HOUSEHOLD INTERNATIONAL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

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)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 564-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of the voting common stock held by nonaffiliates
of the registrant at March 19, 2003 was approximately $13.503 billion. The
number of shares of the registrant's common stock outstanding at March 19, 2003
was 474,631,342.
DOCUMENTS INCORPORATED BY REFERENCE

None.
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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

Household International, Inc. ("Household") has entered into a merger
agreement with HSBC Holdings plc ("HSBC") pursuant to which HSBC will acquire
Household in 2003, subject to the terms and conditions of the merger agreement.
As a result of this merger, Household will no longer be a public company.
However, Household and Household Finance Corporation ("HFC"), Household's wholly
owned subsidiary, will continue to file periodic reports with the United States
Securities and Exchange Commission (the "SEC") in a reduced disclosure format as
permitted by SEC rules following the merger as wholly owned subsidiaries of
HSBC. This Form 10-K does not reflect or assume any changes to Household's
business as a result of the merger and does not discuss the impact of the merger
on Household's compensation policies, employment arrangements, liquidity,
capital or reportable segments. For material information regarding the merger,
including its impact on Household, please see Household's definitive proxy
statement for the special meeting of its shareholders to be held on March 28,
2003, which was filed with the SEC on February 26, 2003, and the supplemental
proxy materials, which were filed with the SEC on March 19, 2003.

GENERAL

Household is principally a non-operating holding company. Household's
subsidiaries primarily provide middle-market consumers with several types of
loan products in the United States, the United Kingdom, Canada, the Czech
Republic and Hungary. Household and its subsidiaries (including the operations
of Beneficial Corporation ("Beneficial") which we acquired in 1998) may also be
referred to in this Form 10-K as "we," "us" or "our." We offer real estate
secured loans, auto finance loans, MasterCard* and Visa* credit cards, private
label credit cards, tax refund anticipation loans, retail installment sales
finance loans and other types of unsecured loans, as well as credit and
specialty insurance products. At December 31, 2002, we had approximately 31,000
employees and over 50 million active customer accounts.

At December 31, 2002, consumers residing in the state of California
accounted for 14% of our managed domestic consumer receivables. We also have
significant concentrations of managed domestic consumer receivables in Florida
(6%), New York (6%), Texas (5%), Illinois (5%), Ohio (5%) and Pennsylvania (5%).
No other state accounts for more than 5% of our receivables.

Our summary financial information is set forth in Item 6. "Selected
Financial Data."

Household was created as a holding company in 1981 as a result of a
shareholder approved restructuring of HFC, which was established in 1878. Our
operational focus is on those areas of consumer financial services that we
believe offer us the best opportunity to achieve appropriate risk-adjusted
returns on our capital. From late 1994 through 1997 we exited from several
businesses that were providing insufficient returns on our investment, such as
our conforming first mortgage origination and servicing business in the United
States and Canada, our individual life and annuity business, our consumer branch
banking business, and our student loan business. Since 1997 we have:

- strengthened our branch-based consumer lending operation and private
label credit card businesses with selected acquisitions, including
Transamerica Financial Services Holding Company in 1997, Beneficial in
1998 and a $2.2 billion portfolio acquisition in 2000;

- expanded into the United States nonprime auto lending industry,
principally with the acquisition of ACC Consumer Finance Corporation in
1997;

- - repositioned our United States MasterCard* and Visa* credit card business to
de-emphasize undifferentiated credit card programs and focus on co-branded and
affinity relationships. In addition, we

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

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initiated secured and unsecured credit card programs to target nonprime
consumers through the acquisition of Renaissance Holdings, Inc. in 2000;

- developed additional distribution channels for our products, such as
through the Internet and co-branding opportunities with retail merchants
and service providers; and

- created a business to acquire nonconforming mortgage loans originated by
unaffiliated third-party lenders and to originate nonconforming mortgage
loans through third-party brokers. This business allows us to access new
customers and leverage our origination and servicing capabilities in the
United States.

Recent Developments.

- On November 14, 2002, Household and HSBC, a public limited company
incorporated in England and Wales, jointly announced that they had
entered into a definitive merger agreement pursuant to which HSBC will
acquire Household, subject to the terms and conditions of the merger
agreement. Promptly following shareholder approvals of the merger, the
merger will be completed and Household will become a wholly owned
subsidiary of HSBC.

- 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 state consumer protection, consumer financing and banking
laws and regulations with respect to secured real estate lending from our
retail branch consumer lending operations. This agreement first became
effective on December 16, 2002, with the filing of related consent
decrees or similar documentation in 41 states and the District of
Columbia. Consent decrees, or similar documentation, have now been filed
in all 50 states and the District of Columbia. In the third quarter of
2002, we recorded a pre-tax charge of $525 million ($333.2 million
after-tax), which reflects the costs of this settlement agreement and
related matters.

- During the fourth quarter of 2002, in conjunction with our efforts to
make the best use of our capital and in recognition of the fact that the
continued operation of Household Bank, f.s.b. (the "Thrift") was not in
our long-term strategic interest, we completed the disposition of
substantially all of the remaining assets and deposits of the Thrift. The
disposition of Thrift assets and deposits included the sale of real
estate secured receivables totaling $3.6 billion, the maturity of
investment securities totaling $2.2 billion and the sale of retail
certificates of deposit totaling $4.3 billion. In the fourth quarter of
2002, we recorded a loss of $240.0 million (after-tax) with respect to
the disposition of these assets and deposits.

- Our net income was $1.6 billion in 2002, compared to $1.8 billion in 2001
and $1.6 billion in 2000. Our operating net income (a non-GAAP financial
measurement of net income that excludes the settlement charge and
expenses relating to our agreement with the states attorneys general and
regulatory agencies discussed above, and the loss on disposition of the
assets and deposits of our Thrift) was $2.1 billion in 2002, a 15 percent
increase over 2001 net income. Operating net income is an important
measure in evaluating trends for comparative purposes. Our diluted
earnings per share was $3.22 in 2002, a decrease of 18 percent from $3.91
in 2001. Diluted earnings per share was $3.40 in 2000.

Our improved operating net income was due to receivable and revenue
growth. Receivable growth was largely offset by higher securitization
levels and asset sales of $6.3 billion, including $3.6 billion of
receivables that were sold as part of the disposition of the assets of
our Thrift. Revenue growth 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 improved
operating results in 2002 were offset by the attorneys general settlement
charge and the loss on the disposition of the assets and deposits of our
Thrift, which collectively reduced net income by $573.2 million.

- During 2002, we took a number of steps as part of our liquidity
management plans that reduced our reliance on short-term debt and
strengthened our position against market-induced volatility. These steps
included issuing long-term debt, establishing $6.25 billion in
incremental real estate secured

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conduit capacity, completing real estate secured whole loan sales of $6.3
billion, disposing of our Thrift assets and deposits, issuing common stock and
other capital securities, issuing securities backed by dedicated pools of home
equity loan receivables of $7.5 billion and establishing an investment
security liquidity portfolio, which totaled $3.9 billion at December 31,
2002 including $2.2 billion which is dedicated to our credit card bank. We
intend to maintain an investment security portfolio for the near future to
protect us from unforeseen liquidity demands. This action will continue to
adversely impact our net interest margin and net income due to the lower
return generated by these assets. Our insurance subsidiaries also held an
additional $3.1 billion in investment securities at December 31, 2002.

- At December 31, 2002, we had exceeded our previously announced capital
targets by generating earnings, suspending our share repurchase program,
restricting growth, selling assets and issuing common stock and other
capital securities. We strengthened our ratio of tangible equity to
tangible managed assets ("TETMA") to 9.08 percent, compared to our target
ratio of 8.50 percent and our ratio of 7.57 percent at December 31, 2001.
We also strengthened our ratio of common tangible equity to tangible
managed assets to 6.83 percent, compared to our target ratio of 6.70
percent and our ratio of 6.24 percent at December 31, 2001. TETMA and
tangible common equity to tangible managed assets are non-GAAP financial
ratios that are used by certain rating agencies as a measure to evaluate
capital adequacy. The ratio of common and preferred equity to total
managed assets, the most directly comparable GAAP financial measure to
TETMA, was 8.48 percent at December 31, 2002 and 7.55 percent at December
31, 2001.

- We restated our consolidated financial statements for the years ended
December 31, 1999, 2000 and 2001, and filed our amended annual report on
Form 10-K/A on August 27, 2002, reflecting this restatement. The
restatement related to MasterCard and Visa co-branding and affinity
credit card relationships and a marketing agreement with a third party
credit card marketing company. 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 that were
entered into between 1992 and 1999 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 either have 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 balance of retained earnings
at December 31, 1998, was restated from amounts previously reported to
reflect a retroactive charge of $155.8 million, after tax, for these
items.

- Two of the three rating agencies (Standard & Poor's and Fitch) that rate
Household's and our subsidiaries' debt and preferred securities took
negative actions in response to the anticipated financial impact
resulting from our announcement of the multi-state settlement agreement
with the states attorneys general and the disposition of our Thrift, as
described above. These rating actions were not anticipated. Although our
ratings are well within the investment grade ratings categories at all
rating agencies for all of our debt and preferred securities, these
actions contributed additional volatility to the trading of our debt and
preferred securities and had the potential to limit our access to funding
at an acceptable cost. As a result of the pending merger with HSBC, the
rating agencies have indicated that their outlook with respect to
Household has improved and trading in our debt and preferred securities
has returned to normal levels.

- We are subject to ongoing regulation by the SEC, the Office of the
Comptroller of the Currency ("OCC") and other US (federal and state) and
foreign regulatory agencies, which agencies have broad oversight,
supervisory and enforcement powers. Within the scope of these powers,
requests have been made, to which Household has responded, for factual
material surrounding our consumer protection settlement with a
multi-state working group of state attorneys general and regulatory
agencies, our 2002 restatement and certain other matters.

On March 18, 2003, without admitting or denying any wrongdoing, we
consented to the entry of an order by the SEC pursuant to Section 21C of
the Securities Exchange Act of 1934, as amended (the

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"Exchange Act"). The order contains findings by the SEC relating to the
sufficiency of certain disclosures in reports we filed with the SEC
during 2002. The SEC found that our disclosures regarding our restructure
policies fail to present an accurate description of the minimum payment
requirements applicable under the various policies or to disclose our
policy of automatically restructuring numerous loans and are therefore
false and misleading. The SEC also found misleading our failure to
disclose our policy of excluding forbearance arrangements in certain of
our businesses from our 60+ days contractual delinquency statistics. The
SEC noted that the 60+ days contractual delinquency rate and
restructuring statistics are key measures of our financial performance
because they positively correlate to charge-off rates and loan loss
reserves. The SEC findings state that these disclosures violated Sections
10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and
13a-13 under the Exchange Act. A copy of the consent order has been filed
publicly with the SEC on a Current Report on Form 8-K and is available
from us upon request.

The consent order requires us to cease and desist from committing or
causing any violations or future violations of the provisions of and rules
under the Exchange Act cited above. The order does not require us to pay
any fines or monetary damages. The SEC's order does not require any
restatement of our financial results. We have agreed to the entry of the
consent order, without admitting or denying the SEC's findings. See Item
7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Credit Quality -- Account Management Policies."

OPERATIONS

Our operations are divided into three reportable segments: Consumer, Credit
Card Services and International. Our Consumer segment includes our consumer
lending, mortgage services, retail services and auto finance businesses. Our
Credit Card Services segment includes our domestic MasterCard and Visa credit
card business. Our International segment includes our foreign operations in the
United Kingdom and Canada. Information about businesses or functions that fall
below the segment reporting quantitative threshold tests such as our insurance
services, refund lending, direct lending and commercial operations, as well as
our corporate and treasury activities, are included under the "All Other"
caption within our segment disclosure.

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. 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.

GENERAL

Across all reportable segments, we generally serve nonconforming and
nonprime consumers. Such customers are individuals who have limited credit
histories, modest income, high debt-to-income ratios, high loan-to-value ratios
(for real estate secured products) or have experienced credit problems caused by
occasional delinquencies, prior charge-offs or other credit related actions.
These customers generally have higher delinquency and credit loss probabilities
and are charged a higher interest rate to compensate us for the additional risk
of loss, where the loan is not adequately collateralized to mitigate such
additional risk of loss, and the anticipated additional collection initiatives
that may have to be undertaken over the life of the loan. In our MasterCard and
Visa business, our retail services business, our mortgage services business and
our international businesses, we also serve prime consumers either through
co-branding or merchant relationships or unaffiliated mortgage originators.

We have taken substantial measures to enhance the profitability and improve
operational control of our businesses. We use our centralized underwriting,
collection and processing functions to adapt our credit standards and collection
efforts to national or regional market conditions. Our underwriting, loan
administration and collection functions are supported by highly automated
systems and processing facilities. Our centralized collection system is
augmented by personalized early collection efforts. Maximizing our technology

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and otherwise streamlining our operations and reducing our costs has enabled us
to improve our efficiency through specialization and economies of scale and
allows us to operate more efficiently than most of our competitors.

We service each customer with a view to understanding that customer's
personal financial needs. We recognize that individuals may not be able to
timely meet all of their financial obligations. Our goal is to assist consumers
in transitioning through financially difficult times in order to expand that
customer's relationship with Household. As a result, our policies and practices
are designed to be flexible to maximize the collectibility of our loans while
not incurring excessive collection expenses on loans that have a high
probability of being ultimately uncollectible. Cross-selling of products,
proactive credit management, "hands-on" customer care and targeted product
marketing are means we use to retain customers and grow our business.

CONSUMER

Our consumer lending business is one of the largest subprime home equity
originators in the United States as ranked by Inside B&C Lending. This business
has approximately 1,300 branches located in 45 states, 32 million active
customer accounts, $43.4 billion in managed receivables and 12,000 employees. It
is marketed under both the HFC and Beneficial brand names, each of which caters
to a slightly different type of customer in the middle-market population. Both
brands offer secured and unsecured loan products, such as first and second lien
position closed-end mortgage loans, open-end home equity loans, personal
non-credit card loans, including personal homeowner loans (a secured high
loan-to-value product that we underwrite and treat like an unsecured loan), and
sales finance contracts. These products are marketed through our retail branch
network, direct mail, telemarketing, strategic alliances and Internet sourced
applications and leads.

Our mortgage services business purchases nonconforming first and second
lien position residential mortgage loans, including open-end home equity loans,
from a network of over 250 unaffiliated third-party lenders (i.e.,
correspondents). This business has approximately $17.0 billion in managed
receivables, 220,000 active customer accounts and 1,850 employees. These
purchases are either "flow" acquisitions (i.e., loan by loan) or "bulk"
acquisitions (i.e., pools of loans), and are made based on our specific
underwriting guidelines. We offer forward commitments to selected correspondent
lenders to strengthen our relationship with these lenders and to create a
sustainable growth channel for this business. Decision One Mortgage Company,
LLC, a subsidiary of Household, was purchased in 1999 to assist us in
understanding the product needs of mortgage brokers and trends in the mortgage
lending industry. Through more than 20 branch locations, Decision One directly
originates mortgage loans sourced by mortgage brokers.

Our retail services business is one of the largest provider of third-party
private label credit cards in the United States based on managed receivables
outstanding. Our retail services business has over 70 active merchant
relationships with approximately $12.6 billion in managed receivables, 11
million active customer accounts and 2,200 employees. Approximately 25 percent
of our retail services receivables are in the furniture industry, 34 percent are
in the consumer electronics industry, 21 percent are in the powersports vehicle
(snowmobiles, personal watercraft, ATV's and motorcycles) industry and
approximately 12 percent are in the home products or home improvement industry.
These products are generated through merchant retail locations, merchant catalog
and telephone sales, application displays, direct mail and Internet
applications.

Our auto finance business purchases, from a network of approximately 4,500
active dealer relationships, retail installment contracts of consumers who do
not have access to traditional, prime-based lending sources. We also originate
and refinance auto loans through direct mail solicitations, alliance partners
and the Internet. This business has approximately $7.4 billion in managed
receivables and 2,000 employees. Approximately 75% of our auto finance
receivables are secured by "used" vehicles versus "new" vehicles. With a
centralized underwriting and funding business model, as well as a strong
financial position to provide liquidity, we believe our auto finance business is
able to respond more quickly and provide better and more consistent service to
auto dealers than our competitors.

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CREDIT CARD SERVICES

Our Credit Card Services business includes our MasterCard and Visa
receivables in the United States, including The GM Card(R), the AFL-CIO Union
Plus(R) ("UP") credit card, a Household Bank branded card, and the Orchard Bank
card. This business has approximately $18.1 billion in managed receivables, 12
million active customer accounts and 5,000 employees. According to The Nilson
Report, this business is the eighth largest issuer of MasterCard or Visa credit
cards in the United States (based on receivables). The GM Card(R), a co-branded
credit card issued as part of our alliance with General Motors Corporation
("GM"), enables customers to earn discounts on the purchase or lease of a new GM
vehicle. The UP card program with the AFL-CIO provides benefits and services to
members of various national and international labor unions. The Household Bank
and Orchard Bank branded credit cards offer specialized credit card products to
consumers underserved by traditional providers or are marketed in conjunction
with merchant relationships established through our retail services business.

Our MasterCard and Visa business is generated primarily through direct
mail, telemarketing, Internet applications, application displays, promotional
activity associated with our affinity and co-branding relationships, mass-media
advertisement (The GM Card(R)), and merchant relationships sourced through our
retail services business. We also cross-sell our credit cards to our existing
consumer lending and retail services customers as well as our refund lending
customers.

Although our relationships with GM and the AFL-CIO enable us to access a
proprietary customer base, in accordance with our agreements with these
institutions Household owns all receivables originated under the programs and is
responsible for all credit and collection decisions as well as the funding for
the programs. These programs are not dependent upon any payments, guarantees or
credit support from these institutions. As a result, we are not directly
dependent upon GM or the AFL-CIO for any specific earnings stream associated
with these programs. We believe we have a strong working relationship with GM
and the AFL-CIO and are not aware of any planned termination of these agreements
in the near term.

INTERNATIONAL

Our United Kingdom business is a mid-market consumer lender focusing on
customer service through its branch locations and consumer electronics through
its retail finance operations. This business offers secured and unsecured lines
of credit, secured and unsecured closed-end loans, retail finance products,
insurance products and credit cards (including the GM Card(R) from Vauxhall and
marbles(TM), an Internet enabled credit card). We operate in England, Scotland,
Wales, Northern Ireland and the Republic of Ireland. We opened offices in
Hungary and the Czech Republic in 2001 and 2002, respectively, to facilitate the
expansion plans of one of our U.K. merchant alliances. We have made an offer to
purchase a bank in Poland to continue our expansion into Central Europe with
this alliance in 2003. Loans held by our United Kingdom operation are originated
through a branch network consisting of 224 HFC and Beneficial Finance branches,
merchants, direct mail, broker referrals and the Internet. This business has
approximately $7.2 billion in managed receivables and 4,000 employees.

Our Canadian business was acquired by Household in 1933 and offers consumer
real estate secured and unsecured lines of credit, secured and unsecured
closed-end loans, insurance products, revolving credit, private label credit
cards and retail finance products to middle and low income families. In
addition, through its trust operations, our Canadian business accepts deposits.
These products are marketed through over 100 branch offices in 10 provinces,
direct mail, telemarketing, 70 merchant relationships and the Internet. This
business has approximately $1.5 billion in managed receivables, 675,000 customer
accounts and 980 employees.

ALL OTHER

Through our insurance services operation, Household offers credit life,
credit accident, health and disability, unemployment, property, term life,
collateral protection and specialty insurance products to our customers. Such
products currently are offered throughout the United States and Canada and are
targeted toward those customers typically under-insured by traditional sources.
The purchasing of insurance products is

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never a condition to any credit or loan granted by Household. Insurance is
directly written by or reinsured with one or more of our subsidiaries.

Our refund lending business is one of the largest providers of consumer tax
refund lending in the United States. We currently have approximately 5,300 tax
preparer relationships covering approximately 14,000 outlets (including 9,900
H&R Block and 546 Jackson Hewitt locations). We provide loans to customers who
are entitled to tax refunds and who electronically file their income tax returns
with the Internal Revenue Service. This business is seasonal with most revenues
generated in the first three months of each calendar year. The majority of
customers who use this product are renters with average household incomes of
$20,000 who are entitled to refunds of greater than $2,000. In 2002 we
originated approximately 7 million accounts and generated a loan volume of
approximately $10.7 billion.

Direct lending was formed to find new markets for Household's existing
consumer loan and loan-related products, develop new product offerings, and test
alternative (i.e., non-branch) distribution channels. The areas of specific
focus for direct lending include the Internet, alliance programs with other
lenders to provide nonprime/nonconforming products to their customers and direct
mail initiatives. Direct lending has approximately $800 million in receivables
and 200 employees.

Our commercial operations are very limited in scope and are expected to
continue to decline. The 10 employees in this group manage the liquidation of
the commercial loan receivables which were part of our commercial lending
portfolio that was discontinued in the early 1990's. They also selectively
invest in tax advantaged low income housing projects to support community home
ownership initiatives while allowing us to obtain federal or state tax benefits.
We have approximately $400 million in commercial receivables.

FUNDING

Our continued success and prospects for growth are dependent upon access to
the global capital markets. Numerous factors, internal and external, may impact
our access to, and the costs associated with, these markets. These factors may
include our debt ratings, overall economic conditions, overall capital markets
volatility and the effectiveness of our management of credit risks inherent in
our customer base.

As a financial services organization, we must have access to funds at
competitive rates, terms and conditions to be successful. During 2002, like
other corporations dependent upon the capital markets for funding, we
experienced a significant change in the risk tolerance of fixed income
investors. Following major accounting scandals and the bankruptcy of significant
global corporations, many investors lowered their counterparty risk exposure to
individual issuers and adjusted their portfolios to hold debt of higher rated
credit issuers. These developments created significant volatility in the fixed
income markets.

On October 11, 2002, in response to the attorneys general settlement and
the announced disposition of our Thrift, two of the three national rating
agencies (Standard & Poor's and Fitch) that rate our securities took negative
action. S&P announced that it had revised its long-term and commercial paper
debt ratings for Household and its principal borrowing subsidiaries, including
HFC, as follows: long-term debt from "A" to "A-" and short-term debt from "A-1"
to "A-2". Fitch announced that it had placed the long-term and commercial paper
ratings of Household and each of its subsidiaries on "Ratings Negative Watch."
Moody's Investors Service affirmed all ratings for Household and HFC. These
actions contributed to additional volatility in the trading of our debt and
preferred securities and presented the potential to limit access to funding at
an acceptable cost. As a result, we decided to accelerate efforts to meet our
previously announced capital target and, in October 2002, issued additional
common stock and other capital securities. Following the announcement of the
pending merger with HSBC, S&P placed our ratings on "Positive" credit watch,
Fitch gave our ratings an "Evolving" rating watch and Moody's placed our ratings
on "Watch for Upgrade." These actions resulted in reduced volatility in the
trading of our securities and enabled us to access the unsecured debt markets at
more attractive rates. If the merger with HSBC does not occur by March 31, 2003,
we have agreed to pay additional interest on certain debt issued after November
14, 2002 until the merger with HSBC occurs. This additional interest, as of
March 19, 2003, would be approximately $330,000 per day.

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As of March 19, 2003, Household's long-term debt, together with that of
HFC, Beneficial, and our Canadian and U.K. subsidiaries, as well as the
preferred stock of Household, have been assigned investment grade ratings by all
nationally recognized statistical rating organizations that rate such
instruments. For a detailed listing of the ratings that have been assigned to
Household and our significant subsidiaries as of March 19, 2003, see Exhibit
99.1 to this Form 10-K. We are committed to maintaining or improving our current
investment grade ratings.

We have funded our operations globally and domestically, using a
combination of capital market debt and equity, deposits and securitizations.
Although we have in the past utilized our banking subsidiaries to provide
deposit funding, the sale of substantially all of our Thrift deposits in the
fourth quarter of 2002 will significantly reduce our access to deposits as a
source of future funding. We do not anticipate that the reduction in the use of
our banking subsidiaries as a funding vehicle will have any material effect on
our results of operations or our ability to timely fund our operations, or will
materially increase the costs associated with our funding. We will continue to
fund our operations in the global capital markets, primarily through the use of
securitizations, commercial paper, term bank financing, medium-term notes and
long-term debt. We will continue to use derivative financial instruments to
hedge our currency and interest rate risk exposure. A description of our use of
derivative financial instruments, including interest rate swaps and foreign
exchange contracts, and other quantitative and qualitative information about our
market risk is set forth in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" ("2002 MD&A") under the caption
"Risk Management" and Footnote 11 of our consolidated financial statements
("2002 Financial Statements"). We also maintain an investment portfolio, which
at year-end 2002 was approximately $7.6 billion. Approximately $3.1 billion of
such investment securities were held by our insurance subsidiaries and $3.9
billion, including $2.2 billion which was dedicated to our credit card bank, was
held in a liquidity portfolio.

Securitizations and secured financings of consumer receivables have been,
and will continue to be, a significant source of our liquidity. During 2002, we
securitized approximately $10.1 billion of receivables compared to $5.5 billion
in 2001 and $7.0 billion in 2000. We securitize auto finance, MasterCard and
Visa credit card, private label credit card and personal non-credit card
receivables. In addition, during 2002 and 2001, we issued securities backed by
dedicated pools of real estate secured receivables in transactions structured
for accounting purposes as secured financings. The aggregate balance of the real
estate secured receivables supporting those transactions was $7.5 billion in
2002 and $1.5 billion in 2001. Based on our current investment grade ratings, we
have no reason to believe that we will not be able to timely access the
securitization and secured funding markets to support our operations.

In the securitizations and secured financing transactions, Household sells
a dedicated pool of receivables to a wholly owned bankruptcy remote special
purpose entity for cash, which, in turn, assigns the receivables to an
unaffiliated trust that is a qualifying special purpose entity under Statement
of Financial Accounting Standards 140. Household continues to service the
receivables and receives a servicing fee. In connection with each transaction,
we obtain opinions from nationally known law firms that the transfer of the
receivables to the special purpose entity qualifies as a "true sale" for legal
purposes and that the entity would not be "substantively consolidated" into any
bankruptcy estate of the transferor.

Generally, in connection with these transactions we utilize credit
enhancement to obtain investment grade ratings on the securities to be issued by
the securitization trust. Although many forms of enhancement are available, in
some transactions we assign loans in excess of the principal balance of the
securities to be issued by the trust. Cash flow from this
"overcollateralization" and servicing fees to be paid to us in connection with
the transaction may be used to reduce the outstanding balance of these
securities and/or may be used to fund a cash account that is available to make
payments on the securities in the event monthly collections on the receivables
are insufficient to pay the investors their contractual return. Therefore, our
recourse is limited to our rights to future cash flows and any subordinated
interests we may retain. See "Securitizations and Secured Financings" on pages
47 to 50 of our 2002 MD&A for further discussion. Based on historical
performance, we do not anticipate any material loss due to performance of any
securitized or secured funding pool of receivables. In other transactions, we
purchase credit enhancement from a third party monoline insurance company in the
form of a payment guaranty.
9

The limited operations of each securitization trust are administered by an
unaffiliated financial institution and are governed by a trust agreement that
limits the trust's permissible activities to those defined in the agreement. The
holders of the securities issued by each trust have the right to pledge or
transfer their interests.

Additional information on our sources and availability of funding are set
forth in the "Liquidity and Capital Resources" and "Off-Balance Sheet
Arrangements (Including Securitizations and Commitments), Secured Financings and
Contractual Cash Obligations" sections of our 2002 MD&A.

REGULATION AND COMPETITION

REGULATION

Consumer Lending. Our consumer finance businesses operate in a highly
regulated environment. These businesses are subject to laws relating to consumer
protection, discrimination in extending credit, use of credit reports, privacy
matters, disclosure of credit terms and correction of billing errors. They also
are subject to certain regulations and legislation that limit operations in
certain jurisdictions. For example, limitations may be placed on the amount of
interest or fees that a loan may bear, the amount that may be borrowed, the
types of actions that may be taken to collect or foreclose upon delinquent loans
or the information about a customer that may be shared. Our consumer branch
lending offices are generally licensed in those jurisdictions in which they
operate. Such licenses have limited terms but are renewable, and are revocable
for cause. Failure to comply with these laws and regulations may limit the
ability of our licensed lenders to collect or enforce loan agreements made with
consumers and may cause Household to be liable for damages and penalties.

There has been a significant amount of legislative activity, nationally,
locally and at the state level, aimed at curbing lending abuses deemed to be
"predatory". In addition, states have sought to alter lending practices through
consumer protection actions brought by state attorneys general and other state
regulators. Legislative activity in this area is expected to continue targeting
certain abusive practices such as loan "flipping" (making a loan to refinance
another loan where there is no tangible benefit to the borrower), fee "packing"
(addition of unnecessary, unwanted and unknown fees to a borrower), "equity
stripping" (lending without regard to the borrower's ability to repay or making
it impossible for the borrower to refinance with another lender), and outright
fraud. Household does not condone or endorse any of these practices. We continue
to work with regulators and consumer groups to create appropriate safeguards to
eliminate these abusive practices while allowing middle-market borrowers to
continue to have unrestricted access to credit for personal purposes, such as
the purchase of homes, automobiles and consumer goods. As part of this effort we
have adopted a set of lending best practice initiatives. These initiatives,
which may be modified from time to time, are discussed at our corporate web
site, www.household.com under the heading "Customer Commitment". As part of our
agreement with the state attorneys general and regulators, we also agreed to
provide simplified and improved lending disclosures and additional compliance
controls over the loan closing process. Notwithstanding these efforts, it is
possible that broad legislative initiatives will be passed which will impose
additional costs and rules on our businesses. Although we have the ability to
react quickly to new laws and regulations, it is too early to estimate the
effect, if any, these activities will have on us in a particular locality or
nationally.

Banking Institutions. Effective July 1, 2002, we combined all of our
credit card banks into a single banking subsidiary of HFC chartered by the OCC.
Effective January 30, 2003, we dissolved our Thrift and are no longer a savings
and loan holding company subject to the supervision of the Office of Thrift
Supervision ("OTS"). As a result of these actions, we now own a single bank,
which issues only consumer credit cards. During 2002, because deposits held at
our banking institutions were insured by the Federal Deposit Insurance
Corporation ("FDIC"), the FDIC also had jurisdiction over them and was actively
involved in reviewing their financial and managerial strength. This supervision
continues as to our credit card bank.

Our banking institution originates receivables in our MasterCard, Visa, and
private label credit card businesses. Prior to January 2003, the Thrift
originated loans for our refund lending business, certain first mortgage loans
and other loans. Historically, these institutions improved our operational
efficiencies by offering loan products with common characteristics across the
United States. Generally, these banking institutions sold the receivables they
originated to non-banking affiliates (also subsidiaries of Household) so that
Household could manage all of its customers with uniform policies, regardless
through which legal entity
10

a loan was made. In addition, this structure allowed us to better manage the
levels of regulatory capital required to be maintained at these banking
institutions. In 2002, we were advised by the OTS, OCC and FDIC that in
accordance with their 2001 Guidance for Subprime Lending Programs, they would
require higher capital levels for institutions holding nonprime or subprime
assets. These capital levels were greater than the historical levels we had
maintained at our subsidiary banking institutions. Household and HFC agreed to
maintain the regulatory capital of our institutions at these specified levels.
Consistent with the need to better manage these new capital requirements, we
combined all of our credit card banks into a single credit card banking
subsidiary of HFC on July 1, 2002. Also on this date, the credit card bank sold
all of its existing receivables to non-bank HFC subsidiaries, which also
purchase new receivables from the bank on a daily basis. In addition, we sold
substantially all of the assets and deposits of our Thrift in the fourth quarter
of 2002. We believe that these actions streamline and simplify our regulatory
structure and optimize capital and liquidity management. We do not expect that
any of these actions will have a material adverse effect on our business or our
financial condition.

Our credit card banking subsidiary is subject to capital requirements,
regulations and guidelines imposed by the OCC and FDIC. During 2002, because
deposits held at our banking institutions were insured by the FDIC, the FDIC
also had jurisdiction over them and was actively involved in reviewing their
financial and managerial strength. This supervision continues as to our credit
card bank. For example, this institution is subject to federal regulations
concerning its general investment authority as well as its ability to acquire
financial institutions, enter into transactions with affiliates and pay
dividends. Such regulations also govern the permissible activities and
investments of any subsidiary of a bank.

Our credit card banking subsidiary is also subject to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). Among
other things, FDICIA creates a five-tiered system of capital measurement for
regulatory purposes, places limits on the ability of depository institutions to
acquire brokered deposits, and gives broad powers to federal banking regulators,
in particular the FDIC, to require undercapitalized institutions to adopt and
implement a capital restoration plan and to restrict or prohibit a number of
activities, including the payment of cash dividends, which may impair or
threaten the capital adequacy of the insured depository institution. Federal
banking regulators may apply corrective measures to an insured depository
institution, even if it is adequately capitalized, if such institution is
determined to be operating in an unsafe or unsound condition or engaging in an
unsafe or unsound activity. In addition, federal banking regulatory agencies
have adopted safety and soundness standards governing operational and managerial
activities of insured depository institutions and their holding companies
regarding internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth and compensation.

In January 2003, the four federal bank regulatory agencies issued final
guidance for account management and loss allowance practices for credit card
lending. We believe that implementation of the guidance should not have a
material adverse impact on our financial statements or the way we manage our
business. This guidance (as well as earlier guidance on other topics, including
criteria for resetting the delinquency status of an account to current) does not
apply to our non-bank lending operations.

Our principal United Kingdom subsidiary (HFC Bank plc) is subject to
oversight and regulation by the U.K. Financial Services Authority ("FSA"). We
have indicated our intent to the FSA to maintain the regulatory capital of this
institution at specified levels. We do not anticipate that any capital
contribution will be required for our United Kingdom bank in the near term.

We also maintain a trust company in Canada, which is subject to regulatory
supervision by the Office of the Superintendant of Financial Institutions
("OFSI").

Insurance. Our credit insurance business is subject to regulatory
supervision under the laws of the states in which it operates. Regulations vary
from state to state but generally cover licensing of insurance companies,
premium and loss rates, dividend restrictions, types of insurance that may be
sold, permissible investments, policy reserve requirements, and insurance
marketing practices.

11

Our insurance operations in the United Kingdom and the Republic of Ireland
are subject to regulatory supervision by the FSA and the Department of
Enterprise, Training and Employment, respectively.

COMPETITION

The consumer financial services industry in which we operate is highly
fragmented and intensely competitive. We generally compete with banks, thrifts,
insurance companies, credit unions, mortgage lenders and brokers, finance
companies, securities brokers and dealers, and other domestic and foreign
financial institutions in the United States, Canada and the United Kingdom. We
compete by expanding our customer base through portfolio acquisitions or
alliance and co-branding opportunities, offering a variety of consumer loan
products, maintaining a strong service orientation, aggressively controlling
expenses to be a low cost producer, and using data segmentation skills to
identify cross-selling opportunities between business units.

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

Certain matters discussed throughout this Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, we may make or approve certain
statements in future filings with the SEC, in press releases, or oral or written
presentations by representatives of Household that are not statements of
historical fact and may also constitute forward-looking statements. Words such
as "believe", "expects", "estimates", "targeted", "anticipates", "goal" and
similar expressions are intended to identify forward-looking statements but
should not be considered as the only means through which these statements may be
made. These matters or statements will relate to our future financial condition,
results of operations, plans, objectives, performance or business developments
and will involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially
different from that which was expressed or implied by such forward-looking
statements. Forward-looking statements are based on our current views and
assumptions and speak only as of the date they are made. Household undertakes no
obligation to update any forward-looking statement to reflect subsequent
circumstances or events.

The important factors, many of which are out of our control, which could
affect our actual results and could cause our results to vary materially from
those expressed in public statements or documents are:

- changes in laws and regulations, including attempts by local, state and
national regulatory agencies or legislative bodies to control alleged
"predatory" lending practices through broad initiatives aimed at lenders
operating in the nonprime or subprime consumer market;

- increased competition from well-capitalized companies or lenders with
access to government sponsored organizations for our consumer segment
which may impact the terms, rates, costs or profits historically included
in the loan products we offer or purchase;

- changes in accounting or credit policies, practices or standards, as they
may be internally modified from time to time or as required by regulatory
agencies and the Financial Accounting Standards Board;

- changes in overall economic conditions, including the interest rate
environment in which we operate, the capital markets in which we fund our
operations, the market values of consumer owned real estate throughout
the United States, recession, employment and currency fluctuations;

- consumer perception of the availability of credit, including price
competition in the market segments we target and the ramifications or
ease of filing for personal bankruptcy;

- the effectiveness of models or programs to predict loan delinquency or
loss and initiatives to improve collections in all business areas, and
changes we may make from time to time in these models, programs and
initiatives;

- continued consumer acceptance of our distribution systems and demand for
our loan or insurance products;

12

- changes associated with, as well as the difficulty in integrating
systems, operational functions and cultures, as applicable, of any
organization or portfolio acquired by Household;

- a reduction of our debt ratings by any of the nationally recognized
statistical rating organizations that rate these instruments to a level
that is below our current rating;

- the costs, effects and outcomes of regulatory reviews or litigation
relating to our nonprime loan receivables or the business practices or
policies of any of our business units, including, but not limited to,
additional compliance requirements;

- increased funding costs resulting from continued or further instability
in the capital markets and risk tolerance of fixed income investors;

- the costs, effects and outcomes of any litigation matter that is
determined adversely to Household or its businesses;

- the ability to attract and retain qualified personnel to support the
underwriting, servicing, collection and sales functions of our
businesses;

- failure to complete the merger with HSBC in accordance with the announced
terms; and

- the inability of Household to manage any or all of the foregoing risks as
well as anticipated.

AVAILABLE INFORMATION

Household maintains a website at www.household.com on which we make
available, as soon as reasonably practicable after filing with or furnishing to
the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to these reports.

ITEM 2. PROPERTIES.

Our operations are located throughout the United States, in 10 provinces in
Canada and in the United Kingdom, with principal facilities located in
Lewisville, Texas; New Castle, Delaware; Brandon, Florida; Jacksonville,
Florida; Tampa, Florida; Chesapeake, Virginia; Virginia Beach, Virginia;
Hanover, Maryland; Bridgewater, New Jersey; Rockaway, New Jersey; Las Vegas,
Nevada; Charlotte, North Carolina; Portland, Oregon; Pomona, California;
Chicago, Illinois; Elmhurst, Illinois; Franklin Park, Illinois; Prospect
Heights, Illinois; Schaumburg, Illinois; Vernon Hills, Illinois; Wood Dale,
Illinois; Carmel, Indiana; Salinas, California; San Diego, California; London,
Kentucky; Sioux Falls, South Dakota; North York, Ontario, Canada; Birmingham,
United Kingdom and Windsor, Berkshire, United Kingdom.

Substantially all branch offices, divisional offices, corporate offices,
regional processing and regional servicing center spaces are operated under
lease with the exception of the headquarters building for our United Kingdom
operations, a credit card processing facility in Las Vegas, Nevada, servicing
facilities in London, Kentucky, Mt. Prospect, Illinois, and Chesapeake,
Virginia, offices in Birmingham, United Kingdom; and an airplane hanger in
Wheeling, Illinois. We believe that such properties are in good condition and
meet our current and reasonably anticipated needs.

ITEM 3. LEGAL PROCEEDINGS.

General We are parties to various legal proceedings resulting from
ordinary business activities relating to our current and/or former operations.
Certain of these actions are or purport to be class actions seeking damages in
very large amounts. These actions assert violations of laws and/or unfair
treatment of consumers. Due to the uncertainties in litigation and other
factors, we cannot be certain that we will ultimately prevail in each instance.
We believe that our defenses to these actions have merit and any adverse
decision should not materially affect our consolidated financial condition.

Merger Litigation Several lawsuits have been filed alleging violations of
law with respect to the pending merger with HSBC. While the lawsuits are in
their preliminary stages, we believe that the claims lack merit and the
defendants deny the substantive allegations of the lawsuits. These lawsuits are
described below.

13

Two of the lawsuits are pending in the Circuit Court of Cook County,
Illinois, Chancery Division. One, McLaughlin v. Aldinger et al., No. 02 CH 20683
(filed on November 15, 2002), asserts claims on behalf of a purported class of
holders of Household common stock against Household and certain of its officers
and directors for breach of fiduciary duty in connection with the pending merger
with HSBC on the grounds that the defendants allegedly failed to take
appropriate steps to maximize the value of a merger transaction for holders of
Household common stock. While the complaint contends that plaintiffs will suffer
irreparable harm unless the pending merger with HSBC is enjoined, it seeks only
unspecified damages. The other, Pace v. Aldinger et al., No. 02 CH 19270 (filed
on October 24, 2002 and amended on November 15, 2002), is both a purported
derivative lawsuit on behalf of Household and a purported class action on behalf
of holders of Household common stock. This lawsuit was filed prior to the
announcement of the pending merger with HSBC and originally asserted claims
relating to the restatement of our consolidated financial statements, the
preliminary agreement with a multi-state working group of state attorneys
general, and other accounting matters. It has since been amended to allege that
Household and certain of its officers and directors breached their fiduciary
duties in connection with the pending merger with HSBC and seeks to enjoin the
pending merger with HSBC, as well as unspecified damages allegedly stemming both
from the pending merger and the original claims described above. On March 11,
2003, the plaintiff in the Pace action moved the Court for expedited discovery
and to set a hearing date for a preliminary injunction motion seeking to enjoin
the pending merger with HSBC. On March 13, 2003, the Court denied the motion
without prejudice.

A third lawsuit relating to the pending merger with HSBC, Williamson v.
Aldinger et al., No. 03 C00331 (filed on January 15, 2003), is pending in the
United States District Court for the Northern District of Illinois. This
derivative lawsuit on behalf of Household claims that certain of Household's
officers and directors breached their fiduciary duties and committed corporate
waste by agreeing to the pending merger with HSBC and allegedly failing to take
appropriate steps to maximize the value of a merger transaction. The complaint
seeks to enjoin the pending merger with HSBC. As to each case described above,
the appropriate insurance carrier has been placed on notice.

Plaintiffs in the three actions have asserted that the proxy materials
provided to our stockholders are deficient in failing to disclose or
sufficiently emphasize the following, which plaintiffs consider important to our
stockholders' decision with respect to the pending merger with HSBC, including:
that Household or its financial advisor failed to obtain internal projections of
HSBC of its expected future performance; that, as has been alleged, Household
failed to take adequate steps to "shop" the company before agreeing to the
merger agreement with HSBC and that the magnitude of the termination fee payable
to HSBC under the merger agreement in certain circumstances constitutes an
unreasonable impediment to a competing transaction; and that, also as has been
alleged, the senior management of Household and our Board of Directors were
motivated to approve and recommend the merger with HSBC allegedly in order to
insulate themselves from personal liability for claims arising out of the
restatement of our consolidated financial statements, the preliminary agreement
with a multi-state working group of state attorneys general, and other
accounting matters.

On March 18, 2003, the plaintiffs in the three actions (together with the
plaintiff in another related action pending in the Circuit Court of Cook County,
Illinois, Chancery Division (Bailey v. Aldinger et al., No. 02 CH 16476 (filed
August 27, 2002)) agreed in principle to a settlement of the actions based on,
among other things, the additional disclosures above relating to their
allegations and HSBC's agreement to waive $55 million of the termination fee
otherwise payable to HSBC from Household under the merger agreement in certain
circumstances. That agreement in principle is subject to customary conditions
including definitive documentation of the settlement, additional confirmatory
discovery by the plaintiffs and approval by the Courts following notice to the
stockholders and a hearing. A hearing will be scheduled at which the Court will
consider the fairness, reasonableness and adequacy of the settlement which, if
finally approved by the Court, will resolve all of the claims that were or could
have been brought in the actions being settled, including all claims relating to
the merger.

Consumer Lending Litigation During the past several years, the press has
widely reported certain industry related concerns that may impact us. Some of
these involve the amount of litigation instituted against finance and insurance
companies operating in the states of Alabama and Mississippi and the large
awards
14

obtained from juries in those states. Like other companies in this industry,
some of our subsidiaries are involved in a number of lawsuits pending against
them in Alabama and Mississippi. The Alabama and Mississippi cases generally
allege inadequate disclosure or misrepresentation of financing terms. In some
suits, other parties are also named as defendants. Unspecified compensatory and
punitive damages are sought. Several of these suits purport to be class actions
or have multiple plaintiffs. The judicial climate in Alabama and Mississippi is
such that the outcome of all of these cases is unpredictable. Although our
subsidiaries believe they have substantive legal defenses to these claims and
are prepared to defend each case vigorously, a number of such cases have been
settled or otherwise resolved for amounts that in the aggregate are not material
to our operations. Appropriate insurance carriers have been notified of each
claim, and a number of reservations of rights letters have been received.
Certain of the financing of merchandise claims have been partially covered by
insurance.

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.
This preliminary agreement, and related subsequent consent decrees and similar
documentation entered into with each of the 50 states and the District of
Columbia, are referred to collectively as the "Multi-State Settlement
Agreement." The Multi-State Settlement Agreement requires us to establish a
settlement fund and to pay certain expenses of investigation and administration.
We will also provide greater disclosures and alternatives for customers in
connection with "nonprime" mortgage lending originated by our retail branch
network. In addition, we will unilaterally amend all branch originated real
estate secured loans to provide that no pre-payment penalty is payable later
than 24 months after origination. No fines, penalties or punitive damages were
assessed by the states pursuant to the Multi-State Settlement Agreement. The
Multi-State Agreement became effective as of December 16, 2002.

Under the terms of the Multi-State Settlement Agreement, we established a
fund of $484 million to be divided among all participating states (including the
District of Columbia), with each state receiving a proportionate share of the
funds based upon the volume of the retail branch originated real estate secured
loans we made in that state during the period of January 1, 1999 to September
30, 2002. We deposited three equal installments into the fund in January,
February and March 2003.

We have also paid $10.2 million to the states as reimbursement for the
expenses of their investigation and will pay fees and expenses of an independent
settlement fund administrator of up to $9.8 million. At our expense, we will
also retain an independent monitor to report on our compliance with the
Multi-State Settlement Agreement over the next five years.

Each borrower that receives a payment under the Multi-State Settlement
Agreement will be required to release all civil claims against us relating to
our consumer lending practices. Each state has agreed that the settlement
resolves all current civil investigations and proceedings by the attorneys
general and state lending regulators relating to the lending practices at issue.

We recorded a pre-tax charge in the third quarter of fiscal year 2002 of
$525 million reflecting the costs of the Multi-State Settlement Agreement and
related matters.

We have also been named in purported class actions by individuals and
consumer groups directly or supporting individuals in the United States (such as
the AARP and the "Association of Community Organizations for Reform Now")
claiming that our loan products or lending policies and practices are unfair or
misleading to consumers. Judicial certification of a class is required before
any claim can proceed on behalf of a purported class and, to date, none of the
purported class claims has been certified. Although the Multi-State Settlement
Agreement does not cause the immediate dismissal of these purported class
actions, we believe it substantially reduces our risk of any material liability
that may result since every consumer who receives payments as a result of the
Multi-State Settlement Agreement must release us from any liability for such
claims generally as alleged by these individuals and groups. We intend to seek
resolution of these related legal actions provided it is financially prudent to
do so. Otherwise, we intend to defend vigorously against the allegations.
Regardless of the approach taken with respect to these purported class actions,
we believe that any
15

liability that may result will not have a material financial impact. We expect,
however, that consumer groups will continue to target us in the media, with
regulators, with legislators and with legal actions to pressure us and the
nonprime lending industry into accepting concessions that would more heavily
regulate the nonprime lending industry. (See "Regulation and Competition"
above.)

Securities Litigation As reported in our Annual Report on Form 10-K/A for
the year ended December 31, 2001, which was filed with the United States
Securities and Exchange Commission on August 27, 2002 and subsequently amended
on March 20, 2003 as a result of the SEC consent order discussed above, we
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 $155.8 million, after-tax, retroactive
reduction to retained earnings at December 31, 1998. As a result of the
restatement, Household, and its directors, certain officers and former auditors,
have been involved in various legal proceedings, some of which purport to be
class actions. A number of these actions allege violations of federal securities
laws, were filed between August and October 2002, and seek to recover damages in
respect of allegedly false and misleading statements about our common stock. To
date, none of the class claims has been certified. These legal actions have been
consolidated into a single purported class action, Jaffe v. Household
International, Inc., et all., No. 02 C 5893 (N.D. Ill. filed August 19, 2002),
and a consolidated and amended complaint was filed on March 7, 2003. The amended
complaint purports to assert claims under the federal securities laws, on behalf
of all persons who purchased or otherwise acquired Household securities between
October 23, 1997 and October 11, 2002, arising out of alleged false and
misleading statements in connection with Household's sales and lending
practices, its preliminary agreement with a multi-state working group of state
attorneys general, the restatement and the HSBC merger. The amended complaint,
which also names as defendants Arthur Andersen LLP, Goldman, Sachs & Co., and
Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the amount of
damages sought.

Other actions arising out of the restatement, which purport to assert
claims under ERISA on behalf of participants in Household's Tax Reduction
Investment Plan, have been consolidated into a single purported class action, In
re Household International, Inc. ERISA Litigation, Master File No. 02 C 7921
(N.D. Ill); a consolidated and amended complaint is to be filed by March 31,
2003. Since the amended complaint has not yet been filed, it is not possible to
state what the claims may be or what damages may be sought.

With respect to these securities litigation matters, we believe that we
have not, and our officers and directors have not, committed any wrongdoing and
in each instance there will be no finding of improper activities that may result
in a material liability to us or any of our officers or directors.

Regulatory Proceedings Additionally, on March 18, 2003, without admitting
or denying any wrongdoing, we consented to the entry of an order by the SEC
relating to the sufficiency of certain disclosures in reports we filed with the
SEC during 2002, as described in more detail under "Business -- General -- 2002
Developments."

In order to complete the merger, HSBC must obtain the approval of the OCC
for the change in control of Household Bank (SB), N.A. (the "Bank"), our credit
card banking subsidiary. Concurrently with the application process, Household
and the OCC have endeavored to resolve any outstanding regulatory issues with
respect to the Bank. In this regard, the Bank has executed an agreement with the
OCC relating to the resolution of issues involving a credit card program for
customers of Hispanic Air Conditioning and Heating ("Hispanic Air") conducted by
the Bank from 1997 to 1999. During that period, the Bank provided financing for
Hispanic Air's sales of heating, ventilation and air conditioning ("HVAC")
systems under a private label

16

credit card program established with manufacturers of HVAC equipment for who
Hispanic Air was an authorized dealer. In 1999, the attorney general of the
State of Texas filed suit against Hispanic Air, accusing Hispanic Air of
deceptive and wrongful practices in the marketing, sale and installation of HVAC
systems. In September 2000, the Texas attorney general added the Bank and
certain of its affiliates as defendants. During this time, the Bank voluntarily
put in place a comprehensive remediation program to resolve the complaints of
customers of Hispanic Air. The Bank was dismissed from the Texas action in 2002.

In June 2000, the attorney general for the State of Arizona, who had also
filed suit against Hispanic Air, added the Bank and an affiliate as defendants.
In connection with this proceeding, the Bank requested that the OCC, as the
agency with exclusive visitorial powers over the Bank, intervene and the OCC
commenced an investigation. The Bank has provided information to the OCC from
time to time in connection with this investigation. As part of our efforts to
resolve any open regulatory issues with the OCC, the Bank has executed an
agreement with the OCC, under which the Bank will be required to take certain
additional actions to supplement its prior remediation program. These actions
will involve providing additional notification to all eligible consumers of the
availability of remediation, providing inspection and repair or replacement of
equipment, providing reimbursement to customers who have incurred expenses to
repair equipment, providing reductions to principal and interest of consumer
credit card balances, providing reimbursement for warranties and late fees and
developing an action plan to enhance the administration of the Bank's private
label credit card programs. We estimate that the pre-tax cost of taking these
additional remedial actions will be less than $1,000,000. Language in the
written agreement confirms our position that the OCC has exclusive jurisdiction
over the matters complained of by the State of Arizona. The written agreement
makes it clear that the Bank neither admits nor denies that it has engaged in
any unsafe or unsound banking practices or violated any law or regulation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

As of March 19, 2003, there were 16,393 record shareholders of Household's
common stock.

Our common stock is listed on the New York and Chicago stock exchanges. We
also have unlisted trading privileges on the Boston, Pacific and Philadelphia
stock exchanges. Call and put options are traded on the American Stock Exchange,
Pacific Stock Exchange and Chicago Board of Options Exchange.

The following table shows the high and low sales prices for our common
stock and the dividends we paid per share of common stock for each quarterly
period in 2002 and 2001:

17

ITEM 6. SELECTED FINANCIAL DATA.

- ---------------

(1) The following information, including operating results for 2002 and 1998
which are provided on a non-GAAP basis, is provided for comparison of our
operating trends only and should be read in conjunction with our owned basis
GAAP financial information. For 2002, the operating results, percentages and
ratios presented below exclude the $333.2 million (after-tax) settlement
charge and related expenses and the $240.0 million (after-tax) loss on the
disposition of Thrift assets and deposits. For 1998, the operating results,
percentages and ratios presented below exclude merger and integration
related costs of $751.0 million (after-tax) resulting from the acquisition
of Beneficial Corporation ("Beneficial") and the $118.5 million (after-tax)
gain on sale of Beneficial's Canadian operations.

(2) In 2002, we sold $6.3 billion of real estate secured whole loans from our
consumer lending and mortgage services businesses and purchased a $.5
billion private label portfolio. In 2001, we sold approximately $1 billion
of credit card receivables as a result of discontinuing our participation in
the Goldfish credit card program and purchased a $.7 billion private label
portfolio. In 2000, we acquired real estate secured portfolios totaling $3.7
billion.

(3) In October 2002, we issued 18.7 million shares of common stock. Share
repurchases pursuant to our share repurchase program totaled 4.7 million
shares ($279.6 million) in 2002, 17.4 million shares ($916.3 million) in
2001, 5.4 million shares ($209.3 million) in 2000 and 16.8 million shares
($712.9 million) in 1999. Shares repurchased to fund various employee
benefit programs totaled 5.0 million shares ($203.0 million) in 1999 and
10.5 million shares ($412.0 million) in 1998.

(4) We monitor our operations and evaluate trends on both an owned basis as
shown in our historical 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. See pages 20 and 21 for
further information on managed basis reporting.

(5) Tangible shareholders' equity to tangible managed assets ("TETMA") and
tangible common equity to tangible managed assets are non-GAAP financial
ratios that are used by certain 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 subordinated nature
and our ability to defer dividends, these rating agencies consider our trust
preferred securities as equity in calculating these ratios. Because they
include obligations to purchase our common stock in 2006, our Adjustable
Conversion-Rate Equity Security Units are also considered equity in
calculating TETMA. Common and preferred equity to total managed assets, the
most directly comparable GAAP financial measure to TETMA, is also presented
in our selected financial ratios.

(6) Tangible shareholders' equity consists of common shareholders'
equity(excluding unrealized gains and losses on investments and cash flow
hedging instruments), preferred stock, company obligated mandatorily
redeemable preferred securities of subsidiary trusts and, in 2002,
Adjustable Conversion-Rate Equity Security Units, less acquired intangibles
and goodwill. Tangible managed assets represents total managed assets less
acquired intangibles, goodwill and derivative financial assets.

(7) Tangible common equity consists of 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 financial assets.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Household is principally a non-operating holding company. Through its
subsidiaries, Household provides middle-market consumers with real estate
secured loans, auto finance loans, MasterCard* and Visa* credit cards, private
label credit cards and personal non-credit card loans. We also offer tax refund
anticipation loans ("RALs") in the United States and credit and specialty
insurance products in the United States, United Kingdom and Canada. Household
may also be referred to in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") as "we", "us", or "our".

Merger with HSBC Holdings plc In November 2002, Household and HSBC
announced they had entered into a definitive merger agreement under which
Household will be merged into a wholly owned subsidiary of HSBC, subject to the
terms and conditions of the merger agreement. Under the terms of the merger
agreement, holders of Household common stock will receive 2.675 HSBC ordinary
shares or 0.535 HSBC American Depositary Shares for each share of Household
common stock. Prior to the merger, outstanding shares of our $4.30, $4.50 and
5.00 percent cumulative preferred stock will be redeemed pursuant to their
respective terms. In connection with the merger, the outstanding shares of our
7.625, 7.60, 7.50 and 8.25 percent preferred stock will be converted into the
right to receive cash from HSBC in an amount equal to their liquidation value,
plus accrued and unpaid dividends which is an aggregate amount of $1.1 billion.
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts will remain as outstanding obligations following the merger.

Pursuant to their terms, the 8.875 percent Adjustable Conversion-Rate
Equity Security Units will remain outstanding after the merger, with the
purchase contracts that form a portion of such units becoming contracts to
purchase HSBC ordinary shares in lieu of Household shares. Outstanding stock
options and restricted stock rights ("RSRs") granted under our various equity
plans will be assumed by HSBC and converted into options to purchase or rights
to receive ordinary shares of HSBC. Stock options and RSRs which were issued
prior to November 2002 will vest upon completion of the merger. The employee
stock purchase plan was terminated on March 7, 2003 and Household stock was
purchased on that date. These shares of Household common stock will be converted
into HSBC shares at the time of the merger. All rights to HSBC shares will be
adjusted based upon the agreed-upon merger exchange ratio.

We have agreed that except with HSBC's prior written consent, we will
conduct our business in the ordinary course consistent with past practice during
the period from the signing of the merger agreement until the completion of the
merger. We have also agreed to use reasonable best efforts to preserve our
present business organizations, to keep available the services of current
officers and key employees and preserve existing relationships and goodwill with
persons with whom we do business. Consummation of the merger is subject to
regulatory approvals, the approval of the stockholders of both Household and
HSBC and other customary conditions.

Segments Our operations are divided into 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 ("U.K.") and Canada. At December 31, 2002, our
owned receivables totaled $82.6 billion.

Basis of Reporting 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 "Securitizations and Secured Financings" on pages 47 to 50 and Note
5, "Asset Securitizations," and

- ---------------

*MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
20

Note 23, "Segment Reporting," to the accompanying consolidated financial
statements for additional information related to the securitizations and secured
financings of our businesses.

The following discussion of our financial condition and results of
operations is presented on an owned basis of reporting. 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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. We follow
accounting guidance promulgated by the AICPA Accounting and Audit Guide for
Finance Companies rather than bank regulatory accounting pronouncements as we
are not a bank holding company. Based on the specific customer segment we serve,
we believe our policies are appropriate and fairly present the financial
position of Household.

The significant accounting policies used in the preparation of our
financial statements are more fully described in Note 1 to the accompanying
consolidated financial statements. Certain critical accounting policies are
complex and involve significant judgment by our management, including the use of
estimates and assumptions or the application of account management policies and
practices which affect the reported amounts of assets, liabilities, revenues and
expenses. As a result, changes in these estimates, assumptions or account
management policies and practices could significantly affect our financial
position or our results of operations. We base and establish our account
management policies and practices on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates under
different assumptions, account management policies and practices or conditions
as discussed below.

We believe that of the significant accounting policies used in the
preparation of our consolidated financial statements, the items discussed below
involve critical accounting estimates and a high degree of judgment and
complexity. Our management has discussed the development and selection of these
critical accounting policies with the audit committee of our Board of Directors,
including the underlying estimates, assumptions and account management policies,
and the audit committee has reviewed our disclosure relating to these accounting
policies and practices in this MD&A.

Credit Loss Reserves Because we lend money to others, we are exposed to
the risk that borrowers may not repay amounts owed to us when they become
contractually due. Consequently, we maintain credit loss reserves at a level
that we consider adequate to cover our estimate of probable losses of principal,
interest and fees, including late, overlimit and annual fees, in the existing
owned portfolio. Loss reserve estimates are reviewed periodically, and
adjustments are reflected through the provision for credit losses on owned
receivables in the period when they become known. We believe the accounting
estimate relating to the reserve for credit losses is a "critical accounting
estimate" because (a) the provision for credit losses totaled $3.7 billion in
2002, $2.9 billion in 2001 and $2.1 billion in 2000 and changes in the provision
can materially affect net income, (b) it requires us to forecast future
delinquency and charge-off trends which are uncertain and require a high degree
of judgment and (c) it is influenced by factors outside of our control such as
customer payment patterns and economic conditions. Because our loss reserve
estimate involves judgement and is influenced by factors outside of our control,
it is reasonably possible such estimates could change. The reserve for credit
losses is a critical accounting estimate for all of our three reportable
segments.

Credit loss reserves are based on a range of estimates and are intended to
be adequate but not excessive. We estimate probable losses for consumer
receivables based on delinquency and restructure status and past loss
experience. Credit loss reserves take into account whether loans have been
restructured, rewritten or are subject to forbearance, credit counseling
accommodation, modification, extension or deferment. Our credit loss reserves
also take into consideration the loss severity expected based on the underlying
collateral, if any, for the loan. In addition, loss reserves on consumer
receivables are maintained to reflect our assessment of portfolio risk factors
which may not be reflected in the statistical calculation which uses roll rates
and

21

migration analysis. Roll rates and migration analysis are techniques used to
estimate the likelihood that a loan will progress through the various
delinquency buckets and ultimately charge-off. Risk factors considered in
establishing loss reserves on consumer receivables include recent growth,
product mix, bankruptcy trends, geographic concentrations, economic conditions
and current levels in charge-off and delinquency. While our credit loss reserves
are available to absorb losses in the entire portfolio, we specifically consider
the credit quality and other risk factors for each of our products in
establishing credit loss reserves due to the different inherent loss
characteristics for each of our products. Charge-off policies are also
considered when establishing loss reserve requirements to ensure appropriate
allowances exist for products with longer charge-off periods. We also consider
key ratios such as reserves to nonperforming loans and reserves as a percentage
of net charge-offs in developing our loss reserve estimate.

Each quarter, we re-evaluate our estimate of probable losses for consumer
receivables. Changes in our estimate are recognized in our statement of income
as provision for credit losses on owned receivables in the period that the
estimate is changed. During 2002 and 2001, our reserves as a percentage of
receivables increased, reflecting the impact of a weakened economy, increased
industry bankruptcy filings, higher levels of delinquency and charge-off,
customer account management policies and practices and the continuing
uncertainty as to the ultimate impact the weakened economy will have on
delinquency and charge-off levels.

Our policies and practices for the collection of consumer receivables,
including restructuring policies and practices, permit us to reset the
contractual delinquency status of an account to current, based on indicia or
criteria which, in our judgment, evidence continued payment probability. Such
restructuring policies and practices vary by product and are designed to manage
customer relationships, maximize collections and avoid foreclosure or
repossession if reasonably possible. Approximately two-thirds of all
restructured receivables are secured products which may have less loss severity
exposure because of the underlying collateral.

The main criteria for our restructuring policies and practices vary by
product. The fact that the restructuring criteria may be met for a particular
account does not require us to restructure that account, and the extent to which
we restructure accounts that are eligible under the criteria will vary depending
upon our view of prevailing economic conditions and other factors which may
change from period to period. In addition, for some products, accounts may be
restructured without receipt of a payment in certain special circumstances
(e.g., upon reaffirmation of a debt owed to us in connection with a Chapter 7
bankruptcy proceeding). As indicated, our account management policies and
practices are designed to manage customer relationships and to help maximize
collection opportunities. We use account restructuring as an account and
customer management tool in an effort to increase the value of our account
relationships, and accordingly, the application of this tool is subject to
complexities, variations and changes from time to time. These policies and
practices are continually under review and assessment to assure that they meet
the goals outlined above, and accordingly, we modify or permit exceptions to
these general policies and practices from time to time. This should be taken
into account when comparing restructuring statistics from different periods.
Further, to the best of our knowledge, most of our competitors do not disclose
account restructuring, reaging, loan rewriting, forbearance, modification,
deferment or extended payment information comparable to the information we
disclose. The lack of such disclosure by other lenders may limit the ability to
draw meaningful conclusions about us and our business based solely on data or
information regarding account restructuring statistics or policies.

In addition to our restructuring policies and practices, we employ other
account management techniques, which we typically use on a more limited basis,
that are similarly designed to manage customer relationships and maximize
collections. These can include, at our discretion, actions such as extended
payment arrangements, Credit Card Services consumer credit counseling
accommodations, forbearance, modifications, loan rewrites and/or deferments
pending a change in circumstances. We typically enter into forbearance
agreements, extended payment and modification arrangements or deferments with
individual borrowers in transitional situations, usually involving borrower
hardship circumstances or temporary setbacks that are expected to affect the
borrower's ability to pay the contractually specified amount for some period or
time. These actions vary by product and are under continual review and
assessment to determine that they meet the goals outlined above. For example,
under a forbearance agreement, we may agree not to take certain collection or
credit agency reporting actions with respect to missed payments, often in return
for the borrower's agreeing
22

to pay us an extra amount in connection with making future payments. In some
cases, a forbearance agreement, as well as extended payment or modification
arrangements, deferments, consumer credit counseling accommodations, or loan
rewrites may involve us agreeing to lower the contractual payment amount or
reduce the periodic interest rate. In most cases, the delinquency status of an
account is considered to be current if the borrower immediately begins payment
under the new account terms, although if the agreed terms are not adhered to by
the customer, the account status may be reversed and collection actions resumed.
When we use one of these account management techniques, we may treat the account
as being contractually current and will not reflect it as a delinquent account
in our delinquency statistics. We generally consider loan rewrites to involve an
extension of a new loan, and such new loans are not reflected in our delinquency
or restructuring statistics.

For more information about our charge-off and customer account management
policies and practices, see "-- Credit Quality -- Delinquency and Charge-offs"
and "-- Credit Quality -- Account Management Policies."

Receivables Sold and Serviced With Limited Recourse and Securitization
Revenue We use a variety of sources to fund our operations. One of these
sources is the securitization of receivables. For securitizations which qualify
as sales, the receivables are removed from the balance sheet and a gain on sale
and interest-only strip receivable are recognized. Determination of both the
gain on sale and the interest-only strip receivable include estimates of future
cash flows to be received over the lives of the sold receivables. We believe the
accounting estimates relating to gains on sale and the value of the
interest-only strip recorded are "critical accounting estimates" because (a)
changes in them may materially affect net income, (b) their values may be
influenced by factors outside of our control such as customer prepayment
patterns and economic conditions which impact charge-off and delinquency and (c)
they require us to forecast cash flows which are uncertain and require a high
degree of judgment. It should be noted, however, that the life of the
receivables that we securitize and which qualify as sales, are relatively short.
We have not structured any real estate secured receivable securitization
transactions to receive sale treatment since 1997. As a result, the real estate
secured receivables, which generally have longer lives than our other
receivables, and related debt remain on our balance sheet. Securitizing
receivables with shorter lives reduces the period of time for which cash flows
must be forecasted and, therefore, reduces the potential volatility of these
projections. However, because our securitization accounting involves judgment
and is influenced by factors outside of our control, it is reasonably possible
such projections could change. Determination of both the gain on sale and the
interest-only strip receivable are critical accounting estimates for all of our
three reportable segments.

A gain on sale is recognized for the difference between the carrying value
of the receivables securitized and the adjusted sales proceeds. The adjusted
sales proceeds include cash received and the present value estimate of future
cash flows to be received over the lives of the sold receivables. Future cash
flows are based on estimates of prepayments, the impact of interest rate
movements on yields of receivables and securities issued, delinquency of
receivables sold, servicing fees and estimated probable losses under the
recourse provisions based on historical experience and estimates of expected
future performance. Gains on sale, net of recourse provisions, are reported as
securitization revenue in our consolidated statements of income.

Securitizations structured as sales transactions also involve the recording
of an interest-only receivable which represents our contractual right to receive
interest and other cash flows from the securitization trust. Our interest-only
strip receivables are reported at estimated fair value using discounted cash
flow estimates as a separate component of receivables, net of our estimate of
probable losses under the recourse provisions. Cash flow estimates include
estimates of prepayments, the impact of interest rate movements on yields of
receivables and securities issued, delinquency of receivables sold, servicing
fees and estimated probable losses under the recourse provisions. Unrealized
gains and losses are recorded as adjustments to common shareholders' equity in
accumulated other comprehensive income, net of income taxes. Any decline in the
value of our interest-only strip receivable, which is deemed to be other than
temporary, is charged against current earnings.

Assumptions used in estimating gains on sales of receivables are evaluated
with each securitization transaction. Assumptions used in valuing interest-only
strip receivables are re-evaluated each quarter based on

23

experience and expectations of future performances. During 2002 and 2001, we
experienced lower interest rates on both the receivables sold and securities
issued as well as higher delinquency and charge-off levels on the underlying
receivables sold as a result of the weak economy. These factors impacted both
the gains recorded and the values of our interest-only strip receivables.

The sensitivity of our interest-only strip receivable to various adverse
changes in assumptions are disclosed in Note 5, "Asset Securitizations," to the
accompanying consolidated financial statements.

Contingent Liabilities Both we and certain of our subsidiaries are parties
to various legal proceedings resulting from ordinary business activities
relating to our current and/or former operations which affect all of our three
reportable segments. Certain of these activities are or purport to be class
actions seeking damages in significant amounts. These actions include assertions
concerning violations of laws and/or unfair treatment of consumers.

Due to the uncertainties in litigation and other factors, we cannot be
certain that we will ultimately prevail in each instance. Also, as the ultimate
resolution of these proceedings is influenced by factors that are outside of our
control, it is reasonably possible our estimated liability under these
proceedings may change. However, based upon our current knowledge, our defenses
to these actions have merit and any adverse decision should not materially
affect our consolidated financial condition, results of operations or cash
flows.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DEVELOPMENTS AND TRENDS

- Our net income was $1.6 billion in 2002, $1.8 billion in 2001 and $1.6
billion in 2000. Our operating net income (a non-GAAP financial
measurement of net income excluding the settlement charge and related
expenses of $333.2 million, after-tax, and the loss on disposition of
Thrift assets and deposits (the "Thrift disposition loss") of $240.0
million, after-tax) was $2.1 billion in 2002, a 15 percent increase over
2001 net income. Operating net income is an important measure in
evaluating trends for comparative purposes. Our diluted earnings per
share was $3.22 in 2002, a decrease of 18 percent from $3.91 in 2001.
Diluted earnings per share was $3.40 in 2000.

Our improved operating net income was due to receivable and revenue
growth. Receivable growth was largely offset by higher securitization
levels and asset sales of $6.3 billion including $3.6 billion of
receivables that were sold as part of the disposition of Thrift assets.
Revenue growth 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 improved
operating results in 2002 were offset by the settlement charge and the
Thrift disposition loss which collectively reduced net income by $573.2
million.

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 state consumer protection, consumer financing and banking
laws and regulations with respect to secured real estate lending from our
retail branch consumer lending operations. This agreement became
effective on December 16, 2002, with the filing of related consent
decrees or similar documentation in 41 states and the District of
Columbia. Consent decrees or similar documentation have now been filed in
all 50 states and the District of Columbia. We recorded a pre-tax charge
of $525.0 million ($333.2 million after-tax) which reflects the costs of
this settlement agreement and related matters and has been reflected in
the statement of income in total costs and expenses.

During the fourth quarter of 2002, in conjunction with our efforts to
make the most efficient use of our capital and in recognition that the
continued operation of the Thrift was not in our long-term strategic
interest, we completed the disposition of substantially all of the
remaining assets and deposits of the Thrift. Disposition of Thrift assets
and deposits included the sale of real estate secured receivables

24

totaling $3.6 billion, the maturity of investment securities totaling
$2.2 billion and the sale of retail certificates of deposit totaling $4.3
billion. A loss of $240.0 million (after-tax) was recorded on the
disposition of these assets and deposits.

- Owned receivables were $82.6 billion at year-end 2002, compared to $79.9
billion at year-end 2001. In our real estate secured portfolio, strong
growth was substantially offset by whole loan sales of $6.3 billion,
including $3.6 billion associated with the disposition of Thrift assets.
Strong growth in our auto finance, MasterCard and Visa, private label and
personal non-credit card portfolios was offset by higher securitization
levels pursuant to our liquidity management plans.

- Our return on average common shareholders' equity ("ROE") was 17.3
percent in 2002, compared to 24.1 percent in 2001 and 23.2 percent in
2000. Our return on average owned assets ("ROA") was 1.62 percent in
2002, compared to 2.26 percent in 2001 and 2.35 percent in 2000.
Excluding the settlement charge and the Thrift disposition loss, ROE was
23.6 percent and ROA was 2.21 percent in 2002.

- Our owned net interest margin was 7.57 percent in 2002, compared to 7.85
percent in 2001 and 7.68 percent in 2000. The decrease in 2002 was
attributable to our liquidity-related investment portfolio which was
established in 2002 and has lower yields than our receivable portfolio.
This decrease was partially offset by lower funding costs. The increase
in 2001 was primarily attributable to lower funding costs.

- Our owned consumer charge-off ratio was 3.81 percent in 2002, compared to
3.32 percent in 2001 and 3.18 percent in 2000. Our delinquency ratio was
5.57 percent at December 31, 2002, compared to 4.53 percent at December
31, 2001. Both ratios were negatively affected by the weak economy and
higher industry bankruptcy filings.

- During 2002, we recorded owned loss provision greater than charge-offs of
$602.9 million, increasing our owned loss reserves to $3.3 billion.
Receivables growth, increases in personal bankruptcy filings, higher
delinquencies and the weak economy contributed to the higher provision.

- Our owned basis efficiency ratio was 42.6 percent in 2002, 38.4 percent
in 2001 and 39.6 percent in 2000. The 2002 ratio reflects the settlement
charge and the Thrift disposition loss. Excluding these items, our owned
basis efficiency ratio was 36.3 percent in 2002 and reflects higher
revenues, partially offset by higher operating expenses to support
growth.

- On August 14, 2002, we announced a restatement of our prior period
financial results relating to our Credit Card Services segment. The
restatement related to MasterCard and Visa co-branding and affinity
credit card relationships and a marketing agreement with a third party
credit card marketing company. The restatement resulted in a $155.8
million, after-tax, retroactive reduction to retained earnings at
December 31, 1998.

- In January 2003, the four federal bank regulatory agencies issued final
guidance for account management and loss allowance practices for credit
card lending. We believe that implementation of the guidance should not
have a material adverse impact on our financial statements or the way we
manage our business.

SEGMENT RESULTS -- MANAGED BASIS

The following summarizes operating results for our reportable operating
segments for 2002 compared to 2001 and 2000. See Note 23, "Segment Reporting,"
to the accompanying consolidated financial statements for additional segment
information.

- Our Consumer segment reported net income of $837.8 million in 2002.
Operating net income (a non-GAAP financial measurement of net income
excluding the settlement charge and related expenses of $333.2 million,
after-tax, and the Thrift disposition loss of $240.0 million, after tax)
was $1.4 billion in 2002, compared to net income of $1.3 billion in both
2001 and 2000. Operating net income is an important measure in evaluating
trends for comparative purposes. The improved operating results were
25

driven by higher net interest margin and other revenues (excluding the
Thrift disposition loss) which increased $1.7 billion, or 25 percent, in
2002 and $1.0 billion, or 17 percent in 2001. Growth in average
receivables drove the increases in both years. In 2002, higher
securitization activity, pursuant to our liquidity management plans, also
contributed to the increases. The higher revenues were partially offset
by substantially higher credit loss provision and higher expenses. Our
credit loss provision rose $1.4 billion, or 53 percent, in 2002 and
$571.9 million, or 29 percent, in 2001 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 $1.0
billion in 2002 and $.4 billion in 2001. Higher salary and operating
expenses were the result of additional employees, increased operating
costs to support higher receivable levels, increased legal and
professional expenses related primarily to our compliance initiatives and
investments in the growth of our business.

Managed receivables grew to $79.4 billion, up 5 percent from $75.6
billion at year-end 2001 and $63.1 billion at year-end 2000. The managed
receivable growth was driven by solid growth in all products with the
strongest growth in our real estate secured receivables. In 2002, this
growth was partially offset by whole loan sales in our mortgage services
and consumer lending businesses of $6.3 billion including $3.6 billion of
receivables which were sold as part of the disposition of Thrift assets.
Return on average managed assets ("ROMA") was 1.02 percent in 2002,
compared to 1.88 percent in 2001 and 2.16 percent in 2000. Excluding the
settlement charge and Thrift disposition loss, ROMA was 1.71 percent in
2002. The declines in the ratios in both years reflect higher credit loss
provision.

- Our Credit Card Services segment reported improved results over the prior
years. Net income increased to $414.0 million in 2002, compared to $291.7
million in 2001 and $144.6 million in 2000. These increases were due
primarily to increased net interest margin, which increased $271.2
million to $1.8 billion in 2002, as a result of higher receivable levels
and spreads. Net interest margin as a percent of average receivables
increased 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 in both periods. Revenue growth was partially
offset by higher credit loss provision, which increased $260.8 million to
$1.4 billion in 2002, and higher operating expenses associated with the
higher receivable levels. We increased managed loss reserves by recording
loss provision greater than charge-offs of $.1 billion in 2002 and $.2
billion in 2001.

Managed receivables were $18.1 billion at December 31, 2002, compared to
$17.2 billion at year-end 2001 and $16.0 billion at year-end 2000. The
AFL-CIO's Union Plus(R) ("UP") portfolio, our affinity card relationship
with the AFL-CIO labor federation, and Household Bank branded portfolio
reported growth in both 2002 and 2001. The increase in receivables during
both 2002 and 2001 also reflects controlled growth in our subprime and
merchant partnership portfolios. ROMA improved to 2.20 percent in 2002,
compared to 1.72 percent in 2001 and .92 percent in 2000.

- Our International segment reported net income of $231.5 million in 2002,
compared to $204.1 million in 2001 and $230.1 million in 2000. Net income
in 2002 includes positive foreign exchange impacts of $9.0 million. In
2002, net interest margin dollars increased primarily as a result of
lower funding costs, partially offset by lower average receivables as a
result of the fourth quarter 2001 sale of the $1 billion Goldfish credit
card portfolio. Other revenues increased in 2002 as a result of increased
securitization activity and servicing fees from Centrica, our former
partner in the Goldfish program which was discontinued in 2001. Also in
2002, we received a final payment of $55 million from Centrica relating
to the termination of the Goldfish program. This revenue growth was
partially offset by a higher credit loss provision and higher operating
expenses. The decrease in 2001 net income reflects lower net interest
margin as a percentage of receivables in the U.K. and higher salaries and
occupancy costs associated with our branch expansion efforts. The decline
in the net interest margin ratio in 2001 was due to lower yields on
private label receivables and a change in the portfolio mix. These
decreases were partially offset by higher insurance revenues and higher
other income resulting from a payment by Centrica to discontinue our
participation in the joint Goldfish credit card program.

26

Managed receivables totaled $8.8 billion at year-end 2002, compared to
$7.2 billion at year-end 2001 and $7.8 billion at year-end 2000.
Receivable balances reflect positive foreign exchange impacts of $718
million at December 31, 2002. In 2002, growth was primarily attributable
to MasterCard and Visa and personal non-credit receivables in the U.K.
and real estate secured receivables. In 2001, the strongest growth was in
our real estate secured and private label portfolios, partially offset by
reductions in our MasterCard and Visa portfolio resulting from the
discontinuation of the Goldfish program and the related sale of
approximately $1.0 billion in receivables. ROMA was 2.60 percent in 2002,
compared to 2.36 percent in 2001 and 2.71 percent in 2000.

BALANCE SHEET REVIEW

Owned assets totaled $97.9 billion at December 31, 2002 and $88.9 billion
at year-end 2001. Owned receivables may vary from period to period depending on
the timing and size of securitization transactions. We had initial receivable
securitizations of $10.2 billion in 2002 and $5.5 billion in 2001. We refer to
securitized receivables that are serviced for investors and are not on our
balance sheet as our serviced with limited recourse portfolio.

Receivables growth has been a key contributor to our 2002 results. This
growth, however, was substantially offset by real estate secured whole loan
sales, including receivables sold as part of the disposition of Thrift assets,
and higher securitization levels pursuant to our liquidity management plans.
Owned receivables and increases (decreases) over prior years are shown in the
following table:

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

- Real estate secured receivables increased $2.0 billion to $45.8 billion
during 2002. Growth in our branches was largely offset by whole loan
sales of $6.3 billion by our mortgage services and consumer lending
businesses including $3.6 billion of receivables which were sold as part
of the disposition of Thrift assets. During 2002, strong demand for debt
consolidation loans and refinancing due to favorable interest rates
contributed to growth in our branches. We intentionally slowed this
growth in the fourth quarter of 2002, however, to improve our capital
ratios.

Auto finance receivables decreased $345.1 million to $2.0 billion during
2002. A strong market driven by a favorable interest rate environment
contributed to higher originations in 2002. The higher

27

originations were more than offset by increased securitization activity.
We had initial securitizations of auto finance receivables of $3.3
billion in 2002 compared to $2.6 billion in 2001.

MasterCard and Visa receivables increased $805.3 million to $8.9 billion
during 2002 despite increased securitization activity. Our partner
programs, which include both our GM and Union Plus portfolios, reported
growth as a result of new account originations. For GM, this growth was
offset by attrition. Our GM portfolio, which consists primarily of prime
customers and accounts for almost a quarter of our domestic owned
MasterCard and Visa portfolio, continues to produce stable, predictable
and profitable results. Our subprime direct mail and Household Bank
branded portfolios also reported growth as the result of new
originations. We continue to control the growth in our subprime portfolio
by limiting credit lines, especially for new customers. Our merchant
partnership portfolio and the U.K. also reported strong growth,
especially in the U.K.'s marbles(TM) portfolio.

Private label receivables decreased $324.3 million to $11.3 billion
during 2002. Organic growth by existing merchants, expansion of the Best
Buy program, strong sales growth by several of our larger merchants and a
$.5 billion portfolio acquisition were more than offset by increased
securitization activity. We had initial securitizations of private label
receivables of $1.7 billion in 2002 compared to $.5 billion in 2001. In
2001, we developed focused marketing efforts and promotions for our core
merchant portfolio. These initiatives included formation of dedicated
marketing teams for our larger merchants and development of promotions
primarily for our mid-size merchants. These efforts contributed strongly
to the organic growth in 2002, which was partially offset by the
liquidation of certain merchant portfolios.

Personal non-credit card receivables increased $633.9 million to $14.0
billion during 2002 despite increased securitization activity. We had
initial securitizations of personal non-credit card receivables of $3.6
billion in 2002 compared to $2.1 billion in 2001. Domestic and foreign
personal unsecured loans (cash loans with no security) are made to
customers who do not qualify for a real estate secured or personal
homeowner loan ("PHL"). The average personal unsecured loan is
approximately $5,000 and 80 percent of the portfolio is closed-end with
terms ranging from 12 to 60 months. The Union Plus personal unsecured
loans are part of our affinity relationship with the AFL-CIO and are
underwritten similar to other personal unsecured loans. The average PHL
is approximately $15,000. PHL's typically have terms of 120 or 180 months
and are subordinate lien, home equity loans with high (100 percent or
more) combined loan-to-value ratios which we underwrite, price, classify
and manage like unsecured loans. Because recovery upon foreclosure is
unlikely after satisfying senior liens and paying the expenses of
foreclosure, we do not consider the collateral as a source for repayment
in our underwriting. Historically, these loans have performed better from
a credit loss perspective than traditional unsecured loans as consumers
are more likely to pay secured loans than unsecured loans in times of
financial distress.

- We reach our customers through many different distribution channels and
our growth strategies vary across product lines. The consumer lending
business originates real estate and personal non-credit card products
through its retail branch network, direct mail, telemarketing, strategic
alliances and Internet applications. The mortgage services business
originates and purchases real estate secured volume primarily through
brokers and correspondents. Private label credit card volume is generated
through merchant promotions, application displays, Internet applications,
direct mail and telemarketing. Auto finance loan volume is generated
primarily through dealer relationships from which installment contracts
are purchased. Additional auto finance volume is generated through direct
lending which includes alliance partner referrals, Internet applications
and direct mail. MasterCard and Visa loan volume is generated primarily
through direct mail, telemarketing, Internet applications, application
displays, promotional activity associated with our co-branding and
affinity relationships, mass media advertisements (GM Card(R)) and
merchant relationships sourced through our retail services business. We
also supplement internally-generated receivable growth with portfolio
acquisitions.

We also are active in cross-selling more products to our existing
customers. This opportunity for receivable growth results from our broad
product array, recognized brand names, varied distribution

28

channels, and large, diverse customer base. As a result of these
cross-selling initiatives, we increased our products per customer by
almost 5 percent in 2002. Products per customer is a measurement of the
number of products held by an individual customer whose borrowing
relationship with us is considered in good standing. Products include all
loan, insurance and related products.

Based on certain criteria, we offer personal non-credit card customers
who meet our current underwriting standards the opportunity to convert
their loans into real estate secured loans. This enables our customers to
have access to additional credit at lower interest rates. This also
reduces our potential loss exposure and improves our portfolio
performance as previously unsecured loans become secured. We converted
approximately $350 million of personal non-credit card loans into real
estate secured loans in 2002 and $400 million in 2001. It is not our
practice to rewrite or reclassify any delinquent secured loans (real
estate or auto) into personal non-credit card loans.

The Internet is also an increasingly important distribution channel and
is enabling us to expand into new customer segments, improve delivery in
indirect distribution and serve current customers in a more
cost-effective manner. Receivables originated via the Internet doubled in
2002. At December 31, 2002, we had almost $7 billion in receivables and 2
million accounts which were originated via the Internet. We currently
accept loan applications via the Internet for all of our products and
have the ability to serve our customers entirely on-line or in
combination with our other distribution channels.

- The owned consumer two-months-and-over contractual delinquency ratio was
5.57 percent at December 31, 2002, compared to 4.53 percent at December
31, 2001. The owned consumer net charge-off ratio was 3.81 percent in
2002, compared to 3.32 percent in 2001 and 3.18 percent in 2000.

- Our owned credit loss reserves were $3.3 billion at December 31, 2002,
compared to $2.7 billion at December 31, 2001. Credit loss reserves as a
percent of owned receivables were 4.04 percent at December 31, 2002,
compared to 3.33 percent at year-end 2001.

- By December 31, 2002, we had exceeded our previously announced capital
targets. We strengthened our ratio of tangible equity to tangible managed
assets ("TETMA") to 9.08 percent, compared to a target level of 8.50
percent, and up from 7.57 percent at December 31, 2001. The ratio of
tangible common equity to tangible managed assets reached 6.83 percent at
December 31, 2002 versus the target level of 6.70 percent, and up from
6.24 percent at December 31, 2001. These targets were met by generating
earnings, suspending share repurchases, restricting growth, selling
assets and issuing capital securities. TETMA and tangible common equity
to tangible managed assets are non-GAAP financial ratios that are used by
certain rating agencies as a measure to evaluate capital adequacy. The
ratio of common and preferred equity to total managed assets, the most
directly comparable GAAP financial measure to TETMA, was 8.48 percent at
December 31, 2002 and 7.55 percent at December 31, 2001. In the fourth
quarter of 2002, we issued 18.7 million shares of our common stock for
approximately $400 million and also issued $542 million of debt which
includes purchase contracts requiring the holder of the contract to
purchase shares of our common stock in 2006.

- On October 11, 2002, in response to the attorneys general settlement and
the announced disposition of our Thrift, Standard & Poor's ("S&P")
announced that it had revised its long-term and commercial paper debt
ratings for Household and its principal borrowing subsidiaries, including
HFC, 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 debt
ratings of Household and each of its subsidiaries on "Ratings Watch
Negative," while Moody's Investors Service affirmed all ratings for
Household and HFC. These actions contributed to additional volatility in
the trading of our debt and preferred securities and reduced our access
to and increased our costs in the commercial paper market.

In response to our announced merger with HSBC, S&P placed our ratings on
"Positive" credit watch, Fitch gave our ratings an "Evolving" rating
watch and Moody's placed our ratings on "Watch for Upgrade." These
actions resulted in reduced volatility in the trading of our securities
and enabled us to

29

access the unsecured debt markets at more attractive rates. Our ratings are well
within the investment grade rating categories at all rating agencies for all of
our debt and preferred securities.

- During 2002, 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 issuing long-term debt which lengthened the term of our funding,
establishing $6.25 billion in incremental real estate secured conduit
capacity, completing real estate secured whole loan sales of $6.3
billion, disposing of our Thrift assets and deposits, issuing shares of
our common and preferred stock, issuing debt which includes purchase
contracts on our common stock in 2006, issuing securities backed by
dedicated home equity loan receivables of $7.5 billion and establishing
an investment security liquidity portfolio which totaled $3.9 billion at
December 31, 2002 including $2.2 billion which is dedicated to our credit
card bank. We intend to maintain an investment security portfolio for the
near future to protect us from liquidity concerns. This action will
continue to adversely impact our net interest margin and net income due
to the lower return generated by these assets. Our insurance subsidiaries
also held an additional $3.1 billion in investment securities at December
31, 2002.

- In connection with our share repurchase program, we repurchased 4.7
million shares of our common stock for a total of $279.6 million during
2002. We stopped our 2002 stock buy-back program in August 2002 as part
of our initiatives to achieve our TETMA target of 8.50 percent. Since
announcing our first share repurchase program in March 1999, we have
repurchased 44.4 million shares for a total of $2.1 billion. At December
31, 2002, we had agreements to purchase, on a forward basis,
approximately 4.9 million shares of our common stock at a
weighted-average forward price of $53.05 per share.

RESULTS OF OPERATIONS

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

Net Interest Margin Our net interest margin on an owned basis increased to
$6.7 billion in 2002, up from $5.8 billion in 2001 and $4.7 billion in 2000. The
increases were primarily due to growth in average receivables and lower funding
costs.

As a percent of average interest-earning assets, net interest margin was
7.57 percent in 2002, 7.85 percent in 2001 and 7.68 percent in 2000. The
decrease in 2002 was attributable to our liquidity-related investment portfolio
which was established in 2002 and has lower yields than our receivable
portfolio. This decrease was partially offset by lower funding costs. The
increase in 2001 was primarily attributable to 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 to $9.3 billion in 2002, up from $7.9 billion in 2001 and $6.4 billion
in 2000. Receivable growth contributed to the dollar increases in both years. As
a percent of average managed interest-earning assets, net interest margin was
8.47 percent in 2002, 8.44 percent in 2001 and 8.05 percent in 2000. Lower
funding costs were the primary driver of the increased margin in both years. In
2002, these increases were substantially offset by the liquidity-related
investment portfolio. This portfolio was established in 2002 and has lower
yields than our receivables.

Net interest margin as a percent of receivables on a managed basis is
greater than on an owned basis because the managed portfolio includes relatively
more unsecured loans, which have higher yields.

We are able to adjust our pricing on many of our products, which reduces
our exposure to changes in interest rates. During both 2002 and 2001, we
benefited from reductions in funding costs, which were greater than the
corresponding reductions in pricing. These benefits, however, were offset by
lower returns on our liquidity-related investment portfolio. We estimate that
our after-tax earnings would decline by about

30

$53 million at December 31, 2002 and $39 million at December 31, 2001, following
a gradual 100 basis point increase in interest rates over a twelve-month period.

See the net interest margin tables on pages 61 to 63 for additional
information regarding our owned basis and managed basis net interest margin.

Provision for Credit Losses The provision for credit losses includes
current period net credit losses and an amount which we believe is sufficient to
maintain reserves for losses of principal, interest and fees, including late,
overlimit and annual fees, at a level that reflects known and inherent losses in
the portfolio.

The provision for credit losses totaled $3.7 billion in 2002, compared to
$2.9 billion in 2001 and $2.1 billion in 2000. Receivables growth, increases in
personal bankruptcy filings and the impact of the continuing weak economy on
charge-off and delinquency trends contributed to a higher provision in both
years. The provision for credit losses may vary from year to year, depending on
a variety of factors including historical delinquency roll-rates and account
management policies and practices (such as, restructure, rewrite, reage,
forbearance and modification activity) of our loan products, the amount of
securitizations in a particular period, economic conditions, and our product
vintage analyses.

As a percent of average owned receivables, the provision was 4.52 percent
in 2002, compared to 4.00 percent in 2001 and 3.50 percent in 2000. The
increases in this ratio reflect higher charge-offs, including bankruptcy
charge-offs, and additions to loss reserves, both resulting from the weak
economy.

Despite a continued shift in our portfolio mix to real estate secured
loans, we recorded owned loss provision greater than charge-offs of $602.9
million in 2002 and $502.9 million in 2001. Growth in our receivables and
portfolio seasoning also ultimately result in a higher dollar loss reserve
requirement. Loss provisions are based on an estimate of inherent losses in our
loan portfolio.

See "Application of Critical Accounting Policies" on pages 21 to 24,
"Credit Loss Reserves" on pages 40 to 42 and the "Analysis of Credit Loss
Reserves Activity" on pages 59 and 60 for additional information regarding our
owned basis and managed basis loss reserves.

Other Revenues Total other revenues were $4.1 billion in 2002, $3.8
billion in 2001 and $3.2 billion in 2000. Excluding the Thrift disposition loss,
other revenues were $4.5 billion in 2002. Total other revenues included the
following:

Securitization revenue is the result of the securitization of receivables
structured as sales 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. Certain securitization trusts, such as
credit cards, are established at fixed levels and require frequent sales of new
receivables into the trust to replace receivable run-off.

31

Securitization revenue included the following:

The increases were due to increases in the levels of receivables
securitized during the year, higher average securitized receivables and changes
in the mix of receivables included in these transactions. In 2002, we actively
accessed the asset-backed securities market as part of our liquidity management
plans to limit dependence on the more volatile unsecured term debt market.
Securitization revenue will vary each year based on the level and mix of
receivables securitized in that particular year (which will impact net initial
and replenishment gains, including the related estimated probable credit losses
under the recourse provisions) as well as 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 impacted by the level and mix of current year securitizations
because securitized receivables with longer lives may require a higher over-
the-life loss provision than receivables securitized with shorter lives
depending upon loss estimates and severities.

Our interest-only strip receivables, net of the related loss reserve and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income, increased $139.0 million in 2002, $100.6 million in 2001
and $59.0 million in 2000.

See Note 1, "Summary of Significant Accounting Policies," and Note 5,
"Asset Securitizations," to the accompanying consolidated financial statements,
"Application of Critical Accounting Policies" on pages 21 to 24 and
"Securitizations and Secured Financings" on pages 47 to 50 for further
information on asset securitizations.

Insurance revenue was $716.4 million in 2002, $662.4 million in 2001 and
$561.2 million in 2000. The increases reflect increased sales on a larger
receivable portfolio. During 2001, we discontinued the sale of single premium
credit insurance on real estate secured receivables in favor of offering a fixed
monthly premium insurance product. The rollout of this insurance product began
in the fourth quarter of 2001 and was substantially completed in the first
quarter of 2002. This change did not have a material impact on our results of
operations for 2002.

Investment income includes interest income on investment securities in the
insurance business as well as realized gains and losses from the sale of
investment securities. Investment income was $182.0 million in 2002, $167.7
million in 2001 and $174.2 million in 2000. Interest income was the primary
driver of the increase in 2002 and the decrease in 2001. In 2002, higher average
investment balances were partially offset by lower yields. In 2001, higher
average investment balances were more than offset by lower yields.

Fee income includes fee-based revenues from products such as MasterCard and
Visa and private label credit cards. Fee income was $948.4 million in 2002,
$903.5 million in 2001 and $760.2 million in 2000. The increases were primarily
due to higher credit card fees. In 2002, the increases were partially offset by
lower fee income as a result of the fourth quarter 2001 sale of the $1 billion
Goldfish credit card portfolio in the U.K. Fee income will also vary from year
to year depending upon the amount of securitizations in a particular period.

See Note 23, "Segment Reporting," to the accompanying consolidated
financial statements for additional information on fee income on a managed
basis.

Other income, which includes revenue from our refund lending business, was
$543.4 million in 2002, $322.5 million in 2001 and $228.8 million in 2000. RAL
income was $239.9 million in 2002, $198.3 million in

32

2001 and $132.7 million in 2000. The increase in 2002 also reflects increased
revenues from our mortgage operations. The increases in both years also reflect
income resulting from our agreement with Centrica to discontinue our
participation in the Goldfish credit card program. Under the terms of this
agreement, we received $55 million in 2002 and $32 million, net of directly
related costs, in 2001.

Loss on disposition of Thrift assets and deposits was $378.2 million in
2002. The loss resulted from the completed disposition of substantially all of
the remaining assets and deposits of the Thrift in the fourth quarter of 2002.

Costs and Expenses Total costs and expenses, including the $525.0 million
settlement charge and related expenses, were $4.8 billion in 2002, $3.9 billion
in 2001 and $3.3 billion in 2000. Excluding the settlement charge, costs and
expenses were $4.3 billion in 2002. The increases were driven by higher
compensation and other expenses to support our growing portfolio and increased
legal and professional expenses related principally to our compliance
initiatives. Our owned basis efficiency ratio was 42.6 percent in 2002, 38.4
percent in 2001 and 39.6 percent in 2000. Excluding the settlement charge and
the Thrift disposition loss, our owned basis efficiency ratio was 36.3 percent
in 2002.

Total costs and expenses included the following:

Salaries and fringe benefits were $1.8 billion in 2002, $1.6 billion in
2001 and $1.3 billion in 2000. The increases were primarily due to additional
staffing at all businesses to support growth including sales, collections and
service quality.

Sales incentives were $255.9 million in 2002, $273.2 million in 2001 and
$203.6 million in 2000. In 2002, the decrease was due to terms of our 2002
branch incentive plans which, generally, had higher volume requirements than the
prior-year plans. In 2001, the increase was primarily due to higher sales
volumes in our branches.

Occupancy and equipment expense was $371.1 million in 2002, $337.4 million
in 2001 and $306.6 million in 2000. In 2002, the increase was primarily due to
higher rental and other expenses. In 2001, the increase was primarily due to
growth in our support facilities and new branches in the United Kingdom and
Canada.

Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $531.0 million in
2002, $490.4 million in 2001 and $443.6 million in 2000. Increased marketing
initiatives in our domestic MasterCard and Visa portfolio was the primary driver
of the increases in both years. In 2002, our U.K. portfolio also reported
increased marketing initiatives.

Other servicing and administrative expenses were $888.9 million in 2002,
$716.8 million in 2001 and $595.0 million in 2000. Higher collection and
consulting expenses and higher REO expenses contributed to the increases in both
years. In 2002, the increase also reflects higher legal and compliance costs. In
2001, costs associated with privacy mailings to comply with new legislation also
contributed to the increase.

33

Amortization of acquired intangibles and goodwill was $57.8 million in
2002, $157.6 million in 2001 and $166.4 million in 2000. In 2002, the decrease
was primarily attributable to the adoption of Statement of Financial Accounting
Standard No. 142, ("SFAS No. 142") "Goodwill and Other Intangible Assets," on
January 1, 2002. Amortization of goodwill recorded in past business combinations
ceased upon adoption of this new accounting standard. We have completed the
transitional goodwill impairment test required by SFAS No. 142 and have
concluded that none of our goodwill is impaired. In 2001, the decrease was
attributable to reductions in acquired intangibles.

Policyholders' benefits were $368.8 million in 2002, $302.6 million in 2001
and $261.7 million in 2000. The increases were primarily due to and consistent
with the increase in insurance revenues resulting from increased policy sales.

Settlement charge and related expenses were $525.0 million in 2002. The
charges are the result of an 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 state consumer protection, consumer finance
and banking laws and regulations relating to real estate secured lending in our
retail branch consumer lending operations as operated under the HFC and
Beneficial brand names.

Income taxes The effective tax rate was 30.9 percent in 2002, 34.4 percent
in 2001 and 34.8 percent in 2000. Excluding the settlement charge and Thrift
disposition loss, the effective tax rate was 32.5 percent in 2002. The decrease
in the effective tax rate is largely attributable to lower state and local taxes
and a reduction in noncurrent tax requirements.

CREDIT QUALITY

Delinquency and Charge-offs Our delinquency and net charge-off ratios
reflect, among other factors, changes in the mix of loans in our portfolio, the
quality of our receivables, the average age of our loans, the success of our
collection and account management efforts, bankruptcy trends and general
economic conditions. The levels of personal bankruptcies also have a direct
effect on the asset quality of our overall portfolio and others in our industry.

Our credit and portfolio management procedures focus on risk-based pricing
and effective collection and account management efforts for each loan. We
believe our credit and portfolio management process gives us a reasonable basis
for predicting the credit quality of new accounts. This process is based on our
experience with numerous marketing, credit and risk management tests. We also
believe that our frequent and early contact with delinquent customers, as well
as account management policies and practices designed to optimize account
relationships, such as restructuring, loan rewrites, forbearance, credit
counseling accommodation, modification, extension or deferment of delinquent
accounts to current status in specific situations, are helpful in maximizing
customer collections.

We have been preparing for an economic slowdown since late 1999. Since
1999, we have emphasized real estate secured loans, which historically have had
a lower loss rate than our other loan products, grown sensibly, tightened
underwriting policies, reduced unused credit lines, strengthened risk model
capabilities and invested heavily in collections capability by adding
collectors.

34

Charge-Off and Nonaccrual Policies

- ---------------

(1) We employ account restructuring and other account management policies and
practices as flexible account management tools. In addition to variances in
criteria by product, criteria may also vary within a product line (for
example, in our private label credit card business, criteria may vary from
merchant to merchant). Also, we continually review our product lines and
assess restructuring criteria and they are subject to modification or
exceptions from time to time. Accordingly, the description of our account
restructuring policies or practices provided in this table should be taken
only as general guidance to the

37

restructuring approach taken within each product line, and not as an
assurance that accounts not meeting these criteria will never be
restructured, that every account meeting these criteria will in fact be
restructured or that these criteria will not change or that exceptions will
not be made in individual cases.

(2) During the first half of 2002, certain previously acquired real estate
secured accounts required one payment to be restructured and were generally
limited to one restructuring every nine months.

(3) For our United Kingdom business, an account may be restructured if we
receive two payments within two calendar months, limited to one restructure
every 12 months, with a lifetime limit of three times.

(4) For our Canada business, private label is limited to one restructure every
four months (six months for new accounts in 2003).

The tables below summarize restructuring statistics in our managed basis
domestic portfolio as of December 31, 2002 and 2001.

TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD -- DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)

TOTAL RESTRUCTURED BY PRODUCT -- DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)

- ---------------

(1) Excludes foreign businesses, commercial and other. Amounts also include
accounts as to which the delinquency status has been reset to current for
reasons other than restructuring (e.g. correcting the misapplication of a
timely payment).

(2) Total including foreign businesses was 14.8 percent at December 31, 2002 and
16.2 percent at December 31, 2001.

See "Credit Quality Statistics" on pages 57 and 58 for further information
regarding owned basis and managed basis delinquency, charge-offs and
nonperforming loans.

In addition to our restructuring policies and practices, we employ other
account management techniques, which we typically use on a more limited basis,
that are similarly designed to manage customer relationships and maximize
collections. These can include, at our discretion, actions such as extended
payment arrangements, Credit Card Services consumer credit counseling
accommodations, forbearance, modifications, loan rewrites and/or deferment
pending a change in circumstances. We typically enter into forbearance

38

agreements, extended payment and modification arrangements or deferments with
individual borrowers in transitional situations, usually involving borrower
hardship circumstances or temporary setbacks that are expected to affect the
borrower's ability to pay the contractually specified amount for some period of
time. These actions vary by product and are under continual review and
assessment to determine that they meet the goals outlined above. For example,
under a forbearance agreement, we may agree not to take certain collection or
credit agency reporting actions with respect to missed payments, often in return
for the borrower's agreeing to pay us an extra amount in connection with making
future payments. In some cases, a forbearance agreement as well as extended
payment or modification arrangements, deferments, consumer credit counseling
accommodations, or loan rewrites may involve us agreeing to lower the
contractual payment amount or reduce the periodic interest rate. In most cases,
the delinquency status of an account is considered to be current if the borrower
immediately begins payment under the new account terms, although if the agreed
terms are not adhered to by the customer the account status may be reversed and
collection action resumed. When we use one of these account management
techniques, we may treat the account as being contractually current and will not
reflect it as a delinquent account in our delinquency statistics. We generally
consider loan rewrites to involve an extension of a new loan, and such new loans
are not reflected in our delinquency or restructuring statistics. The amount of
managed receivables in forbearance, modification, Credit Card Services consumer
credit counseling accommodations, rewrites or other account management
techniques for which we have reset delinquency and that is not included in the
restructured statistics above was approximately $900 million or .84% of managed
receivables at December 31, 2002 compared with approximately $534 million or
..53% of managed receivables at December 31, 2001.

Delinquency and Charge-off Ratios

CONSUMER TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS -- OWNED BASIS

Compared to September 30, 2002, our total consumer delinquency ratio
increased 56 basis points to 5.57 percent at December 31, 2002. Higher levels of
new bankruptcy filings and continued softness of the economy, including higher
unemployment, together with slower receivable growth, caused the rise in the
delinquency ratio. A major contributor to the higher real estate secured
delinquency ratio was the decline in the portfolio due to loan sales and reduced
originations in the fourth quarter. The decline in the portfolio contributed
approximately one half of the increase in real estate delinquencies in the
fourth quarter. The sequential increase in auto finance delinquency reflected
continued softness in the economy and seasonal patterns. Both credit card
portfolios saw quarterly declines in the delinquency ratio as a result of the
benefit of seasonal receivable growth. The ratio for personal non-credit card
loans increased due to higher bankruptcies and unemployment and a decline in the
size of the portfolio.

Compared to December 31, 2001, the weak economy contributed to higher
delinquency ratios in all products. Though we have taken a number of steps
designed to reduce our credit losses, including growing sensibly, tightening
underwriting, reducing unused credit lines, strengthening risk model
capabilities and adding collectors, the weak economy, including higher
bankruptcy and unemployment rates, have resulted in higher delinquency ratios in
all of our products.

See "Credit Quality Statistics -- Managed Basis" on page 58 for additional
information regarding our managed basis credit quality. Please see above
regarding the treatment of restructured accounts and accounts subject to
forbearance and other account management tools.

39

CONSUMER NET CHARGE-OFF RATIOS -- OWNED BASIS

During the fourth quarter of 2002, our net charge-off ratio declined 11
basis points to 3.87 percent. Net charge-off dollars decreased $28.0 million
during the quarter. However, auto charge-offs rose sharply, reflecting an
increase in loss severity on repossessed autos, as the entire used car industry
experienced weaker than normal seasonally depressed prices. Real estate
charge-offs also rose due to seasoning and higher loss frequencies.

The increases in charge-off ratios for the year-ended December 31, 2002
compared to the prior year reflect the weak economy and higher bankruptcy
filings. Though we have taken a number of steps designed to reduce our credit
losses, including growing sensibly, tightening underwriting, reducing unused
credit lines, strengthening risk model capabilities and adding collectors, the
weak economy, including higher bankruptcy rates, have resulted in higher
charge-off ratios in all of our products. The increase in the auto finance ratio
was due in part to higher loss severities on repossessed vehicles. The increase
in the MasterCard and Visa ratio reflects a higher percentage of subprime
receivables in the portfolio. Though subprime charge-off rates declined in 2002,
these receivables continue to have higher loss rates than other MasterCard and
Visa receivables. Charge-offs in our personal non-credit card portfolio
increased more than our other unsecured products because our typical personal
non-credit card customer is less resilient and, therefore, more exposed to
economic downturns.

The increase in real estate charge-offs and REO expense as a percent of
average real estate secured receivables over the 2001 ratio was the result of
the seasoning of our portfolios, higher loss severities, especially in second
lien mortgages, and higher bankruptcy filings.

The increases in charge-off ratios in 2001 compared to 2000 also reflect
the weak economy. These increases were partially offset by improved collections
in our real estate secured, private label and personal non-credit card
portfolios as a direct result of increasing the size of our collection staff,
especially in our branch network. The increase in the auto finance ratio was due
in part to higher loss severities on repossessed vehicles. The increase in the
MasterCard and Visa ratio also reflects a higher percentage of subprime
receivables in the portfolio. Though the overall trend in subprime charge-off
rates improved during 2001, these receivables continue to have higher loss rates
than other MasterCard and Visa receivables. Our total 2001 net charge-off ratio
also reflects the positive impact of the growing percentage of real estate
secured receivables, which have a lower charge-off ratio than other products, in
our portfolio.

See "Credit Quality Statistics -- Managed Basis" on page 58 for additional
information regarding our managed basis credit quality.

Credit Loss Reserves 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 estimate probable losses for consumer receivables
based on delinquency and restructure status and past loss experience. Credit
loss reserves take into account whether

40

loans have been restructured, rewritten or are subject to forbearance, credit
counseling accommodation, modification, extension or deferment. Approximately
two-thirds of all restructured receivables are secured products which may have
less loss severity exposure because of the underlying collateral.

Our credit loss reserves also take into consideration the loss severity
expected based on the underlying collateral, if any, for the loan. 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. Roll rates and
migration analysis are techniques used to estimate the likelihood that a loan
will progress through the various delinquency buckets and ultimately charge off.
Risk factors considered in establishing loss reserves on consumer receivables
include recent growth, product mix, bankruptcy trends, geographic concentration,
economic conditions and current levels in charge-off and delinquency. While our
credit loss reserves are available to absorb losses in the entire portfolio, we
specifically consider the credit quality and other risk factors for each of our
products, which include real estate secured, auto finance, Master Card and Visa
and private label credit cards and personal non-credit cards. We recognize the
different inherent loss characteristics and risk management/collection practices
in each of these products. Charge-off policies are also considered when
establishing loss reserve requirements to ensure the appropriate reserves exist
for products with longer charge-off periods. We also consider key ratios such as
reserves to nonperforming loans and reserves as a percentage of net charge-offs
in developing our loss reserve estimate. Loss reserve estimates are reviewed
periodically and adjustments are reported in earnings when they become known.
These estimates are influenced by factors outside of our control, such as
economic conditions and consumer payment patterns. As a result, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change.

Despite a continued shift in our portfolio mix to real estate secured
loans, we recorded owned loss provision greater than charge-offs of $602.9
million in 2002 and $502.9 million in 2001. Provision for credit losses
reflected our continued receivable growth, increases in personal bankruptcy
filings and uncertainty as to the timing and extent of an economic recovery.
Additionally, growth in our receivables and portfolio seasoning ultimately
result in a higher loss reserve requirement. Loss provisions are based on an
estimate of inherent losses in our loan portfolio.

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

Reserves as a percentage of receivables at December 31, 2002 reflects the
impact of the weak economy, higher delinquency levels, and continuing
uncertainty as to the ultimate impact the weakened economy will have on
delinquency and charge-off levels. These risk factors resulted in higher loss
provisions in 2002.

Over the past five years, our loan portfolio has experienced a dramatic
shift in product mix to real estate secured receivables. Reserves as a
percentage of receivables decreased from 1998 through 2000 as a result of a
growing percentage of secured loans, which historically have had lower loss
rates than unsecured loans, and, in 1999 and 2000, improving credit quality
trends. The 1999 and 2000 ratios also reflect the benefits of the continued
run-off of our undifferentiated Household Bank branded MasterCard and Visa
portfolio. Real estate secured receivables represented 55 percent of our
receivables at December 31, 2002 compared to 42 percent at December 31, 1998.

41

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:

See the "Analysis of Credit Loss Reserves Activity" on pages 59 and 60 for
additional information regarding our owned basis and managed basis loss
reserves.

OWNED NONPERFORMING ASSETS

The increase in nonaccrual receivables is primarily attributable to
increases in our real estate secured and personal non-credit card portfolios.
Accruing consumer receivables 90 or more days delinquent includes domestic
MasterCard and Visa and private label credit card receivables, consistent with
industry practice. The increase in total nonperforming assets is attributable to
growth in our owned portfolio as well as the weak economy.

Geographic Concentrations The state of California accounts for 15 percent
of our domestic owned portfolio. No other state accounts for more than 10
percent of either our domestic owned or managed portfolio. Because of our
centralized underwriting, collections and processing functions, we can quickly
change our credit standards and intensify collection efforts in specific
locations. We believe this lowers risks resulting from such geographic
concentrations.

Our foreign consumer operations located in the United Kingdom accounted for
7 percent of owned consumer receivables and Canada accounted for 2 percent of
owned consumer receivables at December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our continued success and prospects for growth are dependent upon access to
the global capital markets. Numerous factors, internal and external, may impact
our access to, and the costs associated with, these markets. These factors may
include our debt ratings, overall economic conditions, overall capital markets
volatility and the effectiveness of our management of credit risks inherent in
our customer base.

In managing capital, we develop targets for tangible shareholders' equity
to tangible managed assets ("TETMA") and tangible common equity to tangible
managed assets. These ratio targets are based on

42

discussions with rating agencies, reviews of regulatory requirements and
competitor capital positions, credit loss reserve strength, risks inherent in
the portfolio and projected operating environment, and acquisition objectives.
We also specifically consider the level of intangibles arising from completed
acquisitions. Our targets may change from time to time to accommodate changes in
the operating environment or any of the other considerations listed above. A
primary objective of our capital management is to maintain investment grade
ratings from rating agencies in order to have acceptable funding costs as well
as greater access to a variety of funding sources. TETMA and tangible common
equity to tangible managed assets are non-GAAP financial ratios that are used by
certain rating agencies as a measure to evaluate capital adequacy. The ratio of
common and preferred equity to total managed assets, the most directly
comparable GAAP financial measure to TETMA, was 8.48 percent at December 31,
2002 and 7.55 percent at December 31, 2001.

During 2002, 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 issuing
long-term debt which lengthened the term of our funding, establishing $6.25
billion in incremental real estate secured conduit capacity, completing real
estate secured whole loan sales of $6.3 billion, completing the disposition of
substantially all of the assets and deposits of the Thrift, issuing 18.7 million
shares of our common stock, issuing $542 million of debt which includes purchase
contracts requiring the holder of the contract to purchase shares of our common
stock in 2006, issuing securities backed by dedicated home equity loan
receivables of $7.5 billion and establishing an investment security liquidity
portfolio which totaled $3.9 billion at December 31, 2002 including $2.2 billion
which is dedicated to our credit card bank. We intend to maintain an investment
security portfolio for the near future to protect us from unforeseen liquidity
demands. This action will continue to adversely impact our net interest margin
and net income due to the lower return generated by these assets. Our insurance
subsidiaries also held an additional $3.1 billion in investment securities at
December 31, 2002.

In conjunction with our August 2002 accounting restatement and the
resulting decrease in our capital levels, we announced an increase to our TETMA
and tangible common equity to tangible managed asset targets. These targets were
met by December 31, 2002 by generating earnings, suspending share repurchases,
restricting growth, selling assets and issuing capital securities.

Capital ratios were as follows:

- ---------------

(1) Represents a non-GAAP financial ratio that is used by certain rating
agencies as a measure to evaluate capital adequacy. This ratio may differ
from similarly named measures presented by other companies. Because of its
long-term subordinated nature and our ability to defer dividends, these
rating agencies consider trust preferred securities as equity in calculating
this ratio. Because they include obligations to purchase our common stock in
2006, our Adjustable Conversion-Rate Equity Security Units are also
considered equity in calculating TETMA. Common and preferred equity to total
managed assets, the most directly comparable GAAP financial measure to
TETMA, was 8.48 percent at December 31, 2002, and 7.55 percent at December
31, 2001.

The capital markets were volatile throughout 2002. Investor demand for both
medium and long-term debt 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 third quarter and early half of the fourth
quarter of 2002, we issued nominal amounts of medium and long-term unsecured
debt as the cost to access these traditional funding sources became
significantly higher than expected. Since meeting our previously announced
capital goals and announcing the planned merger with HSBC, our access to the
capital markets has improved and our funding costs have decreased as evidenced
by

43

$1.5 billion in offerings that we completed in the fourth quarter of 2002 and
the $4.0 billion in offerings that we completed in January through March 19,
2003. We anticipate further improvement as the markets stabilize and the HSBC
merger is completed. If the merger with HSBC does not occur by March 31, 2003,
we have agreed to pay additional interest on certain debt issued after November
14, 2002 until the merger with HSBC occurs. This additional interest, as of
March 19, 2003, would be approximately $330,000 per day.

Investment Ratings On October 11, 2002, in response to the attorneys
general settlement and the announced disposition of our Thrift, Standard &
Poor's ("S&P") announced that it had revised its long-term and commercial paper
debt ratings for Household and its principal borrowing subsidiaries, including
HFC, 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. These actions contributed to
additional volatility in the trading of our debt and preferred securities and
reduced our access to and increased our costs in the commercial paper market.

In response to our announced merger with HSBC, S&P placed our ratings on
"Positive" credit watch, Fitch gave our ratings an "Evolving" rating watch and
Moody's placed our ratings on "Watch for Upgrade." These actions resulted in
reduced volatility in the trading of our securities and enabled us to access the
unsecured debt markets at more attractive rates. Our ratings are well within the
investment grade rating categories at all rating agencies for all of our
securities.

Parent Company Household International, Inc. is the holding or parent
company that owns the outstanding stock of its subsidiaries. The parent
company's main source of funds is cash received from its subsidiaries in the
form of dividends and intercompany borrowings. In addition, the parent company
may receive cash from third parties by issuing preferred stock, common stock and
debt.

The parent company received dividends from its subsidiaries of $1.3
billion, including $945 million in connection with the disposition of the assets
and deposits of the Thrift, in 2002 and $673 million in 2001. Dividends from
subsidiaries are managed to ensure subsidiaries are adequately capitalized.

The parent company issued 18.7 million shares of common stock in October
2002. The issuance strengthened our capital ratios and was further evidence of
our commitment to maintaining our debt ratings and access to the global capital
markets at reasonable costs.

The parent company issued $350 million of 7.625 percent cumulative
preferred stock in September 2002, $400 million of 7.60 percent cumulative
preferred stock in March 2002 and $300 million of 7.50 percent cumulative
preferred stock in September 2001. In addition, the parent company issued
company obligated mandatorily redeemable preferred securities (representing the
minority interest in the trust) ("trust preferred securities") of $400 million
in 2001. In December 2001, $100 million of 8.70 percent trust preferred
securities were redeemed.

The parent company has a number of obligations to meet with its available
cash. It must be able to service its debt and meet the capital needs of its
subsidiaries. It also must pay dividends on its preferred stock and may pay
dividends to its common stockholders. The parent company paid $509.7 million in
common and preferred dividends to shareholders in 2002 and $406.6 million in
2001.

At various times, the parent company will make capital contributions to its
subsidiaries to comply with regulatory guidance, support receivable growth,
maintain acceptable investment grade ratings at the subsidiary level, or provide
funding for long-term facilities and technology improvements. In 2002, the
parent company made capital contributions of $900 million to its Thrift
subsidiary. HFC made an additional $250 million capital contribution to its
banking subsidiary. Contributions by the parent company to subsidiaries totaled
$50 million in 2001. The increase in capital contributions in 2002 was
attributable to regulatory requirements. In 2002, we were advised by the Office
of Thrift Supervision ("OTS"), Office of the Comptroller of the Currency ("OCC")
and the Federal Deposit Insurance Corporation ("FDIC") that in accordance with
their 2001 Guidance for Subprime Lending Programs, they would impose additional
capital requirements on institutions which hold nonprime or subprime assets.
These capital levels were greater than the historical levels we had maintained
at these subsidiary institutions. On July 1, 2002, we combined all of our credit
card

44

banks into a single credit card banking subsidiary of HFC. We believe the
combination of the banks streamlines and simplifies our regulatory structure as
well as optimizes capital and liquidity management. In connection with the
disposition of Thrift assets and deposits in the fourth quarter of 2002, a
dividend of $945 million was received by the parent.

In July 2002, substantially all of the holders of our $1.2 billion
zero-coupon convertible debt securities exercised their put options requiring us
to repurchase their outstanding securities. The securities were issued in August
2001, were due 2021 and had a one-percent yield to maturity. The redemption was
planned for and funded through our normal funding process.

Prior to suspending its stock buy-back program in August 2002, the parent
company repurchased 4.7 million shares of common stock for a total of $279.6
million in 2002. During 2001, 17.4 million shares were repurchased for a total
of $916.3 million. Pursuant to these programs, repurchases are made from time to
time in the open market depending upon market conditions, other investment
opportunities for growth and capital targets.

At December 31, 2002, the parent company had agreements to purchase, on a
forward basis, approximately 4.9 million shares of its common stock at a
weighted-average forward price of $53.05 per share. The agreements expire at
various dates through August 2003. These agreements may be settled physically or
on a net basis in shares of our common stock or in cash, depending on the terms
of the various agreements, at our option.

At December 31, 2002, the parent company had $400 million in committed
back-up bank lines of credit that it can use on short notice. These lines are
available either to the parent company or its subsidiary, HFC. None of these
back-up bank lines were drawn upon in 2002. These lines of credit expire in 2003
and do not contain independent financial covenants that could restrict
availability, other than an obligation to maintain minimum shareholders' equity
of $2.0 billion. In addition, the parent company has agreed to guarantee certain
debt of its Canadian subsidiary. Under the terms of the guarantee, the parent
company has an obligation to maintain minimum shareholders' equity of $4.0
billion.

Subsidiaries At December 31, 2002, we had two remaining major
subsidiaries: HFC and Household Global Funding ("Global"). Substantially all of
the assets and deposits of our third major subsidiary, Household Bank, f.s.b.
(the "Thrift") were sold in the fourth quarter of 2002. These subsidiaries use
cash to originate loans, purchase loans or investment securities or acquire
businesses. Their sources of cash include the collection of receivable balances,
maturities or sales of investment securities, proceeds from the issuance of debt
and deposits, proceeds from the securitization of receivables, capital
contributions from the parent company and cash provided by operations.

HFC HFC funds its operations by collecting receivable balances; issuing
commercial paper, medium-term debt and long-term debt primarily to wholesale
investors; securitizing and selling consumer receivables; borrowing under
secured financing facilities; and receiving capital contributions from its
parent. HFC domestically markets its commercial paper primarily through an
in-house sales force. Domestic medium-term notes are marketed through HFC's
in-house sales force and investment banks. Long-term debt is generally marketed
through investment banks.

HFC's outstanding commercial paper totaled $4.1 billion at December 31,
2002, a $4.7 billion decrease from the December 31, 2001 balance of $8.8
billion. HFC actively manages the level of commercial paper outstanding to
ensure availability to core investors and proper use of any excess capacity
within internally-established targets. Outstanding commercial paper balances
throughout 2002 were lower than in 2001 as HFC took advantage of the low
interest rate environment and issued long-term debt. HFC also reduced
outstanding commercial paper to address general market liquidity concerns.

During 2002, HFC issued $4.9 billion in domestic medium-term notes, $6.25
billion in U.S. dollar-denominated global debt, $5.9 billion in InterNotes(SM)
(a retail-oriented medium-term note program), L500 ($710) million of 10-year
debt to investors in the U.K., E3 ($2.7) billion in Euro bonds, $410 million in
yen-denominated debt and $542 million of 8.875 percent Adjustable
Conversion-Rate Equity Security Units (the "Units"). Each Unit consists of a
purchase contract requiring the holder of the contract to purchase from the

45

parent company, for $25, shares of common stock of the parent company on
February 15, 2006 and an 8.875 percent senior note due February 15, 2008 of HFC.
Of the issuances in 2002, $8.5 billion had maturities greater than 5 years which
reduced our overall dependence on the potentially volatile commercial paper
markets. In 2001, HFC issued $8.0 billion in domestic medium-term notes, $7.0
billion in U.S. dollar-denominated global debt, $788 million in InterNotes(SM)
and $2.0 billion in Euro, Japanese yen and Czech koruna denominated issuances.
In order to eliminate future foreign exchange risk, currency swaps were used to
convert substantially all foreign-denominated notes issued to U.S. dollars at
the time of issuance.

HFC issued securities backed by dedicated home equity loan receivables of
$7.5 billion in 2002 and $1.5 billion in 2001. For accounting purposes, these
transactions were structured as secured financings, therefore, the receivables
and the related debt remain on our balance sheet. At December 31, 2002,
closed-end real estate secured receivables totaling $8.5 billion secured $7.5
billion of outstanding debt. 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.

HFC had committed back-up lines of credit totaling $10.1 billion at
December 31, 2002, of which $400 million was also available to its parent
company. None of these back-up lines were drawn upon in 2002. HFC's back-up
lines expire on various dates through 2007 and do not contain independent
financial covenants that could restrict availability, other than an obligation
to maintain maintenance of minimum shareholder's equity of $5.8 billion.

During 2002, HFC established $6.25 billion in incremental conduit capacity
for its real estate secured product. Consistent with previous transactions,
draws on these facilities are structured as secured financings for accounting
purposes. At December 31, 2002, HFC had facilities with commercial and
investment banks under which it may securitize up to $19.5 billion of
receivables. HFC may securitize up to $13.3 billion of auto finance, MasterCard,
Visa, private label and personal non-credit card receivables and $6.25 billion
of real estate secured receivables under these facilities. The facilities are
renewable on an annual basis at the banks' option. At December 31, 2002, $11.6
billion of auto finance, MasterCard and Visa, private label and personal
non-credit card receivables and $2.3 billion of real estate secured receivables
were securitized under these programs. The amount available under the facilities
will vary based on the timing and volume of public securitization transactions.
Through existing term bank financing and new debt issuances, we believe HFC
should continue to have adequate sources of funds, which could be impacted from
time to time by volatility in the capital markets, if one or more of these
facilities were unable to be renewed.

On July 1, 2002, Household combined all of its credit card banks into a
single credit card banking subsidiary of HFC. We believe the combination of the
banks streamlines and simplifies our regulatory structure as well as optimizes
capital and liquidity management.

Global Global includes our foreign subsidiaries in the United Kingdom,
Canada and Europe. Global's assets were $8.5 billion at year-end 2002 and $7.3
billion at year-end 2001. Consolidated shareholders' equity includes the effect
of translating our foreign subsidiaries' assets, liabilities and operating
results from their local currency into U.S. dollars. We periodically enter into
foreign exchange contracts to hedge portions of our investment in foreign
subsidiaries.

Each foreign subsidiary conducts its operations using its local currency.
While each foreign subsidiary usually borrows funds in its local currency, both
our United Kingdom and Canadian subsidiaries have borrowed funds directly in the
United States capital markets. This allowed the subsidiaries to achieve a lower
cost of funds than that available at that time in their local markets. These
borrowings were converted from U.S. dollars to their local currencies using
currency swaps at the time of issuance.

Our United Kingdom operation is funded with wholesale deposits, commercial
paper, short and intermediate-term bank lines of credit, long-term debt and
securitizations of receivables. Deposits were $762.7 million at December 31,
2002 and $490.7 million at December 31, 2001. Commercial paper, bank and other
borrowings at year-end 2002 were $1.6 billion compared to $717.4 million a year
ago. Senior debt was $2.8 billion at both December 31, 2002 and 2001.

46

At December 31, 2002, $2.2 billion of the United Kingdom's total debt was
guaranteed by the parent company and $2.8 billion was guaranteed by HFC. HFC
receives a fee for providing the guarantee. Committed back-up lines of credit
for the United Kingdom were approximately $3.5 billion at December 31, 2002 of
which $1.5 billion was used. These lines have varying maturities through 2007.

At December 31, 2002, the U.K. had facilities with commercial banks under
which it may securitize up to $.2 billion of receivables. These conduit
facilities are renewable on an annual basis at the banks' option. At December
31, 2002, $.2 billion of receivables were securitized under these programs. The
amount available under the facilities will vary based on the timing and volume
of public securitization transactions. Through existing term bank financings and
new debt issuances, we believe the U.K. should continue to have adequate sources
of funds, which could be impacted from time to time by volatility in the capital
markets, if one or more of these facilities were unable to be renewed.

Our Canadian operation is funded with commercial paper, intermediate debt
and long-term debt. Intermediate and long-term debt totaled $970.8 million at
year-end 2002 compared to $851.1 million a year ago. Committed back-up lines of
credit for Canada were approximately $363 million at December 31, 2002. None of
these back-up lines were used in 2002. At December 31, 2002, certain of the
Canadian subsidiary's debt was guaranteed by HFC, who receives a fee for
providing the guarantee. The parent company has also guaranteed certain Canadian
bank financings; none of which were drawn at December 31, 2002.

Capital Expenditures We made capital expenditures of $159 million in 2002
and $175 million in 2001.

OFF-BALANCE-SHEET ARRANGEMENTS (INCLUDING SECURITIZATIONS AND
COMMITMENTS), SECURED FINANCINGS AND CONTRACTUAL CASH OBLIGATIONS

Securitizations and Secured Financings Securitizations (which are
structured to receive sale treatment under Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a Replacement of FASB Statement No. 125,"
("SFAS No. 140")) and secured financings (which do not receive sale treatment
under SFAS No. 140) of consumer receivables have been, and will continue to be,
a source of funding and liquidity for us. Securitizations and secured financings
are used to limit our reliance on the debt and equity markets and often are more
cost-effective than alternative funding sources.

At December 31, 2002, securitizations structured as sales represented 23
percent and secured financings represented 7 percent of the funding associated
with our managed portfolio. At December 31, 2001, securitizations structured as
sales represented 22 percent and secured financings represented 2 percent of the
funding associated with our managed portfolio.

In a securitization, a designated pool of non-real estate consumer
receivables 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 SFAS No. 140 and, therefore, is not consolidated. The QSPE funds
its receivable 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. At the time of sale, an interest-only strip receivable
is recorded, representing the present value of the cash flows we expect to
receive over the life of the securitized receivables, net of estimated credit
losses.

Certain securitization trusts, such as credit cards, are established at
fixed levels and, due to the revolving nature of the underlying receivables,
require the sale of new receivables into the trust to replace runoff so that the
principal dollar amount of the investors' interest remains unchanged. We refer
to such activity as replenishments. Once the revolving period ends, the
amortization period begins and the trust distributes principal payments to the
investors.

When loans are securitized in transactions structured as sales, we receive
cash proceeds from investors, net of transaction costs and expenses. These
proceeds are generally used to re-pay other debt and corporate obligations and
to fund new loans. The investors' share of finance charges and fees received
from the securitized loans is collected each month and is primarily used to pay
investors for interest and credit losses

47

and to pay us for servicing fees. We retain any excess cash flow remaining after
such payments are made to investors. As a result of the October 11, 2002
downgrade of our commercial paper debt ratings by S&P, we, as servicer of the
various securitization trusts, currently are required to transfer cash
collections to the trusts on a daily basis.

To help ensure that adequate funds are available to meet the cash needs of
the QSPE, we may retain various forms of interests in securitized assets through
overcollateralization, subordinated series, residual interests or spread
accounts which provide credit enhancement to investors. Overcollateralization is
created when the underlying receivables transferred to a QSPE exceed issued
securities. The retention of a subordinated series provides additional assurance
of payment to senior security holders. Residual interests are also referred to
as interest-only strip receivables and are rights to future cash flows arising
from the securitized receivables after the investors receive their contractual
return. Spread accounts are cash accounts which are funded from initial deposits
from proceeds at the time of sale and/or from excess spread that would otherwise
be returned to us. Investors and the securitization trusts have only limited
recourse to our assets for failure of debtors to pay. That recourse is limited
to our rights to future cash flows and any other subordinated interest that we
may retain. Cash flows related to the interest-only strip receivables and the
servicing of receivables are collected over the life of the underlying
securitized receivables.

Our retained securitization interests are not in the form of securities and
are included in receivables on our consolidated balance sheets. These retained
interests were comprised of the following at December 31, 2002 and 2001:

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 SFAS
No. 140. Therefore, the receivables and the underlying debt of the trust remain
on our balance sheet. We do not recognize a gain in a secured financing
transaction. Because the receivables and the debt remain on our balance sheet,
revenues and expenses are reported consistently with our owned balance sheet
portfolio. Using this source of funding results in similar cash flows as issuing
debt through alternative funding sources.

Our securitization and secured financing activity in 2002 exceeded that of
both prior year periods. The higher levels reflect our liquidity management
plans to limit reliance on short-term unsecured debt in

48

potentially volatile markets and were often a more cost-effective source of
funding than traditional medium and long-term unsecured debt funding sources.
Securitizations and secured financings were as follows:

Outstanding securitized receivables consisted of the following:

The following table summarizes the expected amortization of our securitized
receivables at December 31, 2002:

At December 31, 2002, the expected weighted-average remaining life of these
transactions was 1.7 years.

The securities issued with our securitizations may pay off sooner than
originally scheduled if certain events occur. For certain auto securitizations,
early payoff of securities may occur if established delinquency or loss levels
are exceeded. For all other securitizations, early payoff of the securities
begins if the annualized portfolio yield drops below a base rate or if certain
other events occur. We do not presently believe that any early payoff will take
place. If early payoff occurred, our funding requirements would increase. These

49

additional requirements could be met through new securitizations, issuance of
various types of debt or borrowings under existing back-up lines of credit. We
believe we would continue to have adequate sources of funds if an early payoff
event occurred.

At December 31, 2002, we had facilities with commercial and investment
banks under which we may securitize up to $19.7 billion of receivables. We may
securitize up to $13.5 billion of auto finance, MasterCard and Visa, private
label and personal non-credit card receivables and $6.25 billion of real estate
secured receivables using real estate secured conduit capacity that was
established in 2002. Draws on the real estate conduit facilities are structured
as secured financings for accounting purposes. The facilities are renewable on
an annual basis at the banks' option. At December 31, 2002, $11.8 billion of
auto finance, MasterCard and Visa, private label, and personal non-credit card
receivables and $2.3 billion of real estate secured receivables were securitized
under these programs. The amount available under the facilities will vary based
on the timing and volume of public securitization and secured financing
transactions. Through existing term bank financing and new debt issuances, we
believe we should continue to have adequate sources of funds, which could be
impacted from time to time by volatility in the financial markets, if one or
more of these facilities were unable to be renewed.

We believe the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. However, if the market for
securities backed by receivables were to change, we may be unable to securitize
our receivables or to do so at favorable pricing levels. Factors affecting our
ability to securitize receivables or to do so at cost-effective rates include
the overall credit quality of our securitized loans, the stability of the
securitization markets, the securitization market's view of our desirability as
an investment, and the legal, regulatory, accounting and tax environments
governing securitization transactions.

Commitments We also enter into commitments to meet the financing needs of
our customers. In most cases, we have the ability to reduce or eliminate these
open lines of credit. As a result, the amounts below do not necessarily
represent future cash requirements:

At December 31, 2002, our mortgage services business had commitments with
numerous correspondents to purchase up to $1.4 billion of real estate secured
receivables at fair market value, subject to availability based on underwriting
guidelines specified by our mortgage services business and at prices indexed to
general market rates. These commitments have terms of up to one year and can be
renewed upon mutual agreement.

50

Contractual Cash Obligations The following table summarizes our long-term
contractual cash obligations by period due at December 31, 2002:

These cash obligations could be funded primarily through cash collections
on receivables, from the issuance of new debt or through securitization of
receivables. Our receivables and other liquid assets generally have shorter
lives than the liabilities used to fund them.

RISK MANAGEMENT

We have a comprehensive program to address potential financial risks, such
as liquidity, interest rate, currency and counterparty credit risk. The Finance
Committee of the Board of Directors sets acceptable limits for each of these
risks annually and reviews the limits semi-annually. We maintain an overall risk
management strategy that uses a variety of interest rate and currency derivative
financial instruments to mitigate our exposure to fluctuations caused by changes
in interest rates and currency exchange rates. We manage our exposure to
interest rate risk primarily through the use of interest rate swaps, but also
use forwards, futures, options, and other risk management instruments. We manage
our exposure to currency risk primarily through the use of currency swaps,
options and forwards. We do not speculate on interest rate or foreign currency
market exposure and we do not use exotic or leveraged derivative financial
instruments.

Because we are predominantly capital markets funded, our ability to ensure
continuous access to these markets and maintain a diversified funding base is
important in meeting our funding needs. We have worked with a number of
investment banks to identify and implement the strategic initiatives required to
enhance future market access. Our ability to issue debt at competitive prices is
influenced by rating agencies' views of our credit quality, liquidity, capital
and earnings. As a result, we maintain close working relationships with each
rating agency to secure the highest possible rating on our debt and asset backed
securities. Additionally, access to capital markets is dependent upon a
well-informed investor base. We maintain a comprehensive, direct marketing
program to ensure our investors receive consistent and timely information
regarding our financial performance. The ability to fund our operations,
however, can be influenced by market factors outside of our control. Contingency
funding plans contemplating both general market and Household specific events
are prepared on a regular basis. Any shortfalls created by these events can be
mitigated through access to alternative sources of secured funding, asset sales
and/or reductions in receivable growth rates. Our contingency plans were
validated during 2002. In the second half of 2002, Household, along with other
large unsecured debt issuers, experienced a reduction in demand for our new
issue debt securities as general market conditions deteriorated. Our
institutional debt issuance plans were adjusted lower while alternative sources
of funding increased. Through the expansion of our retail note program,
increased utilization of securitizations
51

and secured financings and selective asset sales, we were able to accommodate
our 2002 funding needs. Since meeting our previously announced capital goals and
announcing the planned merger with HSBC in the fourth quarter of 2002, our
access to the capital markets has improved and our funding costs have decreased
as evidenced by $1.5 billion in offerings that we completed in the fourth
quarter of 2002 and the $4.0 billion in offerings that we completed in January
through March 19, 2003. We anticipate further improvement as the markets
stabilize and the HSBC merger is completed.

Generally, the lives of our assets are shorter than the lives of the
liabilities used to fund them. This initially reduces liquidity risk by ensuring
that funds are received prior to liabilities becoming due. See "Liquidity and
Capital Resources" on pages 42 to 47 for further discussion of our liquidity
position.

Interest rate risk is defined as the impact of changes in market interest
rates on our earnings. We use simulation models to measure the impact of changes
in interest rates on net interest margin. The key assumptions used in these
models include expected loan payoff rates, loan volumes and pricing, cash flows
from derivative financial instruments and changes in market conditions. These
assumptions are based on our best estimates of actual conditions. The models
cannot precisely predict the actual impact of changes in interest rates on our
earnings because these assumptions are highly uncertain. At December 31, 2002,
our interest rate risk levels were substantially below those allowed by our
existing policy.

We estimate that our after-tax earnings would decline by about $53 million
at December 31, 2002 and $39 million at December 31, 2001 following a gradual
100 basis point increase in interest rates over a twelve month period and would
increase by about $52 million at December 31, 2002 and $37 million at December
31, 2001 following a gradual 100 basis point decrease in interest rates. These
estimates include the impact of the derivative positions we have entered into.
These estimates also assume we would not take any corrective action to lessen
the impact and, therefore, exceed what most likely would occur if rates were to
change.

We generally fund our assets with liabilities that have similar interest
rate features. This initially reduces interest rate risk. Over time, however,
customer demand for our receivable products shifts between fixed rate and
floating rate products, based on market conditions and preferences. These shifts
in loan products produce different interest rate risk exposures. We use
derivative financial instruments, principally swaps, to manage these exposures.
Generally, we use derivatives that are either effective hedges, of which 84
percent qualify for the short-cut method of accounting under SFAS No. 133, or
are short-term (less than one year) economic hedges which offset the economic
risk inherent in our balance sheet. As a result, we do not believe that using
these derivatives will result in a material mark-to-market income adjustment in
any period.

The primary exposure on our interest rate swap portfolio is counterparty
credit risk. Counterparty credit risk is the risk that the counterparty to a
transaction fails to perform according to the terms of the contract. We control
counterparty credit risk in derivative instruments through established credit
approvals, risk control limits and ongoing monitoring procedures. Counterparty
limits have been set and are closely monitored as part of the overall risk
management process. These limits ensure that we do not have significant exposure
to any individual counterparty. Based on peak exposure at December 31, 2002, a
large majority of our derivative counterparties were rated AA- or better.
Certain swap agreements require that payments be made to, or received from, the
counterparty when the fair value of the agreement reaches a certain level. We
have never suffered a loss due to counterparty failure.

We also use interest rate futures, interest rate forwards and purchased
options to reduce interest rate risk. We use these instruments primarily to
hedge interest rate changes on our liabilities. For example, short-term
borrowings expose us to interest rate risk because the interest rate we must pay
to others may change faster than the rate we receive from borrowers. Futures,
forwards and options are used to fix our interest cost on these borrowings at a
desired rate and are held until the interest rate on the asset changes. We then
terminate, or close out, the derivative financial instrument. These terminations
are necessary because the date the interest rate changes is usually not the same
as the expiration date of the derivative contracts.

Foreign currency exchange risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange rates.
We enter into foreign exchange rate forward contracts and currency swaps to
minimize currency risk associated with changes in the value of
foreign-denominated assets

52

or liabilities. Currency swaps convert principal and interest payments on debt
issued from one currency to another. For example, we may issue Euro-denominated
debt and then execute a currency swap to convert the obligation to U.S. dollars.
We have foreign subsidiaries located in the United Kingdom and Canada. We
periodically enter into foreign exchange contracts to hedge portions of our
investments in foreign subsidiaries. Our foreign currency exchange risk on these
investments is limited to the unhedged portion of the net investment in our
foreign subsidiaries. We estimate that a 10 percent adverse change in the
British pound/ U.S. dollar or Canadian dollar/U.S. dollar exchange rate would
result in a decrease in common shareholders' equity of $27 million at December
31, 2002 and $72 million at December 31, 2001 and would not have a material
impact on net income.

See Note 11 to the accompanying consolidated financial statements,
"Derivative Financial Instruments and Concentrations of Credit Risk," for
additional information related to interest rate risk management and Note 15,
"Fair Value of Financial Instruments," for information regarding the fair value
of certain financial instruments.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation Number 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("Interpretation No. 45"). This Interpretation provides guidance on
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
are effective for financial statement periods ending after December 15, 2002.
The initial measurement and recognition provisions are applicable to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45's measurement and recognition provisions will not have a material impact to
our financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation Number 46,
"Consolidation of Variable Interest Entities" ("Interpretation No. 46").
Interpretation No. 46 clarifies the application of Accounting Research Bulletin
Number 51, "Consolidated Financial Statements" to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
Qualifying special purpose entities as defined by SFAS No. 140 are excluded from
the scope of Interpretation 46. Interpretation No. 46 applies immediately to all
variable interest entities created after January 31, 2003 and is effective for
fiscal periods beginning after July 1, 2003 for existing variable interest
entities. The adoption of Interpretation No. 46 will not have a material impact
to our financial position or results of operations.

The FASB is expected to issue Statement Number 149, "Accounting for
Financial Instruments with Characteristics of Liabilities, Equity, or Both"
("SFAS No. 149") in the second quarter of 2003. This limited scope statement
will prescribe changes to the classification of preferred securities of
subsidiary trusts and the accounting for forward purchase contracts issued by a
company in its own stock. SFAS No. 149 will require all preferred securities of
subsidiary trusts to be classified as debt on the consolidated balance sheet and
the related dividends as interest expense. Upon adoption of SFAS No. 149, we
will be required to reclassify company obligated mandatorily redeemable
preferred securities of subsidiary trusts totaling $975 million to senior and
senior subordinated debt. Dividends on these securities are currently reported
as interest expense in our consolidated statements of income. SFAS No. 149 will
also require that all forward purchase contracts issued by a company in its own
stock with alternative settlement methods be recorded as an asset or liability
and measured at fair value with changes in fair value recorded in earnings. The
statement is effective upon issuance except that it will be effective beginning
July 1, 2003 for existing forward purchase contacts. Because we currently expect
to close out our remaining forward contracts prior to July 1, 2003, we do not
expect adoption of SFAS No. 149 will have a material impact to our financial
position or results of operations.

53

GLOSSARY OF TERMS

Acquired Intangibles -- Represent the market value premium attributable to
our credit card accounts in excess of the aggregate outstanding credit card
loans acquired.

Affinity Credit Card -- A MasterCard or Visa account jointly sponsored by
the issuer of the card and an organization whose members share a common interest
(e.g., the AFL-CIO Union Plus(R) credit card program).

Auto Finance Loans -- Closed-end loans secured by a first lien on a
vehicle.

Co-Branded Credit Card -- A MasterCard or Visa account that is jointly
sponsored by the issuer of the card and another corporation (e.g., the GM
Card(R)). The account holder typically receives some form of added benefit for
using the card.

Common Dividend Payout Ratio -- Dividends declared per common share divided
by net income per share.

Consumer Net Charge-off Ratio -- Net charge-offs of consumer receivables
divided by average consumer receivables outstanding.

Contractual Delinquency -- A method of determining aging of past due
accounts based on the status of payments under the loan. Delinquency status may
be affected by account management policies and practices such as the restructure
of accounts, forbearance agreements, extended payment plans, modification
arrangements, consumer credit counseling accommodations, loan rewrites and
deferments.

Efficiency Ratio -- Ratio of total costs and expenses less policyholders'
benefits to net interest margin and other revenues less policyholders' benefits.

Fee Income -- Income associated with interchange on credit cards and late
and other fees from the origination or acquisition of loans.

Foreign Exchange Contract -- A contract used to minimize our exposure to
changes in foreign currency exchange rates.

Futures Contract -- An exchange-traded contract to buy or sell a stated
amount of a financial instrument or index at a specified future date and price.

Goodwill -- Represents the purchase price over the fair value of
identifiable assets acquired less liabilities assumed from business
combinations.

Interchange Fees -- Fees received for processing a credit card transaction
through the MasterCard or Visa network.

Interest-only Strip Receivables -- Represent our contractual right to
receive interest and other cash flows from our securitization trusts after the
investors receive their contractual return.

Interest Rate Swap -- Contract between two parties to exchange interest
payments on a stated principal amount (notional principal) for a specified
period. Typically, one party makes fixed rate payments, while the other party
makes payments using a variable rate.

LIBOR -- London Interbank Offered Rate. A widely quoted market rate which
is frequently the index used to determine the rate at which we borrow funds.

Liquidity -- A measure of how quickly we can convert assets to cash or
raise additional cash by issuing debt.

Managed Basis -- Method of reporting whereby net interest margin, other
revenues and credit losses on securitized receivables structured as sales are
reported as if those receivables were still held on our balance sheet.

Managed Receivables -- The sum of receivables on our balance sheet and
those that we service for investors as part of our asset securitization program.

54

MasterCard and Visa Receivables -- Receivables generated through customer
usage of MasterCard and Visa credit cards.

Net Interest Margin -- Interest income from receivables and noninsurance
investment securities reduced by interest expense.

Nonaccrual Loans -- Loans on which we no longer accrue interest because
ultimate collection is unlikely.

Options -- A contract giving the owner the right, but not the obligation,
to buy or sell a specified item at a fixed price for a specified period.

Owned Receivables -- Receivables held on our balance sheet.

Personal Homeowner Loan ("PHL") -- A real estate loan that has been
underwritten and priced as an unsecured loan. These loans are reported as
personal non-credit card receivables.

Personal Non-Credit Card Receivables -- Unsecured lines of credit or
closed-end loans made to individuals.

Private Label Credit Card -- A line of credit made available to customers
of retail merchants evidenced by a credit card bearing the merchant's name.

Products Per Customer -- A measurement of the number of products held by an
individual customer whose borrowing relationship with Household is considered in
good standing. Products include all loan and insurance products.

Real Estate Secured Loan -- Closed-end loans and revolving lines of credit
secured by first or second liens on residential real estate.

Receivables Serviced with Limited Recourse -- Receivables we have
securitized in transactions structured as sales and for which we have some level
of potential loss if defaults occur.

Refund Anticipation Loan ("RAL") Program -- A cooperative program with H&R
Block Tax Services, Inc. and certain of its franchises, along with other
independent tax preparers, to provide loans to customers entitled to tax refunds
and who electronically file their returns with the Internal Revenue Service.

Return on Average Common Shareholders' Equity -- Net income less dividends
on preferred stock divided by average common shareholders' equity.

Return on Average Managed Assets -- Net income divided by average managed
assets.

Return on Average Owned Assets -- Net income divided by average owned
assets.

Secured Financing -- The process where interests in a dedicated pool of
financial assets, such as real estate secured receivables, are sold to
investors. Typically, the receivables are transferred to a trust that issues
interests that are sold to investors. These transactions do not receive sale
treatment under SFAS No. 140. The receivables and related debt remain on our
balance sheet.

Securitization -- The process where interests in a dedicated pool of
financial assets, such as credit card, auto or personal non-credit card
receivables, are sold to investors. Typically, the receivables are sold to a
trust that issues interests that are sold to investors. These transactions are
structured to receive sale treatment under SFAS No. 140. The receivables are
then removed from our owned basis balance sheet.

Securitization Revenue -- Includes income associated with the current and
prior period securitizations structured as sales of receivables with limited
recourse. Such income includes gains on sales, net of our estimate of probable
credit losses under the recourse provisions, servicing income and excess spread
relating to those receivables.

Tangible Common Equity -- Common shareholders' equity (excluding unrealized
gains and losses on investments and cash flow hedging instruments) less acquired
intangibles and goodwill.

55

Tangible Shareholders' Equity -- Common shareholders' equity (excluding
unrealized gains and losses on investments and cash flow hedging instruments),
preferred stock, company obligated mandatorily redeemable preferred securities
of subsidiary trusts and, in 2002, senior debt which contains mandatorily
redeemable obligations to purchase our common stock in 2006 (the Adjustable
Conversion-Rate Equity Security Units), less acquired intangibles and goodwill.

Tangible Managed Assets -- Total managed assets less acquired intangibles,
goodwill and derivative financial assets.

Whole Loan Sales -- Sales of loans to third parties without recourse.
Typically, these sales are made pursuant to our liquidity or capital management
plans.

56

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CREDIT QUALITY STATISTICS -- OWNED BASIS

57

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CREDIT QUALITY STATISTICS -- MANAGED BASIS

58

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY -- OWNED RECEIVABLES

59

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY -- MANAGED RECEIVABLES

60

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

NET INTEREST MARGIN -- 2002 COMPARED TO 2001 (OWNED BASIS)

(1) Nonaccrual loans are included in average outstanding balances.
(2) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total interest variance. For
total receivables, total interest-earning assets and total debt, the rate
and volume variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do not represent
an arithmetic sum of the individual components.
(3) Represents net interest margin as a percent of average interest-earning
assets.
(4) Represents the difference between the yield earned on interest-earning
assets and the cost of the debt used to fund the assets.
(5) The net interest margin analysis includes the following for foreign
businesses:

61

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

NET INTEREST MARGIN -- 2001 COMPARED TO 2000 (OWNED BASIS)

62

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

NET INTEREST MARGIN -- 2002 COMPARED TO 2001 AND 2000 (MANAGED BASIS)

Net Interest Margin on a Managed Basis As receivables are securitized
rather than held in our portfolio, net interest margin is reclassified to
securitization revenue. We retain a substantial portion of the profit inherent
in the receivables while increasing liquidity. The comparability of net interest
margin between periods may be impacted by the level and type of receivables
securitized. Net interest margin on a managed basis includes finance income
earned on our owned receivables as well 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.

- ---------------

(1) Nonaccrual loans are included in average outstanding balances.

(2) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total interest variance. For
total receivables, total interest-earning assets and total debt, the rate
and volume variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do not represent
an arithmetic sum of the individual components.

(3) Represents net interest margin as a percent of average interest-earning
assets.

(4) Represents the difference between the yield earned on interest-earning
assets and cost of the debt used to fund the assets.

63

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information required by this Item is included in sections of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations on the following pages: "Liquidity and Capital Resources", pages 42
to 47, " Off-Balance Sheet Arrangements (Including Securitizations and
Commitments), Secured Financings and Contractual Cash Obligations", pages 47 to
51, and "Risk Management", pages 51 to 53.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our 2002 Financial Statements meet the requirements of Regulation S-X. The
2002 Financial Statements and supplementary financial information specified by
Item 302 of Regulation S-K are set forth below.

64

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial
statements.

65

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

- ---------------

* 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 15,
2031, January 30, 2031, June 30, 2030, December 31, 2037, and June 30, 2025,
respectively.

The accompanying notes are an integral part of these consolidated financial
statements.

66

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.

67

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDERS' EQUITY

- ---------------

(1) Accumulated other comprehensive income (loss) includes the following:

The accompanying notes are an integral part of these consolidated financial
statements.
68

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDERS' EQUITY -- (CONTINUED)

COMPREHENSIVE INCOME

We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," on January 1, 2001. The adoption was accounted for as a cumulative
effect of a change in accounting principle. The table below discloses
reclassification adjustments and the related tax effects allocated to each
component of other comprehensive income (expense) including unrealized gains
(losses) on cash flow hedging instruments, unrealized gains (losses) on
investments and interest-only strip receivables and foreign currency translation
and other adjustments.

The accompanying notes are an integral part of these consolidated financial
statements.
69

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Household International, Inc. and subsidiaries ("Household") is a leading
provider of consumer lending products to middle-market consumers in the United
States, United Kingdom and Canada. Household may also be referred to in these
notes to the consolidated financial statements as "we," "us" or "our." Our
lending products include real estate secured loans, auto finance loans,
MasterCard* and Visa* credit cards, private label credit cards and personal
non-credit card loans. We also offer tax refund anticipation loans in the United
States and credit and specialty insurance in the United States, the United
Kingdom and Canada. We have three reportable segments: Consumer, Credit Card
Services, and International. Our Consumer segment consists of our branch-based
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 ("U.K.") and Canada.

Merger with HSBC Holdings plc In November 2002, Household and HSBC
Holdings plc ("HSBC") announced they had entered into a definitive merger
agreement under which Household will be merged into a wholly owned subsidiary of
HSBC, subject to the terms and conditions of the merger agreement. Under the
terms of the merger agreement, holders of Household common stock will receive
2.675 HSBC ordinary shares or 0.535 HSBC American Depositary Shares for each
share of Household common stock. Prior to the merger, outstanding shares of our
$4.30, $4.50 and 5.00 percent preferred stock will be redeemed pursuant to their
respective terms. In connection with the merger, the outstanding shares of our
7.625, 7.60, 7.50 and 8.25 percent cumulative preferred stock will be converted
into the right to receive cash from HSBC in an amount equal to their liquidation
value, plus accrued and unpaid dividends which is an aggregate amount of $1.1
billion. Company obligated mandatorily redeemable preferred securities of
subsidiary trusts will remain as outstanding obligations following the merger.

Pursuant to their terms, the 8.875 percent Adjustable Conversion-Rate
Equity Security Units will remain outstanding after the merger, with the
purchase contracts that form a portion of such units becoming contracts to
purchase HSBC ordinary shares in lieu of Household shares. Outstanding stock
options and restricted stock rights ("RSRs") granted under our various equity
plans will be assumed by HSBC and converted into options to purchase or rights
to receive ordinary shares of HSBC. Stock options and RSRs which were issued
prior to November 2002 will vest and become outstanding shares of HSBC upon
completion of the merger. The employee stock purchase plan was terminated on
March 7, 2003 and Household stock was purchased on that date. These shares of
Household common stock will be converted to HSBC shares at the time of the
merger. All rights to HSBC shares will be adjusted based upon the agreed-upon
merger exchange ratio.

Consummation of the merger is subject to regulatory approvals, the approval
of the stockholders of both Household and HSBC and other customary conditions.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation The consolidated financial statements include
the accounts of Household International, Inc. and all subsidiaries. Unaffiliated
trusts to which we have transferred securitized receivables which are qualifying
special purpose entities ("QSPE") as defined by Statement of Financial
Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB
Statement No. 125," are not consolidated. All significant intercompany accounts
and transactions have been eliminated.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts

- ---------------

*MasterCard is a registered trademark of MasterCard International,
Incorporated and VISA is a registered trademark of VISA USA, Inc.
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reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Certain prior year amounts have been
reclassified to conform to the current year's presentation.

Investment Securities We maintain investment portfolios (comprised
primarily of debt securities and money market funds) in both our noninsurance
and insurance operations. Our entire investment securities portfolio was
classified as available-for-sale at December 31, 2002 and 2001.
Available-for-sale investments are intended to be invested for an indefinite
period but may be sold in response to events we expect to occur in the
foreseeable future. These investments are carried at fair value. Unrealized
holding gains and losses on available-for-sale investments are recorded as
adjustments to common shareholders' equity in accumulated other comprehensive
income, net of income taxes. Any decline in the fair value of investments which
is deemed to be other than temporary is charged against current earnings.

Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the investment portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.

Receivables Receivables are carried at amortized cost. Finance income is
recognized using the effective yield method. Premiums and discounts on purchased
receivables are recognized as adjustments to the yield of the related
receivables. Origination fees, which include points on real estate secured
loans, are deferred and amortized to finance income over the estimated life of
the related receivables, except to the extent they offset directly related
lending costs. Net deferred origination fees, excluding MasterCard and Visa,
totaled $522.7 million at December 31, 2002. MasterCard and Visa annual fees are
netted with direct lending costs, deferred, and amortized on a straight-line
basis over one year. Deferred MasterCard and Visa annual fees, net of direct
lending costs related to these receivables, totaled $104.7 million at December
31, 2002 and $105.4 million at December 31, 2001.

Insurance reserves and unearned premiums applicable to credit risks on
consumer receivables are treated as a reduction of receivables in the balance
sheet, since payments on such policies generally are used to reduce outstanding
receivables.

Provision and Credit Loss Reserves Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees, in the existing owned
portfolio. Probable losses are estimated for consumer receivables based on
delinquency, restructure status and past loss experience. Credit loss reserves
take into account whether loans have been restructured, rewritten or are subject
to forbearance, credit counseling accommodation, modification, extension or
deferment. Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any, for the loan. For
commercial loans, probable losses are calculated using estimates of amounts and
timing of future cash flows expected to be received on loans. In addition, loss
reserves on consumer receivables are maintained to reflect our judgment of
portfolio risk factors which may not be fully reflected in the statistical
calculation which uses roll rates and migration analysis. Roll rates and
migration analysis are techniques used to estimate the likelihood that a loan
will progress through the various delinquency buckets and ultimately charge-off.
Risk factors considered in establishing loss reserves on consumer receivables
include recent growth, product mix, bankruptcy trends, geographic
concentrations, economic conditions and current levels in charge-off and
delinquency. Charge-off policies are also considered when establishing loss
reserve requirements to ensure appropriate allowances exist for products with
longer charge-off periods. We also consider key ratios such as reserves to non
performing loans and reserves as a percentage of net charge-offs in developing
our loss reserves estimate. Loss reserve estimates are reviewed periodically and
adjustments are reported in earnings when they become known. As these estimates
are influenced by factors outside our control, such as consumer payment patterns
and economic conditions, there is uncertainty inherent in these estimates,
making it reasonably possible that they could change.

Our policies and practices for the collection of consumer receivables,
including restructuring policies and practices, permit us to reset the
contractual delinquency status of an account to current, based on indicia or
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criteria which, in our judgment, evidence continued payment probability. Such
restructuring policies and practices vary by product and are designed to manage
customer relationships, maximize collections and avoid foreclosure or
repossession if reasonably possible. Approximately two-thirds of all
restructured receivables are secured products which may have less loss severity
exposure because of the underlying collateral.

The main criteria for our restructuring policies and practices vary by
product. The fact that the restructuring criteria may be met for a particular
account does not require us to restructure that account, and the extent to which
we restructure accounts that are eligible under the criteria will vary depending
upon our view of prevailing economic conditions and other factors which may
change from period to period. In addition, for some products, accounts may be
restructured without receipt of a payment in certain special circumstances (e.g.
upon reaffirmation of a debt owed to us in connection with a Chapter 7
bankruptcy proceeding). As indicated, our account management policies and
practices are designed to manage customer relationships and to help maximize
collection opportunities. We use account restructuring as an account and
customer management tool in an effort to increase the value of our account
relationships, and accordingly, the application of this tool is subject to
complexities, variations and changes from time to time. These policies and
practices are continually under review and assessment to assure that they meet
the goals outlined above, and accordingly, we modify or permit exceptions to
these general policies and practices from time to time. This should be taken
into account when comparing restructuring statistics from different periods.

In addition to our restructuring policies and practices, we employ other
account management techniques, which we typically use on a more limited basis,
that are similarly designed to manage customer relationships and maximize
collections. These can include, at our discretion, actions such as extended
payment arrangements, Credit Card Services consumer credit counseling
accommodations, forbearance, modifications, loan rewrites and/or deferments
pending a change in circumstances. We typically enter into forbearance
agreements, extended payment and modification arrangements or deferments with
individual borrowers in transitional situations, usually involving borrower
hardship circumstances or temporary setbacks that are expected to affect the
borrower's ability to pay the contractually specified amount for some period or
time. These actions vary by product and are under continual review and
assessment to determine that they meet the goals outlined above. For example,
under a forbearance agreement, we may agree not to take certain collection or
credit agency reporting actions with respect to missed payments, often in return
for the borrower's agreeing to pay us an extra amount in connection with making
future payments. In some cases, a forbearance agreement, as well as extended
payment or modification arrangements, deferments, consumer credit counseling
accommodations, or loan rewrites may involve us agreeing to lower the
contractual payment amount or reduce the periodic interest rate. In most cases,
the delinquency status of an account is considered to be current if the borrower
immediately begins payment under the new account terms, although if the agreed
terms are not adhered to by the customer, the account status may be reversed and
collection actions resumed. When we use one of these account management
techniques, we may treat the account as being contractually current and will not
reflect it as a delinquent account in our delinquency statistics. We generally
consider loan rewrites to involve an extension of a new loan, and such new loans
are not reflected in our delinquency or restructuring statistics.

72

Charge-Off and Nonaccrual Policies Our consumer charge-off and nonaccrual
policies vary by product as follows:

- ---------------

(1) For our United Kingdom business, interest income accruals are suspended when
principal or interest payments are more than three months contractually
delinquent.

(2) For our United Kingdom business, real estate secured carrying values in
excess of net realizable value are charged-off at time of sale.

(3) For our Canada business, the private label and personal non-credit card
charge-off policy is also no payment received in six months, but in no event
to exceed 18 months contractually delinquent.

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Charge-off involving a bankruptcy for MasterCard and Visa receivables
occurs by the end of the month 60 days after notification and, for private label
receivables, by the end of the month 90 days after notification. For auto
finance receivables, bankrupt accounts are charged off no later than the end of
the month in which the loan becomes 210 days contractually delinquent.

Receivables Sold and Serviced with Limited Recourse and Securitization
Revenue Certain real estate secured, auto finance, MasterCard and Visa, private
label and personal non-credit card receivables have been securitized and sold to
investors with limited recourse. We have retained the servicing rights to these
receivables. Recourse is limited to our rights to future cash flow and any
subordinated interest that we may retain. Upon sale, the receivables are removed
from the balance sheet and a gain on sale is recognized for the difference
between the carrying value of the receivables and the adjusted sales proceeds.
The adjusted sales proceeds include cash received and the present value estimate
of future cash flows to be received over the lives of the sold receivables.
Future cash flows are based on estimates of prepayments, the impact of interest
rate movements on yields of receivables and securities issued, delinquency of
receivables sold, servicing fees and other factors. The resulting gain is also
adjusted by a provision for estimated probable losses under the recourse
provisions based on historical experience and estimates of expected future
performance. Gains on sale net of recourse provisions, servicing income and
excess spread relating to securitized receivables are reported in the
accompanying consolidated statements of income as securitization revenue.

In connection with these transactions, we record an interest-only strip
receivable, representing our contractual right to receive interest and other
cash flows from our securitization trusts. Our interest-only strip receivables
are reported at fair value using discounted cash flow estimates as a separate
component of receivables net of our estimate of probable losses under the
recourse provisions. Cash flow estimates include estimates of prepayments, the
impact of interest rate movements on yields of receivables and securities
issued, delinquency of receivables sold, servicing fees and estimated probable
losses under the recourse provisions. Unrealized gains and losses are recorded
as adjustments to common shareholders' equity in accumulated other comprehensive
income, net of income taxes. Our interest-only strip receivables are reviewed
for impairment quarterly or earlier if events indicate that the carrying value
may not be recovered. Any decline in the fair value of the interest-only strip
receivable which is deemed to be other than temporary is charged against current
earnings.

We have also, in certain cases, retained other subordinated interests in
these securitizations. Neither the interest-only strip receivables nor the other
subordinated interests are in the form of securities.

Properties and Equipment, Net Properties and equipment are recorded at
cost, net of accumulated depreciation and amortization. For financial reporting
purposes, depreciation is provided on a straight-line basis over the estimated
useful lives of the assets which generally range from 3 to 40 years.

Leasehold improvements are amortized over the lesser of the economic useful
life of the improvement or the term of the lease. Maintenance and repairs are
expensed as incurred.

Repossessed Collateral Real estate owned is valued at the lower of cost or
fair value less estimated costs to sell. These values are periodically reviewed
and reduced, if necessary. Costs of holding real estate and related gains and
losses on disposition, are credited or charged to operations as incurred as a
component of operating expense. Repossessed vehicles, net of loss reserves when
applicable, are recorded at the lower of the estimated fair market value or the
outstanding receivable balance.

Insurance Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the nature
and terms of the underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported and incurred but
not yet reported losses. Liabilities for future benefits on annuity contracts
and specialty and corporate owned life insurance products are based on actuarial
assumptions as to investment yields, mortality and withdrawals.

Acquired Intangibles, Net Acquired intangibles consist primarily of
acquired credit card relationships which are amortized on a straight-line basis
over their estimated useful lives. These lives vary by portfolio and

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initially ranged from 4 to 15 years. Acquired intangibles are reviewed for
impairment using discounted cash flows whenever events indicate that the
carrying amounts may not be recoverable.

Goodwill Goodwill represents the purchase price over the fair value of
identifiable assets acquired less liabilities assumed from business
combinations. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142") which changed the accounting for
goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill recorded in past business combinations ceased upon our
adoption of the statement. Prior to January 1, 2002, goodwill was amortized on a
straight-line basis over periods not exceeding 25 years and was reviewed for
impairment using undiscounted cash flows. Beginning January 1, 2002, goodwill is
reviewed for impairment annually using discounted cash flows but may be recorded
earlier if circumstances indicate that the carrying amount may not be
recoverable. We consider significant and long-term changes in industry and
economic conditions to be our primary indicator of potential impairment.

Treasury Stock We account for repurchases of common stock using the cost
method with common stock in treasury classified in the balance sheets as a
reduction of common shareholders' equity. Treasury stock is reissued at average
cost.

Derivative Financial Instruments Effective January 1, 2001, we adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), as amended. Under SFAS No. 133, all derivatives are recognized
on the balance sheet at their fair value. On the date the derivative contract is
entered into, we designate the derivative as a fair value hedge, a cash flow
hedge, a hedge of a net investment in a foreign operation, or a non-hedging
derivative. Fair value hedges include hedges of the fair value of a recognized
asset or liability and certain foreign currency hedges. Cash flow hedges include
hedges of the variability of cash flows to be received or paid related to a
recognized asset or liability and certain foreign currency hedges. Changes in
the fair value of derivatives designated as fair value hedges, along with the
change in fair value on the hedged asset or liability that is attributable to
the hedged risk, are recorded in current period earnings.

Changes in the fair value of derivatives designated as cash flow hedges, to
the extent effective as a hedge, are recorded in accumulated other comprehensive
income and reclassified into earnings in the period during which the hedged item
affects earnings. Changes in the fair value of derivatives used to hedge our net
investment in foreign subsidiaries, to the extent effective as a hedge, are
recorded in common shareholders' equity as a component of the cumulative
translation adjustment account within accumulated other comprehensive income.
Changes in the fair value of derivative instruments not designated as hedging
instruments and ineffective portions of changes in the fair value of hedging
instruments are recognized in other income in the current period.

We formally document all relationships between hedging instruments and
hedged items. This documentation includes our risk management objective and
strategy for undertaking various hedge transactions, as well as how hedge
effectiveness and ineffectiveness will be measured. This process includes
linking derivatives to specific assets and liabilities on the balance sheet. We
also formally assess, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, we discontinue hedge
accounting prospectively.

When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective hedge, the derivative will
continue to be carried on the balance sheet at its fair value, with changes in
its fair value recognized in current period earnings. For fair value hedges, the
formerly hedged asset or liability will no longer be adjusted for changes in
fair value and any previously recorded adjustments to the carrying value of the
hedged asset or liability will be amortized in the same manner that the hedged
item affects income. For cash flow hedges, amounts previously recorded in
accumulated other comprehensive income will be reclassified into income as
earnings are impacted by the variability in the cash flows of the hedged item.

75

If the hedging instrument is terminated early, the derivative is removed
from the balance sheet. Accounting for the adjustments to the hedged asset or
liability or adjustments to accumulated other comprehensive income are the same
as described above when a derivative no longer qualifies as an effective hedge.

If the hedged asset or liability is sold or extinguished, the derivative
will continue to be carried on the balance sheet at its fair value, with changes
in its fair value recognized in current period earnings. The hedged item,
including previously recorded mark-to-market adjustments, is derecognized
immediately as a component of the gain or loss upon disposition.

Foreign Currency Translation We have foreign subsidiaries located in the
United Kingdom and Canada. The functional currency for each foreign subsidiary
is its local currency. Assets and liabilities of these subsidiaries are
translated at the rate of exchange in effect on the balance sheet date.
Translation adjustments resulting from this process are accumulated in common
shareholders' equity as a component of accumulated other comprehensive income.
Income and expenses are translated at the average rate of exchange prevailing
during the year.

We periodically enter into forward exchange contracts and foreign currency
options to hedge our investment in foreign subsidiaries. After-tax gains and
losses on contracts to hedge foreign currency fluctuations are accumulated in
common shareholders' equity as a component of accumulated other comprehensive
income. Effects of foreign currency translation in the statements of cash flows
are offset against the cumulative foreign currency adjustment, except for the
impact on cash. Foreign currency transaction gains and losses are included in
income as they occur.

Stock-Based Compensation In 2002, we adopted the fair value method of
accounting for our stock option and employee stock purchase plans. We elected to
recognize stock compensation cost prospectively for all new awards granted under
those plans beginning January 1, 2002 as provided under SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure (an
amendment of FASB Statement No. 123") ("SFAS No. 148"). Prior to 2002, we
applied the recognition and measurement provisions of APB No. 25, "Accounting
for Stock Issued to Employees" in accounting for those plans. No compensation
expense for these plans is reflected in 2001 or 2000 net income as all employee
stock options granted prior to January 1, 2002 had an exercise price equal to
the market value of the underlying common stock on the date of grant and the
purchase price for the shares issued under the employee stock purchase plan was
not less than 85 percent of the market price. Because option expense is
recognized over the vesting period of the awards, generally four years,
compensation expense included in the determination of net income for 2002 is
less than that which would have been recognized if the fair value method had
been applied to all awards since the original effective date of FASB Statement
No. 123.

Compensation expense relating to restricted stock rights ("RSRs") is based
upon the market value of the RSRs on the date of grant and is charged to
earnings over the vesting period of the RSRs, generally five years.

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The following table illustrates the effect on net income and earnings per
share if the fair value method had been applied to all outstanding and unvested
awards in each period.

The pro forma compensation expense included in the table above may not be
representative of the actual effects on net income for future years.

Income Taxes Federal income taxes are accounted for utilizing the
liability method. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Investment tax credits generated
by leveraged leases are accounted for using the deferral method.

2. ACQUISITIONS AND DIVESTITURES

During the fourth quarter of 2002, in conjunction with our efforts to make
the most efficient use of our capital and in recognition that the continued
operation of Household Bank, f.s.b. (the "Thrift") was not in our long-term
strategic interest, we completed the sale of substantially all of the remaining
assets and deposits of the Thrift. Disposition of Thrift assets and deposits
included the sale of real estate secured receivables totaling $3.6 billion, the
maturity of investment securities totaling $2.2 billion and the sale of retail
certificates of deposit totaling $4.3 billion. A loss of $240.0 million
(after-tax) was recorded on the disposition of these assets and deposits.

On February 7, 2000, we purchased all of the outstanding capital stock of
Renaissance Holdings, Inc. ("Renaissance"), a privately held issuer of secured
and unsecured credit cards to subprime customers, for approximately $300 million
of our common stock and cash. The acquisition provided us with an established
platform for growing the subprime credit card business and expanding our product
offerings to customers and prospects in our other businesses. The acquisition
was accounted for as a purchase and, accordingly, Renaissance's operations have
been included in our results of operations since February 7, 2000.

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3. INVESTMENT SECURITIES

Proceeds from the sale of available-for-sale investments totaled
approximately $.6 billion in 2002, $.7 billion in 2001 and $.2 billion in 2000.
We realized gross gains of $18.8 million in 2002, $12.9 million in 2001 and $2.2
million in 2000 and gross losses of $11.8 million in 2002, $1.7 million in 2001
and $1.4 million in 2000 on those sales.

The gross unrealized gains (losses) on available-for-sale investment
securities were as follows:

See Note 15, "Fair Value of Financial Instruments," for further discussion
of the relationship between the fair value of our assets and liabilities.

Contractual maturities of and yields on investments in debt securities were
as follows:

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(1) Computed by dividing annualized interest by the amortized cost of respective
investment securities.

4. RECEIVABLES

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Foreign receivables included in owned receivables were as follows:

Foreign owned receivables represented 9 percent of owned receivables at
December 31, 2002 and 7 percent at December 31, 2001.

The outstanding balance of receivables serviced with limited recourse
consisted of the following:

The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:

We maintain facilities with third parties which provide for the
securitization or secured financing of receivables on both a revolving and
non-revolving basis totaling $19.7 billion, of which $14.1 billion were utilized
at December 31, 2002. The amount available under these facilities will vary
based on the timing and volume of public securitization transactions.

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Contractual maturities of owned receivables were as follows:

A substantial portion of consumer receivables, based on our experience,
will be renewed or repaid prior to contractual maturity. The above maturity
schedule should not be regarded as a forecast of future cash collections. The
ratio of annual cash collections of principal on owned receivables to average
principal balances, excluding credit card receivables, approximated 47 percent
in 2002 and 44 percent in 2001.

The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:

Nonaccrual owned consumer receivables totaled $2,797.2 million (including
$263.6 million relating to foreign operations) at December 31, 2002 and $2,064.3
million (including $215.3 million relating to foreign operations) at December
31, 2001. Interest income that would have been recorded if such nonaccrual
receivables had been current and in accordance with contractual terms was
approximately $413.9 million (including $35.7 million relating to foreign
operations) in 2002 and $315.8 million (including $34.6 million relating to
foreign operations) in 2001. Interest income that was included in finance and
other interest income prior to these loans being placed on nonaccrual status was
approximately $216.8 million (including $16.2 million relating to foreign
operations) in 2002 and $173.5 million (including $16.4 million relating to
foreign operations) in 2001. For an analysis of reserves for credit losses on an
owned and managed basis, see our "Analysis of Credit Loss Reserves Activity" on
pages 59 and 60 of Management's Discussion and Analysis.

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 $1,759.5
million at December 31, 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 $389.2 million at year-end 2002 and
$348.6 million at year-end 2001.

Amounts due and deferred from receivable sales include certain assets
established under the recourse provisions for certain receivable sales,
including funds deposited in spread accounts, and net customer payments due from
(to) the securitization trustee. As a result of the October 11, 2002 downgrade
of our commercial paper debt ratings by S&P, we, as servicer of the various
securitization trusts, currently are required to transfer cash collections to
the trusts on a daily basis.

We issued securities backed by dedicated home equity loan receivables of
$7.5 billion in 2002 and $1.5 billion in 2001. For accounting purposes, these
transactions were structured as secured financings,

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therefore, the receivables and the related debt remain on our balance sheet.
Real estate secured receivables included closed-end real estate secured
receivables totaling $8.5 billion at December 31, 2002 and $1.7 billion at
December 31, 2001 which secured the outstanding debt related to these
transactions.

5. ASSET SECURITIZATIONS

We sell auto finance, MasterCard and Visa, private label and personal
non-credit card receivables in various securitization transactions. We continue
to service and receive servicing fees on the outstanding balance of these
securitized receivables. We also retain rights to future cash flows arising from
the receivables after the investors receive their contractual return. We have
also, in certain cases, retained other subordinated interests in these
securitizations. These transactions result in the recording of an interest-only
strip receivable which represents the value of the future residual cash flows
from securitized receivables. The investors and the securitization trusts have
only limited recourse to our assets for failure of debtors to pay. That recourse
is limited to our rights to future cash flow and any subordinated interest we
retain. Servicing assets and liabilities are not recognized in conjunction with
our securitizations since we receive adequate compensation relative to current
market rates to service the receivables sold. See Note 1, "Summary of
Significant Accounting Policies," for further discussion on our accounting for
interest-only strip receivables.

Securitization revenue includes income associated with the current and
prior period securitization of receivables with limited recourse structured as
sales. Such income includes gains on sales, net of our estimate of probable
credit losses under the recourse provisions, servicing income and excess spread
relating to those receivables.

Our interest-only strip receivables, net of the related loss reserve and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income, increased $139.0 million in 2002, $100.6 million in 2001
and $59.0 million in 2000.

Net initial gains, which represent gross initial gains net of our estimate
of probable credit losses under the recourse provisions, and the key economic
assumptions used in measuring the net initial gains from securitizations were as
follows:

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(1) Weighted-average annual rates for securitizations entered into during the
period for securitizations of loans with similar characteristics.

Certain securitization trusts, such as credit cards, are established at
fixed levels and require frequent sales of new receivables into the trust to
replace receivable run-off. These replenishments totaled $26.1 billion in 2002,
$24.7 billion in 2001 and $21.0 billion in 2000. Net gains (gross gains less
estimated credit losses under the recourse provisions) related to these
replenishments were calculated using weighted-average assumptions consistent
with those used for calculating gains on initial securitizations and totaled
$523.2 million in 2002, $407.5 million in 2001 and $328.4 million in 2000.

Cash flows received from securitization trusts were as follows:

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(1) Other cash flows include all cash flows from interest-only strip
receivables, excluding servicing fees.

At December 31, 2002, the sensitivity of the current fair value of the
interest-only strip receivables to an immediate 10 percent and 20 percent
unfavorable change in assumptions are presented in the table below. These
sensitivities are based on assumptions used to value our interest-only strip
receivables at December 31, 2002.

These sensitivities are hypothetical and should not be considered to be
predictive of future performance. As the figures indicate, the change in fair
value based on a 10 percent variation in assumptions cannot necessarily be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation
in a particular assumption on the fair value of the residual cash flow is
calculated independently from any change in another assumption. In reality,
changes in one factor may contribute to changes in another (for example,
increases in market interest rates may result in lower prepayments) which might
magnify or counteract the sensitivities. Furthermore, the estimated fair values
as disclosed should not be considered indicative of future earnings on these
assets.

Static pool credit losses are calculated by summing actual and projected
future credit losses and dividing them by the original balance of each pool of
asset. Due to the short term revolving nature of MasterCard and Visa, personal
non-credit card and private label receivables, the weighted-average percentage
of static pool credit losses is not considered to be materially different from
the weighted-average charge-off assumptions used in determining the fair value
of our interest-only strip receivables in the table above. At December 31, 2002,
static pool credit losses for auto finance loans securitized in 2002 were
estimated to be 11.9 percent, for auto finance loans securitized in 2001 were
estimated to be 10.0 percent and for auto finance loans securitized in 2000 were
estimated to be 12.6 percent.

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Receivables information by product including two-month-and-over contractual
delinquency and net charge-offs for our managed and serviced with limited
recourse portfolios were as follows:

6. ACQUIRED INTANGIBLES AND GOODWILL

Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS 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 SFAS 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:

Acquired intangible amortization expense totaled $57.8 million in 2002,
$99.0 million in 2001 and $109.0 million in 2000.

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

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

There were no significant changes to our recorded amount of goodwill,
either in total or by segment, in 2002 or 2001.

7. PROPERTIES AND EQUIPMENT, NET

Depreciation and amortization expense totaled $138.7 million in 2002,
$139.7 million in 2001 and $135.8 million in 2000.

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8. DEPOSITS

In conjunction with the fourth quarter 2002 sale of substantially all of
the assets and deposits of the Thrift, we sold $4.3 billion in domestic
deposits. The remaining domestic deposits were sold in the first quarter of
2003. Domestic time certificates included carrying value adjustments relating to
derivative financial instruments totaling $24.7 million at December 31, 2001.
There were no carrying value adjustments relating to derivative financial
instruments at December 31, 2002.

Average deposits and related weighted-average interest rates were as
follows:

Interest expense on total deposits was $380.0 million in 2002, $498.6
million in 2001 and $484.0 million in 2000. Interest expense on domestic
deposits was $358.0 million in 2002, $423.7 million in 2001 and $419.7 million
in 2000.

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Maturities of time certificates in amounts of $100,000 or more at December
31, 2002 were:

Contractual maturities of time certificates within each interest rate range
at December 31, 2002 were as follows:

9. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS

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Outstanding commercial paper balances throughout 2002 were lower than 2001
as we took advantage of the low interest rate environment and issued long-term
debt. We also reduced outstanding commercial paper to address general market
liquidity concerns.

Commercial paper included obligations of foreign subsidiaries of $497.1
million at December 31, 2002, $374.7 million at December 31, 2001 and $360.9
million at December 31, 2000. Bank and other borrowings included obligations of
foreign subsidiaries of $1,487.7 million at December 31, 2002, $713.6 million at
December 31, 2001 and $722.3 million at December 31, 2000.

Interest expense for commercial paper, bank and other borrowings totaled
$180.8 million in 2002, $463.2 million in 2001 and $737.7 million in 2000.

We maintain various bank credit agreements primarily to support commercial
paper borrowings and also to provide funding in the U.K. We had committed
back-up lines and other bank lines of $13.9 billion at December 31, 2002 and
$13.6 billion at December 31, 2001. The U.K. had drawn $1.4 billion on its bank
lines of credit at December 31, 2002 and $.7 billion at December 31, 2001.
Formal credit lines are reviewed annually and expire at various dates from 2003
to 2007. Borrowings under these lines generally are available at a surcharge
over LIBOR. None of the U.S. lines contain material adverse change clauses which
could restrict availability.

Annual commitment fee requirements to support availability of these lines
at December 31, 2002 totaled $11.3 million.

10. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE
YEAR)

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Senior and senior subordinated debt included $7.5 billion of debt secured
by $8.5 billion of real estate secured receivables at December 31, 2002 and $1.5
billion of debt secured by $1.7 billion of real estate secured receivables at
December 31, 2001.

At December 31, 2002, senior and senior subordinated debt included carrying
value adjustments relating to derivative financial instruments which increased
the debt balance by $2.4 billion and a foreign currency translation adjustment
relating to our foreign denominated debt which increased the debt balance by
$989.3 million. At December 31, 2001, senior and senior subordinated debt
included carrying value adjustments relating to derivative financial instruments
which increased the debt balance by $391.1 million and a foreign currency
translation adjustment relating to our foreign denominated debt which reduced
the debt balance by $356.6 million.

Weighted-average interest rates were 4.9 percent at December 31, 2002 and
5.1 percent at December 31, 2001. Interest expense for senior and senior
subordinated debt was $3,310.5 million in 2002, $3,212.0 million in 2001 and
$2,707.2 million in 2000. The most restrictive financial covenants contained in
the terms of our debt agreements are the maintenance of a minimum shareholders'
equity of $4.0 billion for Household International, Inc. and the maintenance of
a minimum shareholder's equity of $5.8 billion for Household Finance Corporation
("HFC"), a wholly owned subsidiary of Household. Debt denominated in a foreign
currency is included in the applicable rate category based on the effective U.S.
dollar equivalent rate as summarized in Note 11, "Derivative Financial
Instruments and Concentrations of Credit Risk."

In 2002, we issued $542 million of 8.875 percent Adjustable Conversion-Rate
Equity Security Units. The Adjustable Conversion-Rate Equity Security Units each
consisted of an HFC senior unsecured note with a principal amount of $25 and a
contract to purchase, for $25, a share of Household common stock on February 15,
2006. The senior unsecured notes will mature on February 15, 2008. The stock
purchase contracts require holders to purchase between 21.1 million and 25.3
million shares of our common stock representing between .9735 and 1.1682 shares
per unit based upon the applicable market value of one share of our common
stock, as defined, on February 15, 2006. The net proceeds from the sale of the
units were allocated between the purchase contracts and the senior unsecured
notes in our balance sheet based on the fair value of each at the date of the
offering. The net present value of the contracted stock purchase payments of
$31.4 million was recorded as a decrease in senior and senior subordinated debt
and an increase in additional paid-in capital.

Maturities of senior and senior subordinated debt at December 31, 2002 were
as follows:

Certain of our senior and senior subordinated debt may be redeemed prior to
its stated maturity.

If the merger with HSBC does not occur by March 31, 2003, we have agreed to
pay additional interest on certain debt issued after November 14, 2002 until the
merger with HSBC occurs. This additional interest, as of March 19, 2003, would
be approximately $330,000 per day.

11. DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

In the normal course of business and in connection with our asset/liability
management program, we enter into various transactions involving derivative
financial instruments. These instruments primarily are used to manage our
exposure to fluctuations in interest rates and currency exchange rates. We do
not serve as a

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financial intermediary to make markets in any derivative financial instruments.
We have a comprehensive program to address potential financial risks such as
liquidity, interest rate, currency and counterparty credit risk. The Finance
Committee of the Board of Directors sets acceptable limits for each of these
risks annually and reviews the limits semiannually. For further information on
our strategies for managing interest rate and foreign exchange rate risk, see
the "Risk Management" section within our Management's Discussion and Analysis of
Financial Condition and Results of Operations.

Objectives for Holding Derivative Financial Instruments We generally fund
our assets with liabilities that have similar interest rate features. Over time,
however, customer demand for our receivable products shifts between fixed rate
and floating rate products, based on market conditions and preferences. These
shifts result in different funding strategies and produce different interest
rate risk exposures. We maintain an overall risk management strategy that uses a
variety of interest rate and currency derivative financial instruments to
mitigate our exposure to fluctuations caused by changes in interest rates and
currency exchange rates. We manage our exposure to interest rate risk primarily
through the use of interest rate swaps, but also use forwards, futures, options,
and other risk management instruments. We manage our exposure to currency risk
primarily through the use of currency swaps. We do not speculate on interest
rate or foreign currency market exposure and we do not use exotic or leveraged
derivative financial instruments.

Interest rate swaps are contractual agreements between two counterparties
for the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The majority of our
interest rate swaps are used to manage our exposure to changes in interest rates
by converting floating rate assets or debt to fixed rate or by converting fixed
rate assets or debt to floating rate. We have also entered into currency swaps
to convert both principal and interest payments on debt issued from one currency
to the appropriate functional currency.

Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. We have both
interest rate and foreign exchange rate forward contracts and interest rate
futures contracts. We use foreign exchange rate forward contracts to reduce our
exposure to foreign currency exchange risk. Interest rate forward and futures
contracts are used to hedge resets of interest rates on our floating rate assets
and liabilities. Cash requirements for forward contracts include the receipt or
payment of cash upon the sale or purchase of the instrument.

Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option. We use caps
to limit the risk associated with an increase in rates and floors to limit the
risk associated with a decrease in rates.

Market and Credit Risk By utilizing derivative financial instruments, we
are exposed to varying degrees of credit and market risk.

Market risk is the possibility that a change in interest rates or foreign
exchange rates will cause a financial instrument to decrease in value or become
more costly to settle. We mitigate this risk by establishing limits for
positions and other controls.

Counterparty credit risk is the possibility that a loss may occur because
the counterparty to a transaction fails to perform according to the terms of the
contract. We control the counterparty credit (or repayment) risk in derivative
instruments through established credit approvals, risk control limits and
ongoing monitoring procedures. Our exposure to credit risk for futures is
limited as these contracts are traded on organized exchanges. Each day, changes
in futures contract values are settled in cash. In contrast, swap agreements and
forward contracts have credit risk relating to the performance of the
counterparty. Additionally, certain swap agreements require that payments be
made to, or received from, the counterparty when the fair value of the agreement
reaches a certain level. Amounts received from or paid to swap counterparties
are recorded in our balance sheet as derivative related liabilities. Derivative
financial instruments are generally expressed in terms

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of notional principal or contract amounts which are much larger than the amounts
potentially at risk for nonpayment by counterparties. We have never suffered a
loss due to counterparty failure.

Fair Value and Cash Flow Hedges To manage our exposure to changes in
interest rates, we enter into interest rate swap agreements and currency swaps
which have been designated as fair value or cash flow hedges under SFAS No. 133.
The critical terms of interest rate swaps are designed to match those of the
hedged items, enabling the application of the shortcut method of accounting as
defined by SFAS No. 133 for 84 percent of the notional amounts of such interest
rate swaps at December 31, 2002. To the extent that the critical terms of the
hedged item and the derivative are not identical, hedge ineffectiveness is
reported in earnings during the current period as a component of other income.
Although the critical terms of currency swaps are designed to match those of the
hedged items, SFAS No. 133 does not allow shortcut method accounting for this
type of hedge. Therefore, there may be minimal ineffectiveness which is reported
in current period earnings.

Fair value hedges include interest rate swaps which convert our fixed rate
debt or assets to variable rate debt or assets and currency swaps which convert
debt issued from one currency into pay variable debt of the appropriate
functional currency. Hedge ineffectiveness associated with fair value hedges is
recorded as other income and was a loss of $5.3 million ($3.4 million after tax)
in 2002 and a gain of $.2 million ($.1 million after tax) in 2001. During both
2002 and 2001, all of our fair value hedges were associated with debt. We
recorded fair value adjustments for open fair value hedges which increased the
carrying value of our debt by $1,841.2 million at December 31, 2002 and
decreased the carrying value of our debt by $85.7 million at December 31, 2001.

Cash flow hedges include interest rate swaps which convert our variable
rate debt or assets to fixed rate debt or assets and currency swaps which
convert debt issued from one currency into pay fixed debt of the appropriate
functional currency. Losses on derivative instruments designated as cash flow
hedges (net of tax) are reported in accumulated other comprehensive income and
totaled $736.5 million at December 31, 2002 and $699.1 million at December 31,
2001. We expect $162.6 million ($103.2 million after-tax) of currently
unrealized net losses will be reclassified to earnings within one year, however,
these unrealized losses will be offset by decreased interest expense associated
with the variable cash flows of the hedged items and will result in no net
economic impact to our earnings. Hedge ineffectiveness associated with cash flow
hedges is recorded as other income and was immaterial in both 2002 and 2001.

At December 31, 2002, $1,863.5 million of derivative instruments, at fair
value, were recorded in derivative financial assets and $187.0 million in
derivative related liabilities. At December 31, 2001, $97.2 million of
derivative instruments, at fair value, were recorded in derivative financial
assets and $1,615.4 million in derivative related liabilities.

Deferred gains resulting from termination of derivatives were $682.4
million at December 31, 2002 and $551.7 million at December 31, 2001. Deferred
losses from termination of derivatives were $139.1 million at December 31, 2002
and $72.1 million at December 31, 2001. Amortization of net deferred gains
totaled $155.9 million in 2002 and $43.6 million in 2001. The weighted-average
amortization period associated with the deferred gains was 4.8 years at December
31, 2002 and 6.2 years at December 31, 2001. The weighted-average amortization
period for the deferred losses was 2.8 years at December 31, 2002 and 5.3 years
at December 31, 2001. At December 31, 2002, net deferred gains and losses,
increased the carrying value of our senior and senior subordinated debt by
$560.1 million and decreased accumulated other comprehensive income by $16.8
million. At December 31, 2001, net deferred gains and losses increased the
carrying value of our deposits by $24.7 million, increased the carrying value of
our senior and senior subordinated debt by $476.8 million and decreased
accumulated other comprehensive income by $21.9 million.

Hedges of Net Investments in Foreign Operations From time to time, we use
forward-exchange contracts and foreign currency options to hedge our net
investments in foreign operations. The purpose of these hedges is to protect
against adverse movements in exchange rates. Net gains and (losses) (net of tax)
related to these derivatives are included in accumulated other comprehensive
income and totaled $(85.9) million in 2002 and $8.9 million in 2001.

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Non-Qualifying Hedging Activities We use forward rate agreements, interest
rate caps, exchange traded futures, and some interest rate swaps which were not
designated as hedges under SFAS No. 133. These financial instruments are
economic hedges that are not linked to specific assets and liabilities that
appear on our balance sheet and do not qualify for hedge accounting. The primary
purpose of these derivatives is to minimize our exposure to changes in interest
rates. Net fair value gains (losses) on derivatives which were not designated as
hedges are reported as other income and totaled $8.0 million ($5.1 million
after-tax) in 2002 and $(.3) million ($(.2) million after-tax) in 2001.

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Derivative Financial Instruments The following table summarizes derivative
financial instrument activity:

- ---------------

(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument or (b) at the maturity of the underlying items being
hedged.

(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
us had these positions been closed out at the respective balance sheet date.
Bracketed amounts do not necessarily represent risk of loss as the fair
value of the derivative financial instrument and the items being hedged must
be evaluated together. See Note 15, "Fair Value of Financial Instruments,"
for further discussion of the relationship between the fair value of our
assets and liabilities.

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We operate in three functional currencies, the U.S. dollar, the British
pound and the Canadian dollar. The U.S. dollar is the functional currency for
exchange-traded interest rate futures contracts and options. Non-exchange traded
instruments are restated in U.S. dollars by country as follows:

The table below reflects the items hedged using derivative financial
instruments which qualify for hedge accounting at December 31, 2002. The
critical terms of the derivative financial instruments have been designed to
match those of the related asset or liability.

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The following table summarizes the maturities and related weighted-average
receive/pay rates of interest rate swaps outstanding at December 31, 2002:

The floating rates that we pay or receive are based on spot rates from
independent market sources for the index contained in each interest rate swap
contract, which generally are based on either 1-, 3- or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. We use derivative
financial instruments to hedge the interest rate inherent in balance sheet
assets and liabilities, which manages the volatility of net interest margin
resulting from changes in interest rates on the underlying hedged items. Had we
not utilized these instruments, owned net interest margin would have decreased
by 31 basis points in 2002, increased by 13 basis points in 2001 and decreased
by 5 basis points in 2000.

Concentrations of Credit Risk A concentration of credit risk is defined as
a significant credit exposure with an individual or group engaged in similar
activities or affected similarly by economic conditions.

Because we primarily lend to consumers, we do not have receivables from any
industry group that equal or exceed 10 percent of total owned or managed
receivables at December 31, 2002 and 2001. We lend nationwide and our
receivables are distributed as follows at December 31, 2002:

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12. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS

The following table summarizes our company obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Preferred Securities") and the
related Junior Subordinated Notes:

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 December 31, 2002 and 2001.

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 us, 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 our option for up to five years. We cannot pay dividends on our
preferred and common stocks during such deferments. The Preferred Securities
have a liquidation value of $25 per preferred security.

HCT I, HCT IV, HCT V, HCT VI and HCT VII (collectively, "the Trusts") are
wholly owned subsidiaries of Household. Our 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 us of the Trust's obligations under the respective Preferred
Securities.

13. PREFERRED STOCK

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Terms of the preferred stock issuances are as follows:

- ---------------

(1) Each depositary share represents 1/40 share of preferred stock.
(2) Plus accrued and unpaid dividends.
(3) Per depositary share.
(4) Plus accrued and unpaid dividends in the event of an involuntary
liquidation.
(5) Expected to be repaid in connection with the merger with HSBC at their
liquidation value.

Dividends on all issues of preferred stock are cumulative. All issues are
redeemable, in whole or in part, at our option or at any time after the dates
indicated above. Holders of all issues of preferred stock are entitled to
payment before any capital distribution is made to common shareholders. The
holders of the $4.30, $4.50 and 5.00 percent preferred stocks are entitled to
vote with the holders of our common stock on all matters. Each issue of
preferred stock is also entitled to vote, as a class separate from our common
stock, to elect two directors if dividends for a specified period shall be in
arrears, until the dividends in arrears are paid in full.

Our Board of Directors has adopted a resolution creating an Offering
Committee of the Board with the power to authorize the issuance and sale of one
or more series of preferred stock. The Offering Committee has the authority to
determine the particular designations, powers, preferences and relative,
participating, optional or other special rights (other than voting rights which
shall be fixed by the Board of Directors) and qualifications, limitations or
restrictions of such issuance. At December 31, 2002, up to 8.2 million shares of
preferred stock were authorized for issuance.

14. FORWARD PURCHASE AGREEMENTS AND JUNIOR PREFERRED SHARE PURCHASE RIGHTS

At December 31, 2002, we had agreements to purchase, on a forward basis,
approximately 4.9 million shares of our common stock at a weighted-average
forward price of $53.05 per share. The agreements expire at various dates
through August 2003. These agreements may be settled physically or on a net
basis in shares of our common stock or in cash, depending on the terms of the
various agreements, at our option. We account for these agreements in accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled In, a Company's Own Stock". As a result, we initially
measure these forward contracts at fair value and report them as permanent
equity. Subsequent changes in their fair value are not recognized. Under the
terms of the various agreements, expiration dates accelerate if our stock price
reaches certain triggers. At December 31, 2002, these triggers varied between
the agreements and ranged between $12 and $16 per share. As a result of
settlements under these forward contracts, we received 4.7 million shares at an
average cost of $58.91 per share during 2002, 9.8 million shares at an average
cost of $47.03 per share in 2001 and 3.3 million shares at an average cost of
$34.82 per share in 2000.

Under a net share settlement, changes in our stock price will affect the
number of common shares that we are required to deliver to or entitled to
receive from the counterparty. The number of shares is based on the difference
between our stock price and the forward price of the agreement. For example, at
December 31, 2002, based on the closing price of our common stock of $27.81 per
share, we would have been required to deliver approximately 4.4 million shares
of our common stock to net share settle these contracts. If our

99

common stock price had been lower by $1 per share at December 31, 2002, we would
have been required to deliver a total of approximately 4.7 common shares to net
share settle these contracts. If our common stock price had been higher by $1
per share at December 31, 2002, we would have been required to deliver a total
of approximately 4.1 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 December 31, 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 40.7 million shares.

The FASB is expected to issue Statement Number 149, "Accounting for
Financial Instruments with Characteristics of Liabilities, Equity, or Both"
("SFAS No. 149") in the second quarter of 2003. This limited scope statement
will prescribe changes to the classification of preferred securities of
subsidiary trusts and the accounting for forward purchase contracts issued by a
company in its own stock. SFAS No. 149 will require all preferred securities of
subsidiary trusts to be classified as debt on the consolidated balance sheet and
the related dividends as interest expense. Upon adoption of SFAS No. 149, we
will be required to reclassify company obligated mandatorily redeemable
preferred securities of subsidiary trusts totaling $975 million to senior and
senior subordinated debt. Dividends on these securities are currently reported
as interest expense in our consolidated statements of income. SFAS No. 149 will
also require that all forward purchase contracts issued by a company in its own
stock with alternative settlement methods be recorded as an asset or liability
and measured at fair value with changes in fair value recorded in earnings. The
statement is effective upon issuance except that it will be effective beginning
July 1, 2003 for existing forward purchase contacts. Because we currently expect
to close out our remaining forward contracts prior to July 1, 2003, we do not
expect adoption of SFAS No. 149 will have a material impact to our financial
position or results of operations.

In 1996, Household issued one preferred share purchase right (a "Right")
for each outstanding share of common stock of the company. Under certain
conditions, each Right may be exercised to purchase one three-thousandth of a
share of a new series of junior participating preferred stock at an exercise
price of $100 per one three-thousandth of a share, subject to further
adjustment. The Rights may be exercised only after the earlier of: (a) a public
announcement that a party or an associated group acquired 15 percent or more of
Household's common stock and (b) ten business days (or later date as determined
by the Board of Directors of Household) after a party or an associated group
initiates or announces its intention to make an offer to acquire 15 percent or
more of Household's common stock. The Rights, which cannot vote or receive
dividends, expire on July 31, 2006, and may be redeemed by Household at a price
of $.0033 per Right at any time prior to expiration or acquisition of 15 percent
of Household's common stock. The Rights were amended to permit the merger
agreement with HSBC and the transactions contemplated thereby.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

We have estimated the fair value of our financial instruments in accordance
with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
("SFAS No. 107"). Fair value estimates, methods and assumptions set forth below
for our financial instruments are made solely to comply with the requirements of
SFAS No. 107 and should be read in conjunction with the financial statements and
notes in this Annual Report.

A significant portion of our financial instruments do not have a quoted
market price. For these items, fair values were estimated by discounting
estimated future cash flows at estimated current market discount rates.
Assumptions used to estimate future cash flows are consistent with management's
assessments regarding ultimate collectibility of assets and related interest and
with estimates of product lives and repricing characteristics used in our
asset/liability management process. All assumptions are based on historical
experience adjusted for future expectations. Assumptions used to determine fair
values for financial instruments for which no active market exists are
inherently judgmental and changes in these assumptions could significantly
affect fair value calculations.

As required under generally accepted accounting principles, a number of
other assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the

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franchise values of our business units) are not considered financial instruments
and, accordingly, are not valued for purposes of this disclosure. We believe
there is substantial value associated with these assets based on current market
conditions and historical experience. Accordingly, the estimated fair value of
financial instruments, as disclosed, does not fully represent our entire value,
nor the changes in our entire value.

The following is a summary of the carrying value and estimated fair value
of our financial instruments:

Cash: Carrying value approximates fair value due to cash's liquid nature.

Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets. Fair
values are based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.

Receivables: The fair value of adjustable rate receivables generally
approximates carrying value because interest rates on these receivables adjust
with changing market interest rates. The fair value of fixed rate consumer
receivables was estimated by discounting future expected cash flows at interest
rates which approximate the rates that would achieve a similar return on assets
with comparable risk characteristics. Receivables also includes our
interest-only strip receivables. The interest-only strip receivables are carried
at fair value on our balance sheets. Fair value is based on an estimate of the
present value of future cash flows associated with securitizations of certain
real estate secured, auto finance, MasterCard and Visa, private label and
personal non-credit card receivables.

Deposits: The fair value of our savings and demand accounts equaled the
carrying amount as stipulated in SFAS No. 107. The fair value of gross fixed
rate time certificates was estimated by discounting future expected cash flows
at interest rates that we offer on such products at the respective valuation
dates.

Commercial paper, bank and other borrowings: The fair value of these
instruments approximates existing carrying value because interest rates on these
instruments adjust with changes in market interest rates due to their short-term
maturity or repricing characteristics.

101

Senior and senior subordinated debt: The estimated fair value of our gross
fixed rate debt instruments was determined using either quoted market prices or
by discounting future expected cash flows at interest rates offered for similar
types of debt instruments. Carrying value is typically used to estimate the fair
value of floating rate debt.

Insurance policy and claim reserves: The fair value of insurance reserves
for periodic payment annuities was estimated by discounting future expected cash
flows at estimated market interest rates at December 31, 2002 and 2001. The fair
value of other insurance reserves is not required to be determined in accordance
with SFAS No. 107.

Derivative financial assets and liabilities: All derivative financial
assets and liabilities, which exclude amounts received from or paid to swap
counterparties, are carried at fair value on the balance sheet. Where practical,
quoted market prices were used to determine fair value of these instruments. For
non-exchange traded contracts, fair value was determined using accepted and
established valuation methods (including input from independent third parties)
which consider the terms of the contracts and market expectations on the
valuation date for forward interest rates (for interest rate contracts) or
forward foreign currency exchange rates (for foreign exchange contracts). We
enter into foreign exchange contracts to hedge our exposure to currency risk on
foreign denominated debt. We also enter into interest rate contracts to hedge
our exposure to interest rate risk on assets and liabilities, including debt. As
a result, decreases/increases in the fair value of derivative financial
instruments which have been designated as effective hedges are offset by a
corresponding increase/decrease in the fair value of the individual asset or
liability being hedged. See Note 11, "Derivative Financial Instruments and
Concentrations of Credit Risk," for additional discussion of the nature of these
items.

16. LEASES

We lease certain offices, buildings and equipment for periods of up to 25
years. The leases have various renewal options. The office space leases
generally require us to pay certain operating expenses. Net rental expense under
operating leases was $135.1 million in 2002, $124.9 million in 2001 and $107.6
million in 2000.

We have a lease obligation on a former office complex which has been
subleased through 2010, the end of the lease period. The sublessee has assumed
our future rental obligations on this lease.

Future net minimum lease commitments under noncancelable operating lease
arrangements were:

17. INCENTIVE COMPENSATION AND STOCK OPTION PLANS

Household's executive compensation plans provide for issuance of
nonqualified stock options and restricted stock rights ("RSRs"). Stock options
permit the holder to purchase, under certain limitations, Household's common
stock at the market value of the stock on the date the option is granted.
Employee stock options generally vest equally over four years and expire 10
years from the date of grant. Shares of our common stock reserved for stock
plans were 40.9 million at December 31, 2002 and 34.9 million at December 31,
2001.

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Non-employee directors annually receive options to purchase shares of
Household's common stock at the stock's fair market value on the day the option
is granted. Director options have a term of ten years and one day, fully vest
six months from the date granted, and once vested are exercisable at any time
during the option term. In November 2002, non-employee directors chose not to
receive their annual option to purchase 10,000 shares of Household's common
stock in light of the transaction with HSBC. Instead, each director will receive
a cash payment of $120,000 which is the fair market value of the options he or
she would have otherwise received.

Common stock data for the stock option plans is summarized as follows:

The following table summarizes information about stock options outstanding
at December 31, 2002:

The fair value of each option granted was estimated as of the date of grant
using the Black-Scholes option pricing model. The fair value estimates used the
following weighted-average assumptions:

The Black-Scholes model uses different assumptions that can significantly
effect the fair value of the options. As a result, the derived fair value
estimates cannot be substantiated by comparison to independent markets.

103

RSRs entitle an employee to receive a stated number of shares of Household
common stock if the employee satisfies the conditions set by the Compensation
Committee for the award. Information with respect to RSRs is as follows:

Household maintains an Employee Stock Purchase Plan (the "ESPP"). The ESPP
provides a means for employees to purchase shares of Household's common stock at
85 percent of the lesser of its market price at the beginning or end of a
one-year subscription period. The ESPP was terminated on March 7, 2003 and stock
was purchased on that date.

18. EMPLOYEE BENEFIT PLANS

Household sponsors several defined benefit pension plans covering
substantially all of its U.S. and non-U.S. employees. At December 31, 2002, plan
assets included an investment in 1,112,546 shares of Household's common stock
with a fair value of $30.9 million.

Pension income (expense) for defined benefit plans included the following
components:

The assumptions used in determining the benefit obligation and pension
income (expense) of the domestic defined benefit plans at December 31 are as
follows:

A reconciliation of beginning and ending balances of the projected benefit
obligation of the defined benefit pension plans is as follows:

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A reconciliation of beginning and ending balances of the fair value of plan
assets associated with the defined benefit pension plans is as follows:

To improve the funded status of our defined benefit pension plans given
recent declines in returns on plan assets, we made contributions totaling $116.1
million during 2002.

The funded status of defined benefit pension plans was as follows:

We also sponsor a non-qualified supplemental retirement plan. This plan,
which is currently unfunded, provides eligible employees defined pension
benefits outside the qualified retirement plan based on average earnings, years
of service and age at retirement. The projected benefit obligation was $57.8
million at December 31, 2002 and $41.5 million at December 31, 2001. Pension
expense related to the supplemental retirement plan was $17.1 million in 2002,
$10.0 million in 2001 and $5.1 million in 2000.

We also sponsor various 401(k) savings plans and profit sharing plans for
employees meeting certain eligibility requirements. Under these plans, each
participant's contribution is matched by the company in Household common stock
up to a maximum of 6 percent of the participant's compensation. Total expense
for these plans was $69.2 million in 2002, $56.7 million in 2001 and $47.0
million in 2000.

Postretirement Plans Other Than Pensions We have several plans which
provide medical, dental and life insurance benefits to retirees and eligible
dependents. These plans cover substantially all employees who meet certain age
and vested service requirements. We have instituted dollar limits on our
payments under the plans to control the cost of future medical benefits.

The net postretirement benefit cost included the following:

105

A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation is as follows:

Our postretirement benefit plans are funded on a pay-as-you-go basis. A
reconciliation of the components of the accrued postretirement benefit
obligation is as follows:

The assumptions used in determining the benefit obligation and cost of such
plans at December 31 are as follows:

A 14.0 percent annual rate of increase in the gross cost of covered health
care benefits was assumed for 2003. This rate of increase is assumed to decline
gradually to 5.6 percent in 2013.

Assumed health care cost trend rates have an effect on the amounts reported
for health care plans. A one-percentage point change in assumed health care cost
trend rates would increase (decrease) service and interest costs and the
postretirement benefit obligation as follows:

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19. INCOME TAXES

Total income taxes were:

Provisions for income taxes related to operations were:

The significant components of deferred income tax provisions attributable
to income from operations were:

Income before income taxes were:

107

Effective tax rates are analyzed as follows:

Provision for U.S. income taxes had not been made on net undistributed
earnings of foreign subsidiaries of $461.5 million at December 31, 2002 and
$280.9 million at December 31, 2001. Determination of the amount of unrecognized
deferred tax liability related to investments in foreign subsidiaries is not
practicable.

In addition, provision for U.S. income taxes had not been made at December
31, 2002 on $80.1 million of undistributed earnings of life insurance
subsidiaries accumulated as policyholders' surplus under tax laws in effect
prior to 1984. If this amount were distributed, the additional income tax
payable would be approximately $28 million.

Household Bank, f.s.b., our U.S. savings and loan subsidiary, previously
had credit loss reserves for tax purposes that arose in years beginning before
December 31, 1987 in the amount of $55.3 million. A deferred tax liability was
not established previously since we did not expect the amount to become taxable
in the future. However, during the fourth quarter of 2002, the sale of
substantially all of its assets and deposits caused this amount to become
taxable resulting in a $20.2 million tax liability.

At December 31, 2002, we had foreign tax credit carryforwards of $13.1
million of which $2.1 million expire in 2004 and $11.0 million expire in 2007.

Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:

108

The deferred tax asset valuation allowance relates entirely to foreign tax
credit carryforwards. Due to the limited carryforward period and limitations
under U.S. tax laws with respect to foreign tax credit utilization, management
believes it is more likely than not that the deferred tax asset will not be
realized. The current period net change in the valuation allowance reflects the
current year addition of excess foreign tax credits. A 100 percent valuation
allowance has been established relating to the remaining carryforwards
available.

20. EARNINGS PER COMMON SHARE

21. COMMITMENTS AND CONTINGENT LIABILITIES

Both we and certain of our subsidiaries are parties to various legal
proceedings resulting from ordinary business activities relating to our current
and/or former operations which affect all of our three reportable segments.
Certain of these activities are or purport to be class actions seeking damages
in significant amounts. These actions include assertions concerning violations
of laws and/or unfair treatment of consumers.

Due to the uncertainties in litigation and other factors, we cannot be
certain that we will ultimately prevail in each instance. Also, as the ultimate
resolution of these proceedings is influenced by factors that are outside of our
control, it is reasonably possible our estimated liability under these
proceedings may change. However, based upon our current knowledge, our defenses
to these actions have merit and any adverse decision should not materially
affect our consolidated financial condition, results of operations or cash
flows.

109

At December 31, 2002, our mortgage services business had commitments with
numerous correspondents to purchase up to $1.4 billion of real estate secured
receivables at fair market value, subject to availability based on underwriting
guidelines specified by our mortgage services business and at prices indexed to
underlying market rates. These commitments have terms of up to one year and can
be renewed upon mutual agreement.

See Note 16 for discussion of lease commitments.

22. ATTORNEY GENERAL SETTLEMENT

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 state consumer
protection, consumer financing and banking laws and regulations with respect to
secured real estate lending from our retail branch consumer lending operations.
This agreement first became effective on December 16, 2002, with the filing of
related consent decrees or similar documentation in 41 states and the District
of Columbia. Consent decrees, or similar documentation, have now been filed in
all 50 states and the District of Columbia. We recorded a pre-tax charge of
$525.0 million ($333.2 million after-tax) 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.

23. SEGMENT REPORTING

We have three reportable segments: Consumer, Credit Card Services, and
International. Our segments are managed separately and are characterized by
different middle-market consumer lending products, origination processes, and
locations. 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
("U.K.") and Canada. The Consumer segment provides real estate secured,
automobile secured and personal non-credit card loans. Loans are offered with
both revolving and closed-end terms and with fixed or variable interest rates.
Loans are originated through branch locations, correspondents, mortgage brokers,
direct mail, telemarketing, independent merchants or automobile dealers. The
Credit Card Services segment offers MasterCard and Visa credit cards throughout
the United States primarily via strategic affinity and co-branding
relationships, direct mail, and our branch network to subprime customers. The
International segment offers secured and unsecured lines of credit and secured
and unsecured closed-end loans primarily in the United Kingdom and Canada. In
addition, the United Kingdom operation offers MasterCard and Visa credit cards
and credit insurance in connection with all loan products. We also cross sell
our credit cards to existing real estate secured, private label and tax services
customers. All segments offer products and service customers through the
Internet. The All Other caption includes our insurance and tax services, direct
lending and commercial businesses, as well as our corporate and treasury
activities, each of which falls below the quantitative threshold tests under
SFAS No. 131 for determining reportable segments.

The accounting policies of the reportable segments are described in the
summary of significant accounting policies. For segment reporting purposes,
intersegment transactions have not been eliminated. We generally account for
transactions between segments as if they were with third parties. We evaluate
performance and allocate resources based on income from operations after income
taxes and returns on equity and managed assets.

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.

110

REPORTABLE SEGMENTS -- MANAGED BASIS

- ---------------
(1) Net income excluding settlement charge and related expenses of $333.2
million (after-tax) and loss on disposition of Thrift assets and deposits of
$240.0 million (after-tax). This is a non-GAAP financial measure which is
presented for comparison of our operating trends only.
(2) Eliminates intersegment revenues.
(3) Eliminates bad debt recovery sales between operating segments.
(4) Tax benefit associated with items comprising adjustments/reconciling items.
(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) Includes goodwill associated with purchase business combinations and capital
expenditures.
(8) Represents receivables serviced with limited recourse.

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MANAGED RECEIVABLES

The following summarizes our managed receivables, which includes both our
owned receivables and receivables serviced with limited recourse.

GEOGRAPHIC DATA

The following summarizes our owned basis assets, revenues and income before
income taxes by material country:

- ---------------

(1) Includes properties and equipment, net of accumulated depreciation;
goodwill, net of accumulated amortization; and acquired intangibles, net of
accumulated amortization.

112

MANAGEMENT'S REPORT

To the Shareholders of Household International, Inc.

Household's management is responsible for establishing and maintaining
internal and disclosure controls relating to the preparation of its published
financial statements that are designed to provide reasonable assurance of the
integrity and fair presentation of its published financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
judgments and estimates made by management. Management also prepared other
information included in the annual report and is responsible for its accuracy
and consistency with the financial statements.

The consolidated financial statements have been audited by an independent
accounting firm, KPMG LLP, which has been given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the Board of Directors and committees of the board. Management
believes that representations made to the independent auditors during their
audit were valid and appropriate.

The Board, operating through its audit committee that is composed entirely
of non-executive directors, provides an independent review and oversight to the
financial reporting process, internal controls and independent auditors.

Internal auditors monitor the operation of the internal control system and
actions are taken by management to respond to deficiencies as they are
identified. Even effective internal controls, no matter how well designed, have
inherent limitations, and can only provide reasonable assurance with respect to
financial statement presentation. These limitations include, but are not
necessarily limited to, the possibility of human error or of circumvention or
overriding of controls, and the consideration of cost in relation to benefit of
a control. Further, the effectiveness of an internal control can change with
circumstances.

Household's management periodically assesses the internal and disclosure
controls for adequacy relating to the preparation of its published financial
statements. Based upon these assessments, Household's management believes that,
in all material respects, Household maintained an effective internal control
structure and procedures relating to preparation of consolidated financial
statements as of and for the year ended December 31, 2002, and effective
disclosure controls and procedures as of December 31, 2002.

William F. Aldinger David A. Schoenholz Steven L. McDonald
Chairman and President and Senior Vice President and
Chief Executive Officer Chief Operating Officer Chief Accounting Officer

March 24, 2003

113

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Household International, Inc.:

We have audited the accompanying consolidated balance sheets of Household
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2002 and 2001, and the related consolidated statements of income, changes in
preferred stock and common shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 2002. These consolidated
financial statements are the responsibility of Household International, Inc.'s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Household
International, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP
----------------------------------------
KPMG LLP

Chicago, Illinois
March 24, 2003

114

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

115

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS OF THE REGISTRANT

The following information on our directors is included pursuant to Item
401(a) of Regulation S-K.

William F. Aldinger, age 55, joined Household in September 1994 as
President and Chief Executive Officer and became Chairman in May 1996. He served
as Vice Chairman of Wells Fargo Bank and a Director of several Wells Fargo
subsidiaries from 1986 until joining Household. Mr. Aldinger is also a Director
of Household Finance Corporation (a subsidiary of Household), Illinois Tool
Works Inc., and MasterCard International, Incorporated. He is a member of
Household's Executive Committee.

Robert J. Darnall, age 65, joined Household's Board in 1988. Mr. Darnall
was Chairman and Interim Chief Executive Officer of Prime Advantage Corp. (an
internet provider of materials and services to manufacturers) from February 2000
to January 2002. On January 31, 2000, he retired as President and Chief
Executive Officer of Ispat North America, Inc. (a carbon steel manufacturer),
having served in that role since 1998. From 1992 until 1998, Mr. Darnall was
Chairman and Chief Executive Officer of Inland Steel Industries and also served
as the President and a Director of Inland from 1986. Mr. Darnall is also a
Director of United States Steel Corporation, Pactiv Corporation, Cummins, Inc.,
Sunoco, Inc., and the Federal Reserve Bank of Chicago, where he currently serves
as Chairman. Mr. Darnall is a member of the Compensation and Executive
Committees.

Gary G. Dillon, age 68, joined Household's Board in 1984. Mr. Dillon
retired as Chairman of the Board of Schwitzer Group (a manufacturer of engine
components) on March 1, 1999. He had served as Chairman of Schwitzer since 1991
and Chief Executive Officer of Schwitzer since 1989. From 1989 to 1997 he also
served as President of Schwitzer. Prior to 1989 he was President and Chief
Executive Officer of Household Manufacturing, Inc., the former diversified
manufacturing subsidiary of Household. Mr. Dillon is a member of the Audit and
Finance Committees.

Anthea Disney, age 58, joined Household's Board in 2001. Ms. Disney is
Executive Vice President for Content at News Corporation Limited and has held
this position since 1999. Prior to this position, she was Chairman and Chief
Executive Officer of TV Guide, Inc. in 1999 and was Chairman and Chief Executive
of News America Publishing Group, a division of News Corporation Limited from
1997 to 1999. From 1996 to 1997, Ms. Disney was President and Chief Executive
Officer of Harper Collins Publishers and from 1990 to 1996 she held a number of
senior management positions within the News Corporation organization. Ms. Disney
is a member of the Nominating & Governance Committee.

John A. Edwardson, age 53, joined Household's Board in 1995. Mr. Edwardson
became a member of the Board of Directors of CDW Computer Centers, Inc. in
January 2001 and became Chairman and Chief Executive Officer in May 2001. He
also served as president from January 2001 to May 2001. He previously was with
Burns International Services Corporation (a provider of security services)
through October 2000 when Burns was acquired by Securitas AB, having served as
its President and Chief Executive Officer since March 1, 1999, and as its
Chairman since June 1, 1999. He previously served as President, Chief Operating
Officer and a member of the Board of Directors of both UAL Corporation and
United Airlines, Inc. from 1994 until 1998. He was Executive Vice President and
Chief Financial Officer of Ameritech Corporation prior to 1994. Mr. Edwardson is
also a Trustee of Purdue University, The Art Institute of Chicago and the
Chicago Symphony Orchestra and a Life Trustee of the Ravinia Festival. Mr.
Edwardson is a member of the Audit and Compensation Committees.

J. Dudley Fishburn, age 56, joined Household's Board in 1995. Mr. Fishburn
became Chairman of the Board of HFC Bank plc (Household's primary subsidiary in
the United Kingdom) in 1998. He previously served as the Conservative Member of
Parliament for Kensington in London from 1988 to 1997. Prior to

116

entering Parliament, Mr. Fishburn was Executive Editor, The Economist Newspaper
Ltd. from 1979 until 1988. He is also a Director of Cordiant Communications
Group plc, First NIS Fund (Luxembourg), Henderson Smaller Companies Investment
Trust plc, Murray Emerging Growth and Income Trust plc, The Beazley Group plc
and Altria Group, Inc., and a Trustee of The National Trust and The Peabody
Trust. Mr. Fishburn is a member of the Finance and Nominating & Governance
Committees.

Cyrus F. Freidheim, Jr., age 67, joined Household's Board in 1992. Mr.
Freidheim became Chairman of the Board and Chief Executive Officer of Chiquita
Brands International, Inc. on March 19, 2002. On April 1, 2002, he retired as
Vice Chairman of Booz, Allen & Hamilton, Inc. (a management consulting firm),
with which he had been affiliated since 1966. He is also a Trustee of
Thunderbird American Graduate School of Institutional Management and a Trustee
of the Brookings Institution. Mr. Freidheim is chair of the Nominating &
Governance Committee and a member of the Executive and Finance Committees.

James H. Gilliam, Jr., age 57, joined Household's Board in 1998. Mr.
Gilliam is an attorney, private investor and consultant. Mr. Gilliam was
employed in various capacities with Beneficial Corporation from 1979 until its
merger with Household on June 30, 1998. At the time of the merger, he was an
Executive Vice President, General Counsel and a Director of Beneficial. Mr.
Gilliam is a Trustee of The Hodson Trust, The Howard Hughes Medical Institute,
and the National Geographic Society and a Director of CTW Foundation. Mr.
Gilliam is a member of the Finance Committee.

Louis E. Levy, age 70, joined Household's Board in 1992. Mr. Levy retired
as Vice Chairman of KPMG LLP (a provider of accounting and consulting services)
in 1990, having been with the firm since 1958. Mr. Levy is also a Director of
Scudder Group of Mutual Funds and ISI Group of Mutual Funds. Mr. Levy is chair
of the Audit Committee and a member of the Finance Committee.

George A. Lorch, age 61, joined Household's Board in 1994. Mr. Lorch served
as Chairman of the Board since 1994 and President and Chief Executive Officer
since 1993 of Armstrong World Industries, Inc. (a manufacturer of interior
finishes) until May 2000. From May until August 2000, Mr. Lorch served as
Chairman and President and Chief Executive Officer of Armstrong Holdings, Inc.
(the parent of Armstrong World Industries, Inc. formed in May 2000). In August
2000, Mr. Lorch became a Chairman Emeritus of Armstrong Holdings, Inc. Armstrong
World Industries, Inc. filed for voluntary reorganization under Chapter 11 of
the U.S. Bankruptcy Code on December 6, 2000 and a plan of reorganization was
approved in November 2002. Mr. Lorch is a Director of The Williams Companies,
Inc., and Pfizer Inc. Mr. Lorch is chair of the Compensation Committee and a
member of the Nominating & Governance Committee.

John D. Nichols, age 72, joined Household's Board in 1988. Mr. Nichols
became Chief Executive Officer of The Marmon Group, Inc. in January 2002. Mr.
Nichols was Chairman of the Board of Illinois Tool Works Inc. from 1986 until he
retired in 1996, previously serving as its President from 1982 through 1986 and
Chief Executive Officer from 1982 until 1995. Mr. Nichols had been a Director of
Illinois Tool Works since 1981. Mr. Nichols is a Director of Altria Group, Inc.
and Rockwell International Corporation. Mr. Nichols is chair of the Executive
Committee and an "ex-officio" non-voting member of the Audit, Compensation,
Finance and Nominating & Governance Committees.

James B. Pitblado, age 70, joined Household's Board in 1994. Mr. Pitblado
was a Senior Executive with RBC Dominion Securities, Inc. of Toronto, Canada and
its predecessor companies from 1959 to 1994 and served as Chairman from 1985
until 1992. He was a Director of Household Financial Corporation Limited (the
Canadian business unit of Household) between 1984 and 1994. He is the Chairman
of the Hospital for Sick Children Foundation. Mr. Pitblado is chair of the
Finance Committee and a member of the Audit Committee.

Larree M. Renda, age 44, joined Household's Board in 2001. Ms. Renda has
been with Safeway Inc. since 1974. She is currently Executive Vice President for
Retail Operations, Human Resources, Public Affairs, Labor and Government
Relations and has held this position since 1999. Prior to this position, she was
a Senior Vice President from 1994 to 1999, and a Vice President from 1991 to
1994. She is Chairwoman of the Board of The Safeway Foundation and a director of
Casa Ley, S.A. de C.V., a Mexican retailer of food and general merchandise. Ms.
Renda is a member of the Audit Committee.

117

S. Jay Stewart, age 64, joined Household's Board in 1994. Mr. Stewart
retired as Chairman of the Board and Chief Executive Officer of Morton
International, Inc. (a manufacturer of specialty chemicals and salt) in October
1999, having served in that role since 1994 and as a Director since 1989. Also,
from June 1999 until November 1, 1999, he was Vice Chairman and a Director of
Rohm and Haas Company after it acquired Morton International. From 1989 through
1994 he was President and Chief Operating Officer of Morton International. Mr.
Stewart is also a Director of Autoliv, Inc., and Box USA Group, Inc. Mr. Stewart
is a member of the Compensation and Executive Committees.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following information on our senior executive policy-making officers is
included pursuant to Item 401(b) of Regulation S-K.

William F. Aldinger, age 55, joined Household in September 1994 as
President and Chief Executive Officer and became Chairman in May 1996. He served
as Vice Chairman of Wells Fargo Bank and a Director of several Wells Fargo
subsidiaries from 1986 until joining Household.

Sandra L. Derickson, age 50, was appointed Group Executive -- Retail
Services, Refund Lending and Insurance Services in July 2002. She joined
Household as Managing Director -- Retail Services in 2000. Prior to joining
Household, Mrs. Derickson was employed with GE Capital Services Corp. since
1975, most recently as President and General Manager of GE Capital Auto
Financial Services.

Thomas M. Detelich, age 46, was appointed Group Executive -- Consumer
Lending in July 2002. Mr. Detelich joined Household Finance Corporation in 1976
and during his career has served in various capacities within our consumer
finance business, particularly in sales.

Douglas A. Friedrich, age 57, was appointed Executive Vice President of
Household in July 2002. He is also President of our mortgage services business,
and has held a variety of positions within the mortgage service and specialty
finance business units since joining Household in 1989.

Kenneth M. Harvey, age 42 was appointed Group Executive -- Chief
Information Officer in July 2002. He was our Managing Director -- Chief
Information Officer since 1999, having previously served in various systems and
technology areas with Household since 1989.

Adrian R. Hill, age 44, was appointed Managing Director -- United Kingdom,
in 1998. Mr. Hill began his career with HFC Bank plc in 1989 as
Director -- Treasury, serving as Chief Financial Officer from 1990 to 1995 and
Chief Operating Officer from 1995 until his current appointment.

Colin P. Kelly, age 60, was appointed Executive Vice
President -- Administration in July 2002 after having served as Senior Vice
President -- Administration since January 2000. Mr. Kelly previously acted as
our Senior Vice President -- Human Resources since 1996, and Vice
President -- Human Resources since 1988. Mr. Kelly joined Household Finance
Corporation in 1965.

Steven L. McDonald, age 42, was appointed Senior Vice President -- Chief
Accounting Officer in July 2002, having previously served as Managing Director
and Corporate Controller since 1999, and Vice President -- Controller since
1996. From 1991 until joining Household in 1996, he was Senior Vice
President -- Accounting and Finance of First USA, Inc.

Siddharth N. Mehta, age 44, was appointed Group Executive -- Credit Card
Services, Auto Finance and Canada in July 2002. He joined Household in June 1998
as Group Executive -- Credit Card Services. Prior to joining Household, Mr.
Mehta was Senior Vice President of Boston Consulting Group in Los Angeles and
co-leader of Boston Consulting Group Financial Services Practice in the United
States.

Kenneth H. Robin, age 56, was appointed Executive Vice President in July
2002, Corporate Secretary in 1998 and Senior Vice President -- General Counsel
in 1996, having previously served as Vice President -- General Counsel since
1993. He joined Household in 1989 as Assistant General Counsel -- Financial
Services. Prior to joining Household, Mr. Robin held various positions in the
legal departments of Citicorp and Citibank, N.A. from 1977 to 1989.

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David A. Schoenholz, age 51, was appointed President and Chief Operating
Officer in July 2002. He has responsibility for our Consumer Lending, Mortgage
Services, Direct Lending and United Kingdom businesses. He was appointed Vice
Chairman -- Chief Financial Officer in January 2002, having previously served as
Group Executive -- Chief Financial Officer since January 2000, Executive Vice
President -- Chief Financial Officer since 1996, Senior Vice President -- Chief
Financial Officer since 1994, and Vice President -- Chief Accounting Officer
since 1993. He joined Household in 1985 as Director -- Internal Audit.

There are no family relationships among our executive officers. The term of
office of each executive officer is at the discretion of the Board of Directors.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires directors and executive officers
and any persons holding more than ten percent of a registered class of our
equity securities to report their initial ownership and any subsequent change to
the SEC and the New York Stock Exchange ("NYSE"). We reviewed copies of all
reports furnished to us and obtained written representations from our Directors
and executive officers that no other reports were required. As a result, we
believe all Section 16(a) filing requirements were complied with except that
Rocco J. Fabiano, a former officer, failed to timely report a sale of 7,000
shares from his children's irrevocable trust on October 30, 2002.

ITEM 11. EXECUTIVE COMPENSATION.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

This Compensation Committee Report on Executive Compensation should not be
considered part of ("incorporated by reference in") other documents we have
filed or must file with the SEC.

GENERAL

The Compensation Committee of Household's Board of Directors (the
"Committee") determines salaries and salary ranges, incentive compensation and
other compensation for the executive officers listed in this Form 10-K as well
as all direct reports to our Chief Executive Officer. The Committee also
examines and recommends to the Board of Directors the creation or amendment of
our pension, benefit or compensation plans and programs. The Committee grants
stock options, restricted stock rights and other awards under our executive
compensation plans and administers and interprets those plans on behalf of all
of our employees. The Committee establishes financial and qualitative
performance goals, which may be objective or subjective, for the Chief Executive
Officer, his direct reports and other key employees. It later reviews whether
the performance goals were met during the specified period and determines the
compensation to be paid. A report on each officer's performance is then
presented to and reviewed by the Board of Directors.

The Committee retains the compensation consulting firm, Frederic W. Cook &
Co., Inc., to advise it on the competitiveness of compensation paid to our
executive officers and to review our compensation programs and goals and compare
them to a defined financial services comparator group. In 2002, the Committee
also retained Mercer Human Resource Consulting, who, with Frederic W. Cook &
Co., Inc., thoroughly reviewed and evaluated our current programs to ensure they
are competitive with the overall marketplace, particularly companies comparable
to Household. Both consulting firms confirmed that Household's compensation and
benefit programs are appropriate. In addition, Frederic W. Cook & Co., Inc.
reviewed the compensation for our Chief Executive Officer and the next four most
highly paid executive officers for 2002 and reported to the Committee that the
compensation of such individuals is within current market practice.

COMPENSATION PHILOSOPHY AND GOALS

We are a pay-for-performance company. Our corporate goal is to link
compensation to financial performance. We design our compensation programs so
that base salaries are generally competitive with our comparator group (11
companies, all in the S&P 500 Financials Index), with substantially higher
earnings

119

potential on bonus and long-term compensation if we deliver superior stockholder
earnings results. Performance is measured primarily by earnings per share
("EPS") growth.

Our executive compensation policy is designed to retain and attract
exceptional executives by offering highly competitive compensation for superior
performance. In addition to reviewing compensation practices and the financial
performance of our comparator group, the Committee also measures each
executive's performance on individual, business unit and corporate bases. For
example, the Committee believes that the quality of our earnings and our assets
is just as important to the performance of our company as the reported financial
results. Therefore, the Committee considers whether reported earnings are
sustainable or are an aberration and how these earnings were obtained.

We believe our stockholders' interests are best served when a significant
portion of senior management's total compensation is at risk and tied to
specific performance objectives. These objectives are designed to help us
achieve our strategic and financial goals, and specifically, to ultimately
improve shareholder value. To support our belief in pay for performance, the
Board of Directors adopted, and stockholders approved, the 1998 Key Executive
Bonus Plan for the Chief Executive Officer, his direct reports and other key
employees. This is a short-term, performance-based, cash incentive plan that
emphasizes shared objectives and measurable corporate financial performance so
that payments may be treated as an expense to the company in accordance with IRS
rules. The available bonus pool for this bonus plan will equal 5% of the
company's net income that exceeds the net income required to achieve a 12%
return on average common stockholder's equity ("ROE"), as determined in
accordance with the bonus plan for the particular plan year. If the ROE achieved
by Household is less than the designated threshold set by the Committee, no
bonus will be paid under this bonus plan. The Committee will determine at the
beginning of each year what percentage of the bonus pool will be allocated to
each participant and is not required to award any, or all, of the bonus pool
regardless of the company's financial performance. The Committee exercises its
discretion in determining actual bonus awards under this bonus plan by comparing
Household's results to its comparator group and by evaluating the performance of
each key executive against financial and qualitative objectives established at
the beginning of each year. These objectives may include meeting revenue and/or
receivable targeted growth; a targeted loss reserve ratio; a targeted equity to
managed assets ratio; a targeted EPS; reduction in expenses and chargeoffs by
specified percentages; specified net income and operating efficiency ratios for
the company and/or the executive's respective business unit; and an increase in
the number of our products used per each customer.

Our compensation policy also strongly encourages stock ownership by our
executives. Our intent is to make an executive's personal net worth heavily
dependent on appreciation in the value of our stock over the long term.

The four components of our executive compensation policy are:

Base Salary: Determined by individual financial and non-financial
performance, actual pay versus market data for each position and general
economic conditions. In administering base pay, all executive positions are
evaluated and placed in appropriate career bands. Market compensation data for
each position is reviewed annually to evaluate our competitiveness with our
comparator group.

Annual Cash Bonus: Tied directly to individual and corporate financial
performance, the annual bonus encourages potential recipients to achieve
individual, business unit and corporate financial and operational goals.
Excellent performance is encouraged by placing a significant part of the
executive's total compensation at risk. As a result, when certain objective or
subjective performance goals are not met, annual bonuses may be less than the
maximum permitted or not paid.

Long-Term Incentives: Stock options inherently incent our executives to
make decisions that ultimately contribute to building shareholder value. Stock
options align the interests of management and stockholders. Option awards are
based on the Committee's evaluation of the executive's performance. Restricted
stock rights are used, when appropriate, to retain or attract consistently high
performing individuals if market conditions require such incentives.

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Executive Benefits: Household provides its executive management with the
broad benefit coverage available to all employees as well as specific, targeted
supplemental benefits and perquisites that help the company remain competitive
and an attractive partner to the employee.

EXECUTIVE OFFICER COMPENSATION

- Chief Executive Officer

Mr. Aldinger's 2002 base salary was determined by the Committee through an
evaluation of his prior year's performance, his value to the company and
competitive market data prepared by Frederic W. Cook & Co., Inc. With the goal
to keep most of Mr. Aldinger's compensation at risk and related to corporate
financial performance, there was no increase to Mr. Aldinger's salary. The last
increase to Mr. Aldinger's annual salary occurred in September of 1998. The
increase in 1998 was made to acknowledge his increased duties and
responsibilities as a result of the successful merger with Beneficial
Corporation.

Mr. Aldinger's annual cash bonus was determined based upon evaluation of
Household's financial performance relative to our comparator group, and the
satisfaction of shared corporate financial performance goals as well as
qualitative goals. For 2002, Mr. Aldinger's qualitative goals related to
expanding Household's Responsible Lending initiatives. In this vein, he adopted
numerous changes to our products, disclosures and sales practices. In
particular, he expanded Household's best practices initiatives, introduced a
highly innovative and unique "secret shopper" program to ensure adherence to the
company's best practices initiatives, and heightened emphasis on compliance by
centralizing the compliance function at the corporate level reporting directly
to him. Mr. Aldinger's qualitative goals also included enhanced brand building
through the launch of our national advertising program, which led to improved
awareness of our corporate brand, and issuance of company-wide guidelines for
brand usage and the development of plans to incorporate the Household brand into
business units wherever possible. The 2002 shared financial performance goals
for Mr. Aldinger were: (a) increase earnings per share to $4.70, (b) maintain a
20% return on equity, (c) achieve receivable growth of 12.5%, (d) achieve
revenue growth of 16%, (e) limit expense growth to 12%, (f) limit the efficiency
ratio to 32.5%, (g) achieve the greater of a Reserves to Chargeoffs ratio of
100%+ or a Reserves to non-performing loans ratio of 100%, (h) increase the
number of products per customer ratio to 1.70, (i) achieve electronic
collections of 8% in the fourth quarter, and (j) maintain a bankruptcy filing
rate below the current industry filing rate. Household's 2002 operating results
were disappointing as a result of the unplanned charges for the multi-state
attorneys general settlement ($333.2 million, after tax) and the disposition of
our Thrift's assets and deposits at a loss in the fourth quarter ($240.0
million, after tax) to support our targeted capital levels. Earnings per share
was $3.22; return on equity was 20.1%, excluding the loss on disposition of the
Thrift's assets and deposits; receivables growth was 14.3%, excluding liquidity
and capital management decisions to slow growth, the temporary delay of the
acquisition of a large retail services portfolio and the sale of $6.3 billion of
whole loans; revenue growth increased 19%; expense growth was 10%, excluding the
multi-state attorneys general settlement; efficiency ratio was 30.8%, excluding
the loss on the disposition of Thrift assets and deposits and the multi-state
attorneys general settlement charge; the reserves to chargeoffs ratio was 114%
and the reserves to non-performing loans ratio was 113%; the number of products
per customer ratio increased to 1.70; the fourth quarter run-rate for the
percentage of electronic collections was 5.2%, an increase from 2.2% in 2001;
and the year-to-date bankruptcy filing rate was $4.307 billion compared to an
industry rate of $4.394 billion.

In accordance with the intent and purposes of the 1998 Key Executive Bonus
Plan, a bonus pool of $22,900,000 was generated for 2002, compared to
$46,300,000 in 2001. Mr. Aldinger's maximum bonus opportunity for 2002, as set
by the Committee, was 20% of the pool, or $4,300,000. Considering the above
results and the fact that the company earned $1.6 billion, the Committee
approved a 2002 bonus of $2,000,000 to Mr. Aldinger, which represented 9% of the
pool and was a 60% reduction to his $5,000,000 bonus paid in 2001, which
represented 11% of the pool. No specific weighting was given to any of the
quantitative or qualitative factors noted.

121

Mr. Aldinger received a stock option grant for 800,000 shares in 2002. This
option grant was for the same number of shares as last year's grant; however,
the Black-Scholes value of this grant was 60% less than the 2001 grant.

- Other Executive Officers

The other executive officers reviewed by the Committee and named on pages
118 and 119 of this Form 10-K were also paid annual bonuses under the 1998 Key
Executive Bonus Plan based on (i) position level, which determines the maximum
percentage of the bonus pool which may be awarded (this ranges from 3% to 11%),
(ii) achievement of the 2002 shared financial performance goals discussed above,
and (iii) the satisfaction of specific individual objective and performance
goals relating to Household and the executive's individual business unit(s). No
such executive officer received the maximum amount permitted by the Plan.

- Long-Term Incentive Compensation

In 2002, awards made to executive officers under the 1996 Long-Term
Executive Incentive Compensation Plan were comprised entirely of stock options.
The Committee believes that, in most instances, incentive compensation based on
an increase in our Common Stock price is the most appropriate long-term
incentive as it directly ties the executive's compensation to our financial
performance and maintains a significant portion of the executive's total
compensation at-risk.

The Committee believes a long-term award must be meaningful in order to
provide the best incentive and retain the best managers. Our aim is to provide a
compensation package that rewards superior performance. The Committee's stock
option award recommendation for each executive officer was based on a review of
that executive's performance for the year, the executive's value to the company,
previous option awards, and competitive information provided by Frederic W. Cook
& Co., Inc. No specific weight was accorded to the factors noted in this
decision process.

TAX DEDUCTIBILITY

We believe our compensation programs have been structured to meet all the
current tests required for compensation to be deductible by Household for
federal income tax purposes, subject to the limitations on deductibility
relating to non-performance based pay. The Committee has the ability to direct
the company to modify, when necessary, compensation plans for its executive
officers to maximize our federal tax deduction. The Committee reserves the right
to use good independent judgment, on a case by case basis, to make nondeductible
awards to reward employees for excellent service or recruit new executives while
taking into consideration the financial effects such action may have on the
company.

It is the Committee's view that the compensation package of Mr. Aldinger
and each of the named executive officers was based on an appropriate balance of
(1) our overall or a particular business unit's 2002 financial performance, (2)
the officer's individual performance, and (3) competitive standards. No member
of the Committee is a former or current officer or employee of Household or any
of its subsidiaries.

Compensation Committee

G. A. Lorch, Chairman
R. J. Darnall
J. A. Edwardson
S. J. Stewart

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EXECUTIVE COMPENSATION

The table below discloses information concerning compensation for services
rendered during 2002, 2001, and 2000 to Household and its subsidiaries by its
Chief Executive Officer and each of the four most highly paid executive officers
of Household other than its Chief Executive Officer as of December 31, 2002.

SUMMARY COMPENSATION TABLE

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(1) Other Annual Compensation includes items such as financial planning
services, physical exams, club initiation fees, expatriate benefits, and car
allowances. SEC rules require disclosure of the specific type and amount of
compensation when a benefit exceeds 25% of the total Other Annual
Compensation for an individual executive officer. That itemization follows:
Car allowances for 2002 were: $15,000 for Mr. Aldinger, and $11,000 for
Messrs. Schoenholz, Mehta and Harvey (Mrs. Derickson is not eligible for a
car allowance). Mr. Aldinger, as Chairman of Household, is expressly
directed by Board policy to use our corporate aircraft to the fullest extent
for business and personal travel; however, personal aircraft use must be
reported as income. Under the IRS formula, his personal use of company
aircraft was calculated to be $110,829 in 2002, $121,534 in 2001, and
$106,881 in 2000. Mr. Schoenholz is eligible for an annual executive
physical and received reimbursement of $8,262 in 2002. Mr. Harvey is also
eligible for our executive physical program and received reimbursement of
$2,022 and $360 in 2001 and 2000, respectively. Mr. Harvey's 2001 and 2000
compensation also includes insurance premiums paid by Household of $1,225
and $1,000, respectively, for his coverage in the $10 million excess
liability insurance policy Household provides to Directors and Officers.
Mrs. Derickson joined Household on September 5, 2000. As part of her hiring
agreement, she received a $50,000 sign-on bonus in 2000. Mrs. Derickson
received reimbursement for financial counseling expenses of $7,500 and
$3,750 in 2002 and 2001, respectively.

(2) On May 10, 2000, the Compensation Committee granted special one-time
restricted stock rights to 66 key executives of the corporation to assist in
retention, reward outstanding operating performance and reflect current
trends in compensation in the financial services industry. The Restricted
Stock Right values shown in this table for Messrs. Aldinger, Schoenholz,
Mehta and Harvey reflect the fair market value of the underlying Household
Common Stock on the date of grant ($39.875 per share). This valuation does
not take into account the diminution in value attributable to the
restrictions applicable to the underlying shares. These special Restricted
Stock Rights become free of restrictions one-third on the second anniversary
of the date of grant and two-thirds on the third anniversary of the date of
grant. As of December 31, 2002, the total number and values of Restricted
Stock Rights held by these executives were as follows: Mr. Aldinger, 200,626
shares ($5,579,409); Mr. Schoenholz, 125,391 shares ($3,487,124); Mr. Mehta,
125,391 shares ($3,487,124) and Mr. Harvey, 50,156 shares ($1,394,838).

Mrs. Derickson received a special Restricted Stock Right grant upon joining
Household on September 5, 2000 at a fair market value of the underlying
Household Common Stock on the date of grant ($47.435 per share). This
one-time award becomes free of restriction one-third on the third, fourth
and fifth anniversaries from the date of grant. As of December 31, 2002, the
total number and value of Restricted Stock Rights held by Ms. Derickson were
as follows: 21,081 ($586,262).

Dividend equivalents, in the form of additional income, are paid on all
underlying shares for the Restricted Stock Rights at the same rate as paid
to all Common Stock shareholders.

Assuming the proposed merger with HSBC is completed on March 31, 2003, the
balance of the Restricted Stock Rights held by these executives will become
free of restrictions as a result of the merger, as follows: Mr. Aldinger,
134,420 shares; Mr. Schoenholz, 84,012 shares; Mr. Mehta, 84,012 shares; Mr.
Harvey, 35,272 shares; and Mrs. Derickson, 21,081 shares.

(3) Includes life insurance premiums paid by Household in 2002 for the benefit
of executives as follows: Mr. Aldinger, $10,062; Mr. Schoenholz, $5,382; Mr.
Mehta, $2,340; Mr. Harvey, $2,340 and Mrs. Derickson, $2,306. The remaining
amounts shown being Household's contribution for the executive officer's
participation in TRIP and Supplemental TRIP.

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INCENTIVE AND STOCK OPTION PLANS

Household's stockholders previously approved the Household International
1996 Long-Term Executive Incentive Compensation Plan (the "1996 Plan"). The
Committee has discretion to grant employees awards under the 1996 Plan. The
Committee may award stock options, restricted stock rights or common stock as
incentive compensation. Until stockholders approve a new incentive compensation
plan, all incentive awards will be made under the 1996 Plan. The 1996 Plan will
terminate on May 8, 2006. The 1996 Plan allows certain optionees to transfer
options within specific rules and limitations and, unless specifically noted in
the grant, provides for immediate vesting of all outstanding awards in the event
of a change in control of Household. No more than 1,200,000 shares may be
awarded under the 1996 Plan to any one person in any calendar year.

Under the 1996 Plan, the Committee may grant any type of option to purchase
shares of common stock that is legally permitted at the time of grant. Options
will generally not be exercisable less than one year nor more than ten years and
one day from the date of grant. However, the Committee may extend the expiration
date of any option provided it does not exceed fifteen years from the date the
option is granted. The Committee has not extended the expiration date of any
option granted to any of the named executive officers. The option price per
share under each plan will not be less than the fair market value of one share
of common stock on the date of grant. Any unissued shares or shares subject to
option grants which expire will be made available for issuance by the Committee
in the future. Shares of common stock issued under the 1996 Plan may be
authorized but unissued shares, treasury shares, or shares purchased in the open
market.

Options to acquire common stock are also outstanding under an incentive
plan adopted by stockholders in 1984 (the "1984 Plan"), and various option plans
assumed by Household in connection with the mergers with Beneficial Corporation
in 1998 and Renaissance Holdings, Inc. in 2000. All options outstanding under
these plans are fully vested. No further awards will be made under any of these
plans. Payment for options under each of the plans may be made with cash or, at
the discretion of the Committee, with shares of common stock or both cash and
shares.

As of December 31, 2002, options to buy 15,680,974 shares of common stock
were outstanding under the 1996 Plan, while options to acquire 3,519,075 shares
were outstanding under the 1984 Plan and options to purchase 650,322 shares were
outstanding under the Beneficial and Renaissance option plans. We have 1,246,183
shares of common stock available for grant under the 1996 Plan. These amounts
will be proportionately adjusted for any stock dividends, stock splits,
consolidations or reclassifications.

The 1996 Plan authorizes the Committee to grant Restricted Stock Rights
("RSRs"). RSRs entitle an employee to receive shares of common stock if the
employee satisfies conditions set by the Committee in the award. The most common
condition requires the employee to remain employed by Household for a period
before the actual shares are issued to the employee. The Committee may
accelerate any payment prior to the vesting period for reasons such as achieving
individual or corporate performance levels established when the RSR was granted.
Unless specifically noted in the grant, if there is a change in control of
Household, all outstanding RSRs vest in full. A holder of RSRs is not entitled
to any of the rights of a holder of common stock until the shares are issued;
however, the Committee may direct Household to pay the holder cash equal to the
cash dividends declared on common stock for each share of stock subject to an
RSR. RSRs were also granted under the 1984 Plan. As of December 31, 2002, 2,592
employees had outstanding RSRs representing 4,740,827 shares under the 1996
Plan.

The average purchase price for all outstanding options held by the 322
participants in the 1996, 1984, Beneficial and Renaissance Plans at December 31,
2002, was $36.80 with expiration dates from 2003 to 2012.

The following table shows the number of stock options granted in 2002 to
the named executive officers, the percentage each award is of the total granted
to employees in 2002, the per share exercise or base price and the expiration
date. The table also presents the potential realizable value for each grant and
the resulting benefit to all common stock shareholders if the assumed
appreciation in stock price occurs. The presentation of stock options in the
table below is required by SEC rules and is not intended to forecast possible
future appreciation, if any, of the common stock price.

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OPTION GRANTS IN LAST FISCAL YEAR

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(1) Options to employees generally vest (can be exercised) as follows: 25% at
each anniversary after the grant date with full vesting on the fourth
anniversary. The 1984 and 1996 Plans allow the Committee to modify terms of
outstanding options and to reprice the options. No options have ever been
repriced by Household.

The option holder may use shares already held to purchase the option shares
or to pay withholding taxes. The options were granted for a term of ten
years and one day, subject to earlier termination or certain events related
to termination of employment.

(2) The option price shown for the "All Employee Optionees" line is $28.525
(the fair market value option price as determined on the grant date of
November 20, 2002). The assumed expiration date for the "All Employee
Optionees" line is November 20, 2012.

The following table shows option exercises by the named executive officers
in 2002 and their gain ("value realized"), which is the market value on the
exercise date less the price of the option when it was granted. It also shows
the number of options that have not been exercised and their potential value
using the fair market value on December 31, 2002.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

- ---------------

(1) Calculated based on the fair market value of Common Stock on December 31,
2002 ($27.67 per share).

SAVINGS-STOCK OWNERSHIP AND PENSION PLANS

Household established its Tax Reduction Investment Plan ("TRIP"), which is
a deferred profit-sharing and savings plan for our eligible employees. TRIP also
qualifies as an employee stock ownership plan. With certain exceptions, an
employee at least 21 years of age with one year of service (three years of
service if under age 21) and not part of a collective bargaining unit may
contribute into TRIP, on a pre-tax and after-tax basis, up to 15% of the
participant's cash compensation (subject to a maximum annual pre-tax
contribution by a participant of $12,000, as adjusted for cost of living
increases, and certain other limitations imposed by the Code) and invest such
contributions in Common Stock or separate equity or income funds.

We contribute 3% of compensation on behalf of each participant who
contributes 1% and we match any additional participant contributions up to 4% of
compensation but the matching contributions will not exceed

125

6% of a participant's compensation if the participant contributes 4% or more of
compensation. Our matching contributions are invested in Common Stock. The plan
provides for immediate vesting of all contributions. With certain exceptions, a
participant's after-tax contributions which have not been matched by us can be
withdrawn at any time. Both our matching contributions made prior to 1999 and
the participant's after-tax contributions may be withdrawn after five years of
participation in the plan. A participant's pre-tax contributions and our
matching contributions after 1998 may not be withdrawn except for an immediate
financial hardship, upon termination of employment, or after attaining age
59 1/2. Participants may borrow from their TRIP accounts under certain
circumstances.

Household has also established the Supplemental Tax Reduction Investment
Plan ("Supplemental TRIP") which is an unfunded plan for eligible employees of
Household and its participating subsidiaries whose participation in TRIP is
limited by the Code. Only matching contributions required to be made by
Household pursuant to the basic TRIP formula are invested in Supplemental TRIP
through a credit to a bookkeeping account maintained by us which deems such
contributions to be invested in Common Stock share equivalents.

The Household Retirement Income Plan ("RIP") is a non-contributory, defined
benefit pension plan for employees of Household and its U.S. subsidiaries who
are at least 21 years of age with one year of service and not part of a
collective bargaining unit. Annual pension benefits equal a percentage of an
employee's "Final Average Salary" (as defined below) not in excess of "Covered
Compensation" (as defined below) plus a percentage of an employee's Final
Average Salary that exceeds Covered Compensation. "Covered Compensation" is the
average of the Social Security taxable wage base over the 35-year period ending
in the year of retirement or earlier termination of employment. "Final Average
Salary" equals the average of salary plus bonus, whether paid in cash or stock,
for the 48 successive highest paid months out of the employee's last 10 years of
service. The percentage applied to Final Average Salary and Covered Compensation
is determined on the basis of years of employment and age at retirement. This
percentage increases as years of employment and age at retirement increase.
Participants become fully vested in their accrued pension benefits after three
years of vesting service. Payment of vested pension benefits normally begins at
age 65, but an early retirement benefit at reduced levels may be paid if a
participant is at least 55 years of age with 10 years of employment or, if the
participant was an employee on December 31, 1989, is at least 50 years of age
with 15 years of employment.

Effective January 1, 2000, RIP was amended to provide an account-based
formula instead of the traditional defined benefit formula described above for
employees hired after 1999. The account-based formula provides a benefit based
upon a percentage of compensation for each year of service and an assumed rate
of return. The contribution percentage is 2% and the assumed rate of return is
tied to the lesser of the 10-year or 30-year treasury rate.

In 1997, the Board adopted a Supplemental Executive Retirement Plan
("SERP") for Mr. Aldinger because he would not otherwise qualify for a full
benefit under RIP and the Household Supplemental Retirement Income Plan
("Supplemental RIP") due to his age when he joined Household. In 2000, the SERP
was subsequently amended and restated to provide for a benefit based upon the
RIP 1989 formula but with 20 years of benefit service being added and with an
offset not only for RIP and Supplemental RIP but also for pension benefits
received from Wells Fargo and Citibank. The benefit under the SERP formula
(before offset) will not be increased, however, except for interest, after Mr.
Aldinger attains age 60.

TRIP and RIP may be made available to members of a collective bargaining
unit if inclusion results from good faith bargaining.

A portion of the benefits payable under RIP to certain executive officers
(including those named in the Summary Compensation Table) may be paid by
Household through the Supplemental RIP. Supplemental RIP was established due to
the limitations imposed on the RIP by federal laws limiting benefits payable
under tax-qualified plans. Payments made by Household under Supplemental RIP to
certain officers have been deposited by such officers in trusts they created.

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The following table illustrates the amount of RIP (including Supplemental
RIP and any related trust) total annual pension benefits on a straight-life
annuity basis for eligible employees retiring at age 65 who were employed before
1990. If the employee was hired after 1989 and does not have at least 30 years
of employment at retirement, his benefit will be reduced for each month less
than 30 years. The amounts in this table are not subject to deduction for Social
Security or other offset amounts and do not reflect any limitations on benefits
imposed by ERISA or federal tax laws.

The years of employment of Messrs. Aldinger, Schoenholz, Mehta and Harvey
and Mrs. Derickson for purposes of RIP are, respectively, 9 years, 19 years, 5
years, 14 years, and 3 years.

DIRECTOR COMPENSATION

In 2002, the independent Directors of Household received an annual cash
retainer of $50,000 (except the Chair of the Executive Committee, who received a
retainer of $62,000). Household does not pay additional compensation for
committee membership or meeting attendance fees to its Directors. The Chairs of
the Audit, Compensation, Finance and Nominating & Governance Committees received
an additional $5,000, and the Chair of the Executive Committee received an
additional $30,000. As Chairman of the Board of HFC Bank plc, Mr. Fishburn was
paid 99,993 British pounds sterling for his service and 3,767 British pounds
sterling for health insurance by HFC Bank plc. Other than Mr. Fishburn,
Directors who are employees of Household or any of its subsidiaries do not
receive any additional compensation related to their Board service. In September
2002, the Board reviewed its directors compensation philosophy compared to other
financial service companies with the assistance of information provided by
Frederic W. Cook and also took into consideration additional responsibilities
Directors have in light of the proposed New York Stock Exchange corporate
governance guidelines. As a result, effective January 1, 2003, the Board
increased the annual compensation for certain positions as follows: members of
the Audit Committee receive an additional $15,000, the chair of the Audit
Committee receives an additional $25,000, the chairs of the Compensation,
Finance and Nominating & Governance Committees receive an additional $15,000,
and the chair of the Executive Committee receives an additional $50,000.

In 2002, independent Directors could elect to receive all or a portion of
their cash compensation in shares of common stock, defer it under the Deferred
Fee Plan for Directors or purchase options to acquire common stock. Under the
Deferred Fee Plan, Directors may invest their deferred compensation in either
units of phantom shares of common stock, with dividends credited toward
additional stock units; or cash, with interest credited at a market rate set
under the plan. At the end of the deferred period, all accumulated amounts under
the Deferred Fee Plan invested in phantom shares of common stock will be paid in
shares of common stock either in a lump sum or installments as selected by the
Director. For stock options issued in lieu of cash compensation, number of
shares granted equals 10% of the Director's annual cash compensation. For
example, a Director that receives a $50,000 annual cash retainer could elect to
receive an option for 5,000 shares in lieu of the cash retainer. The grant date
is the date options are granted annually in November of the year preceding

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the year in which compensation is earned, and the per share exercise price is
the fair market value of common stock on the grant date. During 2002 Directors
elected to receive, in the aggregate 82% of their cash compensation in common
stock, stock options or deferred phantom shares of common stock.

In 2003, all directors compensation will be paid solely in cash.

In November 2002, independent Directors chose not to receive their annual
option to purchase 10,000 shares of common stock at the stock's fair market
value on the day the option was granted in light of the transaction with HSBC
Holdings. Instead, each Director will receive a cash payment of $120,000, which
is the fair market value of the options he or she would have otherwise received.

In 1995, the Directors' Retirement Income Plan was discontinued, and the
present value of each Director's accrued benefit was deposited into the Deferred
Phantom Stock Plan for Directors. Under the Deferred Phantom Stock Plan,
Directors with less than ten years of service received 750 phantom shares of
common stock annually during the first ten years of service as a Director. In
January 1997, the Board eliminated this and all future Director retirement
benefits. Any payouts to current Directors earned under the Deferred Phantom
Stock Plan will be made only when a Director leaves the Board due to death,
retirement or resignation and will be paid in shares of common stock either in a
lump sum or installments as selected by the Director. Directors who joined the
Board after January 1997 will not receive any retirement benefits.

Household provides each Director with $250,000 of accidental death and
dismemberment insurance and a $10 million personal excess liability insurance
policy. Independent Directors also are offered, on terms that are not more
favorable than those available to the general public, a MasterCard/Visa credit
card issued by one of Household's subsidiaries with a credit limit of $15,000.
Household guarantees the repayment of amounts charged on each card. Directors
may use an apartment maintained by Household in New York City for their personal
use, as available. Directors are credited with $350 additional compensation for
tax purposes for each night the apartment is used for personal use.

Under Household's Matching Gift Program, we match charitable gifts to
qualified organizations (subject to a maximum of $10,000 per year), with a
double match for the first $500 donated to higher education institutions (both
public and private) and eligible non-profit organizations which promote
neighborhood revitalization or economic development for low and moderate income
populations. Each current independent Director may ask us to contribute up to
$10,000 annually to charities of the Director's choice which qualify under our
philanthropic program.

EMPLOYMENT AGREEMENTS

EXISTING EMPLOYMENT AGREEMENTS AND EMPLOYMENT PROTECTION AGREEMENTS

Executive officers have employment agreements or employment protection
agreements approved by the Committee. The initial term of each agreement is 18
months, renewed daily, unless we choose not to renew the contract. During the
contract term, each executive officer receives a minimum specified annual
salary, which may be increased during the term, and is entitled to receive
benefits from our executive bonus and incentive plans, employee retirement
plans, and medical, disability and life insurance plans. We may terminate any
agreement for cause. An executive may terminate an agreement if his or her
compensation is reduced, there is a substantial reduction in responsibilities or
the executive is given notice of non-renewal. With the exception of Mr.
Aldinger, if an agreement is terminated, the executive receives a lump sum
payment, which approximates 150% of the executive's salary and bonus as well as
health coverage at Household's expense for up to 18 months. In the case of Mr.
Aldinger, the lump sum payment will approximate 200% of his salary and bonus.
Mr. Aldinger will also be entitled to life, health and disability coverage, as
well as automobile and financial counseling allowances, for up to two years.

Pursuant to the terms of these agreements, if, during the three-year period
(18-month period under the employment protection agreements) following a change
in control, the employment of the executive is terminated due to a "qualifying
termination," which includes a termination other than for "cause" or disability,
or by the executive for "good cause" (including a termination of employment by
the executive with an employment agreement for any reason during the 60-day
period after the 12-month anniversary of the

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change in control or, in the case of Mr. Aldinger, during the three-year period
following the change in control), the executive will be entitled to receive a
cash payment consisting of:

- a pro rata annual bonus through the date of termination, based on the
highest of the annual bonuses payable to the executive during the three
years preceding the year in which the termination occurs;

- a payment equal to three times (1.5 times under employment protection
agreements) the sum of the executive's base salary and highest annual
bonus; and

- a payment equal to the value of three years (18 months under employment
protection agreements) of additional employer contributions under
Household's tax-qualified and supplemental defined contribution plans.

In addition, upon a qualifying termination following a change in control,
each executive will be entitled to continued welfare benefit coverage for three
years (18 months under the employment protection agreements) after the date of
termination, three years (18 months under the employment protection agreements)
of additional age and service credit under Household's tax-qualified and
supplemental defined benefit retirement plans, and outplacement services. If any
amounts or benefits received under the employment agreements, employment
protection agreements or otherwise are subject to the excise tax imposed under
section 4999 of the Internal Revenue Code, an additional payment will be made to
restore the executive to the after-tax position in which he or she would have
been if the excise tax had not been imposed. Under the employment protection
agreements, if a small reduction in the amount payable would render the excise
tax inapplicable, then this reduction will be made instead.

NEW EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS

At the request of HSBC, several executive officers, including Mr. Aldinger,
have entered into employment agreements relating to their employment with
Household following completion of the pending merger with HSBC. Under his new
employment agreement, Mr. Aldinger will serve as chairman and chief executive
officer of Household until January 1, 2004 and thereafter as chairman and chief
executive officer of Household and HSBC North America, Inc. The agreement
further provides that, during its term, Mr. Aldinger will serve as a member of
the HSBC board of directors. During the term of the agreement, Mr. Aldinger will
be paid an annual base salary equal to his annual base salary as of the date
that the merger agreement was signed, and an annual bonus in an amount at least
equal to the annual average of Mr. Aldinger's bonuses paid with respect to years
1999, 2000 and 2001 (pro rated for any partial year).

Within 30 days of completion of the pending merger with HSBC, or, if the
completion of the merger occurs during the two-month period prior to March 3,
2003, within 30 days after such date, subject to approval of the trustee of
HSBC's Restricted Share Plan, Mr. Aldinger will receive a one-time special
retention grant of HSBC restricted shares equal to $10 million, based on the
closing price of HSBC ordinary shares as of the date of grant. The special
restricted shares will vest in three equal installments on each of the first
three anniversaries of the completion of the merger, as long as Mr. Aldinger
remains employed on each applicable vesting date, subject to accelerated vesting
upon termination of employment by Household without "cause," by Mr. Aldinger for
"good reason" or due to his death or disability. After each of the first and
second anniversaries of the completion of the merger, subject to the approval of
the trustee of HSBC's Restricted Share Plan, Mr. Aldinger will receive an
additional grant of restricted shares of HSBC with a value equal to at least
$5.5 million, based on the closing price of HSBC ordinary shares on the
applicable date of grant. These restricted shares will generally be subject to
the same terms and conditions as the special restricted share grant. To the
extent that all or a portion of any of these grants cannot be made under HSBC's
Restricted Share Plan, Mr. Aldinger will receive a cash bonus equal to the
amount of the grant that he was not able to receive, subject to the same general
terms and conditions of the grant.

During the term of the agreement, except with respect to benefits under
qualified and non-qualified excess and supplemental defined benefit retirement
plans, Mr. Aldinger will receive employee benefits and perquisites that are no
less favorable than those provided to him immediately prior to the date of the
merger agreement. Effective as of the completion of the pending merger with
HSBC, Mr. Aldinger's benefits under

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Household's qualified and non-qualified excess and supplemental defined benefit
retirement plans will be frozen, and Mr. Aldinger will be entitled to receive
the retirement benefits provided under his existing employment agreement when he
ultimately retires.

Mr. Aldinger's new employment agreement provides that if his employment is
terminated during the term by him for "good reason," or by Household for reasons
other than "cause" or disability, he will be entitled to:

- a pro rata target annual bonus for the fiscal year of the date of
termination;

- a payment equal to his annual base salary plus the average of his annual
bonuses with respect to the three-year period ended 2001, times the
number of full and partial months from the date of termination until the
third anniversary of the completion of the merger, divided by 12;

- the immediate vesting and exercisability of each stock option, restricted
stock award and other equity-based award or performance award (or cash
equivalent) that is outstanding as of the date of termination and
treatment as retirement eligible for purposes of exercising any such
award;

- for the remainder of his life and that of his current spouse, continued
medical and dental benefits at Household's cost; and

- his retirement benefits in a lump sum.

If any payments or benefits that Mr. Aldinger receives are subject to the
excise tax imposed under Section 4999 of the Internal Revenue Code, his new
employment agreement also provides for any additional payment to restore him to
the after-tax position that he would have been in had the excise tax not been
imposed.

Upon completion of the pending merger with HSBC, Mr. Aldinger's new
employment agreement will supersede his existing employment agreement with
Household, and Mr. Aldinger's employment under his existing employment agreement
will be deemed to have terminated due to a "qualifying termination," entitling
him to the cash payments under that agreement.

The term of the new employment agreements with the other executive officers
will also begin upon completion of the pending merger with HSBC, and will end on
the third anniversary of that date. Under the new employment agreements, each
executive will generally serve in the same position that such executive held as
of the date of the merger agreement. During the term, each executive will be
paid an annual base salary of not less than such executive's annual base salary
as of the date of the merger agreement and will receive an annual bonus in an
amount at least equal to 75 percent of the annual average of such executive's
bonuses earned with respect to the three-year period ended December 31, 2001
(pro rated for any partial year). During the term, each of the executives will
be eligible to participate, as approved by the HSBC board, in any equity-based
incentive compensation plan or program of HSBC as in effect from time to time
for similarly situated senior executives of Household. In addition, during the
term, each executive will be eligible to participate in the various retirement,
welfare and fringe benefit plans, programs and arrangements of Household, in
accordance with the terms of such plans, programs and arrangements, provided
that they will not receive age and service credit under the Household retirement
plans that would be duplicative of the age and service credit that they are
entitled to under the existing employment agreements or employment protection
agreements, as applicable.

Within 30 days of completion of the merger, or, if completion of the merger
occurs during the two-month period prior to March 3, 2003, within 30 days after
such date, subject to the approval of the trustee of HSBC's Restricted Share
Plan, each of the executives will receive a one-time special retention grant of
HSBC restricted shares, vesting in equal annual installments over a three- or
five-year period. Upon termination of an executive's employment by Household
without "cause" or by an executive as a result of a material breach of the
employment agreement by Household, the restricted shares will vest immediately.
To the extent that all or a portion of any of these grants cannot be made under
HSBC's Restricted Share Plan, the executive will receive a cash bonus equal to
the amount of the grant that such executive was not able to receive, subject to
the same general terms and conditions and the grant.

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If during the term of the new employment agreement, an executive's
employment is terminated by Household other than for "cause" or disability or by
the executive for "good reason," subject to the executive's execution of a
general release in favor of Household and its affiliates, the executive will
continue to receive the executive's base salary and annual bonus described above
at that time and in the manner such payments would have been paid had the
executive remained employed for the remainder of the term of the employment
agreement, and to the extent permitted under the terms of the applicable plans,
the continuation of welfare benefits, umbrella liability insurance and
automobile and financial counseling allowances from the date of termination
until the earlier of the executive becoming eligible to participate in similar
plans of another employer and the last day of the term of the employment
agreement.

Upon completion of the pending merger with HSBC, these new employment
agreements will supersede each executive's existing employment agreement or
employment protection agreement, as applicable, with Household (except that the
excise tax gross-up provision in the existing agreements will survive), and each
executive's employment under the existing employment agreement or employment
protection agreement will be deemed to have terminated due to a "qualifying
termination," entitling the executive to the cash payments under the existing
agreement.

STOCK OPTIONS AND RESTRICTED STOCK RIGHTS

Pursuant to the terms of the equity-based plans of Household and the award
agreements thereunder, stock options to acquire Household common stock and
Household restricted stock rights, including stock options and restricted stock
rights granted to Household's executive officers, will full vest or become free
of restrictions immediately prior to a change in control, including the pending
merger with HSBC, becoming effective, and the stock options granted under each
of the Household long-term incentive plans will remain exercisable until the
expiration of their original term. The Household equity-based plans and award
agreements thereunder provide that the stock options to acquire Household common
stock and restricted stock rights granted on or after November 12, 2002,
including stock options and restricted stock rights held by Household's
executive officers, will not vest or become free of restrictions upon completion
of the pending merger with HSBC. These awards will, however, vest upon
termination of employment by Household for a reason other than due to death,
disability or "cause" or by the employee for "good reason."

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PERFORMANCE OF HOUSEHOLD

The graph and related disclosures contained in this section of the Form
10-K should not be considered part of (i.e., are not "incorporated by
reference") other documents we have filed or must file with the SEC. The stock
price performance shown in the graph does not necessarily indicate future price
performance.

SEC rules require us to include a performance graph comparing, over a
five-year period, the performance of our common stock against Standard & Poor's
500 Stock Index ("S&P 500") and against either a published industry or
line-of-business index or a group of peer issuers. The graph below compares
total returns (assuming all dividends are reinvested) of our common stock, the
S&P 500 and the Standard & Poor's 500 Financial Index ("S&P 500 Financials").
Our common stock is included in the S&P 500. In previous years, we used the
Standard & Poor's Composite Financial Stock Price Index ("S&P Financials") as
the published industry index for this comparison. The S&P Financials index was
discontinued in 2001 and, as a result, we are using the S&P 500 Financials
index, which includes 81 issuers in the financial sector as the published
industry index for this comparison.

FIVE-YEAR CUMULATIVE TOTAL RETURN
ASSUMES INVESTMENT OF $100 BEGINNING DECEMBER 31, 1997 AND THE REINVESTMENT OF
DIVIDENDS.
[LINE GRAPH]

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED MATTERS.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table lists the owners who have advised us that they held
more than 5% of our common stock as of December 31, 2002.

- ---------------

(1) On March 10, 2003, Davis Selected Advisers, L.P. filed a Schedule 13G with
the SEC disclosing that, as of December 31, 2002, it had sole dispositive
power and sole voting power over 40,534,022 shares of common stock.

(2) On February 13, 2003, Capital Research and Management Company filed a
Schedule 13G with the SEC disclosing that, as of December 31, 2002, it had
sole dispositive power over 38,735,000 shares of common stock for which
beneficial ownership is disclaimed, and no sole or shared voting power over
any shares of common stock.

SHARES OF COMMON STOCK BENEFICIALLY OWNED BY DIRECTORS AND EXECUTIVE OFFICERS

The following table lists the beneficial ownership, as of March 19, 2003,
of common stock by each director and the executive officers named on page 123,
individually, and the directors and executive officers of the company as a
group. "Beneficial ownership" includes shares for which an individual has direct
or indirect voting or investment power and includes any shares the individual
has a right to acquire within 60 days.

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(1) Directors and executive officers have sole voting and investment power over
the shares listed above, except as follows. The number of shares of common
stock held by spouses or children in which beneficial ownership is
disclaimed is as follows: Mr. Nichols, 13,200; and Directors and executive
officers as a group, 13,200. The number of shares of common stock held by
spouses, children and charitable or family foundations in which voting and
investment power is shared (or presumed to be shared) is as follows: Mr.
Aldinger, 136,500; Mr. Darnall, 2,000; Mr. Schoenholz, 25,238; and Directors
and executive officers as a group, 178,103. The number of shares of common
stock held under Household's employee benefit plans in which participants
have voting rights and/or investment power is as follows: Mr. Aldinger,
23,587; Mrs. Derickson, 809; Mr. Harvey, 7,810; Mr. Mehta, 2,812; Mr.
Schoenholz, 22,919; and directors and executive officers as a group,
142,203. The number of shares included in the table above which may be
acquired by Household's executive officers through May 18, 2003, pursuant to
the exercise of employee stock options is: Mr. Aldinger, 3,096,000, of which
631,250 vested options are held by Mr. Aldinger's family partnership; Mrs.
Derickson, 32,500; Mr. Harvey, 136,750; Mr. Mehta, 652,000; Mr. Schoenholz,
713,900; and directors and executive officers as a group, 6,412,511.

(2) Represents the number of common stock share equivalents owned by executive
officers under Household's Supplemental TRIP and Deferred Compensation Plan
and by Directors under Household's Deferred Fee Plan for Directors and the
Deferred Phantom Stock Plan for Directors. These share equivalents do not
have voting rights, but are valued according to the market price of the
common stock. The share equivalents accrue dividends at the same rate as the
common stock.

(3) Based on 474,631,342 shares outstanding at March 19, 2003, no director or
executive officer beneficially owns directly or indirectly more than 1% of
common stock. Directors and executive officers as a group beneficially own
approximately 1.7% of the common stock.

Our employees held 11,186,715 shares of common stock in TRIP as of March 19,
2003, excluding the shares held by directors and executive officers shown in
the table. Our Pooled Investment Fund ("PIF"), which holds assets of our
domestic pension plan, held 1,112,546 shares of common stock as of March 19,
2003. Together, TRIP and PIF held 2.5% of the common stock outstanding on
March 19, 2003.

(4) As a trustee of The Hodson Trust and a director of the CTW Foundation, Mr.
Gilliam has shared voting and investment power over 680,005 shares of common
stock. Mr. Gilliam disclaims beneficial ownership of such shares and,
therefore, they are not included in the shares listed above.

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EQUITY COMPENSATION PLANS

The following table sets forth information as of December 31, 2002, with
respect to our compensation plans under which Household is authorized to issue
equity securities:

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(1) Stock option awards under compensation plans of Beneficial Corporation and
Renaissance Holdings, Inc. were assumed upon merger in June 1998 and
February 2000, respectively. No further awards may be made under these plans
and an aggregate of 650,322 shares of our common stock were issuable
pursuant to awards outstanding at the time of the respective mergers. The
weighted average exercise price of the outstanding awards is $ .

(2) Pursuant to the Employee Stock Purchase Plan, eligible employees may elect
to have up to $20,040 withheld from their paychecks each year to purchase
our common stock. The stock is purchased on July 1 of each year at 85% of
the lesser of its market price at the beginning or end of a one-year
subscription period. The Employee Stock Purchase Plan was terminated on
March 7, 2003 and common stock was purchased on that date.

CHANGE IN CONTROL

The information required by Item 403(c) of Regulation S-K is included in
Item 1 of this Form 10-K under the heading "Introduction."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Prior to July 30, 2002, and the enactment of the Sarbanes-Oxley Act of
2002, the Committee could direct the company to lend funds or guarantee loans to
executives that were used to settle their tax consequences upon exercising a
stock option or upon vesting of RSRs under the 1984 and 1996 Plans. The board of
directors discontinued this program in September 2002 and, while the
Sarbanes-Oxley Act of 2002 permitted loans outstanding on July 30, 2002 to
remain outstanding, loans to the executive officers named on page 123 were
repaid in full on or before December 31, 2002.

Loans under this program had a maximum term of eight years and a fixed
interest rate equal to the applicable rate in effect under Section 1274(d) of
the Code at the time the loan was made, compounded semiannually. The following
lists the unpaid principal balances for executive officers with loans
outstanding under the 1984 and 1996 Plans during 2002 and for all executive
officers as a group.

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Executive officers and directors of Household have been, or may become,
customers of, or had transactions with, Household's subsidiaries. Such
transactions, which include credit card loans, are made by our subsidiaries in
the ordinary course of business on substantially the same terms, including
interest rate and collateral, as those for comparable transactions with other
persons and do not involve more than normal risk of loss or other unfavorable
consequences.

ITEM 14. CONTROLS AND PROCEDURES.

We maintain a system of internal and disclosure 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 annual report on Form 10-K.

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

AUDIT REPORTS OF KPMG LLP

KPMG LLP's reports on Household's consolidated financial statements for the
two most recent fiscal years ended December 31, 2001 and December 31, 2002 did
not contain an adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles. In
addition, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to KPMG LLP's satisfaction, would have caused
them to make reference to the subject matter in connection with their report on
Household's consolidated financial statements for such years; and there were no
reportable events, as listed in Item 304(a)(l)(v) of Regulation S-K.

RATIFICATION OF AUDITORS

The Board of Directors, upon recommendation of the Audit Committee, voted
to appoint KPMG LLP to serve as the independent public accountants for the
fiscal year ending December 31, 2003, unless the pending merger of Household
with HSBC is completed.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Financial Statements.

The consolidated financial statements listed below, together with an
opinion of KPMG LLP dated March 24, 2003 with respect thereto, are included
in this Form 10-K pursuant to Item 8. Financial Statements and
Supplementary Data of this Form 10-K.

HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES:
Consolidated Statements of Income for the Three Years Ended December
31, 2002.
Consolidated Balance Sheets, December 31, 2002 and 2001.
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2002.
Consolidated Statements of Changes in Preferred Stock and Common
Shareholders' Equity for the Three Years Ended December 31, 2002.

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Notes to Consolidated Financial Statements.
Independent Auditors' Report.
Selected Quarterly Financial Data (Unaudited).

(b) Reports on Form 8-K.

For the three months ended December 31, 2002, Household filed Current
Reports on Form 8-K on October 15, October 16, October 29, October 30,
November 6 and November 18, 2002. Household also filed Current Reports on
Form 8-K on January 16, January 21 and March 19, 2003.

(c) Exhibits.

3(i) Restated Certificate of Incorporation of Household
International, Inc. as amended.
3(ii) Bylaws of Household International, Inc. as amended.
4(a) Rights Agreement dated as of July 9, 1996, between Household
International, Inc. and Harris Trust and Savings Bank, as
Rights Agent (incorporated by reference to Exhibit 99.1 of
our Current Report on Form 8-K dated July 9, 1996).
4(b) Amendment No. 1 to Rights Agreement dated as of November 13,
2002, between Household International, Inc. and Harris Trust
and Savings Bank, as Rights Agent (incorporated by reference
to Exhibit 4.2 of our Current Report on Form 8-K dated
November 13, 2002).
4(c) Standard Multiple-Series Indenture Provisions for Senior
Debt Securities of Household Finance Corporation dated as of
June 1, 1992 (incorporated by reference to Exhibit 4(b) to
the Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-48854).
4(d) Indenture dated as of December 1, 1993 for Senior Debt
Securities between Household Finance Corporation and The
Chase Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-55561 filed on September 20, 1994).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of Holders of our long-term
senior and senior subordinated debt does not exceed 10
percent of our total assets. Household agrees to furnish to
the Securities and Exchange Commission, upon request, a copy
of each instrument defining the rights of holders of our
long-term senior and senior subordinated debt.
10.1 Household International, Inc. 1998 Key Executive Bonus Plan
(incorporated by reference to Exhibit 10.1 of our Annual
Report on Form 10-K for the fiscal year ended December 31,
2001).
10.2 Household International, Inc. Corporate Executive Bonus Plan
(incorporated by reference to Exhibit 10.2 of our Annual
Report on Form 10-K for the fiscal year ended December 31,
2001).
10.3 Household International, Inc. Long-Term Executive Incentive
Compensation Plan, as amended.
10.4 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. Long-Term Executive
Incentive Compensation Plan (incorporated by Reference to
Exhibit 10.4 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.5 Household International, Inc. 1996 Long-Term Executive
Incentive Compensation Plan, as amended.
10.6 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. 1996 Long-Term
Executive Incentive Compensation Plan.
10.7 Household International, Inc. Deferred Fee Plan for
Directors (incorporated by reference to Exhibit 10.7 of our
Annual Report Form 10-K for the fiscal year ended December
31, 1999).
10.8 Household International, Inc. Deferred Phantom Stock Plan
for Directors (incorporated by reference to Exhibit 10.8 of
our Annual Report Form 10-K for the fiscal year ended year
ended December 31, 1999).
10.9 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Executives, as Amended (incorporated
by reference to Exhibit 10.9 of our Annual Report on Form
10-K for the fiscal year ended December 31, 1998).

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10.10 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Stock Option Exercises (incorporated
by reference to Exhibit 10.10 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2001).
10.11 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Restricted Stock Rights, as amended.
10.12(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and W.F. Aldinger.
10.12(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and W.F. Aldinger.
10.13(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and D.A. Schoenholz.
10.13(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and D.A. Schoenholz.
10.14(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and S.N. Mehta.
10.14(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and S.N. Mehta.
10.15(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and K.M. Harvey.
10.15(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and K.M. Harvey.
10.16(a) Executive Employment Protection Agreement, dated March 1,
2002, between Household International, Inc. and S.L.
Derickson.
10.16(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and S.L. Derickson.
10.17 Amended and Restated Supplemental Executive Retirement Plan
for W.F. Aldinger (incorporated by reference to Exhibit
10.16 of our Form 10-K for the fiscal year ended December
31, 2000).
10.18 Beneficial Corporation 1990 Non-qualified Stock Option Plan
(incorporated by reference to Exhibit 4.4 of Beneficial
Corporation's Form S-8 filed on April 23, 1996, File No.
333-02737).
10.19 Amendment to Beneficial Corporation 1990 Non-qualified Stock
Option Plan (incorporated by reference to Exhibit 4.2 of
Beneficial Corporation's Form S-8 filed July 1, 1998, File
No. 333-58291).
11 Statement of Computation of Earnings per Share.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
21 List of our subsidiaries.
23 Consent of KPMG LLP, Certified Public Accountants.
24 Power of Attorney (included on page 139 of this Form 10-K).
99.1 Ratings of Household International, Inc. and its significant
subsidiaries.
99.2 Certification of Chief Executive Officer.
99.3 Certification of Principal Financial Officer.

We will furnish copies of the exhibits referred to above to our
stockholders upon receiving a written request therefor. We charge fifteen cents
per page for providing these copies. Requests should be made to Household
International, Inc., 2700 Sanders Road, Prospect Heights, Illinois 60070,
Attention: Corporate Secretary.

(d) Schedules.

I -- Condensed Financial Information of Registrant.

138

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Household International, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on
this, the 24th day of March, 2003.

HOUSEHOLD INTERNATIONAL, INC.

By: /s/ W.F. ALDINGER
------------------------------------
W.F. Aldinger
Chairman and Chief Executive Officer

Each person whose signature appears below constitutes and appoints J.W.
Blenke and P.D. Schwartz, and each or any of them (with full power to act
alone), as his/her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him/her in his/her name, place and
stead, in any and all capacities, to sign and file, with the Securities and
Exchange Commission, this Form 10-K and any and all amendments and exhibits
thereto, and all documents in connection therewith, granting unto each such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he/she might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent or their substitutes may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Household
International, Inc. and in the capacities indicated on the 24th day of March,
2003.

139

140

CERTIFICATIONS

I, William F. Aldinger, certify that:

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

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

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

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual 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
annual report (the "Evaluation Date"); and

c) Presented in this annual 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 the registrant's board of directors (or persons performing the
equivalent functions):

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 the 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
annual report whether 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.

/s/ WILLIAM F. ALDINGER
--------------------------------------
William F. Aldinger
Chairman and Chief Executive Officer

Date: March 24, 2003

141

CERTIFICATIONS

I, David A. Schoenholz, certify that:

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

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

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

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual 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
annual report (the "Evaluation Date"); and

c) Presented in this annual 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 the registrant's board of directors (or persons performing the
equivalent functions):

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 the 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
annual report whether 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.

/s/ D. A. SCHOENHOLZ
--------------------------------------
David A. Schoenholz
President and Chief Operating Officer
(as principal financial officer)

Date: March 24, 2003

142

EXHIBIT INDEX

3(i) Restated Certificate of Incorporation of Household
International, Inc. as amended.
3(ii) Bylaws of Household International, Inc. as amended.
4(a) Rights Agreement dated as of July 9, 1996, between Household
International, Inc. and Harris Trust and Savings Bank, as
Rights Agent (incorporated by reference to Exhibit 99.1 of
our Current Report on Form 8-K dated July 9, 1996).
4(b) Amendment No. 1 to Rights Agreement dated as of November 13,
2002, between Household International, Inc. and Harris Trust
and Savings Bank, as Rights Agent (incorporated by reference
to Exhibit 4.2 of our Current Report on Form 8-K dated
November 13, 2002).
4(c) Standard Multiple-Series Indenture Provisions for Senior
Debt Securities of Household Finance Corporation dated as of
June 1, 1992 (incorporated by reference to Exhibit 4(b) to
the Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-48854).
4(d) Indenture dated as of December 1, 1993 for Senior Debt
Securities between Household Finance Corporation and The
Chase Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-55561 filed on September 20, 1994).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of Holders of our long-term
senior and senior subordinated debt does not exceed 10
percent of our total assets. Household agrees to furnish to
the Securities and Exchange Commission, upon request, a copy
of each instrument defining the rights of holders of our
long-term senior and senior subordinated debt.
10.1 Household International, Inc. 1998 Key Executive Bonus Plan
(incorporated by reference to Exhibit 10.1 of our Annual
Report on Form 10-K for the fiscal year ended December 31,
2001).
10.2 Household International, Inc. Corporate Executive Bonus Plan
(incorporated by reference to Exhibit 10.2 of our Annual
Report on Form 10-K for the fiscal year ended December 31,
2001).
10.3 Household International, Inc. Long-Term Executive Incentive
Compensation Plan, as amended.
10.4 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. Long-Term Executive
Incentive Compensation Plan (incorporated by Reference to
Exhibit 10.4 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.5 Household International, Inc. 1996 Long-Term Executive
Incentive Compensation Plan, as amended.
10.6 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. 1996 Long-Term
Executive Incentive Compensation Plan.
10.7 Household International, Inc. Deferred Fee Plan for
Directors (incorporated by reference to Exhibit 10.7 of our
Annual Report Form 10-K for the fiscal year ended December
31, 1999).
10.8 Household International, Inc. Deferred Phantom Stock Plan
for Directors (incorporated by reference to Exhibit 10.8 of
our Annual Report Form 10-K for the fiscal year ended year
ended December 31, 1999).
10.9 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Executives, as Amended (incorporated
by reference to Exhibit 10.9 of our Annual Report on Form
10-K for the fiscal year ended December 31, 1998).
10.10 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Stock Option Exercises (incorporated
by reference to Exhibit 10.10 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2001).
10.11 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Restricted Stock Rights, as amended.
10.12(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and W.F. Aldinger.

143

10.12(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and W.F. Aldinger.
10.13(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and D.A. Schoenholz.
10.13(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and D.A. Schoenholz.
10.14(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and S.N. Mehta.
10.14(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and S.N. Mehta.
10.15(a) Executive Employment Agreement, dated March 1, 2002, between
Household International, Inc. and K.M. Harvey.
10.15(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and K.M. Harvey.
10.16(a) Executive Employment Protection Agreement, dated March 1,
2002, between Household International, Inc. and S.L.
Derickson.
10.16(b) Executive Employment Agreement, dated November 14, 2002,
between Household International, Inc. and S.L. Derickson.
10.17 Amended and Restated Supplemental Executive Retirement Plan
for W.F. Aldinger (incorporated by reference to Exhibit
10.16 of our Form 10-K for the fiscal year ended December
31, 2000).
10.18 Beneficial Corporation 1990 Non-qualified Stock Option Plan
(incorporated by reference to Exhibit 4.4 of Beneficial
Corporation's Form S-8 filed on April 23, 1996, File No.
333-02737).
10.19 Amendment to Beneficial Corporation 1990 Non-qualified Stock
Option Plan (incorporated by reference to Exhibit 4.2 of
Beneficial Corporation's Form S-8 filed July 1, 1998, File
No. 333-58291).
11 Statement of Computation of Earnings per Share.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
21 List of our subsidiaries.
23 Consent of KPMG LLP, Certified Public Accountants.
24 Power of Attorney (included on page 139 of this Form 10-K).
99.1 Ratings of Household International, Inc. and its significant
subsidiaries.
99.2 Certification of Chief Executive Officer.
99.3 Certification of Principal Financial Officer.

144

INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION

To the Board of Directors of Household International, Inc.:

We have audited and reported separately herein on the consolidated
financial statements of Household International, Inc. and subsidiaries as of
December 31, 2002 and 2001 and for each of the years in the three-year period
ended December 31, 2002.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements of Household International, Inc. taken as a
whole. The supplementary information included in Schedule 1 of Item 14(d) is
presented for purposes of additional analysis and is not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.

/s/ KPMG LLP
--------------------------------------
KPMG LLP

Chicago, Illinois
March 24, 2003

145

SCHEDULE I

HOUSEHOLD INTERNATIONAL, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME

See accompanying note to condensed financial statements.
146

HOUSEHOLD INTERNATIONAL, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS

- ---------------

* 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 15,
2031, January 30, 2031, June 30, 2030, December 31, 2037 and June 30, 2025,
respectively.

See accompanying note to condensed financial statements.
147

HOUSEHOLD INTERNATIONAL, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS

See accompanying note to condensed financial statements.
148

HOUSEHOLD INTERNATIONAL, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT

The condensed financial statements of Household International, Inc. have
been prepared on a parent company unconsolidated basis.

Acquisition of Household International On November 14, 2002, Household
International, Inc. and HSBC Holdings plc ("HSBC"), announced that they had
entered into a definitive merger agreement under which Household International,
Inc. will be merged into a wholly owned subsidiary of HSBC, subject to the terms
and conditions of the merger agreement. Completion of the merger is subject to
regulatory approvals, the approval of the stockholders of both Household
International, Inc. and HSBC and other customary conditions.

Common Stock Offering In October 2002, we issued 18.7 million shares of
our common stock for $400 million.

Adjustable Conversion-Rate Equity Security Units In October 2002, we
issued 8.875 percent Adjustable Conversion-Rate Equity Security Units. The
Adjustable Conversion-Rate Equity Security Units each consisted of a contract to
purchase, for $25, a share of our common stock on February 15, 2006 and a senior
unsecured note of Household Finance Corporation, a wholly owned subsidiary of
Household International, Inc., with a principal amount of $25. The stock
purchase contracts require holders to purchase between 21.1 million and 25.3
million shares of our common stock representing between .9735 and 1.1682 shares
per unit based upon the applicable market value of one share of our common
stock, as defined, on February 15, 2006.

Zero-Coupon Convertible Debt Securities In July 2002, substantially all of
the holders of our $1.2 billion zero-coupon convertible debt securities
exercised their put options requiring us to repurchase their outstanding
securities. The securities were issued in August 2001, were due 2021 and had a
one-percent yield to maturity.

Forward Purchase Agreements At December 31, 2002, we had agreements to
purchase, on a forward basis, approximately 4.9 million shares of our common
stock at a weighted-average forward price of $53.05 per share. The agreements
expire at various dates through August 2003. These agreements may be settled
physically or on a net basis in shares of our common stock or in cash, depending
on the terms of the various agreements, at our option.

Guarantees We have guaranteed payment of certain debt obligations
(excluding certain deposits) of Household International (U.K.) Limited ("HIUK").
The amount of guaranteed debt outstanding at HIUK was approximately $2.2 billion
at December 31, 2002. We have also guaranteed certain Canadian bank financings;
none of which were drawn at December 31, 2002.

149