms.

Expenses.

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

Results of Operations

The Companys operating results are presented below in the manner in which
they are viewed by management. The Company has exited or committed to divest
certain business units during 2000 and 2001 in order to focus on its core
business lines which are those that perform electronic payment settlement.
Accordingly, the segment results presented below segregate the operating
performance for the remaining core business lines from those that were exited
or will be exited. The segment operating results as shown below exclude
certain nonrecurring items. Certain prior year amounts have been reclassified
to conform with the 2001 presentation.

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##### Table of Contents



Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |        |        |        |        |     |    |    |    | 
|------------------------------------------ | ------------------------------- | ---------------------------------------------- | ------------------ | --------------------------- | ------ | ------- | ------ | ------- | -- | ------ | ------ | ------ | ------ | ------- | ------ | ---- | -- | --- | ------ | ------ | ------ | ------ | ------ | --- | -- | -- | -- | 
|                                           |                                 |                                                |                    |                             |        | 2001    |        | 2000    |    | Change
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |       
|                                           |                                 |                                                |                    |                             |        |         |        |         |    | % of   |        |        |        |         |        | % of
|(Dollars in thousands)                     |                                 | Amount                                         |                    | Revenue                     |        | Amount  |        | Revenue |    | Amount |        | %     
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |       
|Revenue:                                  
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                | $                  | 95,364                      |        |         |        | 81      |    |        | $      | 76,104 |        |         |        | 73   |    |     | $      | 19,260 |        |        |        | 25  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                    | 7,179                       |        |         |        | 6       |    |        |        | 8,996  |        |         |        | 9    |    |     |        | (1,817 | )      |        |        | (20 | ) 
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|                                           |                                 |                                                | Total Core Revenue |                             |        | 102,543 |        |         |    | 87     |        |        |        | 85,100  |        |      |    | 81  |        |        |        | 17,443 |        |     |    | 20 |   
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                    | 15,333                      |        |         |        | 13      |    |        |        | 19,413 |        |         |        | 19   |    |     |        | (4,080 | )      |        |        | (21 | ) 
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|                                           |                                 |                                                | Total Revenue      |                             |        | 117,876 |        |         |    | 100    |        |        |        | 104,513 |        |      |    | 100 |        |        |        | 13,363 |        |     |    | 13 |   
|                                          
|                                          
|                                          
|                                          
|Expenses:                                 
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                |                    | 76,718                      |        |         |        | 80      |    |        |        | 63,909 |        |         |        | 84   |    |     |        | 12,809 |        |        |        | 20  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                    | 5,968                       |        |         |        | 83      |    |        |        | 6,645  |        |         |        | 74   |    |     |        | (677   | )      |        |        | (10 | ) 
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|                                           |                                 |                                                |                    | Core Operating Expenses     |        |         | 82,686 |         |    |        | 81     |        |        |         | 70,554 |      |    |     | 83     |        |        |        | 12,132 |     |    |    | 17 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                    | 14,187                      |        |         |        | 93      |    |        |        | 17,103 |        |         |        | 88   |    |     |        | (2,916 | )      |        |        | (17 | ) 
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|                                           |                                 |                                                |                    | Total Expenses              |        |         | 96,873 |         |    |        | 82     |        |        |         | 87,657 |      |    |     | 84     |        |        |        | 9,216  |     |    |    | 11 | 
|                                          
|                                          
|                                          
|                                          
|Operating Profit:                         
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                |                    | 18,646                      |        |         |        | 20      |    |        |        | 12,195 |        |         |        | 16   |    |     |        | 6,451  |        |        |        | 53  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                    | 1,211                       |        |         |        | 17      |    |        |        | 2,351  |        |         |        | 26   |    |     |        | (1,140 | )      |        |        | (48 | ) 
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|                                           |                                 |                                                |                    | Total Core Operating Profit |        |         | 19,857 |         |    |        | 19     |        |        |         | 14,546 |      |    |     | 17     |        |        |        | 5,311  |     |    |    | 37 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                    | 1,146                       |        |         |        | 7       |    |        |        | 2,310  |        |         |        | 12   |    |     |        | (1,164 | )      |        |        | (50 | ) 
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|                                           |                                 |                                                |                    | Total Operating Profit      |        |         | 21,003 |         |    |        | 18     |        |        |         | 16,856 |      |    |     | 16     |        |        |        | 4,147  |     |    |    | 25 | 
|                                          
|                                          
|                                          
|                                          
|Net Interest Income                        |                                 |                                                | 1,893              |                             |        |         | 2      |         |    |        | 1,878  |        |        |         | 2      |      |    |     | 15     |        |        |        | 1      |    
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|Income Before Taxes and Nonrecurring Items |                                 |                                                | 22,896             |                             |        |         | 19     |         |    |        | 18,734 |        |        |         | 18     |      |    |     | 4,162  |        |        |        | 22     |    
|                                          
|                                          
|                                          
|                                          
|Nonrecurring Items:                       
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Impairment, Restructuring and Related
Expenses |                    |                             | (6,250 | )       |        |         | (5 | )      |        |        | (1,500 | )       |        |      | (1 | )   |        |        | (4,750 | )      |        |     | NM |   
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|Income Before Taxes                        |                                 |                                                | 16,646             |                             |        |         | 14     |         |    |        | 17,234 |        |        |         | 16     |      |    |     | (588   | )      |        |        | (3     | )  
|                                          
|                                          
|                                          
|                                          
|Provision for Income Taxes                 |                                 |                                                | 8,728              |                             |        |         | 7      |         |    |        | 6,758  |        |        |         | 6      |      |    |     | 1,970  |        |        |        | 29     |    
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|Net Income                                 |                                 | $                                              | 7,918              |                             |        |         | 7      |         |    | $      | 10,476 |        |        |         | 10     |      |    | $   | (2,558 | )      |        |        | (24    | )  
|                                           |                                 |                                                |                    |                             |        |         |        |         |    |        |        |        |        |         |        |      |    |     |        |       
|NM  Not Meaningful                       

|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |        |       |        |   |    |    |     |  
|--------------------------------- | --------------------- | ---------- | ------------------- | ------ | ------ | ------ | ---- | --- | ------ | ------ | - | ------ | ------ | ------ | - | --- | -- | -- | - | ------ | ----- | ------ | - | -- | -- | --- | -
|                                  |                       |            |                     |        | 2001   |        | 2000 |     | Change
|                                  |                       |            |                     |        |        |        |      |     |       
|(Dollars in thousands, except per
|share amounts)                    |                       | Amount     |                     | %      |        | Amount |      | %   |        | Amount |   | %     
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |       
|Excluding Nonrecurring Items:    
|                                 
|                                 
|                                 
|                                 
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                 
|                                 
|                                 
|                                 
|                                  | Pre-Tax Income        |            | $                   | 22,896 |        |        |      | 100 |        |        | $ | 18,734 |        |        |   | 100 |    |    | $ | 4,162  |       |        |   | 22 |   
|                                 
|                                 
|                                 
|                                 
|                                  | Taxes                 |            |                     | 8,828  |        |        |      | 39  |        |        |   | 7,283  |        |        |   | 39  |    |    |   | 1,545  |       |        |   | 21 |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       | Net Income |                     | $      | 14,068 |        |      |     | 61     |        |   | $      | 11,451 |        |   |     | 61 |    |   | $      | 2,617 |        |   |    | 23 |    
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Per Share  Diluted |        | $      | 0.27   |      |     |        |        |   |        | $      | 0 .22  |   |     |    |    |   |        | $     | 0.05   |   |    |    | 20  |  
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|Nonrecurring Items:              
|                                 
|                                 
|                                 
|                                 
|                                  | Pre-Tax Income (Loss) |            | $                   | (6,250 | )      |        |      | 100 |        |        | $ | (1,500 | )      |        |   | 100 |    |    | $ | (4,750 | )     |        |   | NM |   
|                                 
|                                 
|                                 
|                                 
|                                  | Taxes                 |            |                     | (100   | )      |        |      | 2   |        |        |   | (525   | )      |        |   | 35  |    |    |   | 425    |       |        |   | NM |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Net Income (Loss)   |        | $      | (6,150 | )    |     |        | 98     |   |        | $      | (975   | ) |     |    | 65 |   |        | $     | (5,175 | ) |    |    | NM  |  
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Per Share  Diluted |        | $      | (0.12  | )    |     |        |        |   |        | $      | (0.02  | ) |     |    |    |   |        | $     | (0.10  | ) |    |    | NM  |  
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|Total:                           
|                                 
|                                 
|                                 
|                                 
|                                  | Pre-Tax Income        |            | $                   | 16,646 |        |        |      | 100 |        |        | $ | 17,234 |        |        |   | 100 |    |    | $ | (588   | )     |        |   | (3 | ) 
|                                 
|                                 
|                                 
|                                 
|                                  | Taxes                 |            |                     | 8,728  |        |        |      | 52  |        |        |   | 6,758  |        |        |   | 39  |    |    |   | 1,970  |       |        |   | 29 |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Net Income          |        | $      | 7,918  |      |     |        | 48     |   |        | $      | 10,476 |   |     |    | 61 |   |        | $     | (2,558 | ) |    |    | (24 | )
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Per Share  Diluted |        | $      | 0.15   |      |     |        |        |   |        | $      | 0.21   |   |     |    |    |   |        | $     | (0.06  | ) |    |    | (26 | )
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       

NM  Not Meaningful

Merchant Card Services

Revenue for the three months ended June 30, 2001 increased 25% to $95.4
million from $76.1 million in 2000. Revenue increased primarily due to
increases in transaction and dollar volume processed of 23% and 24%,
respectively, and as a result the acquisition of National Citys merchant
business units on January 8, 2001. This acquisition contributed $3.8 million
of incremental revenue in the second quarter of 2001. The volume increases
were primarily due to the addition of new national customers, strong execution
in the regional sales channels, and continued expansion in new vertical
markets.

12



---



##### Table of Contents



Expenses for the three months ended June 30, 2001 increased 20% to $76.7
million from $63.9 million in 2000 primarily due to increased processing
volume. Operating margins as a percentage of revenue increased to 20% from
16%, primarily due to economies of scale from increased volume and the addition
of National Citys merchant business units. Operating profit for the quarter
ended June 30, 2001 increased 53% to $18.6 million from $12.2 million in the
2000 second quarter due primarily to the factors outlined above.

Corporate Outsourcing Solutions

Revenue for the core Corporate Outsourcing Solutions business lines for
the three months ended June 30, 2001 decreased 20% to $7.2 million from $9.0
million in 2000. Revenue decreased primarily due to decreased volume from the
Companys Airlines Reporting Corporation contract.

Expenses for the core Corporate Outsourcing Solutions business lines for
the three months ended June 30, 2001 decreased 10% to $6.0 million from $6.6
million in 2000 due primarily to decreased volume and staff reductions.
Operating profit for the quarter ended June 30, 2001 decreased 48% to $1.2
million from $2.4 million in the 2000 first quarter as a result of the items
discussed above.

Divested Business Units and Nonrecurring Items

In June 2001, the Company committed to a formal plan to dispose of its
Business Process Outsourcing (BPO) business units. These business units
primarily process healthcare claims, credit card applications, and airline lift
tickets. In conjunction with the formal plan of disposal in June 2001 the
Company recorded a $6.3 million pre-tax charge primarily related to an
impairment associated with the divestiture. The charge totaled $6.2 million,
after-tax, or $0.12 per share. On July 11, 2001 the Company signed a
definitive agreement with Affiliated Computer Services (ACS), whereby ACS will
acquire the BPO business units for $43 million in cash. This transaction is
expected to close in August 2001.

In the second quarter of 2000, a pre-tax charge of $1.5 million was
recorded for site consolidation initiatives related to the BPO business units.
The charge totaled $1.0 million after-tax, or $0.02 per share, and related
primarily to the write-off of leasehold improvements and the accrual of future
contractual rent payments on abandoned facilities.

Divested business units also include the Companys Springfield remittance
operation sold in August 2000 and the Denver collections operation discontinued
in March 2001.

For the three months ended June 30, 2001 and 2000, the divested business
units had revenue of $15.3 million and $19.4 million, respectively, and
operating profit (loss) of $(5.1) million and $0.8 million, respectively.
Operating profit (loss) includes impairment and restructuring charges related
to the divested business units totaling $6.3 million in the second quarter of
2001 and $1.5 million in the second quarter of 2000.

13



---



##### Table of Contents



Net Interest Income

Net interest income for the three months ending June 30, 2001, was $1.9
million consistent with prior year.

Provision for Income Taxes

The overall effective tax rate for the second quarter of 2001 was 52.4%
compared to 39.2% for the same quarter a year ago. The increase in the
effective tax rate was due to additional provisions related to the sale of the
BPO business units for nondeductible losses, repatriation of previously untaxed
earnings in foreign countries, and dividends from foreign subsidiaries.

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |        |        |        |        |     |    |    |    | 
|------------------------------------------ | ------------------------------- | ---------------------------------------------- | ------------------ | --------------------------- | ------ | ------- | ------- | ------- | -- | ------ | ------ | ------- | ------ | ------- | ------- | ---- | -- | --- | ----- | ------ | ------ | ------ | ------ | --- | -- | -- | -- | 
|                                           |                                 |                                                |                    |                             |        | 2001    |         | 2000    |    | Change
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |       
|                                           |                                 |                                                |                    |                             |        |         |         |         |    | % of   |        |         |        |         |         | % of
|(Dollars in thousands)                     |                                 | Amount                                         |                    | Revenue                     |        | Amount  |         | Revenue |    | Amount |        | %      
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |        
|Revenue:                                  
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                | $                  | 180,704                     |        |         |         | 80      |    |        | $      | 147,015 |        |         |         | 73   |    |     | $     | 33,689 |        |        |        | 23  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                    | 14,809                      |        |         |         | 7       |    |        |        | 18,098  |        |         |         | 9    |    |     |       | (3,289 | )      |        |        | (18 | ) 
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|                                           |                                 |                                                | Total Core Revenue |                             |        | 195,513 |         |         |    | 86     |        |         |        | 165,113 |         |      |    | 82  |       |        |        | 30,400 |        |     |    | 18 |   
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                    | 31,408                      |        |         |         | 14      |    |        |        | 37,267  |        |         |         | 18   |    |     |       | (5,859 | )      |        |        | (16 | ) 
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|                                           |                                 |                                                | Total Revenue      |                             |        | 226,921 |         |         |    | 100    |        |         |        | 202,380 |         |      |    | 100 |       |        |        | 24,541 |        |     |    | 12 |   
|                                          
|                                          
|                                          
|                                          
|Expenses:                                 
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                |                    | 148,455                     |        |         |         | 82      |    |        |        | 124,159 |        |         |         | 84   |    |     |       | 24,296 |        |        |        | 20  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                    | 12,027                      |        |         |         | 81      |    |        |        | 14,262  |        |         |         | 79   |    |     |       | (2,235 | )      |        |        | (16 | ) 
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|                                           |                                 |                                                |                    | Core Operating Expenses     |        |         | 160,482 |         |    |        | 82     |         |        |         | 138,421 |      |    |     | 84    |        |        |        | 22,061 |     |    |    | 16 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                    | 29,004                      |        |         |         | 92      |    |        |        | 33,472  |        |         |         | 90   |    |     |       | (4,468 | )      |        |        | (13 | ) 
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|                                           |                                 |                                                |                    | Total Operating Expenses    |        |         | 189,486 |         |    |        | 84     |         |        |         | 171,893 |      |    |     | 85    |        |        |        | 17,593 |     |    |    | 10 | 
|                                          
|                                          
|                                          
|                                          
|Operating Profit:                         
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                                |                    | 32,249                      |        |         |         | 18      |    |        |        | 22,856  |        |         |         | 16   |    |     |       | 9,393  |        |        |        | 41  |   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                                |                    | 2,782                       |        |         |         | 19      |    |        |        | 3,836   |        |         |         | 21   |    |     |       | (1,054 | )      |        |        | (27 | ) 
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|                                           |                                 |                                                |                    | Total Core Operating Profit |        |         | 35,031  |         |    |        | 18     |         |        |         | 26,692  |      |    |     | 16    |        |        |        | 8,339  |     |    |    | 31 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                                |                    | 2,404                       |        |         |         | 8       |    |        |        | 3,795   |        |         |         | 10   |    |     |       | (1,391 | )      |        |        | (37 | ) 
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|                                           |                                 |                                                |                    | Total Operating Profit      |        |         | 37,435  |         |    |        | 16     |         |        |         | 30,487  |      |    |     | 15    |        |        |        | 6,948  |     |    |    | 23 | 
|                                          
|                                          
|                                          
|                                          
|Net Interest Income                        |                                 |                                                | 4,113              |                             |        |         | 2       |         |    |        | 3,693  |         |        |         | 2       |      |    |     | 420   |        |        |        | 11     |    
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|Income Before Taxes and Nonrecurring Items |                                 |                                                | 41,548             |                             |        |         | 18      |         |    |        | 34,180 |         |        |         | 17      |      |    |     | 7,368 |        |        |        | 22     |    
|                                          
|                                          
|                                          
|                                          
|Nonrecurring Items:                       
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Impairment, Restructuring and Related
Expenses |                    |                             | (6,250 | )       |         |         | (3 | )      |        |         | (1,500 | )       |         |      | (1 | )   |       |        | (4,750 | )      |        |     | NM |   
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|Income Before Taxes                        |                                 |                                                | 35,298             |                             |        |         | 16      |         |    |        | 32,680 |         |        |         | 16      |      |    |     | 2,618 |        |        |        | 8      |    
|                                          
|                                          
|                                          
|                                          
|Provision for Income Taxes                 |                                 |                                                | 15,841             |                             |        |         | 7       |         |    |        | 12,656 |         |        |         | 6       |      |    |     | 3,185 |        |        |        | 25     |    
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       
|Net Income                                 |                                 | $                                              | 19,457             |                             |        |         | 9       |         |    | $      | 20,024 |         |        |         | 10      |      |    | $   | (567  | )      |        |        | (3     | )  
|                                           |                                 |                                                |                    |                             |        |         |         |         |    |        |        |         |        |         |         |      |    |     |       |       

|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |        |       |        |   |    |    |    |  
|--------------------------------- | --------------------- | ---------- | ------------------- | ------ | ------ | ------ | ---- | --- | ------ | ------ | - | ------ | ------ | ------ | - | --- | -- | -- | - | ------ | ----- | ------ | - | -- | -- | -- | -
|                                  |                       |            |                     |        | 2001   |        | 2000 |     | Change
|                                  |                       |            |                     |        |        |        |      |     |       
|                                 
|(Dollars in thousands, except per |                       | Amount     |                     | %      |        | Amount |      | %   |        | Amount |   | %     
|share amounts)                    |                       |            |                     |        |        |        |      |     |        |        |   |       
|                                 
|Excluding Nonrecurring Items:    
|                                 
|                                 
|                                 
|                                 
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                 
|                                 
|                                 
|                                 
|                                  | Pre-Tax Income        |            | $                   | 41,548 |        |        |      | 100 |        |        | $ | 34,180 |        |        |   | 100 |    |    | $ | 7,368  |       |        |   | 22 |   
|                                 
|                                 
|                                 
|                                 
|                                  | Taxes                 |            |                     | 15,941 |        |        |      | 38  |        |        |   | 13,181 |        |        |   | 39  |    |    |   | 2,760  |       |        |   | 21 |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                 
|                                 
|                                 
|                                 
|                                  |                       | Net Income |                     | $      | 25,607 |        |      |     | 62     |        |   | $      | 20,999 |        |   |     | 61 |    |   | $      | 4,608 |        |   |    | 22 |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Per Share  Diluted |        | $      | 0.49   |      |     |        |        |   |        | $      | 0.41   |   |     |    |    |   |        | $     | 0.08   |   |    |    | 20 |  
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|Nonrecurring Items:              
|                                 
|                                 
|                                 
|                                 
|                                  | Pre-Tax Income (Loss) |            | $                   | (6,250 | )      |        |      | 100 |        |        | $ | (1,500 | )      |        |   | 100 |    |    | $ | (4,750 | )     |        |   | NM |   
|                                 
|                                 
|                                 
|                                 
|                                  | Taxes                 |            |                     | (100   | )      |        |      | 2   |        |        |   | (525   | )      |        |   | 35  |    |    |   | 425    |       |        |   | NM |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Net Income (Loss)   |        | $      | (6,150 | )    |     |        | 98     |   |        | $      | (975   | ) |     |    | 65 |   |        | $     | (5,175 | ) |    |    | NM |  
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Per Share  Diluted |        | $      | (0.12  | )    |     |        |        |   |        | $      | (0.02  | ) |     |    |    |   |        | $     | (0.10  | ) |    |    | NM |  
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|Total:                           
|                                 
|                                 
|                                 
|                                 
|                                  | Pre-Tax Income        |            | $                   | 35,298 |        |        |      | 100 |        |        | $ | 32,680 |        |        |   | 100 |    |    | $ | 2,618  |       |        |   | 8  |   
|                                 
|                                 
|                                 
|                                 
|                                  | Taxes                 |            |                     | 15,841 |        |        |      | 45  |        |        |   | 12,656 |        |        |   | 39  |    |    |   | 3,185  |       |        |   | 25 |   
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Net Income          |        | $      | 19,457 |      |     |        | 55     |   |        | $      | 20,024 |   |     |    | 61 |   |        | $     | (567   | ) |    |    | (3 | )
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       
|                                  |                       |            | Per Share  Diluted |        | $      | 0.38   |      |     |        |        |   |        | $      | 0.39   |   |     |    |    |   |        | $     | (0.01  | ) |    |    | (5 | )
|                                  |                       |            |                     |        |        |        |      |     |        |        |   |        |        |        |   |     |    |    |   |       

NM  Not Meaningful

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##### Table of Contents



Merchant Card Services

Revenue for the six months ended June 30, 2001 increased 23% to $180.7
million from $147.0 million in 2000. Revenue increased primarily due to
increases of 25% in both transaction and dollar volume processed over the prior
year and the acquisition of National Citys merchant business units on January
8, 2001. This acquisition contributed $7.9 million of incremental revenue for
the first six months of 2001. The volume increases were primarily due to the
addition of new national customers, strong execution in the regional sales
channels, and continued expansion in new vertical markets.

Expenses increased 20% to $148.5 million from $124.2 million primarily due
to increased processing volume. Operating margins as a percentage of revenue
increased to 18% from 16%, primarily due to economies of scale from increased
volume and the addition of National Citys merchant business units. Operating
profit for the six months ended June 30, 2001 increased 41% to $32.2 million
from $22.9 million for 2000 due primarily to the factors outlined above.

Corporate Outsourcing Solutions

Revenue for the core Corporate Outsourcing Solutions business lines for
the six months ended June 30, 2001 decreased 18% to $14.8 million from $18.1
million in 2000. Revenue decreased primarily due to decreased volume from the
Companys Airlines Reporting Corporation contract.

Expenses for the core Corporate Outsourcing Solutions business lines
decreased 16% to $12.0 million from $14.3 million due primarily to decreased
volume and staff reductions. Operating profit for the six months ended June
30, 2001 decreased 27% to $2.8 million from $3.8 million for 2000 due primarily
to the factors outlined above.

Divested Business Units and Nonrecurring Items

In June 2001, the Company committed to a formal plan to dispose of its
Business Process Outsourcing (BPO) business units. These business units
primarily process healthcare claims, credit card applications, and airline lift
tickets. In conjunction with the formal plan of disposal in June 2001 the
Company recorded a $6.3 million pre-tax charge primarily related to an
impairment associated with the divestiture. The charge totaled $6.2 million,
after-tax, or $0.12 per share. On July 11, 2001 the Company signed a
definitive agreement with Affiliated Computer Services (ACS) whereby ACS will
acquire the BPO business units for $43 million in cash. This transaction is
expected to close in August 2001.

In the second quarter of 2000, a pre-tax charge of $1.5 million was
recorded for site consolidation initiatives related to the BPO business units.
The charge totaled $1.0 million after-tax, or $0.02 per share, and related
primarily to the write-off of leasehold improvements and the accrual of future
contractual rent payments on abandoned facilities.

Divested business units also include the Companys Springfield remittance
operation sold in August 2000 and the Denver collections operation discontinued
in March 2001.

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##### Table of Contents



For the six months ended June 30, 2001 and 2000, the divested business
units had revenue of $31.4 million and $37.3 million, respectively, and
operating profit (loss) of ($3.8) million and $2.3 million, respectively.
Operating profit (loss) includes impairment and restructuring charges related
to the divested business units totaling $6.3 million in the second quarter of
2001 and $1.5 million in the second quarter of 2000.

Net Interest Income

Net interest income for the six months ending June 30, 2001, increased 11%
to $4.1 million due to higher average interest rates and higher average cash
balances.

Provision For Income Taxes

The overall effective tax rate for the six months ended June 30, 2001 was
44.9% compared to 38.7% for the same period a year ago. The increase in the
effective tax rate was due to additional provisions related to the sale of the
BPO business units for nondeductible losses, repatriation of previously untaxed
earnings in foreign countries, and dividends from foreign subsidiaries.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets.SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives. During 2002, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.

Seasonality

The Company experiences seasonality in its businesses and typically
realizes higher revenue in the third and fourth quarters, reflecting increased
transaction volume in the summer and holiday months.

Liquidity and Capital Resources

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

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##### Table of Contents



The Companys capital expenditures include amounts paid for computers,
external and internally developed software, scanning and other document
processing equipment and improvements to operating facilities. During the six
months ended June 30, 2001, the Companys capital expenditures totaled $8.9
million. Such expenditures were financed from operating cash flow, which
totaled $68.5 million for the six month period of 2001. Operating cash flow
and capital expenditures during the six months ended June 30, 2000 totaled
$42.9 million and $6.2 million, respectively. Operating cash flow increased in
the 2001 period compared to 2000 due to strong operating results from the
Merchant Card Services business segment. It is anticipated future capital
expenditures will be funded with operating cash flow.

On January 8, 2001, the Company acquired the merchant services business
units from several National City banking subsidiaries for $44.0 million.

On June 28, 2001, the Company acquired a 70 percent interest in AAMS for
$48.5 million, which was settled on July 2, 2001 using existing cash balances
of the Company.

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 are expected to be
financed through operating cash flow and current cash balances.

The Company maintains restricted cash balances held on behalf of clients
pending distribution to vendors, which are shown on the balance sheet as assets
and equivalent offsetting liabilities. These cash balances totaled $36.1
million and $31.5 million as of June 30, 2001 and December 31, 2000,
respectively.

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. Please refer to the Companys Annual Report on Form 10-K for the
year ended December 31, 2000 for risks and uncertainties that could cause
actual results to differ materially.




Item 3. Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in market risk as disclosed in the
Companys 2000 Annual Report on Form 10-K.

17



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##### Table of Contents






Part II  Other Information

Item 1. Legal Proceedings (None)

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

Item 3. Defaults Upon Senior Securities (None)

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

|                                                                                                                    |  | 
|------------------------------------------------------------------------------------------------------------------- |  | 
|On May 10, 2001, at the Annual Shareholders Meeting of the Registrant,
the shareholders took the following actions:

|   |  |                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|1. |  | Elected as directors all nominees designated in the proxy
statement dated March 30, 2001 as follows:

|                       |  |                 |            |          |  |  |         | 
|---------------------- |  | --------------- | ---------- | -------- |  |  | ------- | 
|                       |  | Number of Votes
|                       |  |                
|                       |  | For             |            | Withheld
|                       |  |                 |            |         
|Paul G. Clark          |  |                 | 50,275,828 |          |  |  | 678,547 | 
|                      
|                      
|                      
|                      
|Preston B. Heller, Jr. |  |                 | 50,812,659 |          |  |  | 141,716 | 
|                      
|                      
|                      
|                      
|Robert G. Siefers      |  |                 | 50,797,009 |          |  |  | 157,366 | 

|   |  |                                                                                                                                                                                 
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. |  | Approved the National Processing, Inc. 2001 Restricted
Stock Plan: 47,800,466 votes cast for, 3,029,645 votes cast
against, and 124,264 votes withheld.                         
|  
|  
|  
|  
|  
|3. |  | Approved the selection of Ernst & Young LLP as independent
auditors for the Registrant for 2001: 50,882,711 votes cast for,
68,864 votes cast against, and 2,800 votes withheld.

Item 5. Other Information (None)

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

|      |  |                                                                                                                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a.    |  | Exhibits                                                                                                                                                                                                  
|     
|10.41 |  | National Processing, Inc. 2001 Restricted Stock Plan (filed as Exhibit A
to National Processing, Inc.s Proxy Statement on Form 14A #001-11905
dated March 30, 2001 and incorporated herein by reference).
|     
|     
|     
|     
|10.42 |  | National Processing, Inc.s U.S. Asset Purchase Agreement dated July 11,
2001 (filed as Exhibit 10.42).                                                                                                   
|     
|     
|     
|     
|10.43 |  | National Processing, Inc.s Mexico Asset Purchase Agreement dated July
11, 2001 (filed as Exhibit 10.43).                                                                                                 
|     
|     
|     
|     
|10.44 |  | National Processing, Inc.s Stock Purchase Agreement dated July 11, 2001
(filed as Exhibit 10.44).                                                                                                        
|     
|     
|     
|     
|10.45 |  | National Processing, Inc.s Limited Liability Company Interest Purchase
Agreement dated June 28, 2001
(filed as Exhibit 10.45).                                                                           
|     
|     
|     
|     
|     
|b.    |  | Reports on Form 8-K                                                                                                                                                                                       

April 30, 2001: On April 19, 2001, the Registrant issued a press release
reporting earnings for the quarter ended March 31, 2001.

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##### Table of Contents






SIGNATURES

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

|      |  |  |                 |  |  |                                                                                                  
|----- |  |  | --------------- |  |  | -------------------------------------------------------------------------------------------------
|      |  |  |                 |  |  | NATIONAL PROCESSING, INC.                                                                        
|     
|Date: |  |  | August 13, 2001 |  |  | By:  /s/ Thomas A. Wimsett                                                                       
|      |  |  |                 |  |  |                                                                                                  
|     
|      |  |  |                 |  |  | Thomas A. Wimsett
President and Chief Executive Officer
(Duly Authorized Signer)                 
|     
|      |  |  |                 |  |  | By:  /s/ David E. Fountain                                                                       
|
|      |  |  |                 |  |  |                                                                                                  
|     
|      |  |  |                 |  |  | David E. Fountain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

19