HOUSEHOLD FINANCE CORP - 10-K Annual Report

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

HOUSEHOLD FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 36-1239445
(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. [X]

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

As of March 19, 2003, there were 1,000 shares of the registrant's common
stock outstanding, all of which are owned by Household International, Inc.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

Household Finance Corporation ("HFC") is a wholly owned subsidiary of
Household International, Inc. ("Household International" or the "parent
company"). Household International has entered into a merger agreement with HSBC
Holdings plc ("HSBC") pursuant to which HSBC will acquire Household
International in 2003, subject to the terms and conditions of the merger
agreement. As a result of this merger, Household International will no longer be
a public company. However, Household International and HFC 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 our business as a result of the merger and does not
discuss the impact of the merger on Household International's compensation
policies or employment arrangements, or our liquidity, capital or reportable
segments. For material information regarding the merger, including its impact on
Household International, please see Household International'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

HFC offers 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 to
consumers in the United States. Where applicable laws permit, we offer credit
and specialty insurance to our customers in connection with our products in the
United States and Canada. HFC and its subsidiaries may also be referred to in
this Form 10-K as "we," "us" or "our."

We have one reportable segment: Consumer, which includes our consumer
lending, mortgage services, retail services, credit card services and auto
finance businesses. Information about businesses or functions that are not
individually reportable, such as our insurance services, refund lending, direct
lending and commercial businesses, as well as our corporate and treasury
activities, are included under the "All Other" segment.

The consumer lending business originates real estate and personal
non-credit card loan volume through its retail branch network, direct mail,
telemarketing, strategic alliances and Internet applications. The mortgage
services business originates and purchases real estate secured loan volume
primarily through brokers and correspondents. Auto finance loan volume is
generated primarily through dealer relationships from which installment
contracts are purchased. Additional auto finance loan 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 affinity and co-branding
relationships and mass-media advertisement (The GM Card(R)). We also supplement
internally-generated receivable growth with portfolio acquisitions and, prior to
2003, purchases from an affiliate.

REGULATION

We are subject to ongoing regulation by the SEC, the Office of the
Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation
("FDIC") and other U.S. (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 Household International,
to which Household International has responded, for factual material surrounding
the consumer protection settlement with a multi-state working group of state
attorneys general and regulatory agencies, the 2002 restatement and certain

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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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other matters. On March 18, 2003, without admitting or denying any wrongdoing,
Household International consented to the entry of an order by the SEC pursuant
to Section 21C of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The order contains findings by the SEC relating to the sufficiency of
certain disclosures in reports Household International filed with the SEC during
2002. The SEC found that Household International's disclosures regarding its
restructure policies fail to present an accurate description of the minimum
payment requirements applicable under the various policies or to disclose its
policy of automatically restructuring numerous loans and are therefore false and
misleading. The SEC also found misleading Household International's failure to
disclose its policy of excluding forbearance arrangements in certain of its
businesses from its 60+ days contractual delinquency statistics. The SEC noted
that the 60+ days contractual delinquency rate and restructuring statistics are
key measures of 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 Household International upon request.

The consent order requires Household International 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 it to
pay any fines or monetary damages. The SEC's order does not require any
restatement of Household International's and our financial results. Household
International has 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."

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 HFC 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. HFC 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 parent company's
corporate web site, www.household.com under the heading "Customer Commitment".
As part of Household International's agreement with the state attorneys general
and regulators, we also will 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.

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Banking Institutions. Our banking institution originates receivables in
our MasterCard, Visa, and private label credit card businesses. Historically,
our banking institutions improved operational efficiencies by offering loan
products with common characteristics across the United States. Generally, our
banking institutions sold the receivables they originated to non-banking
affiliates (also subsidiaries of HFC) so that we could manage all of our
customers with uniform policies, regardless through which legal entity a loan
was made. In addition, this structure allowed us and our parent company to
better manage the levels of regulatory capital required to be maintained at
these banking institutions. In 2002, we were advised by the Office of Thrift
Supervision, the OCC and the 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
institution. Household International and HFC agreed to maintain the regulatory
capital of our institutions at these specified levels. After evaluating ways to
better manage these new capital requirements, Household International combined
all of its credit card banks into a single credit card banking subsidiary of
HFC, chartered by the OCC, 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 on a daily basis. We believe that these actions
streamline and simplify our regulatory process 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. 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.

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.

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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 HFC 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. HFC 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;

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

- 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 HFC or its businesses;

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

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

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

AVAILABLE INFORMATION

Our parent company 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.

Substantially all branch offices, divisional offices, corporate offices,
regional processing and regional servicing center spaces are operated under
lease with the exception of a credit card processing facility in Las Vegas,
Nevada, and servicing facilities in London, Kentucky, Mt. Prospect, Illinois,
and Chesapeake, Virginia, and a 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.

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 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, Household International 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 Household International 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

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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, Household
International 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. Household International
deposited three equal installments into the fund in January, February and March
2003.

Household International has 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 Household
International and its affiliates (including us) relating to 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 action 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 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" 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, we restated our previously reported consolidated financial
statements. The restatement relates to a MasterCard and Visa affinity credit
card relationship and a third party marketing agreement, which were entered into
between 1996 and 1999. All were part of our credit card services business. 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 $70.2 million, after-tax, retroactive reduction to
retained earnings at December 31, 1998. As a result of the restatement,
Household International, 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 stock.
To date, none of the class
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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 International securities between October 23,
1997 and October 11, 2002, arising out of alleged false and misleading
statements in connection with our sales and lending practices, the preliminary
agreement with a multi-state working group of state attorneys general, the
restatement and the merger of Household International with HSBC. 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.

Merger Litigation. Several lawsuits have been filed alleging violations of
law with respect to the pending merger of Household International 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.

The operative complaints in two lawsuits pending in the Circuit Court of
Cook County, Illinois, Chancery Division, McLaughlin v. Aldinger et al. (filed
on November 15, 2002), No. 02 CH 20683, and Pace v. Aldinger et al. (filed on
October 24, 2002 and amended on November 15, 2002), No. 02 CH 19270 , assert
purported derivative claims arising out of the restatement of Household
International's consolidated financial statements, the preliminary agreement
with a multi-state working group of state attorneys general, and other
accounting matters. Both actions seek unspecified damages and the complaint in
Pace also seeks to enjoin the pending merger with HSBC. A third lawsuit relating
to the merger with HSBC, Williamson v. Aldinger et al. (filed on January 15,
2003), is pending in the United States District Court for the Northern District
of Illinois, and claims that certain of Household International'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. This complaint
also seeks to enjoin the pending merger with HSBC.

Plaintiffs in the three actions have asserted that the proxy materials
provided to the parent company's stockholders are deficient in failing to
disclose or sufficiently emphasize the following, which plaintiffs consider
important to the parent company's stockholders' decision with respect to the
pending merger with HSBC, including: that Household International or its
financial advisor failed to obtain internal projections of HSBC of its expected
future performance; that, as has been alleged, Household International 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 International and its 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 Household International's 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 International 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.

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Other actions arising out of the restatement, which purport to assert
claims under ERISA on behalf of participants in Household International'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 complaint has not yet been filed, it is not possible to
state what the claims may be or what damages may be sought.

We believe that we have not, Household International has not and our
respective 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. 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" or "HBSB"), our credit card banking subsidiary. Concurrently with
the application process, HFC 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 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.

Omitted.

PART II

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

All 1,000 shares of HFC's outstanding common stock are owned by Household
International. Consequently, there is no public market in HFC's common stock.

HFC paid cash dividends to Household International of $300 million in 2002,
$650 million in 2001 and $425 million in 2000. Household Bank (SB), N.A., a
wholly owned subsidiary, also paid cash dividends of $225 million to an
affiliate in 2001.

9

ITEM 6. SELECTED FINANCIAL DATA.

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

(1) The following information, including operating results for 2002 which are
presented 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.

10

(2) In 2002, we sold $2.7 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 purchased a $.7 billion private
label portfolio.

(3) 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 below for further
information on managed basis reporting.

(4) The ratio of tangible shareholder's equity to tangible managed assets is a
non-GAAP financial ratio that, when calculated for Household International,
is used by certain rating agencies as a measure to evaluate its capital
adequacy. This ratio may differ from similarly named measures presented by
other companies. Because they include obligations to purchase Household
International common stock in 2006, our Adjustable Conversion-Rate Equity
Security Units are also considered equity in calculating this ratio. Common
equity to total managed assets, the most directly comparable GAAP financial
measure, is also presented in our selected financial ratios.

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

BASIS OF REPORTING

Acquisition of Household International. On November 14, 2002, our parent,
Household International, Inc. ("Household International"), and HSBC Holdings plc
("HSBC"), announced that they had entered into a definitive merger agreement
under which Household International will be merged into a wholly owned
subsidiary of HSBC, subject to the terms and conditions contained in the merger
agreement. Household International has agreed that except with HSBC's prior
written consent, it will conduct its business in the ordinary course consistent
with past practices during the period from the signing of the merger agreement
until the completion of the merger. Household International also agreed to use
reasonable best efforts to preserve its present business organizations, to keep
available the services of its current officers and key employees and preserve
existing relationships and goodwill with persons with whom it does business.
Consummation of the merger is subject to regulatory approvals, the approval of
the stockholders of both Household International and HSBC and other customary
conditions.

Segments. We have one reportable segment, Consumer, which consists of our
consumer lending, mortgage services, retail services, credit card services and
auto finance businesses. At December 31, 2002, our owned receivables totaled
$75.2 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 35 to 37 and Note
5, "Asset Securitizations," and Note 18, "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.

11

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 HFC.

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 Household
International's Board of Directors, including the underlying estimates,
assumptions and account management policies and practices.

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 $3.5 billion in
2002, $2.6 billion in 2001 and $1.9 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.

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 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.

12

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 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
13

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.

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 shareholder's 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 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. Certain of these

14

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, $1.7 billion in 2001 and $1.4
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) was $2.0 billion in 2002, a 14
percent increase over 2001 net income. Operating net income is an
important measure in evaluating trends for comparative purposes.

Our improved operating net income was due to receivable and revenue
growth. Receivable growth was partially offset by higher securitization
levels and asset sales of $2.7 billion. 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.

On October 11, 2002, Household International 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 its 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.

- Owned receivables grew 12 percent to $75.2 billion in 2002. In our real
estate secured portfolio, strong growth was partially offset by whole
loan sales of $2.7 billion pursuant to our liquidity management plans.
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 shareholder's equity ("ROE") was 16.9
percent in 2002, compared to 20.8 percent in 2001 and 19.1 percent in
2000. Our return on average owned assets ("ROA") was 1.99 percent in
2002, compared to 2.56 percent in 2001 and 2.42 percent in 2000.
Excluding the settlement charge, ROE was 20.2 percent and ROA was 2.40
percent in 2002.

- Our owned net interest margin was 8.24 percent in 2002, compared to 8.59
percent in 2001 and 8.23 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 4.10 percent in 2002, compared to
3.72 percent in 2001 and 3.51 percent in 2000. Our delinquency ratio was
5.63 percent at December 31, 2002, compared to 4.93 percent at December
31, 2001. Both ratios were negatively affected by the weak economy and
higher industry bankruptcy filings.

15

- During 2002, we recorded owned loss provision greater than charge-offs of
$568.6 million, increasing our owned loss reserves to $3.2 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 39.4 percent in 2002, 37.1 percent
in 2001 and 38.9 percent in 2000. The 2002 ratio reflects the settlement
charge. Excluding this item, our owned basis efficiency ratio was 34.1
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 Consumer segment. The restatement
related to a MasterCard and Visa affinity credit card relationship and a
marketing agreement with a third party credit card marketing company. The
restatement resulted in a $70.2 million, after-tax, retroactive reduction
to retained earnings at December 31, 1998.

- On July 1, 2002, Household International contributed all of the capital
stock of Household Bank (SB), N.A. ("HBSB"), a wholly owned subsidiary of
Household Bank, f.s.b., to HFC. HBSB, in turn, purchased all of the
assets of Beneficial Bank USA, a wholly owned credit card banking
subsidiary of HFC. Subsequently, we merged our wholly owned banking
subsidiary, Household Bank (Nevada), N.A. with and into HBSB with HBSB
being the surviving entity. The merger completed the consolidation of all
of Household International's credit card banks into one credit card
banking subsidiary of HFC. We believe the combination of the banks
streamlines and simplifies our regulatory reporting process as well as
optimizes capital and liquidity management. In accordance with the
guidance established for mergers involving affiliates under common
control, the financial statements of HFC include the results of HBSB for
all periods presented similar to a pooling of interests.

- 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

Our Consumer segment reported net income of $1.4 billion 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) was $1.7
billion in 2002, compared to net income of $1.5 billion in 2001 and $1.4 billion
in 2000. Operating net income is an important measure in evaluating trends for
comparative purposes.

The improved operating results were driven by higher net interest margin
dollars and total other revenues which increased $2.1 billion, or 23 percent, in
2002 and $1.2 billion, or 16 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 $1.6 billion, or
44 percent, in 2002 and $609.2 million, or 20 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
$1.1 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 $97.4 billion at year-end 2002, up 13 percent
from $86.6 billion in 2001 and $74.0 billion in 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 business of
$2.7 billion pursuant to our liquidity management plans. Return on average
managed assets ("ROMA") was 1.45 percent in 2002, compared to 1.89 percent in
2001 and 1.95 percent in 2000. Excluding the settlement charge, ROMA was 1.80
percent in 2002. The declines in the ratio in both years reflects higher credit
loss provision. A higher percentage of lower margin real estate secured
receivables also contributed to the decrease in 2001.

16

See Note 18, "Segment Reporting," to the accompanying consolidated
financial statements for additional segment information.

BALANCE SHEET REVIEW

Owned assets totaled $88.4 billion at December 31, 2002 and $74.5 billion
at December 31, 2001. Owned receivables may vary from period to period depending
on the timing and size of securitization transactions. We had initial
securitizations of $9.5 billion in 2002 and $5.3 billion of receivables 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 partially offset by real estate secured whole loan sales
and higher securitization levels pursuant to our liquidity management plans.
Owned receivables and increases (decreases) over prior years are shown in the
following table:

- Real estate secured receivables increased $6.9 billion to $44.1 billion
during 2002. Growth in our branches was partially offset by whole loan
sales of $2.7 billion by our mortgage services and consumer lending
businesses pursuant to our liquidity management plans. 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 $304.1 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 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 $638.2 million to $7.6 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 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. We had initial securitizations of
MasterCard and Visa receivables of $.9 billion in 2002 compared to $.3
billion in 2001.

Private label receivables decreased $482.7 million to $9.4 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

17

$.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 $1.1 billion to $11.7
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 $2.0 billion in 2001. The increase in Union
Plus personal unsecured loans is attributable to receivables purchased
from Household Bank, f.s.b. as a result of Household International's
decision to dispose of the assets of this affiliate.

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

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 and
classify as 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 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.

18

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 $6 billion in receivables and over 1.7
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.

- Our owned consumer two-months-and-over contractual delinquency ratio was
5.63 percent at December 31, 2002, compared to 4.93 percent at December
31, 2001. Our owned consumer net charge-off ratio was 4.10 percent in
2002, compared to 3.72 percent in 2001 and 3.51 percent in 2000.

- Our owned credit loss reserves were $3.2 billion at December 31, 2002,
compared to $2.4 billion at December 31, 2001. Credit loss reserves as a
percent of owned receivables were 4.20 at December 31, 2002, compared to
3.62 percent at December 31, 2001.

- Our debt to equity ratio was 7.4 to 1 at December 31, 2002, compared to
7.3 to 1 at December 31, 2001.

- On October 11, 2002, in response to the attorneys general settlement and
Household International's announced disposition of Household Bank,
f.s.b., Standard & Poor's ("S&P") announced that it had revised its
ratings for our long-term and commercial paper debt as well as those of
our parent, Household International. S&P's ratings were revised as
follows: long-term senior debt from "A" to "A-" and short-term debt from
"A-1" to "A-2". Also on October 11, 2002, Fitch Ratings announced that it
had placed the long-term and commercial paper debt ratings of Household
International and each of its subsidiaries, including HFC, on "Ratings
Watch Negative," while Moody's Investors Service affirmed all ratings for
Household International and HFC. These actions contributed to additional
volatility in the trading of our debt securities and reduced our access
to and increased our costs in the commercial paper market.

In response to Household International's 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 subsequent to the announcement. Our ratings are
well within the investment grade rating categories at all rating agencies
for all of our debt 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 $2.7
billion, issuing debt which includes purchase contracts on Household
International 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 $2.7 billion in investment
securities at December 31, 2002.

19

RESULTS OF OPERATIONS

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

Net Interest Margin. Our owned net interest margin on an owned basis
increased to $6.2 billion in 2002, up from $5.2 billion in 2001 and $4.2 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
8.24 percent in 2002, 8.59 percent in 2001 and 8.23 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 $8.7 billion in 2002, up from $7.2 billion in 2001 and $5.8 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
9.07 percent in 2002, 9.05 percent in 2001 and 8.47 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 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 $48 million at December 31, 2002 and $41 million
at December 31, 2001, following a gradual 100 basis point increase in interest
rates over a twelve month period.

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 $3.5 billion in 2002, compared to
$2.6 billion in 2001 and $1.9 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 4.87 percent
in 2002, compared to 4.34 percent in 2001 and 3.88 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 $568.6
million in 2002 and $377.6 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 12 to 15 and
"Credit Loss Reserves" on pages 30 to 32 for additional information regarding
our owned basis and managed basis loss reserves.

20

Other Revenues. Total other revenues on an owned basis were $4.0 billion
in 2002, $3.4 billion in 2001 and $2.7 billion in 2000 and 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.

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 $123.9 million in 2002, $118.1 million in 2001
and $44.9 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 12 to 15 and
"Securitizations and Secured Financings" on pages 35 to 37 for further
information on asset securitizations.

Insurance revenue was $526.4 million in 2002, $489.2 million in 2001 and
$394.8 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

21

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 $167.1 million in 2002, $153.4
million in 2001 and $159.0 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 $868.8 million in 2002,
$827.7 million in 2001 and $748.8 million in 2000. The increases were primarily
due to higher credit card fees. Fee income will also vary from year to year
depending upon the amount of securitizations in a particular period.

See Note 18, "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
$387.0 million in 2002, $293.5 million in 2001 and $183.9 million in 2000.
Higher revenues from our refund lending business contributed to the increases in
both years. In 2002, higher revenues from our mortgage operations also
contributed to the increase.

Costs and Expenses. Total costs and expenses, including the $525.0 million
settlement charge and related expenses, were $4.2 billion in 2002, $3.4 billion
in 2001 and $2.8 billion in 2000. Excluding the settlement charge, costs and
expenses were $3.7 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 39.4 percent in 2002, 37.1
percent in 2001 and 38.9 percent in 2000. Excluding the settlement charge, our
owned basis efficiency ratio was 34.1 percent in 2002.

Total costs and expenses included the following:

Salaries and fringe benefits were $1.5 billion in 2002, $1.3 billion in
2001 and $1.1 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 $244.2 million in 2002, $262.9 million in 2001 and
$193.6 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.

22

Occupancy and equipment expense was $297.1 million in 2002, $270.5 million
in 2001 and $250.3 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.

Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $491.0 million in
2002, $467.2 million in 2001 and $450.1 million in 2000. The increases were
primarily due to increased credit card marketing initiatives in the MasterCard
and Visa portfolio.

Other servicing and administrative expenses were $769.4 million in 2002,
$621.5 million in 2001 and $454.7 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.

Amortization of acquired intangibles and goodwill was $57.8 million in
2002, $157.4 million in 2001 and $166.0 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 $305.2 million in 2002, $268.1 million in 2001
and $231.7 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 34.2 percent in 2002, 35.5 percent
in 2001 and 35.6 percent in 2000. Excluding the settlement charge, the effective
tax rate was 34.6 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 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,

23

tightened underwriting policies, reduced unused credit lines, strengthened risk
model capabilities and invested heavily in collections capability by adding
collectors.

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 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.

The tables below summarize restructure statistics in HFC's managed basis
portfolio as of December 31, 2002 and in our parent company's domestic managed
basis portfolio as of December 31, 2001. HFC did not track separate restructure
statistics for its domestic portfolio for any period prior to the year ended
December 31, 2002.

TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD(1)
(MANAGED BASIS)

27

TOTAL RESTRUCTURED BY PRODUCT(1)
(MANAGED BASIS)

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

(1) Excludes 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).

See "Credit Quality Statistics" on pages 43 and 44 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
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
Household International 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 Household International's 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.

28

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 46 basis points to 5.63 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 slower growth in the portfolio due to loan sales and
reduced originations 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 slower growth in 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 44 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.

CONSUMER NET CHARGE-OFF RATIOS -- OWNED BASIS

During the fourth quarter of 2002, our net charge-off ratio declined 4
basis points to 4.15 percent. Net charge-off dollars were stable to third
quarter levels. 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.

29

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.

See "Credit Quality Statistics -- Managed Basis" on page 44 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 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 chargeoff 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 $568.6
million in 2002 and $377.6 million in 2001. Provision for credit
30

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 59 percent of our
receivables at December 31, 2002 compared to 46 percent at December 31, 1998.

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:

31

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 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.

LIQUIDITY AND CAPITAL RESOURCES

Generally, we are funded independently from our parent. Cash flows,
liquidity, and capital are monitored at both HFC and Household International
levels. 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 market volatility and the effectiveness of our management of credit
risks inherent in our customer base.

In managing capital, we develop targets for the ratio of tangible equity to
tangible managed assets ("TETMA"). This ratio target is based on discussions
with rating agencies, reviews of regulatory requirements and competitor capital
positions, 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 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 is a non-GAAP financial ratio that, when calculated for Household
International, is used by certain rating agencies as a measure to evaluate its
capital adequacy. The ratio of common equity to total managed assets is the most
directly comparable GAAP financial measure to TETMA.

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 $2.7 billion, issuing $542 million of debt
which includes purchase contracts requiring the holder of the contract to
purchase shares of Household International 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

32

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 unforseen 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 $2.7 billion in investment securities at
December 31, 2002.

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 capital goals and
announcing the planned merger of Household International with HSBC, 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 were completed in January through
March 19, 2003. We anticipate further improvement as the markets stabilize and
the HSBC merger is completed. If the merger of Household International 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 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 Household International's announced disposition of
Household Bank, f.s.b., Standard & Poor's ("S&P") announced that it had revised
its ratings for our long-term and commercial paper debt as well as those of our
parent, Household International, 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 International and each of its subsidiaries, including HFC,
on "Ratings Watch Negative," while Moody's Investors Service affirmed all
ratings for Household International and HFC. These actions contributed to
additional volatility in the trading of our debt securities and reduced our
access to and increased our costs in the commercial paper market.

In response to Household International's 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 debt securities.

Dividends and Capital Contributions. We paid cash dividends to our parent
of $300 million in 2002, $650 million in 2001 and $425 million in 2000. HBSB
also paid cash dividends of $225 million to an affiliate in 2001. We received
cash capital contributions from our parent of $50 million in 2001 and $550
million in 2000. No cash capital contributions were received from our parent in
2002.

Funding. Our main uses of cash are originating or purchasing receivables,
repaying maturing debt, purchasing investment securities, acquiring businesses
or paying dividends to our parent. At various times, we also make capital
contributions to our subsidiaries to comply with regulatory guidance, support
receivable growth and, where applicable, maintain acceptable investment grade
ratings at the subsidiary level. We fund our 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 our parent. We domestically market our commercial paper
primarily through an in-house sales force. Domestic medium-term notes are
marketed through our in-house sales force and investment banks. Long-term debt
is generally marketed through investment banks.

Our 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. We
actively manage the level of commercial paper outstanding to ensure availability
to core investors. Outstanding commercial paper balances throughout 2002 were
lower
33

than in 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.

During 2002, we 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
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 the
issuances in 2002, $8.5 billion had maturities greater than 5 years which
reduced our overall dependence on the potentially volatile short-term markets.
In 2001, we 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.

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, 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.

We had committed back-up bank lines of credit totaling $10.1 billion at
December 31, 2002, of which $400 million was also available to our parent
company. None of these back-up bank lines were drawn upon in 2002. Our 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 minimum shareholder's equity of $5.8 billion.

During 2002, we established $6.25 billion in incremental conduit capacity
for our real estate secured product. Consistent with previous transactions,
draws on these facilities are structured as secured financings for accounting
purposes. At December 31, 2002, we had facilities with commercial and investment
banks under which we may securitize up to $19.5 billion of receivables. We 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 we 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.

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 our banking
institutions. As a result of these new guidelines, we contributed $250 million
to our banking subsidiary in the first quarter of 2002. On July 1, 2002,
Household International 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.

Capital Expenditures. We made capital expenditures of $112 million in 2002
and $136 million in both 2001 and 2000.

34

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 markets and often are more
cost-effective than alternative funding sources.

At December 31, 2002, securitizations structured as sales represented 24
percent and secured financings represented 8 percent of the funding associated
with our managed portfolio. At December 31, 2001, securitizations structured as
sales represented 24 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 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.

35

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 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:

36

Outstanding securitized receivables consisted of the following:

The following table summarizes the expected amortization of our securitized
receivables:

At December 31, 2002, the expected weighted-average remaining life of these
transactions was 1.6 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
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 $19.5 billion of receivables. We may
securitize up to $13.3 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, $11.6 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 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 would be
impacted from time to time by volatility in the capital 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.

37

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.

At December 31, 2002, we guaranteed $2.8 billion of our United Kingdom
affiliate's debt and $1.4 billion of our Canadian affiliate's debt. We receive a
fee for providing these guarantees.

In December 2002, we established an escrow account with a third party of
$17.0 million to provide funds for the payment of any commitment or contingent
liabilities that might be paid subsequent to the final dissolution of Household
Bank, f.s.b. After two years, upon written approval from the Office of Thrift
Supervision, any remaining funds will be released to us. We have also guaranteed
all obligations of Household Bank, f.s.b. and its directors against liabilities
for actions taken or initiated in the normal course of business.

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 securitizations 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 of Household International annually sets
acceptable limits for each of these risks for each of Household International's
subsidiaries. The limits are reviewed 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.
38

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 International and
HFC 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, along
with other large unsecured debt issuers, we 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 and secured financings and selective
asset sales, we were able to accommodate our 2002 funding needs. Since meeting
our capital goals and announcing the planned merger of Household International
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 32 to 34 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 $48 million
at December 31, 2002 and $41 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 $49 million at December 31, 2002 and $30 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

39

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 arising from movements in foreign exchange rates. We enter
into currency swaps to minimize currency risk associated with changes in the
value of foreign-denominated assets 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.

See Note 10 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 11,
"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.

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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.

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.

MASTERCARD AND VISA RECEIVABLES -- Receivables generated through customer
usage of MasterCard and Visa credit cards.

41

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 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 SHAREHOLDER'S EQUITY -- Net income divided by
average common shareholder's 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 SHAREHOLDER'S EQUITY -- Common shareholder's equity (excluding
unrealized gains and losses on investments and cash flow hedging instruments)
and, in 2002, senior debt which contains mandatorily redeemable obligations to
purchase Household International 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 management plans.

42

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CREDIT QUALITY STATISTICS -- OWNED BASIS

43

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CREDIT QUALITY STATISTICS -- MANAGED BASIS

44

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 32
to 34, "Off-Balance Sheet Arrangements (Including Securitizations and
Commitments), Secured Financings and Contractual Cash Obligations", pages 35 to
38, and "Risk Management", pages 38 and 40.

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.

45

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial
statements.
46

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.
47

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.
48

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY

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

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

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

(2) Relates to previous equity transactions of Household Bank (SB), N.A.

The accompanying notes are an integral part of these consolidated financial
statements.
49

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S 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
adjustments.

The accompanying notes are an integral part of these consolidated financial
statements.
50

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Household Finance Corporation ("HFC" or "the company") is a wholly owned
subsidiary of Household International, Inc. ("Household International" or the
"parent company"). HFC is a leading provider of consumer lending products to
middle-market consumers in the United States. HFC 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
Sates and credit and specialty insurance in the United States and Canada. We
have one reportable segment: Consumer, which includes our branch-based consumer
lending, mortgage services, retail services, credit card services and auto
finance businesses.

Acquisition of Household International. On November 14, 2002, Household
International and HSBC Holdings plc ("HSBC") announced that they had entered
into a definitive merger agreement under which Household International will be
merged into a wholly owned subsidiary of HSBC, subject to the terms and
conditions of the merger agreement. Household International has agreed that
except with HSBC's prior written consent, it will conduct its 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. Household
International has also agreed to use reasonable best efforts to preserve its
present business organizations, to keep available the services of its current
officers and key employees and preserve existing relationships and goodwill with
persons with whom it does business. Consummation of the merger is subject to
regulatory approvals, the approval of the stockholders of both Household
International and HSBC and other customary conditions.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include
the accounts of Household Finance Corporation 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 are 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 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
shareholder's 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

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

* MasterCard is a registered trademark of MasterCard International, Incorporated
and Visa is a registered trademark of VISA USA, Inc.
51

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 $589.6 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 $118.5 million at December
31, 2002 and $83.5 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
sheets, 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
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. 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
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

52

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.

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

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 by 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 shareholder's 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.

54

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 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 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.

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 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 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

55

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.

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 credit and specialty insurance
operations in Canada. The functional currency for our Canadian insurance
operations is the Canadian dollar. Assets and liabilities of this business are
translated at the rate of exchange in effect on the balance sheet date; income
and expenses are translated at the average rate of exchange prevailing during
the year. Translation adjustments resulting from this process are accumulated in
common shareholder's equity as a component of accumulated other comprehensive
income. Income and expenses are translated at the average rate of exchange
prevailing during the year.

Premiums on Related Party Sales. Receivables are purchased from affiliates
at fair market value. Premiums are recorded when the fair market value exceeds
the carrying value of receivables purchased.

Income Taxes. HFC and its non-insurance subsidiaries are included in
Household International's consolidated federal income tax return and in various
consolidated state income tax returns. In addition, HFC files some
unconsolidated state and federal tax returns. 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. BUSINESS COMBINATIONS AND ACQUISITIONS

On July 1, 2002, Household International contributed all of the capital
stock of Household Bank (SB), N.A. ("HBSB"), a wholly owned subsidiary of
Household Bank, f.s.b., to HFC. HBSB, in turn, purchased all of the assets of
Beneficial Bank USA, a wholly owned credit card banking subsidiary of HFC.
Subsequently, we merged our wholly owned banking subsidiary, Household Bank
(Nevada), N.A. with and into HBSB with HBSB being the surviving entity. The
merger completed the consolidation of all of Household International's credit
card banks into one credit card banking subsidiary of HFC. We believe the
combination of the banks streamlines and simplifies our regulatory reporting
process as well as optimizes capital and liquidity management. In accordance
with the guidance established for mergers involving affiliates under common
control, the financial statements of HFC include the results of HBSB for all
periods presented similar to a pooling of interests.

In February 2000, Household International purchased all of the outstanding
capital stock of Renaissance Holdings, Inc. ("Renaissance"), a privately held
issuer of secured and unsecured credit cards to subprime
56

customers. Simultaneously with the purchase, Renaissance's credit card
operations were merged with and into our operations. The acquisition was
accounted for as a purchase and, accordingly, earnings from Renaissance's credit
operations have been included in our results of operations subsequent to the
acquisition date.

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.
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 were realized on those sales.

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

57

See Note 11, "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:

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

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

4. RECEIVABLES

58

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 of receivables on a revolving basis totaling $19.5 billion, of
which $13.9 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.

Contractual maturities of owned receivables at December 31, 2002 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 44 percent
in 2002 and 42 percent in 2001.

59

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

Nonaccrual owned consumer receivables totaled $2,533.3 million at December
31, 2002 and $1,844.3 million 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 $371.6 million in 2002 and
$278.0 million in 2001. Interest income that was included in finance and other
interest income, prior to these loans being placed on nonaccrual status, was
approximately $195.4 million in 2002 and $153.6 million in 2001.

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 $1,638.3
million at December 31, 2002 and $1,062.1 million at December 31, 2001.
Interest-only strip receivables also included fair value mark-to-market
adjustments of $356.8 million at year-end 2002 and $321.4 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, 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.

The following table sets forth the activity in the company's credit loss
reserves for the periods indicated:

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 reserves and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income, increased $123.9 million in 2002, $118.1 million in 2001
and $44.9 million in 2000.

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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:

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

(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 $25.8 billion in 2002,
$24.4 billion in 2001 and $20.7 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
$505.4 million in 2002, $403.1 million in 2001 and $317.1 million in 2000.

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Cash flows received from securitization trusts were as follows:

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

(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 our
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 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 $112.9 million in 2002,
$113.3 million in 2001 and $113.2 million in 2000.

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8. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS

Interest expense for commercial paper, bank and other borrowings totaled
$110.8 million in 2002, $363.9 million in 2001 and $602.6 million in 2000.

We maintain various bank credit agreements primarily to support commercial
paper borrowings. At both December 31, 2002 and 2001, we had committed back-up
bank lines of credit of $10.1 billion, of which $400 million was also available
to Household International. None of these back-up lines were used in 2002 or
2001. Formal credit lines are reviewed annually and expire at various dates
through 2005. Borrowings under these lines generally are available at a
surcharge over LIBOR. None of these 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 $8.3 million.

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

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
$963.1 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 $313.0 million and a foreign currency
translation adjustment relating to our foreign denominated debt which decreased
the debt balance by $282.9 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 $2,921.2 million in 2002, $2,751.4 million in 2001 and
$2,358.5 million in 2000. The most restrictive financial covenant contained in
the terms of our debt agreements is the maintenance of a minimum shareholder's
equity of $5.8 billion. 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 10, "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 International common stock
on February 15, 2006. The senior unsecured notes will mature on February 15,
2008.

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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 of Household International 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.

10. 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 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 of Household
International 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 in foreign
currencies to U.S. dollars.

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 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.

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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 counterparty 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 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 in foreign currencies into pay variable U.S. dollar debt. Hedge
ineffectiveness associated with fair value hedges is recorded as other income
and was a loss of $3.9 million ($2.4 million after tax) in 2002 and a loss 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 $1,799.9 million at December 31, 2002 and decreased the carrying value
of our debt by $162.9 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 in foreign currencies into pay fixed U.S. dollar debt.
Losses on derivative instruments designated as cash flow hedges (net of tax) are
reported in accumulated other comprehensive income and totaled $685.0 million at
December 31, 2002 and $645.6 million at December 31, 2001. We expect $139.8
million ($88.7 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.

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At December 31, 2002, $1,805.0 million of derivative instruments, at fair
value, were recorded in derivative financial assets and $90.6 million in
derivative related liabilities. At December 31, 2001, $6.7 million of derivative
instruments, at fair value, were recorded in derivative financial assets and
$1,435.4 million in derivative related liabilities.

Deferred gains resulting from termination of derivatives were $634.2
million at December 31, 2002 and $524.2 million at December 31, 2001. Deferred
losses from termination of derivatives were $53.5 million at December 31, 2002
and $70.2 million at December 31, 2001. Amortization of net deferred gains
totaled $145.6 million in 2002 and $41.9 million in 2001. The weighted-average
amortization period associated with the deferred gains was 5.1 years at December
31, 2002 and 6.4 years at December 31, 2001. The weighted-average amortization
period for the deferred losses was 4.5 years at December 31, 2002 and 5.2 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
$597.5 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 senior and senior subordinated debt by $475.9 million and
decreased accumulated other comprehensive income by $21.9 million.

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 $5.1 million ($3.2 million
after-tax) in 2002 and $(.9) million ($(.6) million after-tax) in 2001.

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Derivative Financial Instruments. The following table summarizes
derivative financial instrument activity in 2002, 2001 and 2000.

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

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

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

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 40 basis points in 2002, increased by 17 basis points in 2001 and decreased
by 7 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.

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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:

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

We have estimated the fair value of our financial instruments in accordance
with Statement of Financial Accounting Standards 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 FAS 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 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.

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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.

Advances from Parent Company and Affiliates: The carrying value
approximates fair value for this instrument due to its short-term nature.

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.

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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 FAS 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 10, "Derivative Financial Instruments and
Concentrations of Credit Risk," for additional discussion of the nature of these
items.

12. 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 $116.8 million in 2002, $107.7 million in 2001 and $91.2
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:

13. EMPLOYEE BENEFIT PLANS

Defined Benefit Plans. Substantially all of our employees are covered by
defined benefit pension plans which are sponsored by Household International. At
December 31, 2002, plan assets included an investment in 1,112,546 shares of
Household International's common stock with a fair value of $30.9 million.

The fair value of Household International's pension plan assets exceeded
the projected benefit obligations by $9.9 million at December 31, 2002 and
$182.0 million at December 31, 2001. The assumptions used in

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determining the benefit obligation and pension income/expense of the domestic
defined benefit plans at December 31 were as follows:

Postretirement Plans Other Than Pensions. We participate in Household
International's plans which provide medical, dental and life insurance benefits
to retirees and eligible dependents. These plans are funded on a pay-as-you-go
basis and cover substantially all employees who meet certain age and vested
service requirements. Household International has instituted dollar limits on
its payments under the plans to control the cost of future medical benefits.

Household International recognizes the expected postretirement costs on an
accrual basis, similar to pension accounting. The expected cost of
postretirement benefits is required to be recognized over the employees' years
of service with the company instead of the period in which the benefits are
paid. Household International is recognizing the transition obligation over a
period of 20 years. The transition obligation represents the unfunded and
unrecognized accumulated postretirement benefit obligation.

While no separate actuarial valuation has been made for our participation
in Household International's plans for postretirement medical, dental and life
benefits, our share of the liability and expense has been estimated. Household
International's accumulated postretirement benefit obligation was $243.6 million
at December 31, 2002 and $196.8 million at December 31, 2001. Our estimated
share of Household International's accrued postretirement benefit obligation was
$157.7 million at December 31, 2002 and $156.5 million at December 31, 2001. In
addition, our estimated share of postretirement benefit expense recognized was
$12.8 million in 2002, $14.5 million in 2001 and $14.6 million in 2000.

Household International's accumulated postretirement benefit obligation and
benefit expense were determined using the following assumptions:

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) Household International's service and
interest costs and the postretirement benefit obligation as follows:

Other Employee Benefit Plans. We also participate in various 401(k)
savings plans and profit sharing plans for employees meeting certain eligibility
requirements. Under the Household International plan, each participant's
contribution is matched by the company in Household International common stock
up to a maximum of 6 percent of the participant's compensation. We incurred
expenses relating to these plans of $55.0 million in 2002, $46.5 million in 2001
and $41.0 million in 2000.

Our employees may participate in Household International's Employee Stock
Purchase Plan (the "ESPP"). The ESPP provides a means for employees to purchase
shares of Household International's common stock at 85 percent of the lesser of
its market price at the beginning or end of a one year subscription

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period. As a result of the proposed merger of Household International with HSBC,
the ESPP was terminated on March 7, 2003 and Household International stock was
purchased on that date.

Our key officers and employees participate in Household International's
executive compensation plans which provide for the issuance of nonqualified
stock options and restricted stock rights ("RSRs"). Stock options permit the
holder to purchase, under certain limitations, Household International's common
stock at the market value of the stock on the date the option is granted. Stock
options generally vest equally over four years and expire 10 years from the date
of grant. RSRs entitle an employee to receive a stated number of shares of
Household International's common stock if the employee satisfies the conditions
set by Household International's Compensation Committee for the award.

Household International also sponsors a non-qualified supplemental
retirement plan. This plan, which is unfunded, provides eligible employees
defined pension benefits outside the qualified retirement plan based on average
earnings, years of service and age at retirement.

14. INCOME TAXES

Total income taxes were allocated as follows:

Provisions for income taxes related to operations were:

Income before income taxes were:

All components of deferred income tax provision are attributable to income
from operations.

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Effective tax rates are analyzed as follows:

Provision for U.S. income taxes had not been made at December 31, 2002 and
2001 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 was distributed, the additional income tax payable would be
approximately $28.0 million.

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

15. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES

In the normal course of business, we enter into transactions with related
parties which, generally, are on terms comparable to those that would be made
with unaffiliated parties. These transactions include funding arrangements,
purchases and sales of receivables and servicing agreements. Related party
transactions involving receivables enable effective management of credit risk,
liquidity and interest rate risk; facilitate capital management; and optimize
funding opportunities. All receivables purchased from affiliates retain their
existing delinquency and product status.

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We periodically advance funds to Household International and affiliates or
receive amounts in excess of current requirements. Advances (to) from the parent
company and affiliates consisted of the following:

These advances bear interest at various market interest rates. Interest
income (expense) on advances (to) from the parent company and affiliates was as
follows:

Prior to July 1, 2002, our wholly owned bank subsidiary periodically bought
and sold federal funds with Household Bank, f.s.b. (the "Thrift"). Sales to the
Thrift were included in investment securities while purchases were included in
commercial paper, bank and other borrowings. We had investments of $60.0 million
at December 31, 2001. Net interest income on these sales totaled $.7 million in
2002, $17.4 million in 2001 and $37.9 million in 2000.

Historically, we had purchased receivables, at fair market value, under
various agreements with the Thrift. During the fourth quarter of 2002, in
conjunction with their efforts to make the most efficient use of capital and in
recognition that the continued operation of the Thrift was not in their
long-term strategic interest, Household International completed the sale of
substantially all of the assets and deposits of the Thrift. Our purchases from
the Thrift were as follows:

In December 2001, we purchased $600.3 million of real estate secured and
personal non-credit card receivables, at fair market value, from the Thrift as a
result of re-acquiring former bank agency offices which are now operated as
consumer finance offices.

Prior to March 1, 2002, we also purchased real estate secured and personal
non-credit card receivables from the Thrift at various stages of contractual
delinquency. Delinquent loan purchases totaled $68.8 million in 2002 and $709.4
million in 2001.

We also had purchased non-delinquent real estate secured, auto and personal
non-credit card receivables from the Thrift. These purchases totaled $2.0
billion in 2002 and $2.5 billion in 2001. A portion of the auto and personal
non-credit card receivables were subsequently securitized.

81

Under the terms of a former agreement between the Thrift and Household Tax
Masters, Inc. ("Tax Masters"), a wholly owned subsidiary of HFC, the Thrift
originated tax refund anticipation products for qualifying individuals who
anticipated a tax refund. Tax Masters purchased the refund anticipation products
from the Thrift within two days of originating the account. During 2002, we paid
$42.2 million in fees on approximately 7.0 million refund anticipation accounts
that were purchased from the Thrift. During 2001, we paid $38.5 million in fees
on approximately 6.4 million accounts purchased.

HFC and Household Credit Services, Inc., a wholly owned subsidiary of HFC,
also had a market rate agreement with the Thrift for services such as
underwriting, data processing, item processing, check clearing, bank operations,
accounts payable and payroll processing. Fees received for these services
totaled $160.9 million in 2002, $68.1 million in 2001 and $46.1 million in 2000.

Household International designated us, under a written contractual
arrangement, as the issuer of new GM Card(R) accounts. In effect, Household
International licensed to us the GM Card(R) account relationships and GM's
obligation to administer its rebate program in an arrangement similar to an
operating lease. License fees are paid monthly to Household International based
on the number of GM Card(R) account relationships. License fee expense is
included in other operating expenses and was $47.9 million in 2002, $52.2
million in 2001 and $65.7 million in 2000.

We were allocated costs incurred on our behalf by Household International
for administrative expenses, including insurance, credit administration, legal
and other fees. These administrative expenses were recorded in other operating
expenses and totaled approximately $42.2 million in 2002, $64.8 million in 2001
and $41.6 million in 2000.

At December 31, 2002, we guaranteed $2.8 billion of our United Kingdom
affiliate's debt and $1.4 billion of our Canadian affiliate's debt. We receive a
fee for providing these guarantees.

In December 2002, we established an escrow account with a third party of
$17.0 million to provide funds for the payment of any commitment or contingent
liabilities that might be paid subsequent to the final dissolution of the
Thrift. After two years, upon written approval from the Office of Thrift
Supervision, any remaining funds will be released to us. We have also guaranteed
all obligations of the Thrift and its directors against liabilities for actions
taken or initiated in the normal course of business.

16. 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. 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.

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 12 for discussion of lease commitments.

17. ATTORNEY GENERAL SETTLEMENT

On October 11, 2002, Household International reached a preliminary
agreement with a multi-state working group of state attorneys general and
regulatory agencies to effect a nationwide resolution of alleged
82

violations of federal and state consumer protection, consumer financing and
banking laws and regulations with respect to secured real estate lending from
its retail branch consumer lending operations. This agreement first became
effective on December 16, 2002, with the filing of related consent decrees 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.

18. SEGMENT REPORTING

We have one reportable segment, Consumer, which is managed separately and
characterized by different middle-market consumer lending products, origination
processes, and locations. Our Consumer segment includes our consumer lending,
mortgage services, retail services, credit card services and auto finance
businesses. Our 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, direct mail,
telemarketing, independent merchants or automobile dealers. MasterCard and Visa
credit cards are also offered via strategic affinity relationships. We also
cross sell our credit cards to existing real estate secured, private label and
Refund Anticipation Loan ("RAL") customers. All businesses offer products and
service customers through the Internet. Additionally, we purchase loans of a
similar nature from other lenders and an affiliate. 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 Statement of Financial
Accounting Standards No. 131 for determining reportable segments.

The accounting policies of our reportable segment 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.

83

REPORTABLE SEGMENTS -- MANAGED BASIS

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

(1) Net income excluding settlement charge and related expenses of $333.2
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 and reclassifies loss reserves 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.

84

MANAGED RECEIVABLES

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

GEOGRAPHIC DATA

Identifiable assets, long-lived assets, revenues and income before income
taxes in our Canadian insurance operations are not material.

85

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Household Finance Corporation:

We have audited the accompanying consolidated balance sheets of Household
Finance Corporation (a Delaware corporation) and subsidiaries as of December 31,
2002 and 2001, and the related consolidated statements of income, changes in
common shareholder's 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 Finance Corporation'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
Finance Corporation 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

Chicago, Illinois
March 24, 2003

86

HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

87

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.

Omitted.

ITEM 11. EXECUTIVE COMPENSATION.

Omitted.

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

Omitted.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Omitted.

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. 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 Finance Corporation
(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 HFC'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 HFC's
consolidated financial statements for such years; and there were no reportable
events, as listed in Item 304(a)(1)(v) of Regulation S-K.

88

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 FINANCE CORPORATION 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 Common Shareholder's Equity for
the Three Years Ended December 31, 2002.
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, HFC filed Current
Reports on Form 8-K on October 15, October 30 and November 18, 2002. HFC
also filed Current Reports on Form 8-K on January 21 and March 19, 2003.

(c) Exhibits.

89

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 25th day of March, 2003.

HOUSEHOLD FINANCE CORPORATION

By: /s/ D. A. SCHOENHOLZ
------------------------------------
D. A. Schoenholz
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
Finance Corporation and in the capacities indicated on the 25th day of March,
2003.

90

CERTIFICATIONS

I, David A. Schoenholz, certify that:

1. I have reviewed this annual report on Form 10-K of Household Finance
Corporation;

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. I am 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. 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. 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
Chairman and Chief Executive Officer

Date: March 25, 2003

91

CERTIFICATIONS

I, Steven L. McDonald, certify that:

1. I have reviewed this annual report on Form 10-K of Household Finance
Corporation;

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. I am 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. 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. 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/ STEVEN L. MCDONALD
--------------------------------------
Steven L. McDonald
Executive Vice President,
Chief Accounting Officer and
Controller
(as Principal Financial Officer)

Date: March 25, 2003

92

EXHIBIT INDEX