HOUSEHOLD INTERNATIONAL INC - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

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

For the transition period from ______________ to _______________

Commission file number 1-8198

HOUSEHOLD INTERNATIONAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)

Delaware 36-3121988
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)

2700 Sanders Road, Prospect Heights, Illinois 60070
---------------------------------------------------
(Address of principal executive offices) (Zip Code)

(847) 564-5000
--------------
(Registrant's telephone number, including area code)

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

At September 30, 2002, there were 454,829,105 shares of the registrant's common
stock outstanding.

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. Financial Information Page
----

Item 1. Financial Statements

Condensed Consolidated Statements of Income (Unaudited) -
Three and nine months ended September 30, 2002 and 2001................................. 2

Condensed Consolidated Balance Sheets -
September 30, 2002 (Unaudited) and December 31, 2001.................................... 3

Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2002 and 2001........................................... 4

Notes to Interim Condensed Consolidated Financial
Statements (Unaudited).................................................................. 5

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 14

Item 4. Controls and Procedures................................................................. 29

PART II. Other Information

Item 6. Exhibits and Reports on Form 8-K........................................................ 29

Signature ...................................................................................... 30

Certification of Chief Executive Officer........................................................... 31

Certification of Principal Financial Officer....................................................... 32

1

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

- -----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions, except per share data) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------

Finance and other interest income $ 2,710.9 $ 2,521.7 $ 7,856.5 $ 7,371.3
Interest expense 999.0 1,035.2 2,918.7 3,190.4
- -----------------------------------------------------------------------------------------------------
Net interest margin 1,711.9 1,486.5 4,937.8 4,180.9
Provision for credit losses
on owned receivables 973.0 722.9 2,746.9 2,083.6
- -----------------------------------------------------------------------------------------------------
Net interest margin after
provision for credit losses 738.9 763.6 2,190.9 2,097.3
- -----------------------------------------------------------------------------------------------------
Securitization revenue 556.3 451.1 1,598.0 1,251.6
Insurance revenue 180.8 169.2 528.4 487.1
Investment income 47.6 42.3 137.8 121.9
Fee income 261.7 235.7 668.5 671.3
Other income 101.8 51.5 385.1 262.6
- -----------------------------------------------------------------------------------------------------
Total other revenues 1,148.2 949.8 3,317.8 2,794.5
- -----------------------------------------------------------------------------------------------------
Salaries and fringe benefits 456.6 408.3 1,354.9 1,173.1
Sales incentives 60.6 74.1 182.3 202.2
Occupancy and equipment expense 94.1 86.1 279.6 253.3
Other marketing expenses 135.4 119.5 409.3 370.0
Other servicing and administrative
expenses 199.3 174.1 635.1 542.8
Amortization of acquired intangibles
and goodwill 12.7 39.0 45.1 118.6
Policyholders' benefits 101.2 77.5 272.6 228.1
Settlement charge and related expenses 525.0 -- 525.0 --
- -----------------------------------------------------------------------------------------------------
Total costs and expenses 1,584.9 978.6 3,703.9 2,888.1
- -----------------------------------------------------------------------------------------------------
Income before income taxes 302.2 734.8 1,804.8 2,003.7
Income taxes 81.0 249.2 585.2 689.3
- -----------------------------------------------------------------------------------------------------
Net income $ 221.2 $ 485.6 $ 1,219.6 $ 1,314.4
=====================================================================================================
EARNINGS PER COMMON SHARE
Net income $ 221.2 $ 485.6 $ 1,219.6 $ 1,314.4
Preferred dividends (16.6) (2.9) (40.6) (7.5)
- -----------------------------------------------------------------------------------------------------
Earnings available to common
shareholders $ 204.6 $ 482.7 $ 1,179.0 $ 1,306.9
- -----------------------------------------------------------------------------------------------------
Average common shares 455.4 461.3 456.2 463.5
Average common and common
equivalent shares 459.6 467.7 461.0 469.7
- -----------------------------------------------------------------------------------------------------
Basic earnings per common share $ .45 $ 1.05 $ 2.58 $ 2.82
Diluted earnings per common share .45 1.03 2.56 2.78
- -----------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER
COMMON SHARE $ .25 $ .22 $ .72 $ .63
- -----------------------------------------------------------------------------------------------------

See notes to interim condensed consolidated financial statements.

2

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

- ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions, except share and per share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)

Cash $ 540.6 $ 543.6
Investment securities 10,263.2 3,580.5
Receivables, net 83,157.1 79,263.5
Acquired intangibles, net 405.3 455.6
Goodwill 1,122.1 1,107.4
Properties and equipment, net 533.8 531.1
Real estate owned 451.1 398.9
Other assets 4,605.1 3,030.3
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 101,078.3 $ 88,910.9
================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Deposits $ 5,364.3 $ 6,562.3
Commercial paper, bank and other borrowings 5,249.8 12,024.3
Senior and senior subordinated debt (with original
maturities over one year) 74,831.5 56,823.6
- ----------------------------------------------------------------------------------------------------------------
Total debt 85,445.6 75,410.2
Insurance policy and claim reserves 1,048.3 1,094.5
Other liabilities 3,978.7 3,132.5
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 90,472.6 79,637.2
- ----------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts* 975.0 975.0
Preferred stock 1,193.2 455.8
Common shareholders' equity:
Common stock, $1.00 par value, 750,000,000 shares authorized, 551,786,728
shares issued at September 30, 2002 and
551,684,740 shares issued at December 31, 2001 551.7 551.7
Additional paid-in capital 2,068.8 2,030.0
Retained earnings 9,688.0 8,837.5
Accumulated other comprehensive income (loss) (824.6) (732.4)
Less common stock in treasury, at cost,
96,957,623 shares at September 30, 2002 and
94,560,437 shares at December 31, 2001 (3,046.4) (2,843.9)
- ----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 8,437.5 7,842.9
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 101,078.3 $ 88,910.9
================================================================================================================

* As described in note 8 to the condensed consolidated financial statements,
the sole assets of the trusts are Junior Subordinated Deferrable Interest
Notes issued by Household International, Inc. in November 2001, January
2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25,
10.00, 7.25 and 8.25 percent, respectively, with principal balances of
$206.2, $206.2, $309.3, $206.2 and $77.3 million, respectively, and due
November 2031, January 2031, June 2030, December 2037 and June 2025,
respectively.

See notes to interim condensed consolidated financial statements.

3

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

- -------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
(In millions) 2002 2001
- -------------------------------------------------------------------------------------

CASH PROVIDED BY OPERATIONS
Net income $ 1,219.6 $ 1,314.4
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 2,746.9 2,083.6
Insurance policy and claim reserves 52.6 196.6
Depreciation and amortization 170.7 244.4
Interest-only strip receivables, net change (109.9) (46.2)
Other assets, excluding FAS No. 133 (263.5) (18.7)
Other liabilities, excluding FAS No. 133 2,141.8 42.7
Other, net (40.6) 153.4
- -------------------------------------------------------------------------------------
Cash provided by operations 5,917.6 3,970.2
- -------------------------------------------------------------------------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (3,938.4) (1,370.5)
Matured 1,729.7 363.8
Sold 488.6 470.1
Short-term investment securities, net change (4,745.7) 152.0
Receivables:
Originations, net (36,357.6) (31,888.1)
Purchases and related premiums (510.9) (559.0)
Sold 30,671.4 22,339.4
Properties and equipment purchased (112.0) (138.4)
Properties and equipment sold 15.2 3.3
- -------------------------------------------------------------------------------------
Cash decrease from investments in operations (12,759.7) (10,627.4)
- -------------------------------------------------------------------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change (6,127.2) 281.8
Time certificates, net change (1,219.6) (1,164.9)
Senior and senior subordinated debt issued 25,851.6 17,520.9
Senior and senior subordinated debt retired (11,604.8) (9,684.2)
Policyholders' benefits paid (249.1) (62.6)
Cash received from policyholders 62.1 44.2
Shareholders' dividends (368.8) (298.1)
Purchase of treasury stock (279.6) (776.9)
Issuance of common stock 114.5 97.6
Issuance of preferred stock 726.4 291.4
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts -- 200.0
- -------------------------------------------------------------------------------------
Cash increase from financing and capital transactions 6,905.5 6,449.2
- -------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (66.5) (.1)
- -------------------------------------------------------------------------------------
Decrease in cash (3.1) (208.1)
Cash at January 1 543.6 490.2
- -------------------------------------------------------------------------------------
Cash at September 30 $ 540.5 $ 282.1
=====================================================================================

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 2,833.3 $ 2,881.6
Income taxes paid 605.0 695.4
- -------------------------------------------------------------------------------------

See notes to interim condensed consolidated financial statements.

4

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Household International, Inc. ("Household") and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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. Results for the three and
nine months ended September 30, 2002 should not be considered indicative of the
results for any future quarters or the year ending December 31, 2002. Household
and its subsidiaries may also be referred to in this Form 10-Q as "we," "us" or
"our." These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
included in our restated Annual Report on Form 10-K/A for the year ended
December 31, 2001 which was filed with the Securities and Exchange Commission on
August 27, 2002.

The chief executive officer and principal financial officer of Household have
certified that this quarterly report fairly presents, in all material respects,
the financial condition and results of operations of Household as of and for the
period ended September 30, 2002. These certifications are included as Exhibits
99.2 and 99.3 to this Form 10-Q. The chief executive officer and principal
financial officer of Household have also provided certifications as to the
effectiveness of our controls and procedures which are included on pages 31 and
32.

RESTATEMENT

As reported in our Annual Report on Form 10-K/A for the year ended December 31,
2001, which was filed with the Securities and Exchange Commission on August 27,
2002, we have restated our previously reported consolidated financial
statements. The restatement relates to certain MasterCard and Visa co-branding
and affinity credit card relationships and a third party marketing agreement,
which were entered into between 1992 and 1999. All were part of our Credit Card
Services segment. In consultation with our prior auditors, Arthur Andersen LLP,
we treated payments made in connection with these agreements as prepaid assets
and amortized them in accordance with the underlying economics of the
agreements. Our current auditors, KPMG LLP, advised us that, in their view,
these payments should have either been charged against earnings at the time they
were made or amortized over a shorter period of time. There was no significant
change as a result of these adjustments on the prior periods net earnings trends
previously reported. The restatement resulted in a $359.9 million, after-tax,
retroactive reduction to retained earnings at December 31, 2001.

5

2. INVESTMENT SECURITIES

Investment securities consisted of the following available-for-sale investments:

- ------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
(In millions) COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------

Corporate debt securities $ 2,129.7 $ 2,205.1 $ 2,089.5 $ 2,054.0
Money market funds 3,692.9 3,692.9 342.3 342.3
Certificates of deposit 165.9 171.6 246.1 259.8
U.S. government and federal agency debt securities 2,104.9 2,120.3 217.0 217.8
Marketable equity securities 28.6 18.5 24.4 21.2
Other 1,959.5 1,976.9 611.6 638.9
- ------------------------------------------------------------------------------------------------------------
Subtotal 10,081.5 10,185.3 3,530.9 3,534.0
Accrued investment income 77.9 77.9 46.5 46.5
- ------------------------------------------------------------------------------------------------------------
Total available-for-sale investments $ 10,159.4 $ 10,263.2 $ 3,577.4 $ 3,580.5
============================================================================================================

3. RECEIVABLES

Receivables consisted of the following:

- ----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions) 2002 2001
- ----------------------------------------------------------------------------------------

Real estate secured $ 48,535.4 $ 43,856.8
Auto finance 2,316.1 2,368.9
MasterCard*/Visa* 7,642.7 8,141.2
Private label 10,594.3 11,663.9
Personal non-credit card 14,602.1 13,337.0
Commercial and other 473.6 506.9
- ----------------------------------------------------------------------------------------
Total owned receivables 84,164.2 79,874.7

Accrued finance charges 1,540.7 1,559.8
Credit loss reserve for owned receivables (3,127.3) (2,663.1)
Unearned credit insurance premiums and claims reserves (833.1) (895.8)
Interest-only strip receivables 1,104.9 968.2
Amounts due and deferred from receivable sales 307.7 419.7
- ----------------------------------------------------------------------------------------

Total owned receivables, net 83,157.1 79,263.5
Receivables serviced with limited recourse 23,407.4 20,948.0
- ----------------------------------------------------------------------------------------

Total managed receivables, net $ 106,564.5 $ 100,211.5
========================================================================================

* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of Visa USA, Inc.

Interest-only strip receivables are reported net of our estimate of probable
losses under the recourse provisions for receivables serviced with limited
recourse. Our estimate of the recourse obligation totaled $1,561.5 million at
September 30, 2002 and $1,148.3 million at December 31, 2001. Interest-only
strip receivables also included fair value mark-to-market adjustments which
increased the balance by $375.6 million at September 30, 2002 and $348.6 million
at December 31, 2001.

6

Receivables serviced with limited recourse consisted of the following:

- -----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions) 2002 2001
- -----------------------------------------------------------------------------------

Real estate secured $ 507.8 $ 861.8
Auto finance 5,024.7 4,026.6
MasterCard/Visa 9,873.5 9,254.0
Private label 3,040.0 2,150.0
Personal non-credit card 4,961.4 4,655.6
- -----------------------------------------------------------------------------------

Total receivables serviced with limited recourse $ 23,407.4 $ 20,948.0
===================================================================================

The combination of owned receivables and receivables serviced with limited
recourse, which we consider our managed portfolio, consisted of the following:

- -----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions) 2002 2001
- -----------------------------------------------------------------------------------

Real estate secured $ 49,043.2 $ 44,718.6
Auto finance 7,340.8 6,395.5
MasterCard/Visa 17,516.2 17,395.2
Private label 13,634.3 13,813.9
Personal non-credit card 19,563.5 17,992.6
Commercial and other 473.6 506.9
- -----------------------------------------------------------------------------------

Total managed receivables $ 107,571.6 $ 100,822.7
===================================================================================

4. CREDIT LOSS RESERVES

An analysis of credit loss reserves for the three and nine months ended
September 30 was as follows:

- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------

CREDIT LOSS RESERVES FOR OWNED RECEIVABLES:
Credit loss reserves at beginning of period $ 2,983.3 $ 2,376.5 $ 2,663.1 $ 2,111.9
Provision for credit losses 973.0 722.9 2,746.9 2,083.6
Charge-offs (900.0) (694.1) (2,509.2) (1,913.4)
Recoveries 63.7 63.9 188.5 178.4
Other, net 7.3 7.4 38.0 16.1
- -----------------------------------------------------------------------------------------------------------------
Credit loss reserves for owned receivables
at September 30 3,127.3 2,476.6 3,127.3 2,476.6
- -----------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVES FOR RECEIVABLES
SERVICED WITH LIMITED RECOURSE:
Credit loss reserves at beginning of period 1,385.6 1,080.0 1,148.3 1,082.3
Provision for credit losses 498.3 243.9 1,365.1 750.8
Charge-offs (357.2) (257.4) (1,046.2) (796.2)
Recoveries 22.6 17.0 71.8 51.8
Other, net 12.2 (5.1) 22.5 (10.3)
- -----------------------------------------------------------------------------------------------------------------
Credit loss reserves for receivables serviced with
limited recourse at September 30 1,561.5 1,078.4 1,561.5 1,078.4
- -----------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
AT SEPTEMBER 30 $ 4,688.8 $ 3,555.0 $ 4,688.8 $ 3,555.0
=================================================================================================================

We maintain credit loss reserves to cover probable losses of principal, interest
and fees, including late, overlimit and annual fees. Credit loss reserves are
based on a range of estimates and intended to be adequate but not excessive. We
statistically estimate losses for consumer receivables based on delinquency and
reage status and past loss experience. In addition, we provide loss reserves on
consumer receivables to reflect our assessment of portfolio risk factors which
may not be fully reflected in the statistical calculation (which uses roll rates
and migration analysis). These risk factors include

7

bankruptcy trends, recent growth, product mix, economic conditions and current
levels of charge-offs and delinquencies.

5. ACQUIRED INTANGIBLES AND GOODWILL

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). FAS
No. 142 changed the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill recorded in past business
combinations ceased upon adoption of the statement on January 1, 2002. We have
completed the transitional goodwill impairment test required by FAS No. 142 and
have concluded that none of our goodwill is impaired.

We do not hold any intangible assets which are not subject to amortization.
Amortized acquired intangibles consisted of the following:

- -------------------------------------------------------------------------------------------------------
(In millions) SEPTEMBER 30, DECEMBER 31,
2002 2001
- -------------------------------------------------------------------------------------------------------

Purchased credit card relationships $ 1,038.6 $ 1,038.6
Other intangibles 26.5 26.5
Accumulated amortization - purchased credit card relationships (652.6) (603.8)
Accumulated amortization - other intangibles (7.2) (5.7)
- -------------------------------------------------------------------------------------------------------
Acquired intangibles, net $ 405.3 $ 455.6
=======================================================================================================

Acquired intangible amortization expense totaled $12.7 million for the quarter
ended September 30, 2002, $24.4 million for the quarter ended September 30,
2001, $45.1 million for the nine months ended September 30, 2002, $74.6 million
for the nine months ended September 30, 2001 and $99.0 million for the twelve
months ended December 31, 2001.

Estimated amortization expense associated with our acquired intangibles for each
of the following years is as follows:

- ------------------------------------------------------------------------------
(In millions)
Year ending December 31,
- ------------------------------------------------------------------------------
2002 $57.7
2003 50.3
2004 47.7
2005 43.3
2006 40.9
- ------------------------------------------------------------------------------

The following tables disclose the impact of goodwill amortization on net income
and earnings per share for the periods indicated.

- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------

Reported net income $ 221.2 $ 485.6 $ 1,219.6 $ 1,314.4
Add back: Goodwill amortization, net -- 11.6 -- 34.8
- ---------------------------------------------------------------------------------------------------------------
Adjusted net income $ 221.2 $ 497.2 $ 1,219.6 $ 1,349.2
===============================================================================================================

8

- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
- --------------------------------------------------------------------------------------------
DILUTED BASIC DILUTED BASIC
- --------------------------------------------------------------------------------------------

Reported earnings per share $ .45 $ .45 $ 1.03 $ 1.05
Add back: Goodwill amortization, net -- -- .02 .03
- --------------------------------------------------------------------------------------------
Adjusted earnings per share $ .45 $ .45 $ 1.05 $ 1.08
============================================================================================

- --------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
- --------------------------------------------------------------------------------------------
DILUTED BASIC DILUTED BASIC
- --------------------------------------------------------------------------------------------

Reported earnings per share $ 2.56 $ 2.58 $ 2.78 $ 2.82
Add back: Goodwill amortization, net -- -- .07 .08
- --------------------------------------------------------------------------------------------
Adjusted earnings per share $ 2.56 $ 2.58 $ 2.85 $ 2.90
============================================================================================

There were no significant changes to our recorded amount of goodwill, either in
total or by segment, during the quarter or nine months ended September 30, 2002.

6. INCOME TAXES

Our effective tax rate was 26.8 percent for the quarter ended September 30,
2002, 33.9 percent for the quarter ended September 30, 2001, 32.4 percent for
the nine months ended September 30, 2002 and 34.4 percent for the nine months
ended September 30, 2001. Excluding the settlement charge and related costs,
which resulted in a $191.8 million tax benefit, our effective tax rate was 33.0
percent for the current quarter and 33.4 percent for the nine months ended
September 30, 2002. The recording of the settlement charge and related expenses
resulted in a lower effective tax rate for the quarter and nine months ended
September 30, 2002. The effective tax rate differs from the statutory federal
income tax rate in all periods because of the effects of state and local income
taxes and tax credits.

7. EARNINGS PER COMMON SHARE

Computations of earnings per common share for the three and nine months ended
September 30 were as follows:

- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions, except per share data) 2002 2001
- ---------------------------------------------------------------------------------------------------
Diluted Basic Diluted Basic
--------- ---------- ---------- ----------

Earnings:
Net income $ 221.2 $ 221.2 $ 485.6 $ 485.6
Preferred dividends (16.6) (16.6) (2.9) (2.9)
- ---------------------------------------------------------------------------------------------------

Earnings available to common shareholders $ 204.6 $ 204.6 $ 482.7 $ 482.7
- ---------------------------------------------------------------------------------------------------

Average shares outstanding:
Common 455.4 455.4 461.3 461.3
Common equivalents 4.2 -- 6.4 --
- ---------------------------------------------------------------------------------------------------

Average shares outstanding assuming dilution 459.6 455.4 467.7 461.3
- ---------------------------------------------------------------------------------------------------

Earnings per common share $ .45 $ .45 $ 1.03 $ 1.05
===================================================================================================

9

- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions, except per share data) 2002 2001
- -----------------------------------------------------------------------------------------------------------
Diluted Basic Diluted Basic
------------ ------------ ------------ -------------

Earnings:
Net income $ 1,219.6 $ 1,219.6 $ 1,314.4 $ 1,314.4
Preferred dividends (40.6) (40.6) (7.5) (7.5)
- -----------------------------------------------------------------------------------------------------------

Earnings available to common shareholders $ 1,179.0 $ 1,179.0 $ 1,306.9 $ 1,306.9
- -----------------------------------------------------------------------------------------------------------

Average shares outstanding:
Common 456.2 456.2 463.5 463.5
Common equivalents 4.8 -- 6.2 --
- -----------------------------------------------------------------------------------------------------------

Average shares outstanding assuming dilution 461.0 456.2 469.7 463.5
- -----------------------------------------------------------------------------------------------------------

Earnings per common share $ 2.56 $ 2.58 $ 2.78 $ 2.82
===========================================================================================================

8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS

We have formed special purpose trusts for the purpose of issuing trust preferred
securities. The sole assets of these trusts are Junior Subordinated Deferrable
Interest Notes ("Junior Subordinated Notes") issued by Household. The following
table summarizes our company obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Preferred Securities") and the related Junior
Subordinated Notes:

- -------------------------------------------------------------------------------------------------------------------
Household Household Household Household Household
(Dollar amounts are Capital Trust VII Capital Trust Capital Trust V Capital Trust Capital Trust I
in millions) ("HCT VII") VI ("HCT VI") ("HCT V") IV ("HCT IV") ("HCT I")
- -------------------------------------------------------------------------------------------------------------------

PREFERRED SECURITIES:
Interest rate 7.50% 8.25% 10.00% 7.25% 8.25%
Face value $200 $200 $300 $200 $75
Issue date November 2001 January 2001 June 2000 March 1998 June 1995
JUNIOR SUBORDINATED NOTES:
Principal balance $206.2 $206.2 $309.3 $206.2 $77.3
Redeemable by issuer November 2006 January 2006 June 2005 March 2003 June 2001
Stated maturity November 2031 January 2031 June 2030 December 2037 June 2025
- -------------------------------------------------------------------------------------------------------------------

The Preferred Securities must be redeemed when the Junior Subordinated Notes are
paid. The Junior Subordinated Notes have a stated maturity date, but are
redeemable by Household, in whole or in part, beginning on the dates indicated
above at which time the preferred securities are callable at par ($25 per
Preferred Security) plus accrued and unpaid dividends. Dividends on the
Preferred Securities are cumulative, payable quarterly in arrears, and are
deferrable at Household's option for up to five years. Household cannot pay
dividends on its preferred and common stocks during such deferments. The
Preferred Securities have a liquidation value of $25 per preferred security. HCT
I may elect to extend the maturity of its Preferred Securities to June 2044.
Dividends on the Preferred Securities have been classified as interest expense
in our statements of income.

HCT I, HCT IV, HCT V, HCT VI and HCT VII (collectively, "the Trusts") are wholly
owned subsidiaries of Household. Household's obligations with respect to the
Junior Subordinated Notes, when considered together with certain undertakings of
Household with respect to the Trusts, constitute full and unconditional
guarantees by Household of the Trust's obligations under the respective
Preferred Securities. The Preferred Securities are classified in our balance
sheet as company obligated mandatorily redeemable preferred securities of
subsidiary trusts (representing the minority interests in the trusts) at their
face and redemption amount of $975 million at both September 30, 2002 and
December 31, 2001.

10

9. FORWARD PURCHASE AGREEMENTS

At September 30, 2002, we had agreements to purchase, on a forward basis,
approximately 4.9 million shares of our common stock with a weighted-average
forward price of $52.99 per share. The agreements expire at various dates
through August 2003. These agreements may be settled physically or on a net
basis either in shares of our common stock or in cash, depending on the terms of
the various agreements, at our option and consequently are accounted for as
permanent equity. Under the terms of the various agreements, expiration dates
accelerate if our stock price reaches certain triggers. Currently, these
triggers vary between the agreements and range between $12 and $16 per share.
During the current quarter, we received approximately 2.1 million shares at an
average cost of $55.68 per share as a result of settlements under these forward
contracts.

Under a net share settlement, if the price of our common stock falls below the
forward price, we would be required to deliver common shares to the counterparty
based upon the difference between the forward price and the then current stock
price. Conversely, if the price of our common stock rises above the forward
price, the counterparty would be required to deliver to us shares of our common
stock based on the price difference. Based upon the closing price of our common
stock of $28.31 at September 30, 2002, we would have been required to deliver
approximately 4.2 million shares of our common stock to net share settle these
contracts at September 30, 2002. If our common stock price had been $1 lower at
September 30, 2002, we would have been required to deliver an additional 332,500
common shares to net share settle these contracts. If our common stock price had
been higher by $1 at September 30, 2002, we would have been required to deliver
a total of 3.9 million shares of our common stock to net share settle the
contracts. These agreements, however, contain limits on the number of shares to
be delivered under a net share settlement, regardless of the price of our common
stock. At September 30, 2002, the maximum number of common shares we would be
required to deliver to net share settle the 4.9 million shares currently
outstanding was 29.8 million shares.

10. COMPREHENSIVE INCOME

Comprehensive income was $1.9 million for the quarter ended September 30, 2002,
$299.3 million for the quarter ended September 30, 2001, $1,127.4 million for
the nine months ended September 30, 2002, and $849.0 million for the nine months
ended September 30, 2001.

The components of accumulated other comprehensive income were as follows:

- -------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions) 2002 2001
- -------------------------------------------------------------------------------------------------------------

Unrealized losses on cash flow hedging instruments $ (863.6) $ (699.1)
Unrealized gains on investments and interest-only strip receivables 305.6 223.3
Foreign currency translation adjustments and other (266.6) (256.6)
- -------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (824.6) $ (732.4)
=============================================================================================================

11. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS No. 144"). The adoption of FAS No. 144 did not have a significant
impact on our operations.

In the second quarter, we adopted the fair value method of accounting for our
stock option and employee stock purchase plans in 2002. Under the guidance of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("FAS No. 123"), companies may either recognize stock-based
compensation expense associated with these plans currently in income or disclose
the pro forma impact of the expense. Pursuant to the requirements of FAS No.
123, options granted prior to January 1, 2002 continue to be accounted for under
Accounting Principles Board Opinion No. 25,

11

"Accounting for Stock Issued to Employees," under which expenses for stock
options are generally not recognized. The impact of adopting the expense
recognition provisions of FAS No. 123 is not expected to have a significant
impact on our future results of operations.

12. SUBSEQUENT EVENT

On October 11, 2002, we reached a preliminary agreement with a multi-state
working group of state attorneys general and regulatory agencies to effect a
nationwide resolution of alleged violations of federal and/or state consumer
protection, consumer financing and banking laws and regulations with respect to
secured real estate lending from our retail branch consumer lending operations.
Consistent with the guidance promulgated by Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies," we recorded a pre-tax charge of
$525 million during the third quarter of 2002. The charge reflects the costs of
this settlement agreement and related matters and has been reflected in the
statement of income in total costs and expenses.

Pursuant to the proposed agreement, we will establish a fund of up to $484
million to be divided among the participating states based upon the volume of
Household retail branch real estate secured loans which were originated in the
state from January 1, 1999 through September 30, 2002 (the "Household Covered
Loans"). We will deposit these monies into the fund in three installments,
beginning 30 days after the filing of consent decrees representing at least 80
percent of the Household Covered Loans. The amount of the settlement fund will
proportionately increase above the $387.5 million minimum for participation in
excess of 80 percent of the Household Covered Loans. Household will also
reimburse the states for expenses of their investigation, not to exceed $10.2
million, and pay fees and expenses for each state's independent claim
administrator. For the agreement to be effective, states representing at least
80 percent of the Household Covered Loans must file mutually agreed consent
decrees by December 15, 2002.

13. SEGMENT REPORTING

We have three reportable segments: Consumer, Credit Card Services and
International. Our Consumer segment consists of our consumer lending, mortgage
services, retail services and auto finance businesses. Our Credit Card Services
segment consists of our domestic MasterCard and Visa credit card business. Our
International segment consists of our foreign operations in the United Kingdom
and Canada. There has been no change in the basis of our segmentation or in the
measurement of segment profit as compared with the presentation in our Annual
Report on Form 10-K/A for the year ended December 31, 2001.

We allocate resources and provide information to management for decision making
on a managed basis. Therefore, an adjustment is required to reconcile the
managed financial information to our reported financial information in our
consolidated financial statements. This adjustment reclassifies net interest
margin, fee income and loss provision into securitization revenue.

12

REPORTABLE SEGMENTS - MANAGED BASIS

Adjustments/
Credit Card Inter- All Reconciling
(In millions) Consumer Services national Other Totals Items
- ------------------------------------------------------------------------------------------------------------------------------------

THREE MONTHS ENDED SEPTEMBER 30, 2002
Net interest margin $ 1,789.7 $ 454.7 $ 168.7 $ (24.9) $ 2,388.2 -
Fee income 100.3 307.8 17.3 1.2 426.6 -
Other revenues (1) 279.0 47.8 53.9 109.2 489.9 $ (47.5)(3)
Intersegment revenues 37.5 8.1 2.4 (.5) 47.5 (47.5)(3)
Provision for credit losses 998.2 388.3 68.2 14.9 1,469.6 1.7 (4)
Net income 86.2 97.7 48.7 19.8 252.4 (31.2)
Operating net income(2) 419.4 97.7 48.7 19.8 585.6 (31.2)
Receivables 81,291.1 17,028.0 8,079.6 1,172.9 107,571.6 -
Assets 84,302.3 20,136.6 9,378.2 20,039.4 133,856.5 (9,370.8)(5)
Goodwill 857.6 248.7 1.0 14.8 1,122.1 -
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001
Net interest margin $ 1,478.4 $ 379.9 $ 156.9 $ (6.0) $ 2,009.2 -
Fee income 93.3 281.2 13.1 2.2 389.8 -
Other revenues (1) 76.7 29.7 37.9 120.1 264.4 $ (60.7)(3)
Intersegment revenues 49.9 9.3 2.2 (.7) 60.7 (60.7)(3)
Provision for credit losses 578.7 326.6 52.5 8.6 966.4 .4 (4)
Net income 376.0 61.8 42.4 44.2 524.4 (38.8)
Receivables 70,691.7 16,100.1 8,101.5 761.8 95,655.1 -
Assets 73,397.1 17,085.8 9,343.4 14,456.5 114,282.8 (9,526.7)(5)
Goodwill 853.8 252.2 1.1 15.0 1,122.1 -
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Net interest margin $ 5,166.9 $ 1,295.5 $ 476.1 $ (16.4) $ 6,922.1 -
Fee income 273.2 834.9 40.6 5.2 1,153.9 -
Other revenues (1) 584.8 156.1 190.2 489.2 1,420.3 $ (148.2)(3)
Intersegment revenues 116.1 26.2 7.2 (1.3) 148.2 (148.2)(3)
Provision for credit losses 2,760.7 1,105.7 219.1 48.4 4,133.9 (21.9)(4)
Net income 756.9 240.9 130.6 171.4 1,299.8 (80.2)
Operating net income(2) 1,090.1 240.9 130.6 171.4 1,633.0 (80.2)
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Net interest margin $ 4,227.6 $ 1,071.7 $ 456.3 $ (54.2) $ 5,701.4 -
Fee income 277.2 808.4 47.2 5.1 1,137.9 -
Other revenues (1) 188.4 80.4 121.5 452.7 843.0 $ (184.2)(3)
Intersegment revenues 150.9 28.8 6.1 (1.6) 184.2 (184.2)(3)
Provision for credit losses 1,680.2 954.6 171.1 27.3 2,833.2 1.2 (4)
Net income 1,017.6 131.6 123.6 159.2 1,432.0 (117.6)
- ------------------------------------------------------------------------------------------------------------------------------------

Managed Owned
Basis Basis
Consolidated Securitization Consolidated
(In millions) Totals Adjustments Totals
- ----------------------------------------------------------------------------------------------

THREE MONTHS ENDED SEPTEMBER 30, 2002
Net interest margin $ 2,388.2 $ (676.3)(6) $ 1,711.9
Fee income 426.6 (164.9)(6) 261.7
Other revenues (1) 442.4 342.9 (6) 785.3
Intersegment revenues - - -
Provision for credit losses 1,471.3 (498.3)(6) 973.0
Net income 221.2 - 221.2
Operating net income(2) 554.4 - 554.4
Receivables 107,571.6 (23,407.4)(7) 84,164.2
Assets 124,485.7 (23,407.4)(7) 101,078.3
Goodwill 1,122.1 - 1,122.1
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001
Net interest margin $ 2,009.2 $ (522.7)(6) $ 1,486.5
Fee income 389.8 (154.1)(6) 235.7
Other revenues (1) 203.7 432.9 (6) 636.6
Intersegment revenues - - -
Provision for credit losses 966.8 (243.9)(6) 722.9
Net income 485.6 - 485.6
Receivables 95,655.1 (20,066.4)(7) 75,588.7
Assets 104,756.1 (20,066.4)(7) 84,689.7
Goodwill 1,122.1 - 1,122.1
- ----------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Net interest margin $ 6,922.1 $ (1,984.3)(6) $ 4,937.8
Fee income 1,153.9 (485.4)(6) 668.5
Other revenues (1) 1,272.1 1,104.6 (6) 2,376.7
Intersegment revenues - - -
Provision for credit losses 4,112.0 (1,365.1)(6) 2,746.9
Net income 1,219.6 - 1,219.6
Operating net income(2) 1,552.8 - 1,552.8
- ----------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Net interest margin $ 5,701.4 $ (1,520.5)(6) $ 4,180.9
Fee income 1,137.9 (466.6)(6) 671.3
Other revenues (1) 658.8 1,236.3 (6) 1,895.1
Intersegment revenues - - -
Provision for credit losses 2,834.4 (750.8)(6) 2,083.6
Net income 1,314.4 - 1,314.4
- ----------------------------------------------------------------------------------------------

(1) Net of policyholder benefits and excluding fees.
(2) Net income excluding settlement charge and related expenses of $333.2
million, after-tax. This is a non-GAAP measurement which is presented for
comparison purposes only.
(3) Eliminates intersegment revenues.
(4) Eliminates bad debt recovery sales and reclassifies loss reserves between
operating segments.
(5) Eliminates investments in subsidiaries and intercompany borrowings.
(6) Reclassifies net interest margin, fee income and loss provisions relating
to securitized receivables to other revenues.
(7) Represents receivables serviced with limited recourse.

13

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

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

FINANCIAL HIGHLIGHTS

(1) Net of policyholder benefits.

(2) Ratio of operating expenses to net interest margin and other revenues less
policyholders' benefits.

(3) We monitor our operations and evaluate trends on both an owned basis as
shown in our financial statements and on a managed basis. Managed basis
reporting adjustments assume that securitized receivables have not been sold and
are still on our balance sheet. Managed basis information is intended to
supplement, and should not be considered a substitute for, owned basis reporting
and should be read in conjunction with reported owned basis results.

(4) The ratio of common and preferred equity and trust preferred securities as a
percentage of owned and managed assets and the ratio of tangible equity to
tangible managed assets are non-GAAP ratios that are used by rating agencies as
a measure to evaluate capital adequacy. These ratios may differ from similarly
named measures presented by other companies. Because of its long-term nature and
our ability to defer dividends, rating agencies consider trust preferred
securities as equity in calculating these ratios .

(5) Tangible shareholders' equity includes trust preferred securities, preferred
equity and common shareholders' equity, excluding unrealized gains and losses on
investments and cash flow hedging instruments, less acquired intangibles and
goodwill. Tangible managed assets represents total managed assets less acquired
intangibles, goodwill and derivative assets.

(6) The following non-GAAP presentation is being presented for comparison
purposes only to present our operating results excluding the $333.2 million
(after-tax) settlement charge and related expenses.

Three months ended Nine months ended
September 30, September 30,
2002 2002
--------------------------------------------------------------------------
Operating net income $ 554.4 $ 1,552.8
Diluted operating earnings per common share 1.17 3.28
Return on average owned assets 2.22% 2.19%
Return on average common shareholders' equity 24.7 23.7
Owned basis efficiency ratio (2) 34.7 36.4
Return on average managed assets 1.81 1.78
Managed basis efficiency ratio (2) 29.4 31.1

14

BASIS OF REPORTING

This discussion should be read in conjunction with the unaudited condensed
consolidated financial statements, notes and tables included elsewhere in this
report and in the restated Household International, Inc. Annual Report on Form
10-K/A for the year ended December 31, 2001 (the "2001 Form 10-K/A") filed with
the Securities and Exchange Commission on August 27, 2002. Management's
discussion and analysis may contain certain statements that may be
forward-looking in nature within the meaning of the Private Securities
Litigation Reform Act of 1995. Our results may differ materially from those
noted in the forward-looking statements. Forward-looking statements are
typically identified by words or phrases such as "believe", "expect",
"anticipate", "intend", "may", "will", "should", "would" and "could".
Forward-looking statements involve risks and uncertainties and are based on
current views and assumptions. For a list of important factors that may affect
our actual results, see our 2001 Form 10-K/A.

We monitor our operations and evaluate trends on a managed basis which assumes
that securitized receivables have not been sold and are still on our balance
sheet. We manage our operations on a managed basis because the receivables that
we securitize are subjected to underwriting standards comparable to our owned
portfolio, are serviced by operating personnel without regard to ownership and
result in a similar credit loss exposure for us. In addition, we fund our
operations, review our operating results and make decisions about allocating
resources such as employees and capital on a managed basis. See Note 13,
"Segment Reporting," to the accompanying condensed consolidated financial
statements for additional information related to our results on a managed basis.

The following discussion of our financial condition and results of operations is
presented on an owned basis of reporting unless specifically noted. On an owned
basis of reporting, net interest margin, provision for credit losses and fee
income resulting from securitized receivables are included as components of
securitization revenue.

OPERATIONS SUMMARY AND TRENDS

- - On October 11, 2002, we reached a preliminary agreement with a multi-state
working group of state attorneys general and regulatory agencies to effect
a nationwide resolution of alleged violations of federal and/or state
consumer protection, consumer financing and banking laws and regulations
with respect to secured real estate lending from our retail branch consumer
lending operations. We recorded a charge of $525 million during the third
quarter of 2002 reflecting the costs of this settlement agreement and
related matters. The operational changes which will be implemented as a
result of the settlement agreement, are expected to reduce earnings per
share by $.10 in 2003. This matter is discussed in detail in our Form 8-K
dated October 11, 2002 which we filed on October 15, 2002.

In conjunction with our efforts to make the most efficient use of our
capital and to achieve our stated 8.50 percent TETMA target, we determined
that the continued operation of Household Bank, f.s.b. is not in our
long-term strategic interest. As a result, management is exploring
opportunities to dispose of Household Bank, f.s.b. including its current
assets and deposits in the fourth quarter of 2002. The sale will likely
result in a $250-300 million after tax loss.

On October 11, 2002, Standard & Poor's ("S&P") announced that it had
revised its long-term and commercial paper debt ratings for Household
International, Inc. and its principal borrowing subsidiaries, including
Household Finance Corporation ("HFC"). S&P's ratings were revised as
follows: long-term senior debt from "A" to "A-" and short-term debt from
"A-1" to "A-2". Also on October 11, 2002 Fitch Ratings announced that it
had placed the long-term and commercial paper ratings of Household and each
of its subsidiaries on "Ratings Watch Negative," while Moody's Investors
Service affirmed all ratings for Household and HFC. The downgrade by S&P is
expected to increase our funding costs and may decrease our capacity to
issue commercial paper. In addition, this action may reduce the number of
investors who are able to purchase our debt securities and possibly affect
our ability to grow the business in the future.

15

- - Our net income was $221.2 million for the third quarter and $1.2 billion
for the first nine months of 2002. Diluted earnings per share was $.45 in
the third quarter and $2.56 for the first nine months of 2002. Our
operating net income (a non-GAAP measurement of net income excluding the
settlement charge and related expenses of $333.2 million, after-tax) for
the third quarter of 2002 was $554.4 million, up 14 percent from net income
of $485.6 million a year ago. Operating net income for the first nine
months of 2002 was $1.6 billion, compared to net income of $1.3 billion in
the year-ago period. Diluted operating earnings per share (a non-GAAP
measurement of earnings per share excluding the settlement charge and
related expenses) was $1.17 in the third quarter and $3.28 for the first
nine months of 2002, compared to $1.03 and $2.78 in the same periods in
2001.

Our improved operating results were due to significant receivable and
revenue growth which was partially offset by higher operating expenses to
support portfolio growth and higher credit loss provision due to the larger
portfolio and uncertain economic environment. Our credit loss provision was
greater than charge-offs by $136.7 million in the current quarter and
$426.2 million for the first nine months of 2002 due to the adverse
economic environment affecting customers in the United States. In addition,
our year-to-date earnings included higher revenues from our tax refund
lending business which contributed $.19 to our first quarter earnings per
share, an increase of 27 percent over the $.15 contribution in the first
quarter of 2001. Our improved operating results were offset by the
settlement charge recorded in the third quarter which reduced net income by
$333.2 million.

- - In the first nine months of the year, we took a number of steps as part of
our liquidity management plans which reduced our reliance on short-term
debt and strengthened our position against market induced volatility. These
steps included establishing a $6.5 billion investment security liquidity
portfolio, issuing long-term debt which lengthened the term of our funding,
establishing $6.25 billion in incremental conduit capacity, completing real
estate secured whole loan sales of $2.5 billion and issuing securities
backed by dedicated home equity loan receivables of $6.2 billion. We intend
to maintain an investment security portfolio for the near future to protect
us from any liquidity concerns. This action may adversely impact our net
income due to the lower return generated by these assets.

- - On July 22, 2002, the four federal bank regulatory agencies issued draft
guidance for account management and loss allowance practices for credit
card lending. The agencies have not yet issued final guidance. Based on its
current form, implementation of the draft guidance would not have a
material adverse impact on our financial statements or the way we manage
our business.

SEGMENT RESULTS - MANAGED BASIS

Our Consumer segment reported net income of $86.2 million in the quarter and
$756.9 million year-to-date. Operating net income (a non-GAAP measurement of net
income excluding the settlement charge and related expenses of $333.2 million,
after-tax) was $419.4 million for the third quarter compared to net income of
$376.0 million in the year-ago quarter. Year-to-date, operating net income was
$1.1 billion, compared to net income of $1.0 billion for the first nine months
of 2001. The improved operating results were driven by higher net interest
margin, fee income and other revenues which increased $520.6 million, to $2.2
billion in the quarter and $1.3 billion, to $6.0 billion year-to-date. Strong
receivable growth and higher securitization activity, pursuant to our liquidity
management plans, drove the increases. The higher revenues were partially offset
by substantially higher credit loss provision and higher expenses. Our credit
loss provision rose $419.5 million, to $998.2 million in the quarter and $1.1
billion, to $2.8 billion year-to-date as a result of increased levels of
receivables and the continued weak economy. We increased managed loss reserves
by recording loss provision greater than charge-offs of $221.6 million in the
quarter and $618.7 million year-to-date. Higher salary and operating expenses
were the result of additional employees and operating costs to support the
increased receivable levels, additional collectors and investments in the growth
of our businesses. Managed receivables grew to $81.3 billion at September 30,
2002, from $80.1 billion at June 30, 2002 and $70.7 billion at September 30,
2001. The managed receivable growth was driven by growth in all products with
the strongest growth in our real estate secured receivables. This growth was
partially offset by whole loan sales in our

16

mortgage services business of $1.6 billion in the current quarter and $900
million in the first quarter. We expect to continue whole loan sales from our
mortgage services and consumer lending businesses for the remainder of the year
to meet our capital targets. These actions may adversely affect earnings in 2003
until we are able to replace these assets through growth or portfolio purchases.
Return on average managed assets ("ROMA") was .41 and 1.26 percent in the third
quarter and first nine months of 2002 compared to 2.10 and 1.97 percent in the
year-ago periods. Excluding the settlement charge and related expenses, ROMA was
1.99 percent in the third quarter and 1.79 percent in the first nine months of
2002. The decline in the ratio over both prior-year periods reflects higher
credit loss provision.

Our Credit Card Services segment reported improved results over the prior-year
periods. Net income increased to $97.7 million for the third quarter compared to
$61.8 million in the year-ago quarter. Year-to-date, net income increased to
$240.9 million compared to $131.6 million for the first nine months of 2001. The
increase was due primarily to higher net interest margin, which increased $74.8
million, to $454.7 million in the quarter and $223.8 million, to $1.3 billion
year-to-date, as a result of higher receivable levels. Net interest margin as a
percent of average receivables increased in both the quarter and year-to-date as
a result of lower funding costs and pricing floors, which capped rate reductions
on certain variable rate credit card products. Fee income also increased during
both the quarter and year-to-date. Revenue growth was partially offset by higher
credit loss provision and higher operating expenses associated with the higher
receivable levels. We increased managed loss reserves by recording loss
provision greater than charge-offs of $64.2 million in the quarter and $145.1
million year-to-date. Managed receivables were $17.0 billion at September 30,
2002, $16.6 billion at June 30, 2002 and $16.1 billion at September 30, 2001.
The increase in receivables during both the quarter and year reflects controlled
growth in our subprime portfolio. Our Union Privilege and Household Bank branded
portfolios also reported year-over-year growth. ROMA was 2.00 and 1.76 percent
in the third quarter and first nine months of 2002 compared to 1.45 and 1.04
percent in the year-ago periods.

Our International segment also reported improved results over prior-year
periods. Net income increased to $48.7 million for the third quarter compared to
$42.4 million in the year-ago quarter. Year-to-date, net income was $130.6
million compared to $123.6 million for the first nine months of 2001. Net
interest margin dollars increased in both the quarter and year-to-date. Average
receivables were lower in both the quarter and year-to-date as a result of the
fourth quarter 2001 sale of the $1 billion Goldfish credit card portfolio.
However, higher yields and lower funding costs resulted in the higher net
interest margin dollars. Increased securitization activity contributed to the
increase in other revenues during both the quarter and year-to-date. Revenue
growth was partially offset by a higher credit loss provision and higher
operating expenses associated with our branch expansion efforts. We increased
managed loss reserves by recording loss provision greater than charge-offs of
$9.9 million in the quarter and $44.3 million year-to-date. Managed receivables
were $8.1 billion at September 30, 2002, $7.6 billion at June 30, 2002 and $8.1
billion at September 30, 2001. Receivable balances reflect positive foreign
exchange impacts of approximately $87 million during the quarter and $400
million compared to prior year. Growth during the quarter was primarily
attributable to MasterCard and Visa receivables in the U.K. and real estate
secured receivables. Compared to the prior-year quarter, growth in real estate
secured and personal non-credit card receivables was offset by reductions in our
MasterCard and Visa portfolio resulting from the fourth quarter 2001 Goldfish
receivable sale. ROMA was 2.12 and 2.02 percent in the third quarter and first
nine months of 2002 compared to 1.97 and 1.89 percent in the year-ago periods.
The increases were primarily attributable to lower asset levels. Securitization
activity in the second quarter of 2002 also contributed to the year-to-date
increase.

17

BALANCE SHEET REVIEW

INCREASE (DECREASE) INCREASE (DECREASE)
FROM PRIOR YEAR FROM PRIOR QUARTER
SEPTEMBER 30, -------------------------------------------------
(All dollar amounts are stated in millions) 2002 $ % $ %
- -------------------------------------------------------------------------------------------------------------------

Real estate secured $ 48,535.4 $ 7,713.1 19% $ 223.3 -%
Auto finance 2,316.1 (24.0) (1) (46.5) (2)
MasterCard(1)/Visa(1) 7,642.7 (424.2) (5) 762.0 11
Private label 10,594.3 (142.1) (1) (232.8) (2)
Personal non-credit card (2) 14,602.1 1,512.5 12 329.5 2
Commercial and other 473.6 (59.8) (11) (9.2) (2)
- -------------------------------------------------------------------------------------------------------------------
Total owned receivables $ 84,164.2 $ 8,575.5 11% $ 1,026.3 1%
===================================================================================================================

(1) MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of Visa USA, Inc.

(2) Personal non-credit card receivables are comprised of the following:

SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
(In millions) 2002 2002 2001
----------------------------------------------------------------------------------------

Domestic personal unsecured $ 6,909.2 $ 6,710.3 $ 6,605.6
Union Plus personal unsecured 1,195.7 1,193.7 995.3
Personal homeowner loans 4,339.2 4,393.2 3,955.2
Foreign unsecured 2,158.0 1,975.4 1,533.5
----------------------------------------------------------------------------------------
Total personal non-credit card $ 14,602.1 $ 14,272.6 $ 13,089.6
========================================================================================

Receivables growth was a key contributor to our improved operating results. To
support capital levels and maintain acceptable debt ratings, we expect to
control receivable growth with portfolio sales and lower originations for the
remainder of 2002. Earnings in future periods may be adversely affected if we
are unable to replace the sold receivables with comparable receivables through
growth or portfolio purchases.

Compared to September 30, 2001, owned receivables increased $8.6 billion, or 11
percent, to $84.2 billion at September 30, 2002. Receivable growth was strongest
in our real estate secured portfolio, which increased 19 percent over the
September 2001 level and was balanced between our branch-based consumer lending
business and our mortgage services business. This growth was partially offset by
the sale of approximately $2.5 billion in whole loans by our mortgage services
business during the first nine months of 2002 pursuant to our liquidity
management plans. In our auto finance business, growth resulting from a strong
and rational market, larger sales force, increased dealer penetration and strong
Internet originations, was more than offset by higher securitization levels. In
our MasterCard and Visa portfolio, growth in our subprime, Union Privilege and
Household Bank branded portfolios, was more than offset by the December 2001
sale of the $1 billion Goldfish portfolio in the United Kingdom and higher
securitization levels. In our private label portfolio, organic growth from
existing merchants and a $725 million portfolio acquisition in the fourth
quarter of 2001 were also more than offset by higher securitization levels. In
our personal non-credit card portfolio, which increased 12 percent to $14.6
billion, growth in our branches was also partially offset by higher
securitization levels. During the twelve months ended September 30, 2002, we
securitized $9.0 billion including $3.2 billion of auto finance receivables,
$1.4 billion of MasterCard and Visa receivables, $1.4 billion of private label
receivables and $3.0 billion of personal non-credit card receivables.

Compared to June 30, 2002, receivables grew $1.0 billion or an annualized 5
percent. The strongest growth was in our MasterCard and Visa portfolio,
especially in our domestic Union Privilege and subprime portfolios and in our
marbles(TM) portfolio in the U.K. Good consumer demand resulted in strong volume
in our branch-based consumer lending and mortgage services businesses which
contributed to growth in our real estate secured and personal non-credit card
portfolios. Real estate secured growth was substantially offset by the sale of
approximately $1.6 billion in whole loans by our mortgage services business
during the current quarter. Growth in our auto finance and private label

18

portfolios was more than offset by higher securitization levels. During the
third quarter, we securitized $2.5 billion including $986 million of auto
finance receivables, $160 million of MasterCard and Visa receivables, $390
million of private label receivables and $1.0 billion of personal non-credit
card receivables.

Owned consumer two-months-and-over contractual delinquency as a percent of owned
consumer receivables was 5.01 percent at September 30, 2002, compared to 4.61
percent at June 30, 2002 and 4.58 percent at September 30, 2001. The annualized
consumer owned charge-off ratio in the third quarter of 2002 was 3.98 percent,
compared to 3.76 percent in the prior quarter and 3.43 percent in the year-ago
quarter.

LIQUIDITY AND CAPITAL RESOURCES

Our ratio of tangible equity to tangible managed assets ("TETMA") was 7.95
percent at September 30, 2002, compared to 7.94 percent at June 30, 2002 and
7.57 percent at December 31, 2001. During the current quarter and first nine
months of 2002, we completed the following measures to improve our TETMA ratio:

- - We issued $350 million of 7.625 percent cumulative preferred stock during
the current quarter and $400 million of 7.60 percent cumulative preferred
stock during the first quarter of 2002.

- - We sold approximately $1.6 billion in real estate secured loans that were
held by our mortgage services business during the current quarter and $900
million during the first quarter of 2002.

- - We suspended our stock buy-back program in August 2002. Prior to suspending
the program, we purchased 2.1 million shares of our common stock for a
total of $120 million during the quarter and 4.7 million shares for a total
of $280 million during the first nine months of 2002.

We are committed to reach a TETMA ratio of 8.50 percent by December 31, 2002.
Initiatives to achieve our TETMA target include continued suspension of our
stock buy-back program, additional portfolio sales to control balance sheet
growth, the sale of additional capital market securities and the possible sale
of Household Bank, f.s.b., including its current assets and deposits in the
fourth quarter.

Throughout 2002, the capital markets have been volatile. Investor demand for
both medium and long-term debt has slowed due to adverse economic conditions and
lingering concerns about overall business confidence. These conditions, coupled
with our restatement in August as well as uncertainty preceding the resolution
of certain matters with the various state regulatory agencies, affected the
nature of our funding. During the quarter, the cost to access traditional medium
and long-term unsecured debt funding sources became significantly higher than
expected. We have not experienced funding difficulties. We believe as markets
stabilize and we evidence movement toward meeting our capital goals, our access
to the capital markets will improve and funding costs will decrease. We may, if
we believe circumstances so warrant, issue additional capital securities to
accelerate our progress toward meeting the capital goals. The timing and
amounts of these offerings will be dependent upon market conditions.

On October 11, 2002, Standard & Poor's ("S&P") announced that it had revised its
long-term and commercial paper debt ratings for Household International, Inc.
and its principal borrowing subsidiary, HFC. S&P's ratings were revised as
follows: long-term senior debt from "A" to "A-" and short-term debt from "A-1"
to "A-2". Also on October 11, 2002, Fitch Ratings announced that it had placed
the long-term and commercial paper ratings of Household and each of its
subsidiaries on "Ratings Watch Negative," while Moody's Investors Service
affirmed all ratings for Household and HFC. The downgrade by S&P is expected to
increase our funding costs and decrease our capacity to issue commercial paper.

Commercial paper, bank and other borrowings of $5.3 billion were $1.7 billion
higher at September 30, 2002 than the June 30, 2002 level but $6.8 billion lower
than the year-end 2001 level. We took advantage of the low interest rate
environment and issued long-term debt in early 2002. We also reduced outstanding
commercial paper to address general market liquidity concerns. As a result of
our split credit

19

rating, outstanding commercial paper, bank and other borrowings
may decrease in future quarters as the market for our commercial paper may
contract.

Senior and senior subordinated debt (with original maturities over one year)
increased $18.0 billion from year-end to $74.8 billion at September 30, 2002.
During the nine months ended September 30, 2002, we issued $4.7 billion in
domestic medium-term notes, $5.0 billion in U.S. dollar-denominated global debt,
$4.8 billion in InterNotes(SM) (a retail-oriented medium-term note program),
Pound Sterling 500 ($710) million of 10-year debt to investors in the U.K.,
Euro 3 ($2.7) billion in Euro bonds and $328 million in yen-denominated debt. Of
these issuances, $7.2 billion had maturities greater than 5 years which reduced
our overall dependence on the potentially volatile commercial paper markets. In
addition, we issued $6.2 billion of securities backed by dedicated home equity
loan receivables.

During the current quarter, we issued $328 million in yen-denominated debt, $1.3
billion in InterNotes(SM) and $3.4 billion of securities backed by dedicated
home equity loan receivables.

In July 2002, substantially all of the holders of our $1 billion zero-coupon
convertible debt securities exercised their put options requiring us to
repurchase their outstanding securities. The redemption was funded through our
normal funding process.

During 2002, we established an investment security portfolio designed to improve
liquidity management and provide additional flexibility in the event of
potential future volatility in the financial markets. At September 30, 2002,
this portfolio totaled $6.5 billion, a $2 billion increase over June 30, 2002.

SECURITIZATIONS AND SECURED FINANCINGS
Securitizations and secured financings of consumer receivables have been, and
will continue to be, a source of liquidity for us. In a securitization, a
designated pool of non real estate consumer receivables, typically MasterCard or
Visa credit card, private label credit card, personal non-credit card or auto
finance, is removed from the balance sheet and transferred to an unaffiliated
trust. This unaffiliated trust is a qualifying special purpose entity ("QSPE")
as defined by Statement of Financial Accounting Standards No. 140 ("FAS No.
140") and, therefore, is not consolidated. The QSPE funds its receivables
purchase through the issuance of securities to investors, entitling them to
receive specified cash flows during the life of the securities. The securities
are collateralized by the underlying receivables transferred to the QSPE. Under
the terms of the securitizations, we receive annual servicing fees on the
outstanding balance of the securitized receivables and the rights to future
residual cash flows on the sold receivables after the investors receive their
contractual return. The estimated present value of these rights to future
residual cash flows are recorded on our balance sheet at the time of sale as
interest-only strip receivables, net of our recourse obligation to investors for
failure of debtors to pay. Our recourse is limited to our rights to future cash
flows and any subordinated interests that we may retain. Cash flows related to
the interest-only strip receivables and servicing the receivables are collected
over the life of the underlying securitized receivables.

In a secured financing, a designated pool of receivables, typically real estate
secured, are conveyed to a wholly owned limited purpose subsidiary which in turn
transfers the receivables to a trust which sells interests to investors.
Repayment of the debt issued by the trust is secured by the receivables
transferred. The transactions are structured as secured financings under FAS No.
140. Therefore, the receivables and the underlying debt of the trust remain on
our balance sheet. Using this source of funding results in similar operating
results and cash flows as issuing debt through alternative funding sources.

During the third quarter and first nine months of 2002, our securitization
activity exceeded that of both prior year periods. The higher securitization
levels reflect our liquidity management plans to limit reliance on short-term
unsecured debt in potentially volatile markets. Additionally, securitizations
were often a more cost-effective source of funding than traditional medium and
long-term unsecured debt funding sources. Receivables securitized (excluding
replenishments of certificateholder interests) were as follows:

20

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------

Auto finance $ 986.0 $ 732.0 $ 2,336.0 $ 1,705.8
MasterCard/Visa 160.0 109.9 1,373.4 261.1
Private label 390.0 -- 890.0 --
Personal non-credit card 1,000.0 350.0 2,352.7 1,498.6
- --------------------------------------------------------------------------------------
Total $ 2,536.0 $ 1,191.9 $ 6,952.1 $ 3,465.5
======================================================================================

Our securitized receivables totaled $23.4 billion at September 30, 2002,
compared to $20.9 billion at December 31, 2001.

In the first nine months of 2002, we established $6.25 billion in incremental
conduit capacity for our real estate secured product. Consistent with previous
transactions, draws on these facilities are structured as secured financings for
accounting purposes. At September 30, 2002, our undrawn conduit lines totaled
$5.2 billion and included $4.4 billion of undrawn capacity on the real estate
lines put in place in 2002.

We also issued securities backed by dedicated home equity loan receivables of
$3.4 billion in the third quarter of 2002 and $6.2 billion year-to-date,
compared to $717 million in the nine months ended September 30, 2001. For
accounting purposes, these transactions were structured as secured financings.
Therefore, the receivables and the related debt remain on our balance sheet. As
of September 30, 2002, closed-end real estate secured receivables totaling $7.7
billion secured $6.8 billion of outstanding debt related to these transactions.
At December 31, 2001, closed-end real estate secured receivables totaling $1.7
billion secured $1.5 billion of outstanding debt related to these transactions.

We believe the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. At September 30, 2002,
securitizations represented 22 percent and secured financings represented 6
percent of the funding associated with our managed portfolio. At December 31,
2001, securitizations represented 22 percent and secured financings represented
2 percent of the funding associated with our managed portfolio.

REGULATORY MATTERS
In response to revised capital adequacy guidelines relating to subprime lending
activities adopted by the Office of Thrift Supervision ("OTS"), Office of the
Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC"), in the first quarter, we contributed approximately $1.2
billion of additional capital to our banking subsidiaries. Throughout the year,
we have taken actions designed to optimize capital management of our banks,
including merging all our credit card banks into a single banking subsidiary of
HFC.

In conjunction with our efforts to make the most efficient use of our capital
and to achieve our 8.50 percent TETMA target, we determined that the continued
operation of Household Bank, f.s.b. is not in our long-term strategic interest.
As a result, management is exploring opportunities to dispose of Household Bank,
f.s.b. including its current assets and deposits in the fourth quarter. We have
not utilized deposits to fund our operations since 2000. We do not expect that
the loss of the Bank as a funding source for our operations will materially
impact our business. The sale will likely result in a $250-300 million loss
(after tax) in the fourth quarter.

On October 11, 2002, we reached a preliminary agreement with a multi-state
working group of state attorneys general and regulatory agencies to effect a
nationwide resolution of alleged violations of consumer protection, consumer
lending and insurance laws and regulations in our retail branch consumer lending
operations. We recorded a charge of $525 million (pre-tax) reflecting the costs
of this settlement agreement and related matters. This matter is discussed in
detail in our Form 8-K dated October 11, 2002 which we filed on October 15,
2002.

21

RESULTS OF OPERATIONS

Unless noted otherwise, the following discusses amounts reported in our owned
basis statements of income.

NET INTEREST MARGIN Net interest margin on an owned basis was $1.7 billion for
the third quarter of 2002, up 15 percent from $1.5 billion for the prior-year
quarter. Net interest margin on an owned basis for the first nine months of 2002
was $4.9 billion, up from $4.2 billion in the prior-year period. The increases
were primarily due to receivable growth and lower funding costs.

Net interest margin as a percent of average owned interest-earning assets,
annualized, was 7.46 percent in the quarter and 7.62 percent in the first nine
months of 2002, compared to 7.94 and 7.74 percent in the year-ago periods. The
declines were due to the impact of our liquidity-related investment portfolio
which was established in 2002. These reductions were partially offset by lower
funding costs.

Our net interest margin on a managed basis includes finance income earned on our
owned receivables as well as on our securitized receivables. This finance income
is offset by interest expense on the debt recorded on our balance sheet as well
as the contractual rate of return on the instruments issued to investors when
the receivables were securitized. Managed basis net interest margin increased
$379 million, to $2.4 billion in the third quarter of 2002, and $1.2 billion, to
$6.9 billion year-to-date. The increases were primarily due to higher receivable
levels.

Net interest margin as a percent of average managed interest-earning assets,
annualized, was 8.35 percent in the current quarter and 8.54 percent in the
first nine months of 2002, compared to 8.51 and 8.31 percent in the year-ago
periods. The net interest margin on a managed basis is greater than on an owned
basis because the managed basis portfolio includes relatively more auto finance,
MasterCard and Visa and personal non-credit card loans, which have higher
yields. The decrease in the quarter was primarily due to the liquidity-related
investment portfolio established in 2002. This portfolio has lower yields than
our other products. Lower funding costs were the primary driver of the increased
margin for the nine month period.

PROVISION FOR CREDIT LOSSES The provision for credit losses for receivables for
the third quarter of 2002 totaled $973.0 million, compared to $722.9 million in
the prior-year quarter. The provision for the first nine months of 2002 was $2.7
billion, compared to $2.1 billion in the year-ago period. The provision as a
percent of average owned receivables, annualized, was 4.61 percent in the third
quarter of 2002, compared to 3.91 percent in the third quarter of 2001. We
recorded owned loss provision greater than charge-offs of $136.7 million during
the third quarter and $462.2 million during the first nine months of 2002.
Receivables growth, increases in personal bankruptcy filings and uncertainty as
to the timing and extent of an economic recovery contributed to a higher
provision. The provision for credit losses may vary from quarter to quarter,
depending on the product mix and credit quality of loans in our portfolio. See
Note 4, "Credit Loss Reserves" to the accompanying condensed consolidated
financial statements for further discussion of factors affecting the provision
for credit losses.

22

OTHER REVENUES Total other revenues were $1.1 and $3.3 billion for the third
quarter and first nine months of 2002, compared to $949.8 million and $2.8
billion for the same periods in 2001 and included the following:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------

Securitization revenue $ 556.3 $ 451.1 $ 1,598.0 $ 1,251.6
Insurance revenue 180.8 169.2 528.4 487.1
Investment income 47.6 42.3 137.8 121.9
Fee income 261.7 235.7 668.5 671.3
Other income 101.8 51.5 385.1 262.6
- ---------------------------------------------------------------------------------------
Total other revenues $ 1,148.2 $ 949.8 $ 3,317.8 $ 2,794.5
=======================================================================================

Securitization revenue is the result of the securitization of our receivables
and includes initial and replenishment gains on sale, net of our estimate of
probable credit losses under the recourse provisions, as well as servicing
revenue and excess spread. Securitization revenue was $556.3 million and $1.6
billion for the third quarter and first nine months of 2002, compared to $451.1
million and $1.3 billion for the same periods in 2001. The increases were due to
higher average securitized receivables as well as increases in the level of
receivables securitized during both the quarter and year-to-date. Securitization
revenue will vary each period based on the level and mix of receivables
securitized in that particular period (which will impact the gross initial gains
and related estimated probable credit losses under the recourse provisions). It
is also affected by the overall level and mix of previously securitized
receivables (which will impact servicing revenue and excess spread). The
estimate for probable credit losses for securitized receivables is also impacted
by the level and mix of current period securitizations because, depending upon
loss estimates and severities, securitized receivables with longer lives may
result in higher over-the-life losses than receivables securitized with shorter
lives.

Securitization revenue included the following:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------

Net initial gains $ 78.6 $ 38.5 $ 226.8 $ 104.7
Net replenishment gains 132.2 107.4 383.4 305.0
Servicing revenue and excess spread 345.5 305.2 987.8 841.9
- ----------------------------------------------------------------------------------
Total $ 556.3 $ 451.1 $ 1,598.0 $ 1,251.6
==================================================================================

Our interest-only strip receivables increased $51.2 and $110.0 million in the
third quarter and first nine months of 2002 compared to $45.2 and $46.2 million
in the year-ago periods. These increases exclude the mark-to-market adjustment
recorded in accumulated other comprehensive income.

Insurance revenue was $180.8 and $528.4 million in the third quarter and first
nine months of 2002 compared to $169.2 and $487.1 million in the year-ago
periods. The increases reflect increased sales on a larger receivable portfolio.

Investment income, which includes interest income on investment securities in
the insurance business as well as realized gains and losses from the sale of
investment securities, was $47.6 and $137.8 million in the third quarter and
first nine months of 2002 compared to $42.3 and $121.9 million in the year-ago
periods. The increases were primarily due to higher interest income, primarily
resulting from higher average investment balances consistent with our liquidity
management plans, partially offset by lower yields.

Fee income, which includes revenues from fee-based products such as credit
cards, was $261.7 and $668.5 million in the third quarter and first nine months
of 2002, compared to $235.7 and $671.3 million in the year-ago periods. The
increase in the quarter was due to higher levels of credit card fees from both

23

card businesses. The year-to-date decrease was attributable to improvements in
early stage delinquencies in the first half of the year which resulted in lower
late fees in our credit card businesses. The fourth quarter 2001 sale of the $1
billion Goldfish credit card portfolio in the U.K. also resulted in lower fee
income.

See Note 13, "Segment Reporting," to the accompanying condensed consolidated
financial statements for additional information on fee income on a managed
basis.

Other income, which includes revenue from our tax refund lending business, was
$101.8 and $385.1 million in the third quarter and first nine months of 2002
compared to $51.5 and $262.6 million in the prior-year periods. The increases
are primarily attributable to increased revenues from our mortgage operations
and higher servicing fees. Higher revenues, including higher collections, from
our seasonal tax refund lending business also contributed to the year-to-date
increase.

EXPENSES Total costs and expenses, including the $525 million settlement charge
and related expenses, for the third quarter and first nine months of 2002 were
$1.6 and $3.7 billion compared to $978.6 million and $2.9 billion in the
comparable prior-year periods. Excluding the settlement charge, costs and
expenses were $1.1 billion in the current quarter and $3.2 billion year-to-date.
The increases were driven by higher compensation and other expenses to support
our growing portfolio. Our owned basis efficiency ratio was 53.8 and 43.0
percent in the third quarter and first nine months of 2002 compared to 38.2 and
39.4 percent in the comparable prior-year periods. Excluding the settlement
charge, our owned basis efficiency ratio was 34.7 percent in the quarter and
36.4 percent in the first nine months of 2002.

Total costs and expenses included the following:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------- ---------------------------

Salaries and fringe benefits $ 456.6 $ 408.3 $ 1,354.9 $ 1,173.1
Sales incentives 60.6 74.1 182.3 202.2
Occupancy and equipment expense 94.1 86.1 279.6 253.3
Other marketing expenses 135.4 119.5 409.3 370.0
Other servicing and administrative expenses 199.3 174.1 635.1 542.8
Amortization of acquired intangibles and goodwill 12.7 39.0 45.1 118.6
Policyholders' benefits 101.2 77.5 272.6 228.1
Settlement charge and related expenses 525.0 -- 525.0 --
- ----------------------------------------------------------------------------------------------------------
Total costs and expenses $ 1,584.9 $ 978.6 $ 3,703.9 $ 2,888.1
==========================================================================================================

Salaries and fringe benefits for the third quarter and first nine months of 2002
were $456.6 million and $1.4 billion compared to $408.3 million and $1.2 billion
in the third quarter and first nine months of 2001. The increases were primarily
due to additional staffing at all businesses to support growth including sales,
collections and service quality.

Sales incentives for the third quarter and first nine months of 2002 were $60.6
and $182.3 million compared to $74.1 and $202.2 million in the comparable
prior-year periods. The decreases were due to conditions of our 2002 branch
incentive plans which, generally, have higher volume requirements than the
prior-year plans.

Occupancy and equipment expense for the third quarter and first nine months of
2002 was $94.1 and $279.6 million compared to $86.1 and $253.3 million in the
comparable prior-year periods. The increases were primarily the result of higher
repairs and maintenance costs.

Other marketing expenses for the third quarter and first nine months of 2002
were $135.4 and $409.3 million compared to $119.5 and $370.0 million in the
comparable prior-year periods. The increases were primarily due to increased
credit card marketing initiatives in both our domestic and U.K. MasterCard and
Visa portfolios.

24

Other servicing and administrative expenses for the third quarter and first nine
months of 2002 were $199.3 and $635.1 million compared to $174.1 and $542.8
million in the comparable prior-year periods. The increases were primarily due
to higher collection, REO, legal and consulting expenses.

Amortization of acquired intangibles and goodwill for the third quarter and
first nine months of 2002 was $12.7 and $45.1 million compared to $39.0 and
$118.6 million in the comparable prior-year periods. The decreases were
primarily attributable to the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002.
Amortization of goodwill recorded in past business combinations ceased upon
adoption of the new accounting statement.

Policyholders' benefits for the third quarter and first nine months of 2002 were
$101.2 and $272.6 million compared to $77.5 and $228.1 million in the comparable
prior-year periods. The increases are primarily due to and consistent with the
increase in insurance revenues resulting from the increased policy sales.

Settlement charge and related expenses were $525 million in both the third
quarter and first nine months of 2002. The charges are the result of a
preliminary agreement with a multi-state group of state attorneys general and
regulatory agencies, to effect a nationwide resolution of alleged violations of
consumer protection, consumer lending and insurance laws and regulations in our
retail branch consumer lending operations as conducted under the HFC and
Beneficial brand names.

CREDIT LOSS RESERVES

Our consumer credit management policies focus on product type and specific
portfolio risk factors. Our consumer credit portfolio is diversified by product
and geographic location. See Note 3, "Receivables," in the accompanying
condensed consolidated financial statements for receivables by product type and
Note 4, "Credit Loss Reserves," for our credit loss reserve methodology and an
analysis of changes in the credit loss reserves.

The following table sets forth owned basis credit loss reserves for the periods
indicated:

SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
(All dollar amounts are stated in millions) 2002 2002 2001
- -----------------------------------------------------------------------------------------------

Owned credit loss reserves $ 3,127.3 $ 2,983.3 $ 2,476.6
Reserves as a percent of:
Receivables 3.72% 3.59% 3.28%
Net charge-offs (1) 93.5 97.4 98.2
Previous 12-months' net charge-offs 104.4 106.9 111.3
Nonperforming loans 92.1 96.0 87.9
===============================================================================================

(1) Quarter-to-date, annualized

Reserves as a percentage of receivables at September 30, 2002 reflect higher
delinquency levels and continuing uncertainty as to the ultimate impact the weak
economy will have on charge-off and delinquency levels.

25

For securitized receivables, we also record a provision for estimated probable
losses that we expect to incur under the recourse provisions. The following
table sets forth managed credit loss reserves for the periods indicated:

SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
(All dollar amounts are stated in millions) 2002 2002 2001
- -----------------------------------------------------------------------------------------------

Managed credit loss reserves $ 4,688.8 $ 4,368.9 $ 3,555.0
Reserves as a percent of:
Receivables 4.36% 4.14% 3.72%
Net charge-offs (1) 100.1 100.0 102.1
Previous 12-months' net charge-offs 110.1 110.4 111.1
Nonperforming loans 113.1 112.4 103.9
===============================================================================================

(1) Quarter-to-date, annualized

Managed basis reserve ratios are somewhat higher than comparable owned basis
ratios because our managed portfolio includes a lower percentage of real estate
secured receivables, which historically have had lower credit losses than our
other products.

CREDIT QUALITY

DELINQUENCY - OWNED BASIS

Two-Months-and-Over Contractual Delinquency (as a percent of consumer
receivables):

SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2002 2002 2001
- --------------------------------------------------------------------------------

Real estate secured 3.22% 2.78% 2.71%
Auto finance 3.33 2.99 2.43
MasterCard/Visa 6.36 6.13 5.22
Private label 6.84 6.19 6.57
Personal non-credit card 9.18 9.12 8.75
- --------------------------------------------------------------------------------
Total 5.01% 4.61% 4.58%
================================================================================

Compared to the previous quarter, the weakened economy contributed to higher
delinquencies in all products. These increases were consistent with our
expectations. Approximately 25 percent of the increase in our real estate
secured portfolio was attributable to the sale of $1.6 billion in predominantly
non-delinquent receivables during the quarter. The sequential increase in auto
finance delinquency is consistent with historical seasonal trends.

Compared to a year ago, the weakened economy negatively affected delinquency
rates for all products. These increases were partially offset by improved
collections. The improved collections were a direct result of increasing the
size of our collection staff, especially in our branch network.

26

NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS

Net Charge-offs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):

SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2002 2002 2001
- ------------------------------------------------------------------------------------------------------------------

Real estate secured 1.03% .85% .51%
Auto finance 5.50 4.80 3.72
MasterCard/Visa 9.21 9.94 8.28
Private label 6.65 5.86 5.94
Personal non-credit card 8.96 8.59 7.27
- ------------------------------------------------------------------------------------------------------------------
Total 3.98% 3.76% 3.43%
==================================================================================================================
Real estate charge-offs and REO expense as a percent of average real
estate secured receivables 1.38% 1.23% .85%
==================================================================================================================

The weak economy, including higher bankruptcy charge-offs, drove the increase in
charge-off ratios over the previous quarter. These increases were consistent
with our expectations. The decrease in MasterCard and Visa charge-offs reflects
decreases across all MasterCard and Visa credit card products.

Compared to the prior-year quarter, our net charge-off ratio increased 55 basis
points, primarily due to the weak economy. These increases were partially offset
by improved collections as a direct result of increasing the size of our
collection staff. Charge-offs in our personal non-credit card portfolio
increased more than most other products because our typical personal non-credit
card customer is less resilient and, therefore, more exposed to the recent
economic downturn.

The increases in real estate charge-offs and REO expense as a percent of average
real estate secured receivables over both of the prior periods were the result
of the seasoning of our portfolios, higher loss severities, especially in second
lien mortgages, and higher bankruptcy filings.

OWNED NONPERFORMING ASSETS

SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
(In millions) 2002 2002 2001
- ----------------------------------------------------------------------------------------------------------

Nonaccrual receivables $ 2,569.5 $ 2,356.4 $ 2,009.6
Accruing consumer receivables
90 or more days delinquent 824.2 750.6 806.6
Renegotiated commercial loans 1.3 1.4 --
- ----------------------------------------------------------------------------------------------------------
Total nonperforming receivables 3,395.0 3,108.4 2,816.2
Real estate owned 451.1 456.7 363.0
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,846.1 $ 3,565.1 $ 3,179.2
==========================================================================================================
Credit loss reserves as a percent of
nonperforming receivables 92.1% 96.0% 87.9%
==========================================================================================================

27

REAGE STATISTICS - MANAGED BASIS

Our credit policies for consumer loans permit the reset of the contractual
delinquency status of an account to current, subject to certain limits, if a
predetermined number of consecutive payments has been received and there is
evidence that the reason for the delinquency has been cured. Such reaging
policies vary by product and are designed to manage customer relationships and
ensure maximum collections. The tables below summarize reaging statistics in our
managed basis domestic portfolio as of September 30, 2002, June 30, 2002 and
December 31, 2001.

TOTAL REAGED BY REAGE PERIOD - DOMESTIC PORTFOLIO SEPTEMBER 30, JUNE 30, DECEMBER 31,
(Managed Basis) 2002 2002 2001
- --------------------------------------------------------------------------------------------------------

Never reaged 83.9% 83.3% 83.1%
Reaged:
Reaged in the last 6 months 6.6 7.4 9.0
Reaged in the last 7-12 months 4.9 5.1 3.6
Previously reaged 4.6 4.2 4.3
- --------------------------------------------------------------------------------------------------------
Total ever reaged 16.1 16.7 16.9
- --------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
========================================================================================================

TOTAL REAGED BY PRODUCT - DOMESTIC PORTFOLIO SEPTEMBER 30, JUNE 30, DECEMBER 31,
(Managed Basis) 2002 2002 2001
- --------------------------------------------------------------------------------------------------------

Real estate secured 18.5% 19.1% 20.0%
Auto finance 16.2 15.9 15.0
MasterCard/Visa 3.4 3.4 3.2
Private label 10.4 10.5 11.1
Personal non-credit card 25.3 27.1 27.2
- --------------------------------------------------------------------------------------------------------
Total 16.1% 16.7% 16.9%
========================================================================================================

The percentage of our domestic, managed basis portfolio which has ever been
reaged at September 30, 2002 has declined slightly from both June 30, 2002 and
December 31, 2001.

NEW LEGAL MATTERS

In connection with the restatement of our prior period financial results that
occurred in August 2002, we, and our directors and former auditors, have been
named in various legal actions, purporting to be class actions, alleging
violations of the federal securities law. We believe that the legal actions
described above are without merit. We also believe that our officers and
directors have not committed any wrong doing and in each instance there will be
no finding of improper activities that may result in a material liability to the
company or any of its officers or directors.

28

ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in this report. Our Board of Directors, operating
through its audit committee which is composed entirely of independent outside
directors, provides oversight to our financial reporting process.

Within the 90-day period prior to the date of this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and our Principal Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to Household
International, Inc. (including its consolidated subsidiaries) required to be
included in this quarterly report on Form 10-Q.

There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

12 Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends.

99.1 Selected Debt and Preferred Stock Securities Ratings.

99.2 Certification of Chief Executive Officer.

99.3 Certification of Principal Financial Officer.

(b) Report on Form 8-K

During the third quarter of 2002, we filed the following Current
Reports on Form 8-K:

- Report filed July 17, 2002 with respect to the press release
pertaining to our financial results for the quarter ended June
30, 2002.

- Report filed on August 14, 2002 pursuant to Order No. 4-460 of
the Securities and Exchange Commission (the "Commission") whereby
Household International, Inc. delivered to the Secretary of the
Commission sworn statements of William F. Aldinger, its Chairman
and Chief Executive Officer and David A. Schoenholz, its
President and Chief Operating Officer, as required by such Order,
and advised of a restatement of prior period earnings.

- Report filed September 16, 2002 reporting the issuance of 350,000
shares of 7 5/8% Cumulative Preferred Stock, Series 2002-B,
pursuant to an underwritten public offering of 14,000,000
depositary shares.

29

SIGNATURE

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.

HOUSEHOLD INTERNATIONAL, INC.
----------------------------
(Registrant)

Date: October 24, 2002 By: /s/ David A. Schoenholz
---------------- ---------------------------
David A. Schoenholz
President and Chief
Operating Officer (also as
principal financial
officer) and on behalf of
Household International,
Inc.

30

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William F. Aldinger, Chairman and Chief Executive Officer of Household
International, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Household
International, Inc.;

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

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

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

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

Date: October 24, 2002
/s/ William F. Aldinger
--------------------------------------
William F. Aldinger
Chairman and Chief Executive Officer

31

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, David A. Schoenholz, President and Chief Operating Officer (as the Principal
Financial Officer) of Household International, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Household
International, Inc.;

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

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

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

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

Date: October 24, 2002
/s/ David A. Schoenholz
-------------------------------------
David A. Schoenholz
President and Chief Operating Officer

32

EXHIBIT INDEX

12 Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends.

99.1 Selected Debt and Preferred Stock Securities Ratings.

99.2 Certification of Chief Executive Officer.

99.3 Certification of Principal Financial Officer.

33