10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER

SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number 001-31527

CONCORD EFS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	04-2462252
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee	38133
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:

(901) 371-8000

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

The number of shares of the registrant’s common stock outstanding as of October 31, 2003 was 465,122,798.

CONCORD EFS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

PART I - Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	1
	Consolidated Statements of Income for Three Months and Nine Months Ended September 30, 2003 and September 30, 2002	2
	Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2003 and September 30, 2002	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
PART II - Other Information
Item 1.	Legal Proceedings	41
Item 4.	Submission of Matters to a Vote of Security Holders	46
Item 6.	Exhibits and Reports on Form 8-K	47
Signatures		49

PART I – Financial Information

Item 1. Financial Statements (Unaudited)

CONCORD EFS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2003			December 31, 2002
	(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	521,747		$	471,825
Securities available for sale		801,334			985,400
Accounts receivable, net		133,802			129,983
Settlement receivables, net		39,912			24,958
Inventories		24,352			19,983
Prepaid expenses and other current assets		27,481			48,633
Deferred income taxes		15,767			5,569
TOTAL CURRENT ASSETS		1,564,395			1,686,351
Securities available for sale		130,800			139,092
Property and equipment, net		347,639			338,558
Goodwill, net		265,040			265,460
Other intangible assets, net		46,853			57,073
Other assets, net		84,318			41,906
TOTAL ASSETS	$	2,439,045		$	2,528,440
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and other liabilities	$	20,960		$	25,252
Settlement payables		202,572			165,349
Deposits		27,028			78,133
Accrued liabilities		70,439			53,617
Income taxes payable		36,523			16,527
Current maturities of long-term debt		18,951			58,940
TOTAL CURRENT LIABILITIES		376,473			397,818
Long-term debt		130,800			139,092
Deferred income taxes		65,225			62,343
Other liabilities		7,938			7,962
TOTAL LIABILITIES		580,436			607,215
Commitments and contingent liabilities		—			—
Minority interest in subsidiary		5,869			5,063
STOCKHOLDERS’ EQUITY
Common stock, $0.33 1/3 par value; authorized 1,500,000 shares, issued and outstanding 465,121 at September 30, 2003 and 486,461 at December 31, 2002		155,040			162,154
Additional paid-in capital		990,547			986,416
Retained earnings		713,934			756,605
Accumulated other comprehensive income (loss)		(6,781	)		10,987
TOTAL STOCKHOLDERS’ EQUITY		1,852,740			1,916,162
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,439,045		$	2,528,440

See Notes to Consolidated Financial Statements.

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CONCORD EFS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
	(in thousands, except per share data)
Revenue	$	588,486	$	514,389		$	1,678,391	$	1,424,251
Cost of operations		421,922		367,179			1,220,768		980,996
Selling, general and administrative expenses		34,139		31,233			100,393		88,372
Merger, acquisition, restructuring and write-off charges		9,491		—			17,440		76,506
Litigation settlement charges (credits)		—		(11,000	)		—		9,761
OPERATING INCOME		122,934		126,977			339,790		268,616
Other income and expense:
Investment income		12,455		20,653			41,718		59,723
Interest expense		1,890		3,054			6,259		8,816
Other income, net		7,166		1,023			18,314		7,937
INCOME BEFORE TAXES AND MINORITY INTEREST		140,665		145,599			393,563		327,460
Income taxes		47,826		50,959			136,340		115,033
INCOME BEFORE MINORITY INTEREST		92,839		94,640			257,223		212,427
Minority interest in net income of subsidiary		255		311			806		671
NET INCOME	$	92,584	$	94,329		$	256,417	$	211,756
PER SHARE DATA:
Basic earnings per share	$	0.19	$	0.18		$	0.53	$	0.41
Diluted earnings per share	$	0.19	$	0.18		$	0.52	$	0.40
AVERAGE SHARES OUTSTANDING:
Basic shares		475,382		512,546			482,830		510,973
Diluted shares		486,749		527,856			493,356		530,255

See Notes to Consolidated Financial Statements.

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CONCORD EFS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2003			2002
	(in thousands)
OPERATING ACTIVITIES
Net income	$	256,417		$	211,756
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Minority interest in subsidiary		806			671
Provision for (recovery of) losses on receivables and loans		2,572			(81	)
Depreciation and amortization		81,093			64,537
Deferred income taxes		2,254			14,671
Net realized gain on sales of securities available for sale		(20,624	)		(2,035	)
Restructuring charges		190			38,339
Changes in operating assets and liabilities:
Settlement receivables and payables, net		21,359			(32,381	)
Accounts receivable		(5,481	)		(21,794	)
Inventories		(4,369	)		517
Prepaid expenses and other assets		(25,279	)		(1,268	)
Accounts payable and other liabilities		33,699			41,748
Other, net		3,617			(227	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		346,254			314,453
INVESTING ACTIVITIES
Acquisition of securities available for sale		(750,249	)		(665,725	)
Proceeds from sales of securities available for sale		702,529			558,543
Proceeds from maturity of securities available for sale		229,747			131,483
Acquisition of alternative investments		—			(195,546	)
Purchases of loans		—			(17,716	)
Proceeds from sales of loans		1,918			53,534
Other net change in loans		2,111			41,827
Acquisition of property and equipment		(79,118	)		(100,409	)
Purchase of merchant contracts		(1,036	)		(1,380	)
Business acquisitions, net		—			(17,240	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		105,902			(212,629	)
FINANCING ACTIVITIES
Net decrease in deposits		(51,105	)		(29,298	)
Proceeds from borrowings		41,400			149,900
Payments on borrowings		(89,681	)		(52,118	)
Purchase and retirement of common stock		(306,343	)		(68,365	)
Proceeds from exercise of stock options		3,495			22,819
Payments on leases payable		—			(243	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(402,234	)		22,695
NET INCREASE IN CASH AND CASH EQUIVALENTS		49,922			124,519
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		471,825			682,906
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	521,747		$	807,425

See Notes to Consolidated Financial Statements.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Concord EFS, Inc. and Subsidiaries (Concord) annual report on Form 10-K filed March 27, 2003 for the year ended December 31, 2002.

Nature of Operations: Concord, an electronic transaction processor, provides the technology and network systems that make payments and other financial transactions faster, more efficient, and more secure than paper-based alternatives. As a vertically integrated service provider, Concord acquires, routes, authorizes, captures, and settles virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Concord’s primary activities consist of Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management, and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides point of sale (POS) processing, settlement, and related services, with specialized systems focusing on supermarkets, major retailers, gas stations, convenience stores, restaurants, and trucking companies.

Principles of Consolidation: The consolidated financial statements include the accounts of Concord and its subsidiaries after elimination of all material intercompany balances and transactions.

Business Combinations: Transactions accounted for under the purchase method of accounting reflect the net assets of the acquired company at fair value on the date of acquisition, and the excess of the purchase price over fair value of the assets is recorded as goodwill. The results of operations of the purchased company are included in the consolidated results since the date of acquisition. Stock issued in a purchase transaction is valued at the average closing price of Concord’s stock for a period of a few days surrounding the announcement date of the purchase in accordance with the Financial Accounting Standard Board’s (FASB) Emerging Issues Task Force (EITF) Issue 99-12.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

Use of Estimates: The preparation of the consolidated 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.

Revenue Recognition: Revenue from credit card and other transaction processing activities is recorded when the service is provided. Network Services revenue is recorded gross of network fees and net of interchange fees. Payment Services revenue is recorded gross of network and interchange fees. For both Network Services and Payment Services, network fees represent amounts charged to Concord by the card associations and debit networks and billed to its clients. In accordance with EITF 01-14, as discussed below, Concord recognizes these amounts as both a component of revenue and expense in its financial statements. Network Services interchange fees represent amounts paid to Concord from the card associations as the card issuer processor and subsequently paid by Concord to the card issuer. In accordance with EITF 02-16, as discussed below, Network Services revenue excludes this interchange fee. In contrast, Payment Services interchange fees are collected from Concord’s merchant clients, not the card association or network vendor, and as a result are reported as both a component of revenue and expense. Payment Services interchange fees amounted to $268.6 million and $220.1 million for the three months ended September 30, 2003 and 2002, respectively. Payment Services interchange fees amounted to $766.4 million and $580.5 million for the nine months ended September 30, 2003 and 2002, respectively.

In January 2003 the EITF reached a consensus on Issue 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor” (EITF 02-16). EITF 02-16 provides guidance on how a customer should account for cash consideration received from a vendor. The transition provisions apply prospectively to arrangements entered into or modified subsequent to December 31, 2002 and require all amounts received from vendors to be accounted for as a reduction of the cost of the products or services purchased unless certain criteria are met. Concord elected to early adopt the provisions of EITF 02-16 in the fourth quarter of 2002.

The application of EITF 02-16 resulted in a change in presentation of interchange fees received by Concord from card associations relating to signature debit card transactions processed by its Network Services segment. The interchange fee received reimburses Concord for similar amounts paid to signature debit card issuing financial institutions processed by its Network Services segment. These amounts received are presented as a reduction of segment cost of operations, which offset the amounts paid. Prior to the adoption of EITF 02-16, interchange received on signature debit card transactions was included in segment revenue. Prior interim periods presented herein have been reclassified to conform to this change. The adoption of EITF 02-16 had no effect on reported operating income, net income or cash flows for any periods presented.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

In January 2002 the EITF reached a consensus on Issue 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (EITF 01-14). EITF 01-14 concluded that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. Concord adopted EITF 01-14 effective January 1, 2002. The adoption of EITF 01-14 had no material effect on Concord, as substantially all reimbursements governed by EITF 01-14 were previously reported in revenue. These expenses (certain telecommunications expenses and network fees) are billed to the customer separately or as part of a bundled rate including other Concord services.

Revenue from service contracts and product sales is recognized when the service is provided or title to the equipment passes to the customer. Concord changed its method of recognizing revenue for product sales in the third quarter of 2003. Prior to the third quarter, Concord had recognized revenue for product sales when the equipment was shipped. This change in accounting policy did not necessitate a restatement of the financial statements because the impact of the change was not material. Service contracts and related sales include all revenues under system service contracts, including revenue from sales of terminal hardware when the contract includes such sales.

Revenue from most Payment Services customers is collected daily from settlement funds due to Concord’s merchants or through an automated debit to the customer’s account in the next month. Transaction revenue from Network Services customers is recorded as a receivable at month end and collected through a debit to the customer’s account during the next month. In addition, Concord records an account receivable when revenue is recognized from sales of POS equipment to Payment Services customers.

Accounts and Settlement Receivables: Concord may incur losses from cardholder disputes in the case of merchant insolvency or bankruptcy for the full amount of the cardholder transaction. Based on historical losses, Concord believes its allowance for doubtful accounts is adequate. The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. Losses are charged against the allowance when management confirms that a receivable balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance.

Cash Equivalents: Concord considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of federal funds sold through Concord’s financial institution subsidiary and money market funds that invest in commercial paper, repurchase agreements, and instruments of domestic and foreign banks and other financial institutions.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

Securities Available for Sale: Management determines the appropriate classification of debt securities at the time of purchase and evaluates such designation as of each balance sheet date. Securities available for sale are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income in stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization, interest, and dividends are included in investment income. The cost of securities sold is based on the specific identification method.

Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist of POS terminals and related equipment. Concord periodically reviews its inventories for obsolescence and slow-moving items.

Property and Equipment: Property and equipment are stated at cost. Costs associated with internally developed software are capitalized once technological feasibility of the software has been established. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

Goodwill and Other Intangible Assets: Goodwill and other intangible assets are stated at cost. Concord adopted Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets” (SFAS 142), effective January 1, 2002. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with finite useful lives will continue to be amortized over their estimated useful lives. Prior to the adoption of SFAS 142, amortization was computed using the straight-line method over an estimated useful life of 10 to 25 years for goodwill. The amortization of intangibles other than purchased merchant contracts, such as customer lists and trade names, is computed using the straight-line method over an estimated useful life of 5 to 15 years. Individual purchased merchant contracts are written off if the merchant has terminated its processing relationship. The remaining contracts are amortized using the straight-line method over an estimated useful life of nine years.

Other Assets: Other assets, net of accumulated amortization, include $71.9 million as of September 30, 2003 and $29.9 million as of December 31, 2002 for capitalized payments made to customers, which are amortized over the life of the customer contract and are recoverable on a pro-rata basis upon early termination. These payments represent reimbursement of customer costs to convert to Concord’s systems and contract renewal payments.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

Impairment of Long-Lived Assets: In accordance with Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective January 1, 2002, long-lived assets are reviewed for impairment on an annual basis and whenever events indicate that their carrying amount may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or operations are compared with their carrying value to determine if a write-down to fair value, normally measured by discounting estimated future cash flows, is required.

Income Taxes: Concord accounts for income taxes using the liability method. Concord’s overall tax rate was reduced to 34.0% for the three months ended September 30, 2003 from 35.0% for the six months ended June 30, 2003. This decrease was due to a reassessment of our effective tax rate based on filing our 2002 federal and state tax returns in the third quarter of 2003.

Stock-Based Compensation: Concord grants options to employees and directors for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of the grant. These stock option grants are accounted for in accordance with Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (APB 25); accordingly, Concord recognizes no compensation expense for the stock option grants.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

The following table presents information regarding Concord’s use of the intrinsic value method under APB 25 of accounting for stock-based compensation and states pro forma net income and earnings per share, as required by SFAS 123, “Accounting for Stock-Based Compensation,” as if Concord had accounted for its stock options under the fair value method of that statement for the periods indicated (in thousands, except per share data):

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Net income as reported	$	92,584	$	94,329	$	256,417	$	211,756
Basic earnings per share as reported	$	0.19	$	0.18	$	0.53	$	0.41
Diluted earnings per share as reported	$	0.19	$	0.18	$	0.52	$	0.40
Stock-based compensation cost, net of tax, included in the determination of net income as reported		—		—		—	$	4,844
Stock-based compensation cost, net of tax, that would have been included in the determination of net income if the fair value method had been applied to all stock option grants	$	10,679	$	10,899	$	31,653	$	30,123
Pro forma net income	$	81,905	$	83,430	$	224,764	$	181,633
Pro forma basic earnings per share	$	0.17	$	0.16	$	0.47	$	0.36
Pro forma diluted earnings per share	$	0.17	$	0.16	$	0.46	$	0.34

Recent Pronouncements: In July 2002 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue 94-3. The principal difference between SFAS 146 and Issue 94-3 relates to SFAS 146’s requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The FASB concluded in SFAS 146 that an entity’s commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in Issue 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement may affect the timing of the recognition of exit costs, if any, in future periods.

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

In October 2002 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 147, “Acquisitions of Certain Financial Institutions” (SFAS 147). SFAS 147 addresses the financial accounting and reporting for the acquisition of all or part of a financial institution and is effective for any such activities initiated after October 1, 2002. The adoption of this statement is not anticipated to have a material effect on Concord’s financial statements.

In November 2002 the Financial Accounting Standards Board issued FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 elaborates on the disclosures that must be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and its recognition requirements are applicable for guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material effect on Concord’s financial statements.

In December 2002 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (SFAS 148). SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB 25. Concord intends to continue to account for stock options under the provisions of APB 25.

In January 2003 the Financial Accounting Standards Board issued FASB Interpretation 46, “Consolidation of Variable Interest Entities” (FIN 46). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A - Significant Accounting Policies, continued

the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003 regardless of when the variable interest entity was established. The consolidation provisions of FIN 46 did not have an effect on Concord’s financial statements.

Reclassification: Certain 2002 amounts have been reclassified to conform to the 2003 presentation.

Note B - Business Combinations and Merger, Acquisition, Restructuring and Write-Off Charges

On April 1, 2003 First Data Corporation (First Data) and Concord entered into a definitive agreement to merge in an all-stock transaction. Upon completion of the transaction, the combined company is expected to have approximately $10.0 billion in annual revenues with more than 31,000 employees worldwide.

First Data will exchange 0.40 First Data common shares for every Concord common share. Upon completion of the transaction, based on the number of FDC and Concord shares and options outstanding on September 8, 2003, Concord stockholders are expected to own approximately 21% of the outstanding shares of First Data on a fully diluted basis. On October 28, 2003, at their respective special meetings, the stockholders of First Data and Concord approved of the agreement to merge. The transaction remains, however, subject to various regulatory approvals and other customary closing conditions. Currently a lawsuit filed by the Antitrust Division of the Department of Justice and the Attorneys General of seven states and the District of Columbia is pending challenging the proposed merger. This case is set for trial on December 15, 2003.

Professional fees and other costs of $9.5 million and $18.4 million related to the First Data merger were recorded during the three months and nine months ended September 30, 2003, respectively, and are included in merger, acquisition, restructuring and write-off charges.

On May 17, 2002 Concord acquired Core Data Resources, Inc. (n/k/a Concord Processing, LP), an electronic transaction processor. Core Data’s ATM processing services are designed specifically for retailers and independent sales organizations and complement Concord’s existing ATM driving and monitoring services. The acquisition, for which Concord issued approximately 2.0 million shares of its common stock valued at $64.9 million, was accounted for as a purchase transaction and is immaterial to Concord’s results of operations. The allocation of the purchase price was based on a valuation study completed in the fourth quarter of 2002.

On March 1, 2002 Concord acquired The Logix Companies, LLC, an electronic transaction processor. Logix technology supplies new features to Concord’s check conversion and risk management services, and the Logix ATM driving business serves independent sales organizations. The acquisition, for which Concord issued approximately 0.9 million shares of its common stock valued at $28.8 million and paid approximately $6.3 million in cash, was

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note B - Business Combinations and Merger, Acquisition, Restructuring and Write-Off Charges, continued

accounted for as a purchase transaction and is immaterial to Concord’s results of operations. The allocation of the purchase price was based on a valuation study completed in the fourth quarter of 2002.

On January 1, 2002 Concord acquired H & F Services, Inc., an independent sales organization, for $8.9 million in cash. Prior to the acquisition, Concord had purchased merchant contracts from H & F Services. The acquisition was intended to establish control over this sales channel with product, pricing, compensation, and productivity initiatives. The acquisition was accounted for as a purchase transaction and is immaterial to Concord’s financial statements. The H & F Services stock purchase agreement contains deferred purchase price payments through 2007 subject to the terms and conditions contained therein. As of September 30, 2003, the deferred payments amounted to $3.1 million.

During the second quarter of 2002, management approved a plan in conjunction with the Core Data acquisition and continued consolidation initiatives to improve overall operating efficiencies. Merger, acquisition, restructuring and write-off charges relating to the second quarter 2002 plan were $27.9 million. The charge consisted of $16.2 million for contract terminations, $3.8 million for exiting a non-strategic business, $0.6 million for closing and consolidating certain facilities, and $0.9 million for compensation and severance. In addition, the charge included stock compensation charges of $4.8 million related to the modification of stock options of terminated employees and asset impairment charges of $1.6 million recorded as an adjustment to the write-off of non-performing purchased merchant contracts. In connection with the plan, Concord eliminated 24 positions as of June 30, 2003. Compensation and severance costs paid and charged against the restructuring charge accrual were $0.5 million through September 30, 2003. As of September 30, 2003, $0.4 million of the charges were accrued but unpaid. Concord substantially completed the plan by June 30, 2003.

The following table presents a summary of current year activity through September 30, 2003 related to the second quarter 2002 restructuring charge accrual (in thousands):

Balance, December 31, 2002	$	3,876
Changes in estimate		(414	)
Cash outlays		(2,823	)
Non-cash writedowns and charges—asset impairment		(190	)
Balance, September 30, 2003	$	449

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CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note B - Business Combinations and Merger, Acquisition, Restructuring and Write-Off Charges, continued

Substantially all of the changes in estimates noted above are attributable to actual costs to shut down ATM operating platforms of an existing subsidiary and convert to Core Data’s operating platforms being less than expected and lower than anticipated costs related to terminations of Concord contracts.

The following table presents a summary of the remaining components related to the second quarter 2002 restructuring charge accrual (in thousands):

Non-strategic business closures	$	43
Compensation and severance		406
Balance, September 30, 2003	$	449

During the first quarter of 2002, management approved a corporate consolidation plan initiated to continue improvements in overall operating efficiency and integrate recent acquisitions. Merger, acquisition, restructuring and write-off charges relating to the first quarter 2002 plan were $46.1 million. The charge consisted of $7.2 million for closing and consolidating certain facilities, $5.5 million for compensation and severance, and $3.0 million for exiting non-strategic businesses. In addition, asset impairment charges of $22.5 million were incurred for the write-off of non-performing purchased merchant contracts identified in the first quarter of 2002 and $7.9 million was incurred for the write-off of capitalized software and computer and communications equipment no longer in use. In connection with the plan, Concord eliminated approximately 165 positions as of March 31, 2003. Compensation and severance costs paid and charged against the restructuring charge accrual were $5.5 million through September 30, 2003. As of September 30, 2003, $3.4 million of the charges were accrued but unpaid. Concord substantially completed the consolidation plan by March 31, 2003.

The following table presents a summary of current year activity through September 30, 2003 related to the first quarter 2002 restructuring charge accrual (in thousands):

Balance, December 31, 2002	$	6,852
Changes in estimate		(563	)
Cash outlays		(2,907	)
Balance, September 30, 2003	$	3,382

Substantially all of the changes in estimate related to the first quarter 2002 plan are attributable to lower compensation and severance costs than originally estimated.

- 13 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note B - Business Combinations and Merger, Acquisition, Restructuring and Write-Off Charges, continued

The following table presents a summary of the remaining components related to the first quarter 2002 restructuring charge accrual (in thousands):

Facility closings and consolidations (lease obligations)	$	3,364
Non-strategic business closures		18
Balance, September 30, 2003	$	3,382

Note C - Goodwill and Other Intangible Assets

The following table presents changes to unamortized goodwill by Concord’s reporting units (in thousands):

	Network Services		Payment Services			Total
Balance, December 31, 2002	$	193,943	$	71,517		$	265,460
Purchase price adjustment		—		(420	)		(420	)
Balance, September 30, 2003	$	193,943	$	71,097		$	265,040

The purchase price adjustment represents the reversal, recorded in the first quarter of 2003, of estimated accrued liabilities in connection with the acquisition of H & F Services.

Note D - Comprehensive Income

Total comprehensive income was $79.9 million and $100.4 million for the three months ended September 30, 2003 and 2002, respectively. Total comprehensive income was $238.6 million and $229.2 million for the nine months ended September 30, 2003 and 2002, respectively. Comprehensive income includes net income and the change in the unrealized gain or loss on securities available for sale arising during the period.

Note E - Commitments and Contingencies

During the second quarter of 2003, Concord entered into amended and restated agreements for the financing, construction and leasing of a new corporate headquarters in Memphis, Tennessee. These agreements amend the previous agreements entered into during the third quarter of 2002 for the Memphis facility to include leasing existing facilities in Wilmington, Delaware, and Marietta, Georgia that were covered under other leasing agreements. The agreements qualify for operating lease accounting treatment under Statement of Financial Accounting Standards 13, “Accounting For Leases,” and, as such, the related assets and obligations are not recorded on Concord’s balance sheet. Upon completion of construction of the Memphis facility, which is

- 14 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note E - Commitments and Contingencies, continued

expected in the fourth quarter of 2003, rent payments will begin and will be expensed in Concord’s statements of income. The minimum annual lease payments under these agreements are not material to Concord. The following table summarizes certain aspects of these agreements:

Property Location	Lease Expiration	Renewal Option at Expiration	Value Guaranteed at Expiration	Total Cost Financed
Wilmington, DE	Jan. 2010	One five-year term	$12.5 million	$15.0 million
Marietta, GA	Jan. 2010	One five-year term	$16.7 million	$20.0 million
Memphis, TN	Jan. 2010	One five-year term	$45.9 million	$55.0 million

The renewals, including economic terms of the leases during the renewal term, are subject to the consent of the lessor and lenders. In addition to the renewal option, Concord also has the option of purchasing the related property for the lease balance or remarketing the property for the lessor at the end of the initial and any renewal term. Concord has guaranteed the value realizable from the sale of the property at the end of the lease term as indicated in the table above. Should Concord elect to market the property for the lessor at the end of the lease term, Concord would be responsible for the difference in the sale proceeds and the value guaranteed above. As of September 30, 2003, the fair value of the guarantee of $1.4 million was recorded as other assets and other liabilities on Concord’s balance sheet and will be amortized using the straight-line method over the lease term. Based on current market conditions, Concord does not expect to be required to make payments under these residual value guarantees.

Concord is actively pursuing the renewal of its most significant Network Services customer contracts that would, if not renewed, terminate on December 31, 2004. These contracts accounted in 2002 for less than $100.0 million in revenue. There can be no assurance that such customer contracts will be renewed. Concord may be required to make material expenditures in order to secure the renewals. As negotiations of certain contract renewals are ongoing, Concord cannot currently predict the aggregate amount of such expenditures.

Pursuant to the terms of a change of control agreement with an unaffiliated third party, Concord will be required, upon the consummation of the proposed merger with First Data, to make a payment of $5.0 million to that party, plus an additional $5.0 million depending on the amount of certain revenues during the six-month period immediately preceding the merger.

In the agreement and plan of merger with First Data, Concord is obligated to pay a termination fee of $210.0 million under certain terms and conditions in the event the agreement is terminated.

- 15 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note E - Commitments and Contingencies, continued

On October 23, 2003 the Antitrust Division of the Department of Justice and the Attorneys General of the states of Connecticut, Illinois, Louisiana, Massachusetts, New York, Ohio, Texas and the District of Columbia filed a complaint in the United States District Court for the District of Columbia challenging the proposed merger of Concord and First Data. The complaint alleges that the merger would likely substantially lessen competition in the provision of PIN debit network services in violation of the Clayton Act. The complaint seeks an order permanently enjoining Concord and First Data from consummating the proposed merger, attorneys’ fees and costs and other relief the court deems just and proper. This case has been set for trial on December 15, 2003.

As a result of this complaint, Concord may be unable to obtain the regulatory approvals required to complete the merger or, in order to obtain the necessary approval, the combined company may be required to comply with material restrictions or conditions. Denial or condition of such regulatory approvals could result in loss or disadvantage to Concord. Although this matter is in the preliminary stages, Concord believes that the claims are without merit and intends to vigorously defend against all claims.

Concord and certain of its current and former directors and officers have been named as defendants in a purported securities fraud class action lawsuit and two stockholder derivative actions which were filed in September 2002 in the United States District Court for the Western District of Tennessee and in the Circuit Court for the Thirtieth Judicial District at Memphis. The lawsuits raise allegations relating to Concord’s financial performance between March 2001 and September 2002, changes in the price of Concord’s common stock during that time, alleged failures to disclose material facts, and alleged insider trading and breaches of fiduciary duties by certain officers and certain directors. On April 21, 2003 the plaintiffs in the Tennessee state court derivative action filed a consolidated complaint which adds allegations that the defendants arranged the proposed merger with First Data at a below market price in return for indemnification against alleged prior wrong doing and for other benefits to them personally. The lawsuits seek unspecified compensatory and punitive damages, attorneys’ fees, and other relief. In addition, the Tennessee state court derivative action seeks an injunction against the proposed merger. Although these matters are in the preliminary stages, Concord believes that the claims against it and its directors and officers are without merit and intends to vigorously defend against all claims. Any losses incurred by Concord in connection with this litigation may be covered in part by Concord’s directors’ and officers’ liability insurance.

On April 1, 2003 Concord filed a motion to dismiss the consolidated amended complaint filed in the shareholder derivative litigation pending in the United States District Court for the Western District of Tennessee. This motion was fully briefed as of May 30, 2003, but has yet to be ruled on by the court.

- 16 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note E - Commitments and Contingencies, continued

On May 2, 2003 Concord filed a motion to dismiss the consolidated amended complaint filed by the lead plaintiffs in the purported securities fraud class action pending in the United States District Court for the Western District of Tennessee. This motion was fully briefed as of June 25, 2003, but has yet to be ruled on by the court.

On June 20, 2003 Concord filed a motion to dismiss the consolidated complaint filed in the shareholder derivative litigation pending in Tennessee state court. This motion has yet to be ruled on, but the court has permitted the plaintiffs to conduct limited, expedited discovery pertaining to the proposed merger. On October 27, 2003 the plaintiffs in this matter filed a motion to temporarily enjoin Concord’s shareholder vote on the proposed merger. This motion was denied by the court the same day.

On July 30, 2003 Concord, National Payment Systems Inc., and Concord Payment Systems (CPS) were named as defendants in a lawsuit in New York State Supreme Court. The plaintiff was the principal of a business that had contracted to have CPS provide credit card processing services. CPS has unsuccessfully sought to collect $90,000 of the business’s unpaid obligations from the plaintiff, based upon his personal guaranty. The complaint alleges claims of defamation and tortious interference, asserting that the plaintiff did not sign a guaranty and that CPS wrongfully reported his failure to honor the guaranty to credit rating agencies. The complaint seeks damages in excess of $10.0 million and to compel CPS to withdraw its report to the credit rating agencies. On October 13, 2003 Concord and CPS answered the complaint, denying the allegations and asserting counterclaims against the plaintiff. Although this matter is in the preliminary stages, Concord believes that the claims against it are without merit and it intends to vigorously defend against all claims.

On April 30, 2003 CPS was named as a defendant in a lawsuit originally filed in August 2002 in New York State Supreme Court. The plaintiffs allege that CPS engaged in unfair competition and tortious interference by allegedly hiring a former employee of one of the plaintiffs and then allegedly using trade secrets that the employee misappropriated from that plaintiff. The complaint seeks damages in the amount of $4.0 million for unspecified losses. On July 31, 2003 CPS answered the complaint, denying the allegations, asserting that it had never hired or otherwise had contact with the individual in question. Although this matter is in the preliminary stages, Concord believes that the claims are without merit and it intends to vigorously defend against all claims.

On or about April 3 and 4, 2003 two purported class action complaints were filed in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis. The defendants in those actions were certain of Concord’s current and former officers and directors. The complaints generally alleged breaches of the defendants’ duty of loyalty and due care in connection with the defendants’ alleged attempt to sell Concord without maximizing the value to shareholders in

- 17 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note E - Commitments and Contingencies, continued

order to advance the defendants’ alleged individual interests in obtaining indemnification agreements related to the securities and other derivative litigation discussed above. The complaints sought class certification, injunctive relief directing the defendants’ conduct in connection with an alleged sale or auction of Concord, reasonable attorneys’ fees, experts’ fees and other costs and relief the court deems just and proper. These complaints were consolidated into one action and transferred to the division of the Shelby County Circuit Court in which the Tennessee consolidated state-court derivative action is pending.

On or about April 2, 2003 an additional purported class action complaint was filed in the Chancery Court for Shelby County, Tennessee. The defendants were Concord, certain of its current and former officers and directors, and First Data. This complaint contained allegations regarding the individual defendants’ alleged insider trading and alleged violations of securities and other laws and asserted that this alleged misconduct reduced the consideration offered to Concord’s shareholders in the proposed merger between Concord and First Data. The complaint sought class certification, attorneys’ fees, experts’ fees, costs and other relief the court deems just and proper. Moreover, the complaint also sought an order enjoining consummation of the merger, rescinding the merger if it is consummated and setting it aside or awarding rescissory damages to members of the putative class, and directing the defendants to account to the putative class members for unspecified damages. On June 25, 2003 this complaint was transferred to the Shelby County Circuit Court in which the now consolidated class actions filed April 3 and 4 are pending. Through a court-ordered second amended consolidated complaint filed September 19, 2003, this matter was consolidated with that matter. On October 15, 2003, the plaintiffs moved for leave to file a third amended consolidated complaint similar to the previous complaints but also alleging that the proxy statement disclosures relating to the antitrust regulatory approval process were inadequate. On October 17, 2003 the plaintiffs filed a motion for preliminary injunction to enjoin the shareholder vote on the proposed merger and/or the merger itself. The court denied the plaintiffs’ motion on October 20, 2003 but ordered deposition discovery on an expedited basis. On October 27, 2003 the plaintiffs filed a renewed motion to enjoin the shareholder vote, which was denied by the court the same day. Although this matter is in the preliminary stages, Concord believes that the claims are without merit and intends to vigorously contest these claims.

In November 2002 Concord EFS National Bank was named one of several defendants in a lawsuit in the Superior Court of California, County of Santa Clara. The plaintiff made several allegations, including breach of contract, fraud and negligent misrepresentation arising out of business transactions between the plaintiff and Purchase Plus Buyers Group, an entity which formerly processed credit card transactions through Concord EFS National Bank. This lawsuit, sought compensatory damages in the amount of $55,000 and punitive damages in the amount of $195.0 million. Concord EFS National Bank filed a demurrer seeking dismissal of the

- 18 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note E - Commitments and Contingencies, continued

complaint. The court granted the motion on October 10, 2003 with leave to amend. Should the plaintiff file an amended complaint, Concord intends to vigorously contest the plaintiff’s claims.

In September 2002 Concord was named as a defendant in a purported class action lawsuit filed in New Jersey state court. The plaintiff alleges that Concord wrongfully allowed and facilitated surcharges on electronic benefits transfer (EBT) withdrawals at ATMs within its network. The plaintiff’s four original claims were for violation of N.J.S.A. 44:10-75(c) (which concerns New Jersey’s EBT program), violation of New Jersey’s Consumer Fraud Act, negligence, and breach of contract (as an alleged third-party beneficiary). The plaintiff seeks certification of a class consisting of all New Jersey public assistance recipients participating in the New Jersey EBT program who, since March 24, 1997, withdrew their cash benefits from ATMs serviced and processed by Concord and incurred a surcharge per EBT withdrawal. The lawsuit seeks unspecified compensatory and punitive damages, attorneys’ fees, and injunctive and other relief.

Concord moved to dismiss all four claims. On March 16, 2003, the court entered an order, finding that the claim for violation of N.J.S.A. 44:10-75(c) should be dismissed with prejudice and that the claims for violation of New Jersey’s Consumer Fraud Act and for breach of contract should be dismissed without prejudice, but the court denied Concord’s motion to dismiss as to the negligence claim. On April 16, 2003 a First Amended Complaint was filed alleging violation of New Jersey’s Consumer Fraud Act and negligence and seeking unspecified compensatory and punitive damages, attorneys’ fees, and injunctive and other relief. Although this matter is in the preliminary stages, Concord believes that the claims against it are without merit and intends to vigorously defend against all claims.

In June 2002 Concord EFS National Bank, Concord, and John Doe Corporations were named as defendants in a purported class action lawsuit filed in the United States District Court for the Western District of Tennessee. The plaintiffs alleged that Concord changed fees and charges without providing the requisite notice, charged merchants for transactions that never occurred, and failed to route payments in accordance with the plaintiffs’ instructions. The plaintiffs alleged fraud, breach of contract, conversion, and causes of action under the Tennessee Consumer Protection Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). The class plaintiffs sought to certify consisted of all merchant customers of Concord EFS National Bank, Concord, or John Doe Corporations, who were subject to charges that were not fully disclosed on their statements, charges for transactions which the merchant never undertook, and/or charges in excess of the amount agreed upon in their contracts. The lawsuit sought unspecified compensatory and punitive damages, attorneys’ fees, and other relief. Concord moved to dismiss all claims, the motion was granted by the court on August 13, 2003 and judgment was entered in favor of Concord EFS National Bank and Concord on August 19, 2003. On September 11, 2003 the plaintiffs filed a notice of appeal. No briefing schedule has yet been set. Concord intends to vigorously defend this appeal.

- 19 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note E - Commitments and Contingencies, continued

In October 1996 Commonwealth Savings Bank (Commonwealth) filed a lawsuit against CoreStates Financial Corp. (CoreStates) in the Court of Common Pleas of Chester County, Pennsylvania. On August 6, 1997 Commonwealth added MONEY ACCESS SERVICE INC. (MASI), a Concord subsidiary, as a defendant therein, alleging that MASI is liable to Commonwealth for an amount in excess of $3.6 million based on claims arising out of alleged errors in the conversion of certain Meridian Bank branches to the MAC network and MASI processing at the time the branches were acquired by Commonwealth from CoreStates and CoreStates’ affiliates. Discovery is complete. The court has struck various reports and portions of reports submitted by Commonwealth’s damages experts. At a deposition in March 2000, Commonwealth’s expert testified to a damages calculation of $4.2 million. On November 15, 2002 CoreStates and MASI filed motions for partial summary judgment on all but a small part of Commonwealth’s remaining claim, which were denied on April 15, 2003. This case has been set for trial on February 2, 2004. On September 22, 2003, the court heard MASI’s motion in limine relating to expert testimony and requesting a Frye hearing but has not ruled on this motion. Concord believes that the claims against it are without merit and intends to continue to vigorously defend against all claims.

Concord is also a party to various routine lawsuits arising out of the conduct of its business, none of which is expected to have a material adverse effect upon Concord’s financial condition or results of operations.

Note F - Stockholders’ Equity

During the third and fourth quarters of 2002, Concord’s Board of Directors approved the repurchase of up to $500.0 million of its common stock. On July 29, 2003 Concord announced that its Board of Directors approved the repurchase of an additional $200.0 million of its common stock. Under the repurchase plan, Concord may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions. The Board’s approvals bring the total potential repurchase to $700.0 million. As of September 30, 2003, a total of 48.6 million shares at an aggregate cost of $699.9 million had been purchased and retired pursuant to the repurchase plan since the plan was initiated. During the third quarter of 2003, a total of 21.8 million shares at an aggregate cost of $306.3 million were repurchased. All repurchases were made in the third and fourth quarters of 2002 and the third quarter of 2003 in the open market without the use of any derivative instruments. Due to the imposition of a blackout period during and following the negotiation and execution of the merger agreement with First Data and Concord’s fourth quarter 2002 earnings release, there were no shares repurchased during the first and second quarters of 2003. Concord immediately retires its common stock when purchased. Upon retirement, Concord reduces retained earnings for the excess of purchase price over par value.

- 20 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note G - Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Numerator:
Net income	$	92,584	$	94,329	$	256,417	$	211,756
Denominator:
Denominator for basic earnings per share, weighted-average shares		475,382		512,546		482,830		510,973
Effect of dilutive stock options		11,367		15,310		10,526		19,282
Denominator for diluted earnings per share, weighted-average shares and assumed conversions		486,749		527,856		493,356		530,255
Basic earnings per share	$	0.19	$	0.18	$	0.53	$	0.41
Diluted earnings per share	$	0.19	$	0.18	$	0.52	$	0.40

The number of anti-dilutive stock options not included above was 14,403,701 shares and 14,267,401 shares for the three months ended September 30, 2003 and 2002, respectively. The number of anti-dilutive stock options not included above was 15,980,015 shares and 9,282,967 shares for the nine months ended September 30, 2003, and 2002, respectively.

Note H - Operations by Business Segment

Concord has two reportable segments: Network Services and Payment Services.

Network Services revenue consists of access and switching fees for network access, processing fees for driving and monitoring ATMs, and processing fees for managing debit card records, plus network fees charged to Concord by other networks and billed to its customers.

Revenue from Payment Services includes discount fees charged to merchants, which are a percentage of the dollar amount of each credit card or signature debit card transaction Concord processes, as well as a flat fee per transaction. These discount and flat fees constitute a bundled rate for the transaction authorization, processing, settlement, and funds transfer services Concord provides, plus the interchange fees charged to Concord by the card associations. Payment Services revenue also includes fees for debit card and EBT card transactions, check verification and authorization services, and sales of POS terminals from inventory. Debit card and EBT card transactions are similar to credit card transactions in that the bundled fee Concord charges to a merchant includes the transaction authorization, processing, settlement, and funds transfer

- 21 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note H - Operations by Business Segment, continued

services Concord provides, plus the interchange and network fees charged to Concord by the debit networks.

Concord evaluates performance and allocates resources based on profit or loss from operations. Items classified as “Other” include amounts not identifiable with the two reported segments described above. The accounting policies of the reportable segments are the same as those described in “Note A - Significant Accounting Policies.”

Concord’s reportable segments are business units that are managed separately because they offer distinct products for different end users. No single customer of Concord accounts for a material portion of Concord’s revenue.

As previously disclosed, Concord had expected to organize a new segment during the 2003 fiscal year. The new Risk Management Services segment would provide software, information, and analysis to financial institutions, retailers, government service providers, and other businesses to assist in fraud prevention and reduction. In part as a result of Concord’s agreement and plan of merger with First Data, it has not yet determined when or if Concord will organize a Risk Management Services segment.

Business segment information for the three months and nine months ended September 30, 2003 and 2002 is presented as follows (in thousands):

	Three months ended September 30, 2003
	Network Services		Payment Services		Other			Total
Revenue	$	169,171	$	419,315	$	—		$	588,486
Cost of operations		67,229		354,693		—			421,922
Selling, general and administrative expenses		—		—		34,139			34,139
Merger, acquisition, restructuring and write-off charges		4,450		5,041		—			9,491
Litigation settlement charges (credits)		—		—		—			—
Investment income		—		—		12,455			12,455
Interest expense		—		—		1,890			1,890
Other income, net		—		—		7,166			7,166
Income taxes		—		—		47,826			47,826
Minority interest in subsidiary		—		—		255			255
Net income (loss)	$	97,492	$	59,581	$	(64,489	)	$	92,584

- 22 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note H - Operations by Business Segment, continued

	Three months ended September 30, 2002
	Network Services		Payment Services		Other			Total
Revenue	$	155,500	$	358,889	$	—		$	514,389
Cost of operations		61,222		305,957		—			367,179
Selling, general and administrative expenses		—		—		31,233			31,233
Merger, acquisition, restructuring and write-off charges		—		—		—			—
Litigation settlement charges (credits)		—		—		(11,000	)		(11,000	)
Investment income		—		—		20,653			20,653
Interest expense		—		—		3,054			3,054
Other income, net		—		—		1,023			1,023
Income taxes		—		—		50,959			50,959
Minority interest in subsidiary		—		—		311			311
Net income (loss)	$	94,278	$	52,932	$	(52,881	)	$	94,329
	Nine months ended September 30, 2003
	Network Services		Payment Services		Other			Total
Revenue	$	488,344	$	1,190,047	$	—		$	1,678,391
Cost of operations		198,825		1,021,943		—			1,220,768
Selling, general and administrative expenses		—		—		100,393			100,393
Merger, acquisition, restructuring and write-off charges		8,154		9,286		—			17,440
Litigation settlement charges (credits)		—		—		—			—
Investment income		—		—		41,718			41,718
Interest expense		—		—		6,259			6,259
Other income, net		—		—		18,314			18,314
Income taxes		—		—		136,340			136,340
Minority interest in subsidiary		—		—		806			806
Net income (loss)	$	281,365	$	158,818	$	(183,766	)	$	256,417

- 23 -

CONCORD EFS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note H - Operations by Business Segment, continued

	Nine months ended September 30, 2002
	Network Services		Payment Services		Other			Total
Revenue	$	455,848	$	968,403	$	—		$	1,424,251
Cost of operations		174,653		806,343		—			980,996
Selling, general and administrative expenses		—		—		88,372			88,372
Merger, acquisition, restructuring and write-off charges		31,278		45,228		—			76,506
Litigation settlement charges (credits)		—		—		9,761			9,761
Investment income		—		—		59,723			59,723
Interest expense		—		—		8,816			8,816
Other income, net		—		—		7,937			7,937
Income taxes		—		—		115,033			115,033
Minority interest in subsidiary		—		—		671			671
Net income (loss)	$	249,917	$	116,832	$	(154,993	)	$	211,756

- 24 -

CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

You should read the following discussion together with our consolidated financial statements and the notes to those financial statements, which are included in this report. This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates, and assumptions, based on information available at the time of the statement or, with respect to any document incorporated by reference, available at the time that such document was prepared. Forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives, and expectations. The words “anticipate,” “ believe,” “estimate,” “expect,” “plan,” “intent,” “likely,” “will,” “should,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors, including those set forth below, which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements.

Important factors that could cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements include, but are not limited to: (i) the failure to successfully execute our corporate consolidation plans, (ii) the loss of key personnel or inability to attract additional qualified personnel, (iii) the loss of key customers or renewal of customer contracts on less favorable terms, (iv) increasing competition and its effect on our margins, (v) changes in card association rules and practices, (vi) the inability to remain current with rapid technological change, (vii) risks related to acquisitions, (viii) the imposition of additional state taxes, (ix) continued consolidation in the banking and retail industries, (x) business cycles and the credit risk of our merchant customers, (xi) the outcome of litigation involving VISA and MasterCard, (xii) utility and system interruptions or processing errors, (xiii) information theft, (xiv) susceptibility to merchant fraud and credit and fraud risk of entities we sponsor into networks, (xv) changes in card association fees or products, (xvi) automated teller machine market saturation or restrictions on surcharging, (xvii) rules and regulations governing financial institutions and other networks and changes in such rules and regulations, (xviii) the timing and extent of changes in interest rates, (xix) volatility of the price of our common stock, (xx) litigation risks, and (xxi) the receipt of regulatory approvals required for the planned merger with First Data Corporation, as well as the timing of the anticipated completion and possible conditions of the planned merger and their consequences.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time. See the cautionary statements included as Exhibit 99.1 to this quarterly report on Form 10-Q for a more detailed discussion of certain of the factors that could cause our actual results to differ materially from those included in the forward-looking statements.

Overview

Concord EFS, Inc. (Concord), an electronic transaction processor, provides the technology and network systems that make payments and other financial transactions faster, more efficient, and more secure than paper-based alternatives. As a vertically integrated service provider, we acquire, route, authorize, capture, and settle virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide.

On April 1, 2003 First Data Corporation (First Data) and Concord entered into a definitive agreement to merge in an all-stock transaction. Upon completion of the transaction, the combined company is expected to have approximately $10.0 billion in annual revenues with more than 31,000 employees worldwide.

First Data will exchange 0.40 First Data common shares for every Concord common share. Upon completion of the transaction, based on the number of FDC and Concord shares and options outstanding on September 8, 2003, Concord stockholders are expected to own approximately 21% of the outstanding shares of First Data on a fully diluted basis. On October 28, 2003, at their respective special meetings, the stockholders of First Data and Concord approved of the agreement to merge. The transaction remains, however, subject to various regulatory approvals and other customary closing conditions. Currently a lawsuit filed by the Antitrust Division of the Department of Justice and the Attorneys General of seven states and the District of Columbia is pending challenging the proposed merger. This case is set for trial on December 15, 2003.

We organize our business into two segments based upon the different products and services that we offer to the different industries we serve. Our reportable business segments are Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management, and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides point of sale (POS) processing, settlement, and related services, with specialized systems focusing on supermarkets, major retailers, gas stations, convenience stores, restaurants, and trucking companies.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Network Services

Network Services provides the systems and processing that allow financial institutions to offer their customers access to their deposit accounts at ATMs and POS locations. Our network access services include transaction switching and settlement, plus related support services to our customers. We operate the network switch for the combined STAR_sm, MAC^_®, and Cash Station^® debit networks that connects over 1.2 million ATMs and POS locations that accept debit cards issued by our member financial institutions. In addition, we provide ATM processing and monitoring, transaction routing and authorization via credit card associations and debit networks, deposit risk management, and card management, authorization, and fraud protection for PIN-secured debit and signature debit cards.

We are actively pursuing the renewal of our most significant Network Services customer contracts that would, if not renewed, terminate on December 31, 2004. These contracts accounted in 2002 for less than $100.0 million in revenue. There can be no assurance that such customer contracts will be renewed. We may be required to make material expenditures in order to secure the renewals. As negotiations of certain contract renewals are ongoing, we cannot currently predict the aggregate amount of such expenditures.

Payment Services

Payment Services provides the systems and processing that allow retail clients to accept virtually any type of electronic payment, including all card types – credit, debit, electronic benefits transfer (EBT), prepaid, and proprietary cards – as well as a variety of check-based options. We provide POS processing, settlement, and related services, with specialized systems focusing on supermarkets, major retailers, gas stations, convenience stores, restaurants, and trucking companies. Our services are generally turn-key, providing merchants with POS terminal equipment, transaction routing and authorization, settlement, funds movement, and sponsorship into all credit card associations (such as VISA and MasterCard) and debit networks (such as STAR, Pulse, and NYCE).

As previously disclosed, we had expected to organize a new segment during the 2003 fiscal year. Our new Risk Management Services segment would provide software, information, and analysis to financial institutions, retailers, government service providers, and other businesses to assist in fraud prevention and reduction. In part as a result of our agreement and plan of merger with First Data, we have not yet determined when or if we will organize a Risk Management Services segment.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Consolidation Plans

In the second quarter of 2002 we initiated a consolidation plan and continued our consolidation initiatives to improve overall operating efficiencies. This plan includes contract terminations, exiting a non-strategic business, closing and consolidating certain facilities, and eliminating 24 positions. We incurred charges of $27.9 million related to this plan. The consolidation activities that were initiated in the second quarter of 2002 were substantially completed by June 30, 2003.

In the first quarter of 2002 we initiated a consolidation plan to continue improvements in overall operating efficiency and integrate recent acquisitions. This plan includes closing and consolidating certain facilities, exiting several non-strategic businesses, and eliminating approximately 165 positions. We incurred charges of $46.1 million related to this consolidation plan. The consolidation activities that were initiated in the first quarter of 2002 were substantially completed by March 31, 2003.

Components of Revenue and Expenses

Network Services and Payment Services are our two reportable business segments. These business units are managed separately because they offer distinct products for different end users. All of our revenue is generated and all of our assets are located in the United States, and no single customer accounts for a material portion of our revenue. The majority of our revenue is tied to contracts with initial terms of between three and five years.

A principal component of our revenue is derived from Network Services (28.7% and 30.2% in the three months ended September 30, 2003 and 2002, and 29.1% and 32.0% in the nine months ended September 30, 2003 and 2002). Network Services revenue consists of access and switching fees for network access, processing fees for driving and monitoring ATMs, and processing fees for managing debit card records, plus network fees charged to us by other networks and billed to our customers. We recognize this revenue at the time of the transaction.

The majority of our revenue (71.3% and 69.8% in the three months ended September 30, 2003 and 2002, and 70.9% and 68.0% in the nine months ended September 30, 2003 and 2002) is derived from transaction fees and other income related to Payment Services. Revenue from Payment Services includes discount fees charged to merchants, which are a percentage of the dollar amount of each credit card or signature debit card transaction we process, as well as a flat fee per transaction. These discount and flat fees constitute a bundled rate for the transaction authorization, processing, settlement, and funds transfer services we provide, plus the interchange fees charged to us by the card associations. The fee structure for smaller merchants includes the flat fee per transaction and a discount rate generally greater than the card association interchange rate. The fee structure for larger merchants includes the flat fee per transaction and a

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

discount rate generally equal to the card association interchange rate. One result of having revenue partially based on a percentage of the transaction dollar amount is that lower average ticket size causes a reduction in revenue. However, net income is not always correspondingly affected because transactions with large merchants, where the discount rate is generally equal to the card association interchange rate, have a direct dollar for dollar decrease in revenue and cost of operations.

Payment Services revenue also includes fees for debit card and EBT card transactions, check verification and authorization services, and sales of POS terminals from inventory. Debit card and EBT transactions are similar to credit card transactions in that the bundled fee we charge to a merchant includes the transaction authorization, processing, settlement, and funds transfer services we provide, plus the interchange and network fees charged to us by the debit networks. We recognize this revenue at the time of the transaction.

The following table lists revenue by segment for the periods indicated (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Network Services	$	169.2	$	155.5	$	488.4	$	455.9
Payment Services		419.3		358.9		1,190.0		968.4
Total	$	588.5	$	514.4	$	1,678.4	$	1,424.3

Payment Services revenue, net of interchange fees, is an alternative generally accepted accounting principles (GAAP) revenue recognition method that Concord believes is useful to investors because it enables comparison with certain industry peers. The following table provides the impact of interchange fees on our reported revenue for the periods indicated (in millions):

	Three months ended September 30, 2003
	Network Services		Payment Services		Total
Revenue per the income statement	$	169.2	$	419.3	$	588.5
Interchange fees included in revenue		—		268.6		268.6
Revenue, net of interchange fees	$	169.2	$	150.7	$	319.9

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	Three months ended September 30, 2002
	Network Services		Payment Services		Total
Revenue per the income statement	$	155.5	$	358.9	$	514.4
Interchange fees included in revenue		—		220.1		220.1
Revenue, net of interchange fees	$	155.5	$	138.8	$	294.3
	Nine months ended September 30, 2003
	Network Services		Payment Services		Total
Revenue per the income statement	$	488.4	$	1,190.0	$	1,678.4
Interchange fees included in revenue		—		766.4		766.4
Revenue, net of interchange fees	$	488.4	$	423.6	$	912.0
	Nine months ended September 30, 2002
	Network Services		Payment Services		Total
Revenue per the income statement	$	455.9	$	968.4	$	1,424.3
Interchange fees included in revenue		—		580.5		580.5
Revenue, net of interchange fees	$	455.9	$	387.9	$	843.8

Cost of operations includes all costs directly attributable to our providing services to our customers. In Payment Services the most significant component of cost of operations is interchange fees, which amounted to $268.6 million and $220.1 million in the three months ended September 30, 2003 and 2002, and $766.4 million and $580.5 million in the nine months ended September 30, 2003 and 2002. In most instances, the interchange fee is a percentage of the transaction amount and is charged to us by the credit card associations and debit networks. Cost of operations in both Network Services and Payment Services also includes telecommunications costs, personnel costs, occupancy costs, depreciation, and the cost of equipment leased and sold.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table lists cost of operations by segment for the periods indicated (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Network Services	$	67.2	$	61.2	$	198.8	$	174.7
Payment Services		354.7		306.0		1,022.0		806.3
Total	$	421.9	$	367.2	$	1,220.8	$	981.0

Our selling, general and administrative expenses include certain salaries, sales commissions, and other general administrative expenses, including legal fees, accounting fees, advertising, and marketing expenses. These costs are not allocated to the reportable segments.

Information regarding our business segments is included under the caption “Note H – Operations by Business Segment” in the notes to our consolidated financial statements and is incorporated herein by reference.

Results of Operations

The following table shows the percentage of revenue represented by certain items on our consolidated statements of income for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of operations	71.7		71.4		72.7		68.9
Selling, general and administrative expenses	5.8		6.1		6.0		6.2
Merger, acquisition, restructuring and write-off charges	1.6		—		1.1		5.4
Litigation settlement charges (credits)	—		(2.1	)	—		0.7
Operating income	20.9		24.6		20.2		18.8
Net investment income	1.8		3.4		2.1		3.6
Other income, net	1.2		0.2		1.1		0.6
Income before taxes	23.9		28.2		23.4		23.0
Income taxes	8.2		9.9		8.1		8.1
Net income	15.7	%	18.3	%	15.3	%	14.9	%

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter 2003 Compared to 2002

Revenue increased 14.4% to $588.5 million in the third quarter of 2003 from $514.4 million in the same period of 2002. In the third quarter of 2003 Network Services accounted for 28.7% of revenue, and Payment Services accounted for 71.3%. Network Services revenue increased 8.8% over the same period in 2002. This increase was attributable to a 9.3% increase in transaction volumes and increased non-transaction processing fees, offset by increased amortization of capitalized customer payments. The increased transaction volumes from new and existing network and processing customers resulted from a 15.6% increase in STAR network POS transactions. Revenue from Payment Services increased 16.8% over the same period in 2002, due to a 22.6% increase in transaction volumes, offset by price compression. Interchange fees in the third quarter of 2003 increased 22.0% or $48.5 million. Payment Services revenue, net of interchange fees, increased 8.6% or $11.9 million during this period due to transaction growth from the addition of large lower margin merchants and the expansion of relationships with existing lower margin merchants. Payment Services revenue, net of interchange fees, is an alternative GAAP revenue recognition method that Concord believes is useful to investors because it enables comparison with certain industry peers. The transaction volume increase includes a 20.5% increase in PIN-debit card transactions, a 36.0% increase in EBT card transactions, and an 18.9% increase in credit card and signature debit transactions at new and existing merchants.

Cost of operations increased in the third quarter of 2003 to 71.7% of revenue compared to 71.4% in the same period in 2002. Overall, cost of operations increased to $421.9 million in the third quarter of 2003 from $367.2 million in the same period in 2002. This increase was due to increased transaction volumes that resulted in increased interchange fees of $48.5 million in Payment Services and increased salary, benefits and depreciation. The increased interchange fees as a percentage of revenue resulted from the addition of large lower margin merchants, the expansion of relationships with existing large lower margin merchants, and price increases instituted by the debit and credit networks.

Selling, general and administrative expenses decreased as a percentage of revenue to 5.8% in the third quarter of 2003 from 6.1% in the same period in 2002. Overall, selling, general and administrative expenses increased to $34.1 million in the third quarter of 2003 from $31.2 million in the same period in 2002. This increase was attributable to increased salary and sales commissions offset by reduced marketing expenses.

Merger, acquisition, restructuring and write-off charges were $9.5 million in the third quarter of 2003. There were no such charges in the same period in 2002. The charges incurred in the third quarter of 2003 represent professional fees and other costs related to the First Data merger.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

There were no litigation settlement charges in the third quarter of 2003. We reduced our litigation settlement charges by $11.0 million in the third quarter of 2002. The charges represent credits and payments to merchants and former merchants, legal expenses, and claims administration expenses in connection with a settlement agreement relating to a purported class action lawsuit alleging that certain rate and fee charges were improper under Tennessee law due to allegedly deficient notice.

Operating income as a percentage of revenue decreased to 20.9% in the third quarter of 2003 from 24.6% in the same period in 2002. This decrease was due to an increase of $9.5 million in 2003 merger, acquisition, restructuring, and write-off charges and the reversal of $11.0 million in litigation settlement charges in 2002.

Net investment income decreased as a percentage of revenue to 1.8% in the third quarter of 2003 from 3.4% in the same period in 2002. Overall, net investment income decreased 40.0% to $10.6 million in the third quarter of 2003 compared to $17.6 million in the same period in 2002. This decrease resulted from lower rates of return and less cash available for investment due to the repurchase of our common stock during the third quarter in 2003 of $306.3 million and during the third and fourth quarters in 2002 of $393.5 million.

Other income increased as a percentage of revenue to 1.2% in the third quarter of 2003 from 0.2% in the same period in 2002. This increase was due to increased gain on the sale of securities in the third quarter of 2003.

Our overall tax rate was 34.0% in the third quarter of 2003 compared to 35.0% in 2002. This decrease was due to a reassessment of our effective tax rate based on filing our 2002 federal and state tax returns in the third quarter of 2003.

Net income as a percentage of revenue decreased to 15.7% in the third quarter of 2003 from 18.3% in the same period in 2002. The components of this decrease are explained above.

Nine months ended September 30, 2003 compared to 2002

Revenue increased 17.8% to $1,678.4 million in the nine months ended September 30, 2003 from $1,424.3 million in the same period of 2002. In the nine months ended September 30, 2003 Network Services accounted for 29.1% of revenue, and Payment Services accounted for 70.9%. Network Services revenue increased 7.1% over the same period in 2002. This increase was attributable to an 11.7% increase in transaction volumes, the full year impact of prior year acquisitions, increased non-transaction processing fees, offset by increased amortization of capitalized customer payments. The increased transaction volumes from new and existing network and processing customers resulted from a 17.8% increase in STAR network POS transactions. Revenue from Payment Services increased 22.9% over the same period in 2002, due to interchange fee price increases and a 27.4% increase in transaction volumes, offset by price

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

compression. Interchange fees in the nine months ended September 30, 2003 increased 32.0% or $185.9 million. Payment Services revenue, net of interchange fees, increased 9.2% or $35.7 million during this period due to transaction growth from the addition of large lower margin merchants and the expansion of relationships with existing lower margin merchants. Payment Services revenue, net of interchange fees, is an alternative GAAP revenue recognition method that Concord believes is useful to investors because it enables comparison with certain industry peers. The transaction volume increase includes a 26.8% increase in PIN-debit card transactions, a 33.1% increase in EBT card transactions, and a 23.8% increase in credit card and signature debit transactions at new and existing merchants.

Cost of operations increased in the nine months ended September 30, 2003 to 72.7% of revenue compared to 68.9% in the same period in 2002. Overall, cost of operations increased to $1,220.8 million in the nine months ended September 30, 2003 from $981.0 million in the same period in 2002. This increase was due to increased transaction volumes that resulted in increased interchange fees of $185.9 million in Payment Services, increased depreciation, increased assessments and other pass through fees, increased salary and benefits, and the write-off of excess supplies inventory. The increased interchange fees as a percentage of revenue resulted from the addition of large lower margin merchants, the expansion of relationships with existing large lower margin merchants, and price increases instituted by the debit and credit networks.

Selling, general and administrative expenses decreased as a percentage of revenue to 6.0% in the nine months ended September 30, 2003 from 6.2% in the same period in 2002. Overall, selling, general and administrative expenses increased to $100.4 million in the nine months ended September 30, 2003 from $88.4 million in the same period in 2002. This increase was attributable to increased salary, sales commissions and professional fees, offset by reduced marketing expenses.

Merger, acquisition, restructuring and write-off charges decreased to $17.4 million in the nine months ended September 30, 2003 from $76.5 million in the same period in 2002. The charges incurred in the nine months ended September 30, 2003 included $18.4 million representing professional fees and other costs related to the First Data merger offset by a $1.0 million change in estimate related to our first and second quarter 2002 consolidation plans. The charges incurred in the same period in 2002 included $24.1 million for the write-off of non-performing purchased merchant contracts, $16.8 million for contract terminations, $7.9 million for the write-off of capitalized software and equipment no longer in use, and $27.7 million for other activities.

There were no litigation settlement charges in the nine months ended September 30, 2003. Such charges in the same period in 2002 amounted to $9.8 million and represent credits and payments to merchants and former merchants, legal expenses, and claims administration expenses in connection with a settlement agreement relating to a purported class action lawsuit alleging that

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

certain rate and fee charges were improper under Tennessee law due to allegedly deficient notice.

Operating income as a percentage of revenue increased to 20.2% in the nine months ended September 30, 2003 from 18.8% in the same period in 2002. This increase was due to a decrease of $59.1 million in merger, acquisition, restructuring, and write-off charges and a decrease of $9.8 million in litigation settlement charges, offset by the addition of lower margin revenue from large merchants.

Net investment income decreased as a percentage of revenue to 2.1% in the nine months ended September 30, 2003 from 3.6% in the same period in 2002. Overall, net investment income decreased 30.4% to $35.5 million in the nine months ended September 30, 2003 compared to $50.9 million in the same period in 2002. This decrease resulted from lower rates of return and less cash available for investment due to the repurchase of our common stock during the third quarter in 2003 of $306.3 million and during the third and fourth quarters in 2002 of $393.5 million.

Other income increased as a percentage of revenue to 1.1% in the nine months ended September 30, 2003 from 0.6% in the same period in 2002. This increase was due to increased gain on the sale of securities in the nine months ended September 30, 2003.

Our overall tax rate decreased to 34.6% in the nine months ended September 30, 2003 compared to 35.1% in the same period in 2002.

Net income as a percentage of revenue increased to 15.3% in the nine months ended September 30, 2003 from 14.9% in the same period in 2002. The components of this increase are explained above.

Liquidity and Capital Resources

In the nine months ended September 30, 2003 we generated cash of $346.3 million from operating activities. Included in this amount is $21.4 million from the change in settlement receivables and payables. Fluctuations in settlement receivable and payable balances are affected by the timing of settlements. If the end of a reporting period occurs on a Saturday or Sunday, we are due cash from the credit card associations that is payable to our merchants. If the end of a reporting period occurs on a Monday, we hold multiple days of cash that is payable to our merchants. This may inflate the period-end cash balance and cash provided by operating activities on our cash flow statement. Conversely, cash provided by operating activities may be adversely affected for the next reporting period depending on what day of the week the reporting period ends. All settlement cash balances are cleared in one or two business days. Inclusion of settlement in GAAP cash flows is not indicative of cash provided by operating activities unless settlement receivable and payable amounts are consistent from period to period.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We generally hold a significant amount of cash and securities because of the capital requirements of banking regulators and because of the liquidity requirements associated with conducting settlement operations and owning ATM machines. During the nine months ended September 30, 2003, we liquidated $182.0 million in securities available for sale, net of acquisitions due to market conditions and the repurchase of our common stock. As of September 30, 2003, we held securities with a market value of $932.1 million, including $184.2 million pledged as collateral for Federal Home Loan Bank (FHLB) advances. We invested $79.1 million in the nine months ended September 30, 2003 in capital expenditures, which were for capitalized and purchased software and computer facilities and equipment.

We have historically financed our operations through net cash provided by operating activities, the issuance of equity, and the exercise of stock options. Our last public offering of common stock occurred in June 2001 when we received $420.6 million, net of underwriting and other expenses, for the 17.8 million shares of common stock we issued and sold. Proceeds from the exercise of stock options has decreased from historical amounts due to the per share market value of our common stock.

As of September 30, 2003, we had a line of credit with a financial institution totaling $20.0 million and no amounts were outstanding on this line of credit. As of September 30, 2003, we had $149.8 million of advances outstanding to, and $18.2 million in unused lines of credit with, the FHLB. In the nine months ended September 30, 2003 we paid $48.3 million on FHLB advances, net of proceeds.

During the third and fourth quarters of 2002, we announced that our Board of Directors approved the repurchase of up to $500.0 million of our common stock. On July 29, 2003 we announced that our Board of Directors approved the repurchase of an additional $200.0 million of our common stock. Under the repurchase plan, we may buy back shares of our outstanding stock from time to time either on the open market or through privately negotiated transactions. The Board’s approvals bring the total approved repurchase to $700.0 million. Due to the imposition of a blackout period during and following the negotiation and execution of the merger agreement with First Data and our fourth quarter 2002 earnings release, there were no shares repurchased during the first and second quarters of 2003. During the third quarter of 2003, we repurchased a total of 21.8 million shares at an aggregate cost of $306.3 million.

During the second quarter of 2003, we entered into amended and restated agreements for the financing, construction and leasing of a new corporate headquarters in Memphis, Tennessee. These agreements amend the previous agreements entered into during the third quarter of 2002 for the Memphis facility to include leasing existing facilities in Wilmington, Delaware, and Marietta, Georgia that were covered under other leasing agreements. The agreements qualify for operating lease accounting treatment under Statement of Financial Accounting Standards 13, “Accounting For Leases,” and, as such, the related assets and obligations are not recorded on our balance sheet. Upon completion of construction of the Memphis facility, which is expected in

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the fourth quarter of 2003, rent payments will begin and will be expensed in our statements of income. The minimum annual lease payments under these agreements are not material to us. At the end of the lease term, we have options that include the renewal of the leases and fixed-price purchase options on the land and facilities. We have guaranteed the residual value of the land and facilities at the end of the lease term to the owner / lessor for each facility. Under these guarantees, we would be responsible for a decline in fair value during the lease term up to an estimated maximum amount if we do not exercise our option to acquire the land and facilities at the end of the term of the leases. The following table summarizes the guarantees and certain aspects of the agreements:

Property Location	Lease Expiration	Renewal Option at Expiration	Value Guaranteed at Expiration	Total Cost Financed
Wilmington, DE	Jan. 2010	One five-year term	$12.5 million	$15.0 million
Marietta, GA	Jan. 2010	One five-year term	$16.7 million	$20.0 million
Memphis, TN	Jan. 2010	One five-year term	$45.9 million	$55.0 million

Based on current market conditions, we do not expect to be required to make payments under these residual value guarantees.

We are actively pursuing the renewal of our most significant Network Services customer contracts that would, if not renewed, terminate on December 31, 2004. These contracts accounted in 2002 for less than $100.0 million in revenue. There can be no assurance that such customer contracts will be renewed. We may be required to make material expenditures in order to secure the renewals. As negotiations of certain contract renewals are ongoing, we cannot currently predict the aggregate amount of such expenditures.

We and certain of our directors and certain of our officers have been named as defendants in a number of securities fraud class action lawsuits and shareholder derivative actions. In addition, the Antitrust Division of the Department of Justice and the Attorneys General of seven states and the District of Columbia have filed a complaint challenging our proposed merger with First Data. We are also party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution or settlement of a particular lawsuit could have an adverse effect on our business, operating results, and financial condition.

Pursuant to the terms of a change of control agreement with an unaffiliated third party, we will be required, upon the consummation of the proposed merger with First Data, to make a payment of $5.0 million to that party, plus an additional $5.0 million depending on the amount of certain revenues during the six-month period immediately preceding the merger.

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CONCORD EFS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In our agreement and plan of merger with First Data, we are obligated to pay a termination fee of $210.0 million under certain terms and conditions in the event the agreement is terminated.

We believe that our cash and cash equivalents, securities, available credit (unused lines of credit with the FHLB and the line of credit with a financial institution), and cash generated from operations are adequate to meet our capital and operating needs. Concord EFS National Bank, our wholly owned financial institution subsidiary, exceeded all required regulatory capital ratios as of September 30, 2003.

Effects of Inflation

Our assets are monetary, consisting of cash, assets convertible into cash, securities, and receivables. Because of their liquidity, these assets are not significantly affected by inflation; however, earnings and asset values are impacted by the interest rate environment. We believe that anticipated replacement costs of software, facilities, and equipment will not materially affect operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of our services.

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CONCORD EFS, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2003, there were no changes with regard to market risk that would require further quantitative or qualitative disclosure. For our quantitative and qualitative disclosures about market risk for the fiscal year ended December 31, 2002, refer to Exhibit 13 to our annual report on Form 10-K filed on March 27, 2003.

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CONCORD EFS, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

Item 4. Controls and Procedures

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our Co-Chief Executive Officers and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in various litigation matters arising out of the conduct of our business. Previously pending matters that are material to us were reported in our Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 27, 2003, our quarterly report on Form 10-Q for the quarter ended March 31, 2003 filed on May 9, 2003, and our quarterly report on Form 10-Q for the quarter ended June 30, 2003 filed on August 11, 2003. There were no material developments in the litigation matters previously disclosed except for the developments discussed below.

On October 23, 2003 the Antitrust Division of the Department of Justice and the Attorneys General of the states of Connecticut, Illinois, Louisiana, Massachusetts, New York, Ohio, Texas and the District of Columbia filed a complaint in the United States District Court for the District of Columbia challenging the proposed merger of Concord and First Data. The complaint alleges that the merger would likely substantially lessen competition in the provision of PIN debit network services in violation of the Clayton Act. The complaint seeks an order permanently enjoining Concord and First Data from consummating the proposed merger, attorneys’ fees and costs and other relief the court deems just and proper. This case has been set for trial on December 15, 2003.

As a result of this complaint, we may be unable to obtain the regulatory approvals required to complete the merger or, in order to obtain the necessary approval, the combined company may be required to comply with material restrictions or conditions. Denial or condition of such regulatory approvals could result in loss or disadvantage to us. Although this matter is in the preliminary stages, we believe that the claims are without merit and we intend to vigorously defend against all claims.

As previously disclosed, a purported securities class action and two purported stockholder derivative actions are pending against us and certain of our current and former officers and directors, as well as other defendants. The following table lists certain information with respect to these actions, as of October 23, 2003:

Name of Proceeding	Filing Date +	Type of Case
In re Concord EFS, Inc. Derivative Litigation	September 9, 2002 *	Derivative
In re Concord EFS, Inc. Securities Litigation	September 6, 2002 **	Securities Fraud
In re Concord EFS, Inc. Derivative Litigation	September 13, 2002 **	Derivative

+ For consolidated matters, the filing date represents the date on which the first component case was filed.

* Pending in Tennessee state court in Memphis (Circuit Court)

** Pending in the United States District Court for the Western District of Tennessee

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings, continued

All of the above lawsuits raise allegations relating to our financial performance between March 2001 and September 2002, changes in the price of our common stock during that time, alleged failures to disclose material facts, and alleged insider trading and breaches of fiduciary duties by certain officers and certain directors. On April 21, 2003 the plaintiffs in the Tennessee state court derivative action filed a consolidated complaint which adds allegations that the defendants arranged the proposed merger with First Data at a below market price in return for indemnification against alleged prior wrong doing and for other benefits to them personally. The lawsuits seek unspecified compensatory and punitive damages, attorneys’ fees and other relief. In addition, the Tennessee state court derivative action seeks an injunction against the proposed merger.

On April 1, 2003 we filed a motion to dismiss the consolidated amended complaint filed in federal court in In re Concord EFS, Inc. Derivative Litigation. This motion was fully briefed as of May 30, 2003, but has yet to be ruled on by the court.

On May 2, 2003 we filed a motion to dismiss the consolidated amended complaint filed by the lead plaintiffs in In re Concord EFS, Inc. Securities Litigation. This motion was fully briefed as of June 25, 2003, but has yet to be ruled on by the court.

On June 20, 2003 we filed a motion to dismiss the consolidated complaint filed in Tennessee state court in In re Concord EFS, Inc. Derivative Litigation. This motion has yet to be ruled on, but the court has permitted the plaintiffs to conduct limited, expedited discovery pertaining to the proposed merger. On October 27, 2003 the plaintiffs in this matter filed a motion to temporarily enjoin our shareholder vote on the proposed merger. This motion was denied by the court the same day.

Although these matters are in the preliminary stages, we believe that the claims against us and our directors and officers are without merit and intend to vigorously defend against all claims.

On July 30, 2003 John D’Eri filed a lawsuit against Concord, National Payment Systems Inc., and Concord Payment Systems (CPS) in New York State Supreme Court. The plaintiff was the principal of a business that had contracted to have CPS provide credit card processing services. CPS has unsuccessfully sought to collect $90,000 of the business’s unpaid obligations from the plaintiff, based upon his personal guaranty. The complaint alleges claims of defamation and tortious interference, asserting that the plaintiff did not sign a guaranty and that CPS wrongfully reported his failure to honor the guaranty to credit rating agencies. The complaint seeks damages in excess of $10.0 million and to compel CPS to withdraw its report to the credit rating agencies. On October 13, 2003 we answered the complaint, denying the allegations and asserting

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings, continued

counterclaims against the plaintiff. Although this matter is in the preliminary stages, we believe that the claims against us are without merit and we intend to vigorously defend against all claims.

On April 30, 2003 Global Marketing, LLC (Global) and Martin Fischer filed an amended complaint naming CPS as a defendant in a lawsuit first filed on August 28, 2002 in New York State Supreme Court. The plaintiffs allege that CPS engaged in unfair competition and tortious interference by allegedly hiring a former employee of Global and then allegedly using trade secrets that the employee misappropriated from Global. The complaint seeks damages in the amount of $4.0 million for unspecified losses. On July 31, 2003 CPS answered the complaint, denying the allegations, asserting that it had never hired or otherwise had contact with the individual in question. Although this matter is in the preliminary stages, we believe that the claims are without merit and we intend to vigorously defend against all claims.

On or about April 3 and 4, 2003 two purported class action complaints were filed in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis by Charles Reed and Coralyn Stransky. The defendants in those actions were certain of our current and former officers and directors. The complaints generally alleged breaches of the defendants’ duty of loyalty and due care in connection with the defendants’ alleged attempt to sell Concord without maximizing the value to shareholders in order to advance the defendants’ alleged individual interests in obtaining indemnification agreements related to the securities and other derivative litigation discussed above. The complaints sought class certification, injunctive relief directing the defendants’ conduct in connection with an alleged sale or auction of Concord, reasonable attorneys’ fees, experts’ fees and other costs and relief the court deems just and proper. These complaints were consolidated into one action (In re Concord EFS, Inc. Shareholder Litigation) and transferred to the division of the Shelby County Circuit Court in which the Tennessee consolidated state-court derivative action (In re Concord EFS, Inc. Derivative Litigation, filed September 9, 2002) is pending.

On or about April 2, 2003 an additional purported class action complaint was filed in the Chancery Court for Shelby County, Tennessee, by Barton K. O’Brien. The defendants were Concord, certain of our current and former officers and directors, and First Data. This complaint contained allegations regarding the individual defendants’ alleged insider trading and alleged violations of securities and other laws and asserted that this alleged misconduct reduced the consideration offered to our shareholders in the proposed merger between Concord and First Data. The complaint sought class certification, attorneys’ fees, experts’ fees, costs and other relief the court deems just and proper. Moreover, the complaint also sought an order enjoining consummation of the merger, rescinding the

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings, continued

merger if it is consummated and setting it aside or awarding rescissory damages to members of the putative class, and directing the defendants to account to the putative class members for unspecified damages. On June 25, 2003 this complaint was transferred to the Shelby County Circuit Court in which In re Concord EFS, Inc. Shareholder Litigation is pending. Through a court-ordered second amended consolidated complaint filed September 19, 2003, this matter was consolidated with that matter. On October 15, 2003, the plaintiffs moved for leave to file a third amended consolidated complaint similar to the previous complaints but also alleging that the proxy statement disclosures relating to the antitrust regulatory approval process were inadequate. On October 17, 2003, the plaintiffs filed a motion for preliminary injunction to enjoin the shareholder vote on the proposed merger and/or the merger itself. The court denied the plaintiffs’ motion on October 20, 2003 but ordered deposition discovery on an expedited basis. On October 27, 2003 the plaintiffs filed a renewed motion to enjoin the shareholder vote, which was denied by the court the same day. Although this consolidated matter is still in the preliminary stages, we believe that the claims are without merit and we intend to vigorously contest these claims.

On November 5, 2002 Richard R. Sutherland filed a lawsuit against a number of defendants, including Concord EFS National Bank, in the Superior Court of California, County of Santa Clara. The plaintiff made several allegations, including breach of contract, fraud and negligent misrepresentation arising out of business transactions between the plaintiff and Purchase Plus Buyers Group, an entity which formerly processed credit card transactions through Concord EFS National Bank. This lawsuit sought compensatory damages in the amount of $55,000 and punitive damages in the amount of $195.0 million. Concord EFS National Bank filed a demurrer seeking dismissal of the complaint. The court granted the motion on October 10, 2003 with leave to amend. Should the plaintiff file an amended complaint, we intend to vigorously contest the plaintiff’s claims.

On June 11, 2002 Walter E. Ryan and Ryco Development, Inc. filed a purported class action lawsuit against Concord EFS National Bank, Concord, and John Doe Corporations in the United States District Court for the Western District of Tennessee. The plaintiffs alleged that we changed fees and charges without providing the requisite notice, charged merchants for transactions that never occurred, and failed to route payments in accordance with the plaintiffs’ instructions. The plaintiffs alleged fraud, breach of contract, conversion, and causes of action under the Tennessee Consumer Protection Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). The class plaintiffs sought to certify consisted of all merchant customers of Concord EFS National Bank, Concord, or John Doe Corporations, who were subject to charges that were not fully disclosed on their statements, charges for transactions which the merchant never

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings, continued

undertook, and/or charges in excess of the amount agreed upon in their contracts. The lawsuit sought unspecified compensatory and punitive damages, attorneys’ fees, and other relief. We moved to dismiss all claims, the motion was granted by the court on August 13, 2003 and judgment was entered in favor of Concord EFS National Bank and Concord on August 19, 2003. On September 11, 2003 the plaintiffs filed a notice of appeal. No briefing schedule has yet been set. We intend to vigorously defend this appeal.

On October 31, 1996 Commonwealth Savings Bank (Commonwealth) filed a lawsuit against CoreStates Financial Corp. (CoreStates) in the Court of Common Pleas of Chester County, Pennsylvania. On August 6, 1997 Commonwealth added MONEY ACCESS SERVICE INC. (MASI), a subsidiary of ours, as a defendant therein, alleging that MASI is liable to Commonwealth for an amount in excess of $3.6 million based on claims arising out of alleged errors in the conversion of certain Meridian Bank branches to the MAC network and MASI processing at the time the branches were acquired by Commonwealth from CoreStates and CoreStates’ affiliates. Discovery is complete. The court has struck various reports and portions of reports submitted by Commonwealth’s damages experts. At a deposition in March 2000, Commonwealth’s expert testified to a damages calculation of $4.2 million. On November 15, 2002 CoreStates and MASI filed motions for partial summary judgment on all but a small part of Commonwealth’s remaining claim, which were denied on April 15, 2003. This case has been set for trial on February 2, 2004. On September 22, 2003, the court heard our motion in limine relating to expert testimony and requesting a Frye hearing but has not ruled on this motion. We believe that the claims against us are without merit and intend to continue to vigorously defend against all claims.

We are also a party to various routine lawsuits arising out of the conduct of our business, none of which is expected to have a material adverse effect upon our financial condition or results of operations.

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

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

At a special meeting of our shareholders held on October 28, 2003, our shareholders elected to adopt the Agreement and Plan of Merger, dated as of April 1, 2003, among First Data Corporation, Monaco Subsidiary Corporation, a wholly owned subsidiary of First Data, and Concord EFS, Inc., with votes cast as follows: 294,532,600 shares for, 1,749,882 shares against, 2,749,971 abstentions, and no broker non-votes.

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No.	Description
2.1	Agreement and Plan of Merger among Concord EFS, Inc., First Data Corporation and Monaco Subsidiary Corporation, dated as of April 1, 2003, is incorporated herein by reference to Exhibit 2.1 to Concord’s current report on Form 8-K (File No. 001-31527), filed on April 2, 2003.
3.1	Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.1 to Concord’s registration statement on Form S-8 (File No. 333-90678), filed on June 18, 2002.
3.2	Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord’s registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999.
31.1	Certification of Co-Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Co-Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Co-Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Co-Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Cautionary Statements

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K, continued

(b) Reports on Form 8-K

On July 29, 2003 we filed a current report on Form 8-K to furnish, under Item 12 of that form, our press release containing earnings information for our second quarter of 2003 ended June 30, 2003.

On October 23, 2003 we filed a current report on Form 8-K to furnish, under Item 12 of that form, our press release containing earnings information for our third quarter of 2003 ended September 30, 2003.

On October 23, 2003 we filed a current report on Form 8-K to file, under Item 5 of that form, our press release regarding the proposed merger with First Data Corporation.

On October 24, 2003 we filed a current report on Form 8-K to file, under Item 5 of that form, a press release issued by First Data Corporation and Concord EFS, Inc. regarding the complaint filed by the United States Department of Justice, seven states and the District of Columbia seeking to block the proposed merger of First Data Corporation and Concord EFS, Inc.

On October 24, 2003 we filed a current report on Form 8-K to file, under Item 5 of that form, the complaint filed on October 23, 2003 by the United States Department of Justice, seven states and the District of Columbia seeking to block the proposed merger of First Data Corporation and Concord EFS, Inc.

On October 24, 2003 we filed a current report on Form 8-K to file, under Item 5 of that form, our financial results for the three- and nine-month periods ended September 30, 2003.

On October 28, 2003 we filed a current report on Form 8-K to furnish, under Item 9 of that form, a press release announcing that our shareholders had approved a proposal to adopt the merger agreement entered into between Concord EFS, Inc., First Data Corporation and Monaco Subsidiary Corporation, a wholly owned subsidiary of First Data Corporation.

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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.

	CONCORD EFS, INC.
Date: November 7, 2003	By:	/s/    DAN M. PALMER
		Dan M. Palmer Director and Co-Chief Executive Officer (Principal Executive Officer)

Date: November 7, 2003	By:	/s/    BOND R. ISAACSON
		Bond R. Isaacson Director and Co-Chief Executive Officer (Principal Executive Officer)

Date: November 7, 2003	By:	/s/    EDWARD T. HASLAM
		Edward T. Haslam Senior Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)

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CONCORD EFS, INC. AND SUBSIDIARIES

FORM 10-Q LISTING OF EXHIBITS

Exhibit No.	Description
2.1	Agreement and Plan of Merger among Concord EFS, Inc., First Data Corporation and Monaco Subsidiary Corporation, dated as of April 1, 2003, is incorporated herein by reference to Exhibit 2.1 to Concord’s current report on Form 8-K (File No. 001-31527), filed on April 2, 2003.
3.1	Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.1 to Concord’s registration statement on Form S-8 (File No. 333-90678), filed on June 18, 2002.
3.2	Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord’s registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999.
31.1	Certification of Co-Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Co-Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Co-Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Co-Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Cautionary Statements

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Dan M. Palmer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Concord EFS, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2003
By:	/s/    DAN M. PALMER
	Dan M. Palmer Co-Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Bond R. Isaacson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Concord EFS, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2003
By:	/s/    BOND R. ISAACSON
	Bond R. Isaacson Co-Chief Executive Officer

EX-31.3

Exhibit 31.3

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Edward T. Haslam, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Concord EFS, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2003
By:	/s/    EDWARD T. HASLAM
	Edward T. Haslam Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350, as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Concord EFS, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dan M. Palmer, Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2003	By:	/s/    DAN M. PALMER
		Dan M. Palmer Co-Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Concord EFS, Inc. and will be retained by Concord EFS, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350, as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Concord EFS, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bond R. Isaacson, Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2003	By:	/s/    BOND R. ISAACSON
		Bond R. Isaacson Co-Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Concord EFS, Inc. and will be retained by Concord EFS, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.3

Exhibit 32.3

Certification Pursuant to 18 U.S.C. Section 1350, as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Concord EFS, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward T. Haslam, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2003	By:	/s/    EDWARD T. HASLAM
		Edward T. Haslam Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Concord EFS, Inc. and will be retained by Concord EFS, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

CONCORD EFS, INC.

CAUTIONARY STATEMENTS

Press releases and the reports and other documents we file with the Securities and Exchange Commission may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates, and assumptions, based on information available at the time the document, or any document incorporated therein by reference, was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives, and expectations. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” “likely,” “will,” “should,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors which may cause our actual performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to, those indicated below. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time. You are cautioned not to rely on forward-looking statements.

1. If we fail to successfully execute our corporate consolidation plans, our business, operating results, and financial condition could be adversely affected.

We typically initiate consolidation plans to integrate our acquisitions, to exit existing businesses, and to improve the efficiency of our operations. The plans are intended, among other things, to eliminate operational redundancies and functionally integrate acquired organizations into Concord. We cannot assure you that we will be able to implement our consolidation plans without encountering difficulties or experiencing the loss of key employees or customers or that the expected benefits from such consolidation plans will be realized. If we are unsuccessful in executing our consolidation plans, our business, operating results, and financial condition could be adversely affected.

2. If we lose key personnel or are unable to attract additional qualified personnel as we grow, our business could be adversely affected.

We are dependent upon the ability and experience of a number of our key management personnel who have substantial experience with our operations, the rapidly changing electronic payment processing industry, and the selected markets in which we offer our services. It is possible that the loss of the services of one or a combination of our senior executives or key managers would have an adverse effect on our operations. Our success also depends on our ability to continue to attract, manage, and retain other

qualified middle management and technical and clerical personnel as we grow. We cannot assure you that we will continue to attract or retain such personnel.

3. Loss of key customers could adversely affect our business.

Customer attrition is due to several factors, including losses to competitors, business acquisitions and mergers, and business closures. We cannot assure you that any of our customer contracts will be renewed or, if renewed, will be renewed on terms as favorable to us as at present. If they are not renewed, or if they are renewed on less favorable terms, we may not be able to reduce our costs in proportion to the lost revenue, because many of our costs are fixed. In addition, we may be required to make material expenditures in order to secure renewals.

4. We face significant competition in each of our lines of business.

All the businesses we are engaged in are highly competitive. The level of competition has increased in recent years, and other service providers have established a sizable market share in some of the service areas in which we compete. We expect that the level of competition will continue to increase. For example, competitors to our debit network, which consist of other national and regional debit networks, continue to consolidate as large banks merge and combine their debit networks and as shared debit networks continue to combine into larger, super-regional conglomerates. The continued expansion of the national debit networks operated by VISA and MasterCard also places increasing competitive pressure on other networks as banks seek to consolidate their network affiliations. Further, several of our competitors and potential competitors have greater capital and technological, management, and marketing resources than we have, and we cannot assure you that we will continue to be able to compete successfully with such entities. The competitive pricing pressures resulting in an increase in competition could adversely affect our margins and may have an adverse effect on our business, operating results, and financial condition.

5. Current or future card association rules and practices could adversely affect our business, transaction volumes, operating results, and financial condition.

Concord EFS National Bank is a member of the VISA and MasterCard organizations and is a registered processor of Discover, American Express, and Diners Club transactions. We compete directly with VISA and MasterCard in the provision of network and transaction processing services. Further, the rules of the credit card associations are set by member banks or, in the case of Discover, American Express, and Diners Club, by the card issuers, and some of those banks and issuers are our competitors with respect to these services. With respect to our electronic benefits transfer (EBT) business, the governmental issuers of the benefits set the rules governing such transactions, and the financial institutions or processors hired by the government administer them. We cannot assure you that the credit card associations will maintain our registrations or that the current card association or EBT rules allowing us to market and provide transaction processing services will remain in effect. The termination of our

member registration or our status as a certified processor and changes in card association or EBT rules, including any that limit our ability to provide transaction processing and marketing services, could have an adverse effect on our business, transaction volumes, operating results, and financial condition. In addition, if we were precluded from processing any of these card association transactions, there can be no assurance that our processing clients would continue to use us to process transactions in other networks.

In addition, our STAR_sm network, as a result of the combination of the STAR, MAC^_®, and Cash Station^® networks, is the first regional debit network that may potentially be viewed as achieving national status in terms of size and geographic coverage. Current VISA and MasterCard rules prohibit their members from issuing the debit cards or credit cards of any competing national network, with the exception of each other. These rules also prohibit the coexistence of competing national marks on their credit and branded debit cards. If VISA or MasterCard were to determine that STAR is a competing national network and mark, they could attempt to prohibit their members from issuing STAR-branded cards and/or prohibit the coexistence of the STAR mark with the VISA and/or MasterCard marks on debit and credit cards. If this occurred, we cannot predict whether, when forced to choose between us and other brands, issuing banks would favor us over VISA or MasterCard. Further, we could lose access to the VISA or MasterCard network and cardholders, which could adversely affect our business, automated teller machine (ATM) transactions, personal identification number (PIN)-secured and signature debit transactions, credit card transactions, operating results, and financial condition.

Card issuers who participate in both STAR and VISA or MasterCard networks also may provide incentives for cardholders to use VISA or MasterCard signature-based systems instead of our STAR PIN-based system. Such incentives may adversely affect our business, operating results, and financial condition.

In addition, VISA’s combined PIN-based and signature debit product called VISA Check Card II could adversely impact our Network Services business if a significant number of financial institutions issue the product or if VISA reinstitutes its original rule prohibiting the placement of competing debit marks on the product.

6. We must remain current with rapid technological change.

Our ability to provide services is heavily dependent upon our use of and access to computing and telecommunications technology. The businesses we are engaged in have been characterized by rapid technological change. We cannot assure you that we will be able to continue to incorporate new developments in technology or that the costs involved in doing so will not be substantial.

7. Acquisitions involve risks that could cause our actual growth to differ from our expectations.

We expect to continue to seek selective acquisitions as an element of our growth strategy. It is possible that recent or future acquisitions could have an adverse effect upon our operating results, particularly in the fiscal quarters immediately following the completion of such transactions while the operations of the acquired entities are being integrated into our operations. For example, we may not be able to successfully integrate acquired businesses in a timely manner. We may also incur substantial costs, delays, or other operational or financial problems in connection with such acquisitions, including during the integration process. In addition, we could incur additional indebtedness to finance acquisitions.

8. If additional state taxes are imposed on us, our business, operating results, and financial condition could be adversely affected.

Transaction processing companies like us may be subject to state taxation of certain portions of their fees charged to customers for their services. Application of this tax is an ongoing issue in the industry, and the states have not yet adopted uniform guidelines implementing these regulations. If we are required to pay these taxes and are unable to pass this tax expense through to our customers, our business, operating results, and financial condition could be adversely affected.

9. Continued consolidation in the banking and retail industries could adversely affect our growth.

• Our Network Services business could be adversely affected. As banks consolidate, our ability to successfully offer our Network Services will depend in part on whether the institutions that survive those consolidations are willing to outsource their ATM and debit processing to third-party vendors like us and whether those institutions have pre-existing relationships with any of our competitors. Larger institutions with more geographically dispersed customer bases may wish to consolidate their network participation with fewer networks having the broadest geographic coverage and the best service offerings. As regional networks continue to consolidate, we may lose network business if we are unable to continue to offer a range of products that is competitive in terms of geographic distribution as well as quality and breadth of service. Larger banks that continue to participate in our network may also process proportionately fewer ATM transactions through our network as more transactions can be handled within the bank’s own internal systems, and larger banks with larger transaction volumes may demand lower fees which could result in lower operating margins for us.

• Our Payment Services business could lose customers, and fee revenue could decrease. Continued consolidation in the retail industry, which makes up a substantial portion of our customer base for Payment Services, could impede

our ability to grow as the survivors of such consolidation may have relationships with competitors or may be more interested in pursuing internal processing options due to their increased scale. Larger merchants with larger transaction volumes may also demand lower fees which could result in lower operating margins for us.

10. We are subject to the business cycles and credit risk of our merchant customers.

A recessionary economic environment could have a negative impact on our customers, particularly smaller merchants and trucking companies, which could, in turn, negatively impact our business, operating results, and financial condition. If our customers make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenue. Similarly, if the dollar amount of those sales is smaller, we will have smaller transactions to process, also resulting in lower revenue.

In addition, in a recessionary environment our merchant customers could experience a higher rate of bankruptcy filings which could adversely affect us financially. For example, we bear credit risk for billing disputes between credit card holders and bankrupt merchants. In the event a billing dispute between a credit card holder and a merchant is not resolved in favor of the merchant, the transaction is normally charged back to the merchant, and the purchase price is refunded to the cardholder. However, if that merchant files for bankruptcy or is otherwise unable or unwilling to pay, we must bear the credit risk for the full transaction amount of these chargebacks. Billing disputes would include instances where a customer ordered goods or services on credit, but those goods and services are not delivered by the defunct merchant. We cannot assure you that chargebacks will not increase in the future. Increases in chargebacks that are not paid by merchants could have an adverse effect on our business, operating results, and financial condition.

11. The outcome of litigation involving VISA and MasterCard could have a negative impact on our business.

VISA and MasterCard lost a lawsuit initiated by the Department of Justice (DOJ) for violation of the federal antitrust laws arising out of their respective functionally identical policies of (1) allowing members in the respective organization to issue cards participating in the other organization’s system and (2) prohibiting their members from issuing cards in competing systems other than VISA, MasterCard, or Citigroup, one of the largest owners/members of VISA and MasterCard. The potential impact of this litigation on us depends upon the relief ordered by the court. We do not currently issue cards in either system and have not been deemed to operate a competing system by either VISA or MasterCard. If VISA and MasterCard are permitted to prohibit members from issuing cards in competing systems, however, there could be a significant negative impact on us if VISA or MasterCard were then to deem the STAR debit network to be a competing system for these purposes.

VISA and MasterCard also were sued in a class action case brought by merchants who alleged that VISA and MasterCard had (1) unlawfully tied merchant acceptance of VISA and MasterCard signature debit cards to merchant acceptance of VISA and MasterCard credit cards and (2) attempted and conspired to monopolize the market for debit cards, a market in which we compete against VISA and MasterCard. It has been reported that on June 4, 2003, MasterCard and VISA each entered into an agreement to settle the class action litigation with the merchants. According to publicly available versions of the agreements, the proposed settlements include monetary payments in the amount of approximately $2 billion with respect to VISA and $1 billion with respect to MasterCard, as well as agreements relating to the operating rules and competitive practices of the MasterCard and VISA networks. The settlements have not been finally approved by the court. Currently, given the uncertainties regarding the proposed settlements and their effect on the complex competitive environment, we cannot assess the potential impact of the settlement terms on us or on the business practices of VISA and MasterCard.

12. Utility and system interruptions or processing errors could adversely affect our business, operating results, and financial condition.

In order to process transactions promptly, our computer equipment and network servers must be functional on a 24-hour basis, which requires access to telecommunications facilities and the availability of electricity. Telecommunications services and the electricity supply are susceptible to disruption. Computer system interruptions and other processing errors may result from such disruptions or from human error or other unrelated causes. There is also the potential threat of telecommunications disruptions caused by the malicious acts of computer criminals, who may attempt to compromise specific systems or generally propagate malicious software, such as viruses and worms. The loss of one or more of our data centers could result in a significant delay in resuming normal business activities and functions. Any extensive or long-term disruptions in our processing services could cause us to incur substantial additional expense, which could have an adverse effect on our business, operating results, and financial condition.

13. Information theft could adversely affect our business, operating results, and financial condition.

An active and lucrative black market has developed in stolen credit card numbers and other personal information of consumers. This has led to organized criminal attempts to steal credit card databases from banks, merchants, and processors. Notwithstanding our efforts to counteract such theft, the risk is real, and any such theft could adversely affect our business, operating results, and financial condition.

14. We may be susceptible to merchant fraud as well as credit and fraud risk of entities we sponsor into debit, credit, and EBT networks.

Merchant fraud includes recording false sales transactions or false credits by the merchant or its customers. Under some circumstances we bear the risk of incidents of merchant fraud. It is possible that incidents of merchant fraud could increase in the future. Increased incidents of merchant fraud could have an adverse effect on our business, operating results, and financial condition. As part of our processing business, we sponsor the participation of a variety of independent sales organizations, financial institutions, and other entities into debit, credit, and EBT networks. As sponsor, we could bear the credit and fraud risk of those entities under some circumstances. Increased bankruptcy or incidence of fraud among these institutions could have an adverse effect on our business, operating results, and financial condition.

15. Changes in card association fees or products could increase our costs or otherwise limit our operations.

From time to time, VISA, MasterCard, Discover, American Express, and Diners Club increase the organization and/or processing fees (known as interchange fees) that they charge. It is possible that competitive pressures will result in our absorbing a portion of such increases in the future, which would increase our operating costs, reduce our profit margin, and adversely affect our business, operating results, and financial condition. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital.

16. Revenue growth in ATM processing could slow because of market saturation or restrictions on surcharging.

Revenue from “convenience fees” or “surcharges” imposed by owners of ATMs, including us, has been a significant factor in the recent growth in our ATM processing business, since such fees have encouraged ATM owners to deploy additional terminals. There have been initiatives at the federal, state, and local levels to limit surcharges. To the extent that ATM deployment does not continue to grow at recent rates due to the enactment and successful enforcement of statutory restrictions on surcharges, the availability of fewer favorable retail ATM locations, market saturation, or other factors, demand for our ATM processing services may not continue to grow at recent rates or may decline.

17. Rules and regulations governing financial institutions and changes to those rules and regulations could limit our business.

We are a financial holding company and a bank holding company subject to regulation under the Bank Holding Company Act of 1956, as amended, and to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). Our bank subsidiary, Concord EFS National Bank, is a national banking association established

under the National Bank Act and is subject to additional regulation by the Office of the Comptroller of the Currency as well as the Federal Reserve. The Federal Deposit Insurance Corporation insures the domestic deposits of Concord EFS National Bank under the Federal Deposit Insurance Act. The restrictions imposed by these and other laws governing the activities of national banks and their holding companies and related regulations and restrictions imposed by regulatory agencies limit our discretion and the discretion of Concord EFS National Bank and its affiliates in operating their businesses. These limitations include:

• restrictions on engaging in activities that are not approved by the Federal Reserve as financial in nature or incidental or complementary to a financial activity,

• restrictions on mergers and acquisitions involving companies engaged in activities other than those approved by the Federal Reserve as financial in nature or incidental or complementary to a financial activity,

• narrower constraints on activities, mergers, and acquisitions if Concord EFS National Bank does not remain well capitalized and well managed or does not maintain “satisfactory” ratings under the Community Reinvestment Act,

• minimum capital requirements at both the holding company and bank levels,

• restrictions on dividends by Concord EFS National Bank,

• restrictions on intercompany transactions, and

• restrictions on tie-ins involving the products or services of Concord EFS National Bank.

Our failure to comply with financial institution rules and regulations applicable to us could have a material adverse effect on us, including regulatory enforcement proceedings, incurring financial or other penalties, being subject to cease and desist orders, and, in certain cases, being required to divest our depository institution subsidiary Concord EFS National Bank.

Material changes in applicable federal or state regulation of financial institutions could increase our operating costs, change the competitive environment, or otherwise adversely affect us. We cannot assure you that these laws and regulations will not be amended or interpreted differently by regulatory authorities, or that new laws and regulations will not be adopted, which could adversely affect our business, operating results, and financial condition.

In addition, we are subject to the financial privacy provisions of the Gramm-Leach-Bliley Act (the GLB Act). As a result, certain consumer financial information that we receive may be subject to limitations on reuse and redisclosure under the GLB Act.

Additionally, pending legislation at the state and federal levels may further restrict our information gathering and disclosure practices. Existing and potential future privacy laws may limit our ability to develop new products and services that make use of certain data gathered through our Network Services and Payment Services businesses.

The USA Patriot Act, which includes a number of provisions designed to enhance the United States regime for combating money laundering and terrorist financing, also may affect our business, operating results, and financial condition. We offer products and services that assist financial institutions in complying with the USA Patriot Act. However, the USA Patriot Act, and particularly its requirements for verification of the identity of customers engaging in various types of financial transactions, may also depress demand for other transaction processing services. These new provisions to address money laundering and terrorist financing also create new compliance risks, with potentially significant consequences from violations, including monetary penalties and adverse consideration in regulatory applications.

18. The timing and extent of changes in interest rates could have a significant impact on the returns on our investments.

Expectations regarding and the actual timing of changes in the Federal Funds interest rate could impact the returns on our investable funds. A significant portion of our available-for-sale securities are fixed income securities with values that generally move in the opposite direction of changes in interest rates. This has little impact if we hold the securities to maturity, but if we sell a fixed income security before maturity, the amount of our gain or loss could vary dramatically with fluctuations in interest rates.

The Federal Reserve generally lowers interest rates to stimulate the economy and generally raises interest rates to fight inflation. Given that the Federal Reserve has lowered interest rates several times in the past two years, our investment income has been and could continue to be negatively affected as our cash flow from receipt of interest payments and proceeds from securities sold, called, or matured is reinvested in lower yielding securities due to declining interest rates.

In the event that interest rates rise, our investment portfolio could decrease in value and some expected maturities could lengthen, which would impact our investment strategies.

19. The price of our common stock could be volatile.

In recent years, there has been and may continue to be significant volatility in the market price for our common stock. Factors such as changes in quarterly operating results, the gain or loss of significant contracts, the entry of new competitors into our markets, changes in management, announcements of technological innovations or new products by us or our competitors, and general events and circumstances beyond our control could have a significant impact on the future market price of our common stock and the relative volatility of such market price. In the past, following periods of volatility

in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Following volatility in the market price of our common stock, various securities fraud class action lawsuits and shareholder derivative actions were filed against us, our directors, and certain of our officers.

20. We face certain litigation risks.

We and certain of our directors and certain of our officers have been named as defendants in a number of securities fraud class action lawsuits and shareholder derivative actions. In addition, the Antitrust Division of the Department of Justice and the Attorneys General of seven states and the District of Columbia have filed a complaint challenging our proposed merger with First Data. We are also party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution or settlement of a particular lawsuit could have an adverse effect on our business, operating results, and financial condition.

21. The receipt of regulatory approvals required for the planned merger with First Data Corporation, as well as the timing of the anticipated completion and possible conditions of the planned merger and their consequences are subject to uncertainty.

The completion of the planned merger with First Data may not occur. If the merger does occur, the consequences of the merger could vary significantly based on numerous factors. Important factors upon which forward-looking statements with respect to the planned merger with First Data are premised generally include but are not limited to: (a) receipt of regulatory approvals without unexpected delays or conditions, (b) timely implementation and execution of merger integration plans, (c) the ability to implement comprehensive plans for asset rationalization, (d) the successful integration of the IT systems and elimination of duplicative overhead and IT costs without unexpected costs or delays, (e) retention of customers and critical employees, (f) successfully offering First Data/Concord’s comprehensive product offering to the combined customer base, (g) continued growth at rates approximating recent levels for card-based payment transactions and other electronic processing services, (h) no unanticipated changes in laws, regulations, credit card association rules or other industry standards affecting First Data/Concord’s combined businesses which require significant product redevelopment efforts, reduce the market for or value of its products or render products obsolete, (i) no unanticipated developments relating to previously disclosed lawsuits or similar matters, (j) successful management of any impact from slowing economic conditions or consumer spending, (k) no catastrophic events that could impact First Data/Concord’s or its major customers’ operating facilities, communication systems and technology or that have a material negative impact on current economic conditions or levels of consumer spending, (l) no material breach of security of any of First Data/Concord’s combined systems, and (m) successfully managing the potential both for patent protection and patent liability in the context of the rapidly developing legal framework for expansive software patent protection. In addition, the ability of a combined First Data/Concord to achieve expected revenues, accretion and synergy savings also will be affected by the effects of competition (in particular the response to the proposed transaction in the marketplace), and the effects of general economic and other factors beyond the control of First Data and Concord.